The majority of firms that have already kicked off projects to map their issuer and counterparty data have opted to put them on hold, pending a decision being made with regards to the establishment of a standard legal entity identifier, according to Steve Engdahl, senior vice president of product strategy at EDM vendor GoldenSource. The recently ended comment period for responses to the US Office of Financial Research’s (OFR) proposals is a start down the road towards standardisation but it will be a long journey, involving considerable time and expense to complete, says Engdahl, who officially joined GoldenSource’s ranks last month.
Engdahl joined GoldenSource in January from order management, trading and compliance software provider Charles River Development (CRD), where he was director of product management for five years. Prior to CRD, he worked for CheckFree Corporation (before Fiserv bought it), during which time he held various positions including vice president, product management and marketing for CheckFree Financial and Compliance Solutions (CFACS).
In the eighth in our series of talking heads on the challenges surrounding legal entity data management in the current market, Engdahl explains the impact that the OFR’s proposals and the development within many firms towards establishing an enterprise risk management framework are having on financial institutions. Much like many of the responses to the OFR, he is also a proponent of a comprehensive and global identification standard that would be administered by a not for profit body.
How has the regulatory attention directed at the legal entity identification challenge in the post-Lehman environment impacted financial institutions’ practices with regards to this data?
The majority of firms are waiting for the final decision on the ultimate standard, issuance process and issuance organisation before continuing with their internal risk and data management projects. Some have actually already stopped their issuer/counterparty hierarchy and mapping projects, recognising that cross referencing information from multiple sources will be simpler once a standard legal entity identifier is established.
While a standardised entity identifier will mean firms are able to finally combine information from different sources with relative ease, they still face the challenge of ensuring all sources and consuming systems are interoperable with the new identifier. Entities without an ID will also need to complete the registration process, so it will still take considerable time and expense for the majority of companies to meet the requirements of the new identifier.
Which regulations and compliance requirements are having the biggest impact on this area?
While new regulations such as MiFID II, Dodd Frank, Basel III and Solvency II necessarily have a large remit and have a far reaching impact across the financial services market, we’re seeing the biggest impact in the enterprise risk arena. This is because counterparty exposure needs to be properly aggregated across multiple legal entities and the current absence of a single source to provide cross referenced data makes this a complex procedure. We also expect further reporting requirements from the new OFR as upcoming regulations are finalised, which will drive further demand in this area.
Given there is currently no industry standard legal entity identifier and the US regulator is looking at mandating its introduction as part of the OFR, what impact will this likely have on the US market? And the rest of the world?
For any kind of standard identifier to add real value, it will need to be adopted on a global basis. Establishing a standard that satisfies both the OFR and the requirements of national regulators will be critical, and it’s a positive sign that the US regulators seem to understand exactly where the value of the new identifier lies.
Once established, its existence will make integration projects simpler, particularly those that require cross referencing of issuer related information from one source with another. This means firms who have been building out their infrastructure to map linkages between common identifiers will ultimately be able to redirect their efforts into other value add activity. Data cleansing and valuation will get easier too, ultimately improving the quality of data and making risk management and reporting quicker and more accurate, and regulatory compliance easier.
A number of options are on the table for such an identifier – Swift’s BIC, the S&P/Avox Cabre, a version of ISO’s IGI – what is your feeling for which will be selected as the most appropriate option and why?
It’s critical the final identifier is one the entire industry is comfortable with, hence the extensive feedback period on the proposals. It needs to be international and open, so it’s up to the industry as a whole to establish what it prefers and why. From our perspective, as long as the standard is comprehensive, has a clear process for registering previously unlisted entities, and is administered by a not for profit body, it will achieve the tenets the OFR has laid out.
How will all of this impact the vendor community?
Vendors have had to deal with a multi-standard environment for many years now, and the need for agility won’t change. Even once the identifier is established there will be a need to drive its global adoption, and manage different international approaches in the meantime.
There are many challenges that currently exist in managing and using entity-level information, and the introduction of a standard identifier holds both threats and opportunities for vendors. This will enable vendors to focus on adding value, such as cross referencing multiple sources to create a ‘golden source’. As a company, GoldenSource has always embraced standards to help drive quality of data, so our system already has the capability to operate with the new standard once it is selected.
How have counterparty risk management concerns impacted the underlying data management systems within systemically important financial institutions? What level of maturity is the market at with regards to the management of this data?
With the demand for an increase in transparency and upcoming regulations, data management has become a board level rather than IT led discussion. Siloed business line approaches combined with the lack of a standard identifier have created a complex infrastructure, and even the largest institutions are still wrestling with counterparty hierarchies for risk purposes. Many have adopted their own hierarchies and manage multiple versions, where the one used by the risk department may differ from that used by compliance or portfolio management. The current counterparty hierarchy maintenance process still requires a lot of manual review and intervention, so there is certainly room for maturation.
Are firms largely opting for a centralised approach towards dealing with this data or are the vertical silos across the different parts of an institution persisting?
While a centralised approach with a central golden copy version of the data may be the ideal, current practice takes a rather more practical approach. Different departments develop vertical silos according to their needs, resulting in multiple sets of counterparty data, and multiple hierarchies being established within different departments of an institution. As they look to optimise their operations, reduce the need for manual intervention and its associated risk, it’s likely they will work toward a version of ‘multiple golden copies’ of this data, however this will be an ongoing process rather than one big push.
Is there a degree of disparity in these practices between the buy side and the sell side? Large and small firms?
There will always be a degree of disparity between the buy and sell side as their drivers are different. The buy side’s primary focus is on portfolio level compliance, and not breaking client mandates, whereas the sell side is more focused on firm-wide exposure and risk across lines of business. By definition, this means the sell side’s challenge is much more complex. We expect the sell side to shift toward a more centralised approach first, while buy side firms might be able to persist with the siloed approach for longer.
What trends do you expect to see over 2011 in terms of market practices in this space?
We’re already seeing a greater investment by financial firms into reference data and data management systems, a trend we expect to grow. We’re looking forward to the industry arriving at an agreed global legal entity identifier, registration process, and administrative organisation. From there, we’re expecting data providers to roll this out, working with industry bodies to help drive its global adoption. We’re looking forward to working with our customers on process improvement projects to take advantage of the new identifier as it becomes utilised in future years, and helping them simplify their systems and comply with emerging regulation.