Can commercial initiatives and innovation through partnerships succeed where standards bodies have failed in the world of entity and complex instrument identification? That is the question posed by A-Team Group and Cusip Global Services’ (CGS) most recent whitepaper, “Expanding Global Identifiers in Complex Assets and Other Areas”, and one which, given the focus of the regulatory community of late, is increasingly important to the community at large.
Regulators have become much more focused on the data details of the reports they receive; one need only look at the UK Financial Services Authority’s (FSA) recent fines for transaction reporting failures for proof. The proposals for reference data utilities in the US and Europe are further proof that the issue of data quality and the need for standardisation is high on the priority list in the current market. Within financial institutions themselves, as well as regulatory reporting, the risk management function also relies on accurate and reliable data, and in the post-crisis world this is a top priority for these firms.
However, entity identification has long been a challenge for market participants due to a lack of standardisation across the industry and this makes the performance of essential functions such as counterparty risk assessment much more challenging. Securities identification for the more complex instruments in the market poses a similar challenge, especially given the increase in the use of these alternative assets across the market. As the whitepaper says: “In order to ensure that an individual ?rm’s exposure through such complex instruments can be accurately measured, and therefore, managed, that ?rm must be able to correctly identify the securities and the entities that they are investing in.”
Thus far, the market has failed to progress a standardised approach to problem of identifying securities and entities across geographies. A March 2009 industry briefing, “Business Entity Identifiers”, prepared by A-Team Group for Standard & Poor’s, analyses the ongoing global initiatives to create business entity identifiers and highlights the lengthy and as yet unresolved process of agreeing a standard format among industry bodies. Given the seriousness with which risk management and regulatory reporting is being taken in the post-crisis environment, however, this lack of standardisation cannot continue for long.
The focus on systemic risk tracking at a global level is just one of the drivers that will push this agenda forward, basic risk management practices are the fundamental issue. “Without the consistent application of unique identifiers the risk of error is significantly increased throughout the instrument’s lifecycle, from pre-trade valuation, through trading, clearing and settlement to post-trade valuation,” explains the whitepaper.
A-Team Group and CGS highlight the practical challenges encountered in the derivatives and securitised debt instrument markets in the whitepaper and the appetite for the extension of new unique identifiers to this sector as a result. These instruments require a much more wide ranging set of criteria for identification purposes, for example, including reference entity, tier, currency, restructuring type, trade date, maturity date and initial spread.
So, it is a serious challenge and one that cannot be ignored, but how can it be tackled? The whitepaper suggests that “innovation through partnership” could be an answer, with the participation of specialist data providers such as CGS, industry bodies and clients to drive forward the instrument and entity identification cause.
For its part, CGS has already launched its own series of initiatives in which it has partnered with the industry and other key vendors to this end. The whitepaper explores the work the vendor has done thus far in three key spaces: business entity identification with the Cusip Avox Business Reference Entity identifier (Cabre) code; US listed options identifiers launched in partnership with UK-based futures and options specialist FOW Tradedata; and identifiers for the European syndicated loans market.
However, much more work is still to be done and the OTC markets in particular are likely to continue to throw challenges in the path of greater standardisation for identifiers across the market. It will therefore take a collaborative approach, such as that adopted by CGS, to solve some of these problems and achieve vital progress over the coming years.
The whitepaper concludes: “As financial markets recover from the effects of the credit crisis, we can expect to see innovation in the use of identifier driven data for the early identification of market trends and capital creation opportunities, alongside the continued expansion of unique identifiers into alternative asset classes.”
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