The market for counterparty data solutions is heating up, as the London Stock Exchange becomes latest in a slew of firms becoming active in the space. The Exchange is working with six participating financial institutions for an upcoming pilot of a counterparty data utility.
Says the exchange’s head of reference data, Mark Husler, “We are testing the market to see if there is a role for the Exchange to become a neutral place to share data for comparison and cleansing.”
The proposed service will collect high level European entity relationship data, primarily the ultimate and immediate parents, from the contributing institutions. This data will then be cross-referenced and compared against that of its peers, with findings and amended data (kept anonymous) reported back to the participants. Such management statistics could prove useful to both encourage further investment internally, or to benchmark service levels and show improvements as a result of any investment.
The Exchange is aiming to go live with the pilot within the next few months, says Husler. Any further product development will be dependent upon the success of the pilot.
The Exchange will manage the systems, technology, data repository, and management reporting functions in-house. It is, however, in the process of recruiting a third-party data management provider to supply the data analysis and cleansing component for the service.
It won’t comment on the companies it is evaluating, but a company like Cicada could be an obvious choice given its counterparty data client experience and its recent launch of CounterpartyLink (see Reference Data Review, February 2005).
It is not clear if other utility providers Azimuth’s Azdex or Credit Dimensions are involved in the evaluation but there are definite similarities in the utility approach of the services. Azimuth has had discussions with the Exchange and there were unconfirmed rumours at the end of last year that the Exchange might be interested in a potential acquisition of the relatively new software company, although this option now appears to be off the table. Husler declines to comment.
The Exchange would itself be in a good position to provide a neutral and trustworthy utility service – essential attributes when considering data sharing – given its established and central role within the London market.
The idea for the service was initially presented to about 25 financial institutions last October. The six firms that have so far agreed to participate in the free pilot are global sell side firms operating out of London. Husler says the Exchange is also in discussions with buy-side firms about potential involvement and that the pilot is open to a limited number of additional participants.
Sharing data with other firms is not an issue all institutions are comfortable with, and sign-off needs to go through compliance, which can be time consuming. Says Husler, “We need to prove the concept of data sharing. Our focus is on low risk data; the data that is likely to be the same across all firms.”
While initially focusing on immediate hierarchies, there is potential for the service to expand the scope of the data to include full trees, documentation, settlement details, and links to the Exchange’s Sedol securities identifier codes.
Initially the data will be assigned its own London Stock Exchange identifier, which Husler points out would be a natural extension of the Sedol. He says, “The industry has agreed that entities identifiers are needed and the Exchange is involved in the ISO TC68 SC4 Working Group 8 efforts towards that end. (See Reference Data Review, July 2004). In the meantime we will assign our own numbering while an industry standard solution is worked out.”
The Exchange hopes that should ISO look to appoint local agencies as numbering allocators, it might consider utilizing the Exchange for the U.K. region (similar to the securities identifiers process where the LSE maintains Sedols). “Whatever the solution, we will adopt the industry standard when it becomes available,” says Husler.
Although it is too early to discuss pricing details, the pricing model will be transparent and tiered based on usage.