The pricing and valuations space is becoming ever more complex and data management teams focused on this function are being asked to do even more with fewer resources at hand, so how can they cope? The answer may lie in increasing automation and slotting this area of data management into a wider enterprise data management (EDM) strategy, according to panellists at the recent A-Team Group, GoldenSource and Interactive Data valuations event in London.
Panellist Matthew Cox, head of securities data management in Europe for BNY Mellon Asset Servicing, explained that his team has been faced with a boom in exceptions in the pricing process as a result of increased market volatility and this has put undue pressure on resources. “In the short term we have been able to cope with this challenge but it is not a long term solution as staff will burn out eventually if they are faced with dealing with these huge volumes of exceptions on a regular basis,” he said.
Moreover, all indicators suggest that the recessionary environment is exacerbating the situation. A recent Reference Data Review reader poll highlights that although most firms are being faced with a moratorium on hiring new staff, some readers are facing a decrease in staff (29% of reader respondents said they had experienced a decrease in staff this year).
Further evidence of this strain was presented by Virginie O’Shea, editor of Reference Data Review, who chaired the session and discussed the results of a recent A-Team Group survey, which highlights the current state of the valuations function within financial institutions. She indicated that majority of respondents to the survey had between six and 15 staff members, “not a great number given the increase in the volume and the complexity of the work involved”. Especially as 43% of respondents also indicated that their processes are more manual than they would like. “That is an interesting statistic,” added Cox. “It indicates that these fund accounting teams are being pushed to their limits.”
In light of these pressures on staffing, Cox suggested that firms could instead take a more “creative” approach to data workflow by adding in more automation and by dual sourcing data. He said that risk management has become much more of a driver for investment in market data feeds and automation projects and this could be leveraged to get buy in from senior management.
Gert Raeves, senior vice president of strategic business development and marketing at EDM solution vendor GoldenSource, added that the business case for investment in pricing data management solutions does not often rest on considerations regarding headcount. Instead, the focus is generally on data quality and reducing risk in the valuations process, he said.
Cox is convinced that things are gradually getting better in this space and spoke of the trend towards greater investment in consolidating and automating processes in many institutions. “There is more of a desire to bring down costs by rationalising processes following mergers and acquisitions. The business has also changed from monthly valuations to daily, which means firms have to be more scalable; all of which adds up to increased spending,” he said.
However, Antoine Kohler, managing director at Icap Information Services, agreed that there has been a noticeable uptick in interest in the valuations space over the last couple of years, but from the perspective of a provider, he said this has not yet fully translated into budget. One particular area that he said has seen investment is the complex end of the spectrum or “prices that must be derived from virtually no data”, but again processing of these is very manual.
The A-Team Group survey results indicate that the future is bright for about half of the market: 50% of respondents indicated that they expect their firms to increase spending on pricing and valuations in 2010. An unlucky 44%, on the other hand, expected spending to decrease, thus supporting the degree of scepticism demonstrated by the vendor community.
Regulators are not likely to let this issue lie, however, given their interest in getting greater transparency into derived prices. The US Securities and Exchange Commission (SEC) and the European Commission have both been actively engaged in reviewing the application of accounting rules in their respective markets this year and this in itself represents hope for further investment in the space.
Anthony Belcher, director of fixed income at Interactive Data, contended that providing a price is no longer good enough: “You need to be able to prove how you arrived at that price to auditors, regulators and clients.”
Cox added: “You never want to throw people at the problem because they can make mistakes and it is not a cost efficient way to operate. You need to invest in technology to allow your best people to focus on the riskiest and most important part of the business rather than being tied up with manual processing of exceptions.”
GoldenSource’s Raeves propounded the benefits of a golden copy approach to this data in order to lower exceptions and make the valuations process more flexible to meet future volume increases.
The A-Team Group survey indicated that 78% of respondents have an EDM strategy in place and 86% of these respondents claimed they had included pricing and valuations in the overall plan. The panel, however, were rather sceptical about the integrity of these claims. Raeves indicated that perhaps a survey bias might have produced these results, where firms did not wish to admit the siloed nature of their infrastructures. “Our experience indicates that firms are only just starting to focus on putting pricing data into an EDM context,” he said.
Cox added that many firms claim to have EDM plans in place to justify their strategies but this might not be the case in reality. Furthermore, rather than taking a big bang approach to EDM, he suggested that firms should break the challenges of data management into “chunks” and tackle the most pressing needs first.
Raeves seconded this notion and added that a more “pragmatic approach” that proceeds in stages would be the easiest to manage in the current environment. “Focus on the areas where there is greatest benefit for risk management and client satisfaction,” he suggested.
Stepping aside from EDM, investment in data feeds is definitely increasing, according to the A-Team Group survey. Many firms have taken the decision to dual source or triple source valuations feeds: 31% of respondents dual source and 48% triple source this data in comparison to only 15% that receive a single feed, said O’Shea.
All the panellists concurred that multiple feeds are becoming the norm across the market. However, Cox cautioned that investment in these feeds might be going to waste if “80% of it falls on the floor due to a lack of resources to process the data”. He said that robust processes need to be in place for firms to be able to fully benefit from this extra data. EDM, it seems, is the order of the day.
The A-Team Group survey was conducted during the month of October this year, in cooperation with GoldenSource to examine the challenges being faced when managing pricing and valuations data. It involved interviews with a selection of 20 senior level specialists working in the market data and valuations functions from firms in the UK, Europe and the US.
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