Reference Data Management Takes Center Stage

By Sol Zlotchenko, VP Product Management, Paladyne Systems.

Market developments and a host of major regulatory initiatives are forcing the arcane world of reference data into the spotlight.

Reference data drives all investment firms’ activities. As Accenture points out, accurate reference and market data are essential for effective investment decisions, trade execution, securities pricing, portfolio valuation and measurement, risk management and regulatory compliance. (See Managing Data for High Performance in Capital Markets, Accenture.)

Yet a combination of market globalization, the growing interconnectedness and complexity of industry participants, a surge in data volumes spurred by electronic trading strategies, and the introduction of a medley of onerous regulatory requirements, mean that reference data management has become more challenging and essential.

Focus on Disclosure

Regulatory developments place a particular pressure on reference data management. In a bid to reduce systemic risk and increase transparency, policymakers and regulators are enacting a series of regulations that will impose enhanced disclosure responsibilities on investment management organizations. They include:

• Form PF – Phased in from June 2012: requires SEC-registered investment advisers to report an unprecedented array of portfolio, risk, collateral and performance data to the regulator on a quarterly or annual basis (depending on the fund’s size).
• Dodd-Frank Act – Implementation phased through 2012 and beyond: introduces sweeping reforms that include mandating most hedge fund and private equity managers to register with the SEC and report on their trades and portfolios, as well as requirement that all OTC derivative transactions be reported to trade repositories.
• European Market Infrastructure Regulation (EMIR) – Due to come into force by end-2012: à la Dodd-Frank, eligible standardized OTC derivative contracts will have to be cleared through a central counterparty, with all cleared and non-cleared trades reported to authorized trade repositories. Similar rules are also being introduced in other jurisdictions, including Japan, Australia, Singapore and Hong Kong.
• Markets in Financial Instruments Directive/Regulation (MiFID II/MiFIR) – Bulk of the revisions not expected until at least 2015: changes include extending the original transaction reporting requirement to all financial instruments traded on a regulated venue. Firms will have to capture a broad array of data, and report it accurately and within the stipulated timeframes.
• Alternative Investment Fund Managers (AIFM) Directive – To be transposed by EU countries into national law by July 2013: includes provisions requiring funds to provide supervisors with regular reports detailing their trading activities and exposures.
• Foreign Account Tax Compliance Act (FATCA) – Staggered implementation from 2013-2017: to comply, firms will need to obtain and maintain additional client data, identify and withhold tax on payments to people/entities contravening the regime, and calculate and report the proportion of assets that generate US source income (the ‘passthru percentage’).

More than Compliance

Complying with the stringent disclosure rules included in each regulation will entail firms providing more, better and timelier information on their activities and positions. Incomplete, incorrect or late reports bring the risk of regulatory censure and fines, so ensuring the data used is accurate and easily accessible is critical. And given many market participants will be subject to multiple regulations, the reference data impact becomes even more pressing.

At a minimum, firms have a financial and reputational incentive for avoiding the penalties that result from non-compliance. But adopting a strategic approach to the capture, cleansing and maintenance of data can bring far greater rewards, by lowering the enterprise’s data acquisition and administration costs, and streamlining data flows to mitigate operational risk.

At the same time, a holistic view of their market activities can help investment managers improve their business processes and decision-making, generate better risk-adjusted returns, optimize their product offerings and attract new clients.

Investor demands are another crucial driving force. While many institutional investors are upping allocations to alternative investment managers, these organizations are also increasingly focused on managing risk and enhancing performance in this challenging economic environment. The result is an inexorable call by investors for high-quality, detailed and timely information on their assets.

Data Repository Imperative

For many firms, especially those with cross-border and cross-asset class activities, the data they need to meet their regulatory and investor reporting responsibilities will be dispersed across discrete business unit silos and/or housed in multiple (often legacy) systems. As a result, it can be difficult to extract the requisite data on demand, and ensure it is consistent and comprehensive.

By contrast, a centralized reference data repository allows security terms and conditions, corporate actions, and pricing and valuation data to be easily collated, cleansed, maintained and accessed on an enterprise-wide basis, providing the fund manager with up-to-date and accurate information they can use to calculate their risks and exposures.

Attributes of a robust data repository include:

• Support for a full sweep of global listed and OTC security types.
• Integration with industry-leading market data providers to automate the data feeds.
• Rules-based arbitration between data sources to create a single “golden copy” database.
• Ability to collect unstructured pricing quotes from different providers.
• Data validation tools to track and monitor incomplete or inaccurate data.
• Ability to automatically solicit brokers to price illiquid instruments that have not been priced for a specified period.
• Real-time corporate action notifications.
• Flexibility for users to design their own data governance workflows to facilitate compliance, four eyes validation techniques, entitlement and data quality.
• Complete audit trail of all historical prices, valuation rules and pricing sources.
• Seamless integration with downstream accounting, trading, risk and reporting applications to automate data distribution and synchronization across the enterprise.

The cost, risk and compliance benefits that an effective central data repository affords are too great to ignore, especially in this evolving regulatory and market environment.

Cost Pressures

Yet despite the multifaceted benefits to be garnered on the back of data management improvements, the expense involved in developing and maintaining a sophisticated data infrastructure will give many organizations pause for thought. Years of difficult market conditions – and an uncertain outlook – mean investment managers, banks and brokers face shrinking revenues and margins, and escalating pressure to cut costs and rethink operating models. As a result, many in the industry are considering alternative ways to address the data management question.

One option is to leverage an independent managed reference data solution. By outsourcing the task to a third-party service provider with the requisite expertise and economies of scale, market participants are able to streamline their operations, and reduce their data infrastructure and maintenance costs. In addition, they gain the comfort of knowing their investors and regulators will receive properly cleansed and complete data at the time it is required.

But whatever strategy market participants pursue, the end result must be an effective and efficient data management capability. The current climate demands no less.

Reference Data Checklist

• Centralized data repository allows for easy collation, cleansing, maintenance and extraction of reference data on an enterprise-wide basis.
• Facilitates compliance with onerous regulatory reporting requirements.
• Meet growing investor demands for high-quality, detailed and timely information on their assets.
• Strategic data approach can help reduce operating costs, mitigate risk, improve business processes and decision-making, and attract new clients.