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‘Assume Role of Vendor’ to Ensure Rigour in Applying Data Licences, State Street’s John White tells FIMA

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A clear and thorough understanding of precisely how data is utilised within investment firms, tied to “differentiating” data usage, is essential before data licensing can be effectively and successfully embarked upon, John White, principal data management, State Street Global Advisors (SSGA), has contended.

Knowing “upfront” what is explicitly covered within contracts signed with data vendors as to the permitted use is absolutely crucial, and not asking permission first about exact scope of use could result in lawsuits if you are caught out.

“Before you can really start licensing (data), you need to fully understand how your data is going to be utilised, who is going to be using it and what the downstream effects are,” White told delegates at FIMA earlier this month.

Use of derived data from information vendors and its onward distribution – both internally and externally – within top-tier banking organisations continues to be a “red hot button”, according to White. Obtaining “clarity” on derived data is key to avoiding potential legal action, he said. “Know your usage, understand what your client wants, assume the role of the vendor through pre-audit reviews and ensure agreements are explicit on all usage. I would caution that you really want to understand what you mean by derived data.”

More vendors are undertaking audits, he said – and more investment banks are carrying out audits too. One of the biggest grey areas today is the scraping of websites for information, he reckoned. “There are lot of implied warranties at the bottom of websites, beyond which use is – sometimes – not permitted.”

SSGA has created and maintained a database to specifically track rules and usage of data. White said tangible benefits from this and the State Street unit’s Proof Journal had helped reap savings. Use of a centralised negotiation model by SSGA has also helped it to know when it is in the clear – before vendors are in a position to challenge it. “It’s better to ask permission first than having to ask for forgiveness later. So, have the information upfront, state clearly what it is you want and negotiate upfront.”

Critical too is ensuring firms’ subsidiaries and affiliates are properly covered, finding out from vendors what is allowed in the normal course of business and getting to grips with multiple use issues. While State Street as a whole comprises three different businesses – including State Street Bank & Trust and State Street Global Markets – White revealed that despite “lots” of information being licensed to SSGA, its data vendor licences did not necessarily apply to the rest of State Street.

In respect of the investment process, data includes proprietary research, information created internally that goes into the investment decision making process, as well as third-party data services such as tick data coming in from Reuters or information being pulled from financial databases like Compustat or any of the index databases like MSCI or Standard & Poor’s.“

All that information we can flow into our investment models,” White said. “It is used not only in portfolio management reporting but also goes up into the investment decision making process.” Involved in that process, data flows into areas like gaining validation from compliance prior to authorising of trades.“

There are different pockets of how the data really needs to be licensed. Once you’ve been able to execute the trade, now it’s going into portfolio accounting. So for example, are you undertaking your own portfolio accounting or are you somehow outsourcing it? There are licensing issues associated with that too.”

Finally, the data flows into the settlement process and into client reports. White said many licences firms have in place may specifically say “for internal use only”. This needs careful treatment and handling. Evaluating multiple use, according to White, is an “administrative nightmare” but essential, particularly with some exchanges.

“If you have an internal use (clause)… how are you going to ensure that your clients are also covered by your firm’s licensing as well?” he asked.

In terms of differentiating the types of data used, White said it is imperative to know who in your organisation can use the data and what divisions/locations are included.

“Much of our licensing in SSGA is exclusively just for our use… it does not cover the entire organisation. Even internally there has been a wrong assumption that we are one State Street,” White said. He pointed out that most licences are “very explicit” in explaining location for use as well as division.

When it comes to product licences, which in SSGA’s case cover its passively managed products that seek to match the stated returns of an index with their own products, a separate kind of licence needs to be in place.

“In any sort of product licence, you first of all need to be sure that the data can be used to create a marketing product. Do you have that licence in place? You cannot just assume that because your firm is receiving a particular kind of data that there is an implied licence. Ninety per cent of the time there is not. If you are creating that licensed product, are you allowed to stay within the US, are you able to keep within the UK, or is it more global in nature?”

Firms need to watch out for the level of trademarks required by vendors, White said. “If you are marketing one of the vendor’s products to create another product, the vendor will want to ensure it has effective attribution – in addition to the data being properly licensed and the vendor having its trademarks clearly displayed.”

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