Following its partnership agreement with business entity data specialist Avox earlier this year, enterprise data management (EDM) vendor Asset Control is keenly focused on the area of counterparty data. Rick Enfield, product business owner of the vendor’s AC Plus solution, explains to Reference Data Review why counterparty data and valuations are so important in the current market.
Enfield, who joined Asset Control two years ago and is based in the vendor’s New York office, is eager to stress the importance of data in the post-financial crisis world. “There are two primary drivers in the current market: the concept of what people are loosely calling counterparty exposure and valuations transparency,” explains Enfield.
“From a counterparty perspective, what I am finding most interesting is that nobody is able to exactly define what they mean by the term ‘counterparty’. It is one of those words that people tend to use assuming that it means the same thing to everybody but it doesn’t. The base level that people are talking about counterparties at the moment is concerning derivatives contracts – so it describes the other side of a derivatives trade,” he continues.
Enfield reckons this definition is far too narrow a focus and highlights that these counterparties may also be issuers of securities, for example. The concept is also starting to expand into the area of operational risk exposure, he contends. “If you look a what happened with the prime broker relationships six months ago a lot of the counterparty risk was tied into the operational side of things,” he says. “Trying to identify to whom you may have exposure is not just identifying who is sitting on the other side of a position, it’s identifying the relationships between parents and subsidiaries also.”
Lehman has been used as an example of counterparty risk exposure because a lot of funds were using them as the counterparty for the processing of transactions, says Enfield. “These funds had trouble identifying where they were exposed to Lehman but if you peel the onion back and look at all the firms that were relying on Lehman for other things, for example the Lehman Point product for performance attribution benchmarks and analytics, you can see it is a lot more widespread.”
There is a trend in the vendor community at the moment towards coming up with a common identifier for business entities and Asset Control is focused on that area, confirms Enfield. Its agreement with Avox is part and parcel of that focus on business entity identification and risk management. Part of the reason behind the Avox partnership, which was announced in February this year, was to help firms deal with the current market’s compliance and risk management requirements by providing an accurate, documented and auditable data management process.
Under the agreement, the EDM vendor has integrated Avox’s business entity data service, including entity data and proprietary universal identification codes, into its solutions, AC Plus and Tapmaster. The aim is to provide mutual customers access to validated and stress tested data, and allow them to freely distribute it across multiple source systems, business units and locations within their organisations – all from within Asset Control’s data management platforms.
Although this work towards standardisation is very valuable, says Enfield, there are still many issues within the entity identification space. “When we talk to our customers about parent-subsidiary relationships, a lot of the time they say there are problems around partial ownership percentages. If they need to find out the details of any party that owns more than 5% of the entity, where do they get that information?”
Enfield therefore thinks that the introduction of a common identifier will prove to be just one piece of a larger puzzle within the counterparty data space. Asset Control is currently looking at different ways of identifying parent-subsidiary relationships and this is likely to prove a key focus for the future. “For strict parent-subsidiary relationships we have always had providers of data for this space and we are also working with Avox and CounterpartyLink to help our customers pull the data together. But I think that we are going to have to go further in the future to add more data in spaces that we cannot get from third party providers,” he explains.
Companies also have to look internally for a lot of the entity data that they need, according to Enfield. “A lot of this data is on internal credit systems, risk systems and settlement systems,” he says. “The silo issue is very real with this endeavour and it comes down to convincing the silos that they have benefit to participate in a more unified approach to data content.”
The silo mentality has always been a challenge for EDM projects and Enfield highlights that the current market conditions have made this an even greater mountain to climb. The focus on metrics and measurements for success of a project is key to this undertaking, especially with regards to cost savings in a harsh economic climate. “Right now what we are seeing is a move to try to find the always elusive return on investment (ROI) formula,” says Enfield. “The amorphous enterprise projects are not being approved because they don’t have that measurement but the more targeted projects are being approved because they are easier to justify.”
The challenge is to demonstrate specifically where implementations will save money by reducing duplication in terms of effective relationships or operational risk features. This work to identify tangible benefits is an integral part of the Asset Control sales pitch, says Enfield. The sales cycle for projects has generally lengthened recently because everybody “slammed the window” last year on their projects, he explains. Projects are now starting up again because people are starting to see the connection between data and achieving a financial institution’s goals. Enfield highlights the financial crisis as a good example of this: “It took a week to figure out what was going on in some cases and firms are now looking to see how they can make these processes better and data is really the key to this.”
The regulatory community is certainly taking an active interest in the data space; the European Central Bank’s (ECB) proposed reference data utility is proof positive of this fact. However, Enfield is concerned about the lack of coordination with regards to regulation, even at a national level, and fears that it may just result in an extra layer of complexity on top of the problems. He is also sceptical about the idea of a bureaucratic body taking charge of the reference data agenda. “Profit has to be a motive because I think profit drives innovation. I’m concerned about anyone trying to set up a bureaucracy to solve a problem where there are already firms working to solve this problem,” he elaborates.
Enfield is, however, interested in the idea of a “regulatory golden copy of data” in the area of pricing and valuation transparency. “The new rules in the space will eventually gel into something completely tangible in the next year. People do realise that data is at the heart of making it all work. They can have a whole lot of rules and controls in place but if the data is incomplete or inconsistent, then there will be a problem,” he adds.
Although price transparency is a positive step forwards, Enfield is concerned about a reliance on third party valuations. “I don’t see a big difference between the third party valuations and the reliance on the ratings agencies, which we’ve had so many problems with. I’m very worried that all the industry is doing is shifting the problem. In reality, asset managers should be responsible for their valuations and they can’t contract that away,” he explains. The industry should instead obtain multiple valuations sources in order to improve transparency and proof of best price, according to Enfield.
The focus for Asset Control over the next six months on the product side will be looking at counterparty exposure and helping customers to quantify their actual monetary and operational exposure to counterparties. The partnerships with Avox and CounterpartyLink should therefore stand them in good stead for this venture.
From a geographic perspective, the vendor is also expanding into China and it has accordingly translated its GUI interfaces into Chinese and Japanese, says Enfield. “The growth in the Far East has put enormous pressure on software companies not to meet them half way, but to translate everything into local languages and formats,” he says.
Enfield is confident that despite the tough economic climate, which has meant some of its client base has fallen by the wayside (such as the demise of a number of hedge funds), the vendor will go the distance and make it out the other end. “It has certainly been a rough road for the financial software community in general, as customers are consolidating or disappearing, but those firms that will remain in business are the ones with decent infrastructures that can support their remaining customers in these troubled times,” he concludes.