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Financial InterGroup Advisors Calls for Establishment of Central Counterparty for Data Management

The lack of a standardised source for reference data is at the heart of the problems surrounding European clearing and settlement, according to strategic advisory firm Financial InterGroup. The comments come in response to the request by the Committee of European Securities Regulators (CESR) to provide feedback on its consultation paper on recommendations for securities settlement systems and central counterparties.

The main aim of the CESR recommendations is to promote competitive, efficient, safe and sound pan-European post trading arrangements and the regulator received responses from a number of industry groups with regards to its proposals. Financial InterGroup’s contribution was submitted to CESR by president of the firm, Allan Grody, at the end of January.

The response highlights the area of reference data as a particular problem in the European post-trade landscape. Grody suggests that CESR should be focusing some of its efforts in understanding and tackling the problems inherent in the way reference data is dealt with in the current market.

Even the definition of reference data is a problem, Financial InterGroup asserts. “To the information professional reference data is any kind of data used solely to categorise other data found in a database or solely for relating data in a database to information beyond the boundaries of an enterprise. To the risk manager it is internal and external (third party) data that is used to establish the underlying criteria from which credit risk analysis is performed and credit risk exposure is modelled. To operating management referential data is information that enables financial transactions to be identified and processed and financial information to be internally and externally reported,” the firm’s response to the CESR recommendations says.

If financial institutions cannot even decide on the definition of reference data internally, then this signifies the scale of the problem, according to the firm. If firms are therefore unable to begin to think about the scale of the problem, then there is no possible way that it can be efficiently tackled.

In order to begin to solve the problem of reference data, Financial InterGroup suggests that CESR bring the concepts embodied by its recommendations for settlement systems and central counterparties to the reference data world. “To date, mutualised risk sharing within clearance and settlement systems have only been applied to the value portion of transactions (principally quantities, transaction prices and currency values). These same techniques, however, can be applied to the matching and settling of the referential data components of these transactions,” it suggests.

The main thrust of the firm’s argument is that fixing faulty reference data within financial institutions is a costly, risky and time consuming chore and therefore there is a strong case for the establishment of a central counterparty for data management. The new facility would match multiple incoming feeds of reference data, clean this data and supply it to participants and their counterparties.

According to Financial InterGroup, the reference data facility would be initially established by a handful of industry infrastructure entities and multi-national financial firms. It points to the Group of 30’s suggestions in its Financial Monitoring Report for the Global Clearing and Settlement Committee on 22 May 2006 as an example of support for the idea.

“The implementation of reference data standards has proven difficult. With no global owner of reference data and friction between the needs of the domestic and cross?border market users, progress has been slow. Future progress will require greater efforts by market infrastructure operators and international institutions with global reach,” says the G30 report.

Via the establishment of a global central counterparty, the industry could be afforded a single golden copy of reference data across institutions rather than multiple golden copies for each firm, Financial InterGroup continues. The firm contends that this duplication of effort in maintaining multiple golden copies introduces “systemic risk and excessive cost” to the market.

It highlights the work going on in the standards space as a precursor to this work and suggests that a central counterparty would focus the work of these disparate groups. “The governing body for the central counterparty for data management can play a significant role in coordinating these efforts, providing for the first time, a global centre for these data management initiatives,” it states.

The firm recommends that regulators and industry participants discuss these issues and collaborate to “benefit the entire global financial industry”. It does not, however, suggest who should take the reigns of such an ambitious project.

Given that the industry hasn’t even been able to agree on the establishment of a standard for a business entity identifier (BEI), Financial InterGroup’s suggestions seem to be somewhat optimistic. Many firms don’t even have a golden copy approach to their own reference data, let alone be able to contribute to a pan-industry effort.

However, the idea is not beyond the realms of imagination for some areas of reference data. At last year’s FIMA conference in November, for example, Soeren Kier Christensen, managing director of Finsoft Financial Systems, suggested that the European Central Bank’s Centralised Securities Database (CSDB) could be used as the industry’s recognised source of BEIs in the future.

Moreover, DClear, the wholly owned subsidiary of the investment arm of the Dubai International Financial Centre (DIFC), released its plans last May for the establishment of a reference data utility. Although it has been rather quiet about progress so far…

It will be interesting, nevertheless, to see CESR’s reaction to these suggestions and whether it chooses to set up a specific working group to discuss them.

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