Could 2007 be the year in which counterparty data improvement projects make it on to the top 10 priority lists of most financial institutions? Analyst Aite Group certainly believes that during the next year a number of drivers will conspire to make counterparty data projects as compelling as instrument data projects – among them the growth in the OTC derivatives business. In a new report, Aite suggests those top tier institutions that have already invested in streamlining their counterparty data for risk management purposes have gone on to reap a number of additional benefits through the application of business intelligence techniques. However, the analyst also highlights the numerous challenges firms must overcome if they are to successfully extend their enterprise data management (EDM) projects into the counterparty space.
Aite’s analysis of the practical challenges associated with managing legal entity data and its exploration of the experiences of firms who have undertaken such projects yield a number of interesting findings. For one, Aite reckons legal entity data accuracy within a firm runs at an average of 68 per cent before data cleansing efforts are carried out. Though not subject to anything like as much change as market data, counterparty data does change: on average some 20 per cent of all legal entity data changes at least once a year as a result of corporate actions. Most other corporate records change at least three times a year. Cleansing takes an average of 18 months, and is universally described as the most painful part of any project. It takes up to three years to complete projects to the stage of integrating data into downstream systems. Aite believes budgets for large firms start in the low seven figure range, with six figure annual maintenance on external systems choices.
Business case justification for legal entity data projects can be tricky, when there are clear revenue generating opportunities waiting in the wings. This challenge is compounded by the fact that the business personnel who are better able to carry out effective cleansing than IT personnel – because of their closer understanding of the data – would often have to be taken off other projects for the duration of the exercise.
Regarding the vendors, Aite suggests those helping firms to manage legal entity data are less mature in their cycle, and their solutions less well known by the people responsible for managing customer and counterparty data within institutions. The analyst names the top legal entity data providers as Big Dough, CounterpartyLink, Credit Dimensions, Dun & Bradstreet and Standard & Poors – and says it has invited each vendor to participate in a thorough analysis of their products for a subsequent report.
A classic pitfall of counterparty data projects identified by Aite is opting to use a CRM system – a bad idea, the analyst reckons, because “these systems were designed for marketing – not for managing risk”. The CRM choice has led to project failure in many instances. Utilizing an inhouse system is certainly one option, though this tends to introduce additional time into the process of achieving integration with downstream systems, Aite contends. While the counterparty data teams within firms often are not aware that the reference data people have implemented an EDM system off which they could leverage, utilizing such a system where possible is the best bet, the analyst says, as EDM systems usually have flexible data models, corporate actions functionality, native connectivity to product data and connectivity to downstream systems.
While many firms view counterparty data projects as “budgetary exceptions” in today’s market, this will not be the case going forward, Aite believes, as the need for better risk management, compliance, STP and customer service differentiation pushes customer data improvement to the top of the agenda.