The current financial crisis has had a significant impact on the buy side’s data management practices, according to a recent white paper by Asset Control in partnership with London-based management consultancy Lepus. Martijn Groot, director of market strategy at Asset Control, explains the highlights to Reference Data Review.
The white paper, entitled “Establishing Control: Buy-Side Data Management in a Changing Landscape”, bases a lot of its assumptions on recent research carried out by Lepus. The most interesting findings of this research, according to Groot, relate to the area of independent valuation. “Buy side institutions no longer take prices they are given at face value, but often face an arduous task in aggregating all the information from brokers, execution venues and information providers in order to come to a judgment,” he explains.
The white paper indicates that managing price data is a universal challenge facing buy side institutions holding OTC derivatives. Until a sufficient source of pricing and valuation is established, data collection, especially for complex instruments, remains largely manual and time consuming, it claims. Standardised, integrated and quality controlled data is therefore needed to create a clean set of prices for daily mark to market and risk management.
The problem has been exacerbated by the sheer weight of data generated by increased volumes, with spectacular growth from OTC derivatives. This has made it difficult to manage data in a structured and effective manner, Asset Control asserts. Data availability and the consistency of using a centralised approach are crucial to handling volume growth, it claims.
Groot’s colleague and president and CEO of the vendor, Phil Lynch, identifies a climate of change in the market: “The unprecedented volumes of data flowing throughout the financial services industry are forcing both buy side and sell side firms to take a closer look at the viability of their existing data management infrastructures and practices.”
Lynch stresses the importance of access to consistent and complete information via the elimination of data silos. “The cost of not doing this will be measured not only in terms of lost revenue, but in mere survival of organisations,” he warns.
Groot adds that the huge rise of volatility has meant that the outcome of actively managed funds has been more diverse. “As a result, to some extent, investor focus has moved towards capital protection and corresponding investment products. The buy side is a diverse group, and different buy side segments face different challenges. Traditional investment management faces cost pressures, as investors move to lower margin funds while the overall fall in asset prices means their assets under management (AUM) based fee model puts pressure on their revenues. In the case of hedge funds, mounting redemptions and difficulty in getting funding are the main concerns. Pension funds face tough regulatory discussions on the ability and speed to repair funding gaps,” he elaborates.
Buy side institutions will invest in solutions that address data management challenges for different reasons, Groot continues. One important reason is a need for cost reduction that only increased accessibility, centralisation of quality control and overall improvement of data quality can bring, he says. Other reasons include consolidation in the industry and improved risk awareness, risk measurement and risk management. “Buy side institutions will put more demands on valuation and transparency in the context behind prices. Recent events have acted as ‘stress tests’, revealing inadequacies in information availability and process at critical junctures in the transaction lifecycle,” he adds.
Other areas explored by the white paper include disclosure requirements and other effects of the post-MiFID world. The introduction of MiFID has increased the volume of price and trade data firms need to manage and has made it more challenging for buy side firms to locate available liquidity and gauge its depth, the white paper continues. Fragmentation of dark pools of liquidity and sources of data as well as an increasingly complex post-trade environment have accentuated the need for reliable access to consistent and complete data, while the cost of data rises due to buy backs.
Moreover, as buy side investments have become more diverse with the adoption of multi-asset trading strategies including alternative investments, this has also put strain on systems. Fragmented front to back office processes, disparate spreadsheets and application-based reference data silos can lead to increased errors and maintenance issues, the vendor claims.
Data management’s importance is being recognised by the buy side, according to Groot. “The difficulty market participants face is that there is a long agenda of issues to address and the difficult question often is where to start,” he adds.
The main challenge for the buy side from an information management perspective is how to support portfolio managers in their investment and product development decisions, says Groot. “Concretely this can include integrating information from many different venues to provide a complete market picture, linking different products to provide cross asset views, and providing easy access to large data sets to improve analytical capabilities,” he explains.
But from a back and middle office perspective, challenges include counterparty data management and increased scrutiny of the information that comes from other market participants and service providers, from brokers to custodians, he concludes.
By this logic, the outlook for the data management community over this year is fairly positive. That is, as long as they keep focused on the right areas when pushing their solutions. And by Asset Control’s estimations, these are in the risk management and counterparty data fold.