Although financial institutions have had teams of people managing and cleansing entity data for decades, when CounterpartyLink was founded in 2005 the practice of turning to external sources for cleansed entity data and verification of one’s own data was a relatively new concept. Identified by backers Investors Guaranty and data platform provider Cicada as a space that would see increasing investment, primarily due to the KYC and AML regulations, they formed CounterpartyLink to take advantage of that growing need.
Three years on and the drivers for financial institutions to focus on entity data have changed and expanded. Regulatory pressure remains the key driver, generating a 200 per cent average annual growth rate in spending, according to Aite Group. The current climate in the wake of the credit crunch has brought risk management to the forefront of executives’ minds and successful risk management relies on knowing who you’re dealing with to understand the exposure you have. And the explosive growth in the use of OTC derivatives has also prompted increased need for counterparty data.
Indeed A-Team, through its consulting and publishing arms, has found itself talking to more ‘global managers of legal entities’ or individuals responsible for ‘global customer account information’. In our research, we’ve found that 93 per cent of firms have or plan to centralise management of client/counterparty data – a significant number with such projects and budgets to support them. Those budgets sometimes run into six and seven figure sums.
In fact Aite Group projected that by 2010 more than 10 per cent of total spending within the enterprise data management industry will be on legal entity data and its management. Overall it believes spend on legal entity data services will rise from $16 million in 2006 to $253 million in 2010. But, of course, the real indication of a business reaching the mainstream, is the advent of its own industry event, with WBR (organisers of the reference data industry’s biggest show FIMA) creating a dedicated event focused on Entity Data Management, held in New York last year and due to be repeated this year.
That said, it has been a tough market for all vendors of counterparty data cleansing and management. Given institutions’ significant investment in legacy infrastructure and manual teams to manage entity data internally – clearly not the most efficient of processes – as well as the general reluctance to outsource sourcing and cleansing of what can be seen as confidential and sensitive data, the take up of external services has been slow. It is also difficult for managers to secure budget for such projects when there are clear revenue generating opportunities elsewhere.
But again, the current climate may help to shift those priorities. As such it has taken these providers time to establish themselves and become recognised and trusted by financial institutions. The deal this month for CounterpartyLink to be purchased in its entirety by Investors Guarantee Global Alliance now gives CounterpartyLink deeper pockets to expand on its products and really capitalise on the opportunity.
It also gives it a window into IGGA’s broad range of clients representing additional sales opportunities. Perhaps more importantly, it gives CounterpartyLink more control of its product direction and sales approach. For Cicada, the deal provides a nice return on its investment, as well as freeing it up to focus on its core business. For the industry, counterparty data just got more interesting. We will see over coming months how CPL responds to the opportunity, and how competitors like Avox respond to the challenge.