The high cost involved in the processing of reference data is the main driver this year behind investment in technology in the data management space, according to the results of 2009’s annual survey by Aim Software and Interactive Data. This focus is unsurprising, given the intense budget cutting that has been characteristic of the post-crisis environment, with many being forced to rationalise headcounts significantly. Perhaps more surprising (for those that haven’t been following Reference Data Review closely this year especially) is the renewed emphasis on corporate actions data within the market, despite the downturn.
The online survey, which was carried out over the course of six months this year and involved responses from 264 industry practitioners, is the sixth of its kind carried out by the two vendors. Much like its predecessors the aim of the survey was to provide an overview of the state of reference data management across the 270 financial institutions in 51 countries involved in the questionnaire.
“A special objective of the study is to take a close look at reference data management procedures and observe developments over the years in order to help institutions to get a better picture of their business in a constantly changing environment. By comparing their own data management strategy with the regional or global results, enterprises will be able to assess their future steps in reference data management,” explains Martin Buchberger, head of marketing and sales at Aim Software
Last year’s survey identified a trend towards investment in reference data automation as a result of data quality initiatives, with 70% of respondents citing this as their primary reason, whereas costs were a secondary consideration for 53% of the respondents in 2008. This year, on the other hand, it seems that cost considerations have overtaken all other priorities and many are being inspired to invest in order to tackle the increasing expense of fixing bad data. According to 49% of respondents, high costs are perceived to be the most pressing problem, closely followed by missing standards for data delivery (43%) and poor data quality (also 43%).
The industry seems to be more aware than ever before of the importance of high quality reference data; regulators have certainly done their bit to make sure of that (see the UK Financial Services Authority’s fining of Barclays earlier this year and the Fed’s focus on the counterparty challenge of living wills regulations for proof). Respondents to the 2009 survey support this notion, as 73% of respondents said that data is considered to be a key issue within their institutions in order to reduce errors. After all, if Barclays had 16% incorrect reference data underlying its MiFID transaction reports, how much higher is this percentage within other firms?
Cutting costs again features in this dynamic, as 58% of firms said they were keen to reduce expenditure by improving reference data and another 58% wanted to reduce risk exposure in this manner. Compared to the results of previous years, these figures indicate a steady increase of enterprises’ awareness in this field: in 2006 only 53% of all participants perceived errors, costs (45%) and risk management (44%) to be major driving forces for reference data automation.
In order to be able to cope with falling headcounts and tighter budgets, which involve little wriggle room for manual processes, firms seem to be turning to data management automation. The hottest geographic regions for investment in either buying in a new solution or extending a current one seem to be in parts of continental Europe, Africa and Latin America (see the heatmap below). Although much has been made of the Asian appetite for investment, the survey results do not seem to support this (outside of a couple of exceptions, including Taiwan).
Another major finding of this year’s survey indicates that the demand for a centrally managed security master is still growing, especially in Western Europe and North America. Whereas in 2007 only 38% of all respondents stated that they had a golden copy, in 2009, 51% already feed reference data into a centrally managed repository. Perhaps this accounts for the heatmap’s results: many firms have already started the boll rolling in terms of investment in a solution in a targeted instrument data management context.
“Despite the cost containment policy in many institutions following the economic crisis, firms are aware of their need to enhance operational efficiency and to support the growing risk management and compliance requirements. This might be the reason for the steadily rising demand for central security master files,” explains Buchberger.
According to respondents, the priorities being assigned to these projects fall heavily on getting the basics right. The focus of reference data management lies on the management of basic data (61%), the automated opening of instruments (48%) and the management of pricing data (48%).
However, as previously mentioned, the management of corporate actions is gaining importance as firms are recognising the need for the efficient processing of corporate actions data in a timely and reliable manner. More than a third of all respondents to the survey (39%) said that they were keen to invest in the automation of corporate actions. Paul Kennedy, European business manager for reference data at Interactive Data, reckons this is a response to recent market events that have highlighted the need to have a greater understanding of how a corporate action can affect a firm’s risk profile.
“New types of corporate actions continue to emerge, covering an array of instruments that have grown in complexity. Besides this growing complexity, the volume of corporate actions data is expected to further rise in the future due to an increase in corporate refinancing and restructuring, and back office teams will be sorely pressed to keep it under control,” he continues.
If you look at the geographic proclivity towards investment in corporate actions (see the heatmap below), it seems that North Americans are most apt to invest in this space, as well as a few countries in the Asian region such as Hong Kong and Taiwan.
On the whole and as one would expect in the current market, regulation and risk management are playing a big role in the decision making process around reference data management projects. In keeping with the upcoming review of the Basel framework and the 2010 MiFID review, respondents seem to be slightly more concerned about the challenges of Basel II (49%), rather than those related to MiFID (42%). In North America, Sarbanes Oxley and Basel II have most affected the investment activities in data automation, although MiFID does remain a driver for the US itself.