The FICC Markets Standards Board (FMSB) in its latest Spotlight Review warns that if markets are to remain stable and trusted, fair and effective, then the rapid growth of new technology and of data science must be balanced with more effective governance and control.
The report, which examines the crucial role of data management in the stability and resilience of wholesale FICC markets and financial systems, notes that the exponential growth of electronic trading in the past two decades, coupled with increased electronic reporting requirements, has significantly increased the quantum of transaction data – and while this has increased transparency and improved the overall efficiency of FICC markets, there remain notable issues with the clarity, consistency and ease of use of data that should be addresses through a standardised approach to data governance.
Data runs through all the infrastructure of participants in global wholesale FICC markets, including the pricing, order and trade management, risk management, regulatory reporting, financial and corporate systems. These systems continuously process and feed data around the organisation, and each system plays a different part in storing, processing, enhancing and transmitting data. Data is duplicated, aggregated, integrated, cleansed, enhanced and acted upon in real time, in multiple locations around the world – and failure to exercise appropriate controls over data, warns FMSB, could significantly increase the risks to organisations and market functioning, from both a reputational and financial perspective.
In addition, rapid changes in the uses, and users, of data – where the same term can be duplicated and presented in a myriad of ways using a variety of definitions – risks introducing high degrees of complexity and inconsistency. Increasing complexity and inconsistency could also increase the risks of market misconduct and market instability resulting from improper access to, or use of, data. And although various industry initiatives, such as the Financial Information eXchange (FIX) Protocol and Legal Entity Identifiers (LEIs), have been partially successful in standardising the way in which financial data is referenced and transferred, further steps are needed to manage this risk.
“The proper functioning of trading, reporting and risk management is critically dependent on the security, accuracy, timeliness and integrity of data,” comments Rupak Ghose, Senior Advisor on Data and Technology change and author of the report. “Wholesale FICC market participants are facing increased risks to stability and conduct resulting from the growing challenges of data management. Standardisation and good data governance are key to mitigating these risks.
The report features a list of seven key sources of critical data (business continuity, data confidentiality, trading, aggregate exposure, regulatory enforcement, ownership rights and security risks relating to misconduct) along with a review of the work of regulatory authorities in the field. In addition, it outlines eight key components to promote effective data governance, including the data lifecycle, data policies, data taxonomy, mapping data sources, data movement and lineage, data classification, data leakage detection and data quality. It establishes the foundational need for robust data governance and management strategies, and highlights the significant benefits to market participants from moving to a more centralised data strategy
Its findings have been met with enthusiasm by the industry.
“FMSB lays out the essential role of data governance for the future success of data management. FIs can easily locate and utilize quality data to make informed trading decisions and uncover new opportunities faster, produce fast data analysis and have an overall better understanding of their business and processes,” notes Scott Mayster, Global Product Manager at Tick Data (a subsidiary of OneMarketData).
“This is crucial, especially with financial market data exponentially growing during the current market climate. Just days before the country started social distancing, we saw significant jumps in market volatility and volume, which led to outages and data delays as exchange and vendor systems became overloaded. At the precise time when every trade represented greater risk and opportunity, many market participants did not have the data they required to analyse the unprecedented activity. Firms that self-manage data collection, cleaning, and organization may have missed out at a time they could be applying this analysis to their decision-making. With an ever-expanding set of data and analytics creating a greater challenge to find alpha, quants demand accurate time series data and can benefit from removing data management responsibilities such as cleansing and normalizing. Real-time data capabilities will allow FIs to effectively build and test the models that will drive their strategies going forward, in navigating a complex ecosystem, by powering all aspects of their quantitative strategies.”
Regulators too have welcomed the report. Gareth Ramsay, Executive Director of Data at the Bank of England, says: “The rapid pace of systems development and the increasing dependence of the financial system on data is a key strategic focus for the Bank. Therefore, the FMSB’s Spotlight Review is a welcome exploration of the critical role of data management for the financial industry. The key themes in the review, particularly the importance of data governance and standardisation, complement the Bank’s ongoing data collection review, which aims to make data collection more efficient for the Bank and for firms, and to improve our ability to use that data effectively.”
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