Ahead of the end of month deadline for responses to the Office of Financial Research’s legal entity identification consultation, Reference Data Review is speaking to a number of industry participants about their views on the entity data challenge in the current market. BT Global Services’ head of marketing for financial markets and wholesale banking Chris Pickles is first in the hot seat.
In our Q&A Pickles explains why many standards efforts have failed in the past, his hope that vendors will be included in the standards development process of the future, why ISO is the best way forward for entity ID development and why ‘sharing’ is key but ‘federation’ is critical.
How do you feel the regulatory attention directed at the legal entity identification challenge in the post-Lehman environment has impacted financial institutions’ practices with regards to this data?
Regulators have become more aware of the practical problems that the financial services industry faces today in the areas of unique identification. This doesn’t apply only to legal entity identifiers, or even only to the financial services industry. But what is happening is that regulators and financial institutions have been starting to query their own understanding of what they do and how their businesses work. By asking the right questions, they are now beginning to understand that the state of adoption of industry standards is now much worse than they had thought.
The reason that standards have not been adopted is not due to lack of attention alone – it is also due to some existing standards no longer being fit for use, the lack of availability of new appropriate standards, and the fact that financial institutions would have to change the way that they operate in order to adopt standards which would cost them money in the short term to become more cost efficient in the long term.
Which regulations and compliance requirements do you think are having the biggest impact on this area?
US regulatory reviews are having the biggest impact, as these affect all US firms and the larger non-US firms as well. These are followed in impact by European legislation and regulatory reviews. However, regulators are cooperating across borders much more than they have ever done before in order to achieve better solutions for firms and markets that today are not just domestic but international.
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? What about the rest of the world?
There are, in fact, current industry standard legal entity identifiers in many countries. The issues tend to be that they weren’t designed to fit the overall requirement, for example Swift Bank Identifier Codes (BICs), that they don’t allow for all of the legal entities that a bank has to do business, and that they are used domestically and not internationally.
Rushing through a regulatory solution may not therefore solve the real problem. Whatever mandate may be given by US regulators will have an impact on firms that operate in the US, though this doesn’t necessarily mean that it will have much impact outside of the US, unless it is a particularly appropriate standard for international use. That is the key issue – it’s not just about having standards, it’s about having the right standards and then getting those standards adopted.
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?
For data standards, I would in general say that an ISO approach is more appropriate than any other because it has a better chance of being applied internationally. That also applies even if the resulting ISO standard is based on a current existing usage such as IGI or Cabre – as long as there is no resulting monopoly that is given to a vendor because of this. But the issue needs to be dealt with in breadth – not just in a ‘shoot from the hip’ fashion.
Banks in particular have to deal with a vast number of legal entities across the breadth of their operations, and the same legal entity can have multiple different roles in its relations with a single bank. Having a standard that a bank can apply across its business, and not just for one business operation or asset class, is most important overall. Financial markets is just one sub-set of the overall business issue for a bank.
How will all of this impact the vendor community?
We have been told for years that “the industry has migrated to ISO 15022”, when in fact it hasn’t, and when ISO 15022 as a standard doesn’t do everything that the industry needs. ISO 20022 is producing better results for the industry – but it won’t be the one answer for all known problems, and it won’t be adopted by all of the international financial community in our lifetime. We have always lived in a multi-standard world, and we will probably always live in a multi-standard world. The vendor community is fully aware of this and of the problems and business opportunities that this can generate.
One of the key impacts for vendors is that they will need to understand better what all of these standards mean. In the past there has been a tendency for financial institutions to try to keep vendors away from the process of defining and creating industry standards, expecting the vendors just to pick up the results afterwards and come up with some appropriate product and service offerings. Vendors have too often been told that they are not allowed or expected to attend the meetings of standards development bodies. Even where the relevant national standards body does allow and encourage vendor participation, the financial institutions have tended to set up parallel standards organisations that discourage vendor participation.
That has been very different in the development of FIX Protocol standards, where vendors internationally of all sizes are welcomed and can play an active role alongside financial institutions from around the world in creating the necessary standards for financial markets. Being optimists, the vendor community hopes that the regulators and the financial institutions will recognise the vital role that vendors play in helping the industry to achieve change, and will include the vendor community in the new standards development process that is needed to meet these new regulatory requirements and to meet the overall business needs of financial institutions, their customers and their suppliers.
But agility and commitment will be critical for all vendors: those that don’t get actively involved in the standards development process are unlikely to be at the forefront of the market in the future, and are more likely to find themselves picking up the left over business from those leaders.
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?
Counterparty risk management has been well understood for many years: a problem is that financial institutions haven’t necessarily implemented the systems that they need to manage those risks appropriately. This doesn’t apply only to counterparty risk management, but to many other aspects of risk management as well.
Financial institutions today understand better the need to have a holistic picture of counterparties and markets, of clients and of risk as a whole. Overall the market is still at a relatively immature state, with, of course, a very small number of very large institutions being advanced, and the vast majority of market participants being far behind. For example, in Europe with some 40 sell side firms being responsible for 80% of trading volumes out of a market with over 2,000 sell side firms, it is only normal to expect the ‘long tail’ effect.
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?
Vertical silos still persist in financial institutions. The situation has improved in the last seven years in some aspects of firms, but the silo effect is still very strong. It is quite usual for the heads of different silos never to have met the heads of other silos. Within the data management function alone inside the firm there are silos.
The hope is that with a greater appreciation of some of the newer industry trends the firms can address these issues both effectively and more cost effectively. It is impractical and perhaps impossible for every firm in the financial community each to build its own individual solution for legal entity identification and for external identification systems in general. And there is unlikely to be one single global solution to meet the needs of the world. ‘Sharing’ is key, and ‘federation’ is critical.
Legal entity identifiers are just one aspect of unique identification and identity management that every investment firm has to deal with, with greater or lesser success. There are also the issues of unique instrument identifiers, unique market identifiers, and so on. The challenge is not to have one world standard to identify everything – the challenge for a firm is to be able to identify each thing uniquely.
By having solutions that allow firms to ‘federate’ internally the many different external identity systems that exist, and to link these to their own internal identity management systems, investment firms can address their overall business needs and not just the niche requirements of financial markets or just financial markets regulators. For every firm to have a separate infrastructure to access all of these different external identity systems would not be cost effective, so using a shared infrastructure becomes a prerequisite.
That brings us back to the overarching, firm-wide challenges and opportunities that the industry is facing in terms of coud approaches, infrastructure as a service (IaaS) and software as a service (SaaS).
Is there a degree of disparity in these practices between the buy side and the sell side? Large and small firms?
Classically, buy side firms chose between their sell side service providers, as well as between application service providers, according to the range of services and solutions that each one offers and the fees that they charge, and it’s reasonable to expect that buy side firms would look to sell side firms and application service providers in the same way when it comes to addressing the issues around unique identification.
Buy side and sell side firms are two different industries – one is the customer, the other is the service provider to that customer. As always, it’s to be expected that larger sell side firms will implement solutions earlier, but medium and small sized firms still need solutions, so we see a considerable opportunity for application service providers that wish to address the needs of the broad community of thousands of non-large sell side firms around the world – because this is a global issue, and not just a US or European issue.
What trends do you expect to see over 2011 in terms of market practices in this space?
We’d expect to see much more attention being paid to federated identity management, to the message transformation and data transformation services where identity management systems can act as a bridge, and to making these services available over cloud-type infrastructures, whether the public internet or private managed clouds like the BT Radianz managed infrastructure.