A large proportion of buy side firms are being compelled to re-evaluate their data management systems as a result of their use of complex instruments, according to A-Team Group and GoldenSource’s recent derivatives webinar, Derivatives: The Eye of the Data Storm.
Automation is no longer a choice; it is a necessity, explained Maryann Houglet, senior vice president of A-Team Group’s strategic consulting team, as she presented the findings of the recent joint report – A View into OTC Derivatives – Complex Products’ Impact on Buy Side Data Management Practices – by both firms into the impact of OTC derivatives on data management. The resounding theme of the report was that firms constantly have to upgrade their systems to handle OTC derivatives and data management is an integral part of this process.
“Growth and scalability came out as the top priority for why firms are re-evaluating their data management practices. That ties right into the front office wanting to invest in more complex strategies and they need to be supported by data management practices,” she said.
Neil Edelstein, senior director of product solutions, GoldenSource, added: “What we are finding is that products are being built on the fly and quickly. The real delay in bringing them to market is that they really don’t fit within standard security masters.”
The increased awareness of risk surrounding complex instruments means that buy side institutions are much more willing to invest in data management systems, the panel agreed.
“We asked people to rank priorities when using data to manage risk and we were pleased to see that 96 per cent of the firms either connected, or were planning to connect, their accounting systems to their reference data systems,” said Houglet.
Derivatives have become widespread and it is important to note that they are here to stay, she explained. The buy side is taking a long hard look at its data management strategies and re-evaluation is not necessarily driven by centralisation, but rather other factors such as new investment strategies and risk management. According to the report, 78 per cent of respondents were re-evaluating their technology, including their central management strategies.
The study looked at the strategies of a range of traditional asset managers in tiers one and two at varying stages in the centralisation process, said Houglet. “We focused on the US and UK firms because our experience tells us that a lot of data management practices are centralised geographically in these areas. Geographic split of responsibilities confirmed that data was being centrally managed; with 70 per cent of the people we spoke to saying that they had centralised.”
Respondents pointed to strong regulatory pressure to have a better understanding of all related reference, market and financial data, and internal pressure to get to market quicker with new products as key drivers with regards to centralisation. However, a small group of respondents were unsure whether centralised data management could properly address the requirements of more complex instruments. One respondent was quoted as saying: “I do not think it is possible to handle alternative investments centrally – they’re just too complex.”
Of those planning to centralise, 74 per cent indicated that they would be using third party data management and the expected spend on these vendor solutions varied considerably along with the perceived scale of the problem. Houglet explained the details: “The amount of spending on these activities varies and it’s tied directly to the idea of unfolding the layers (of data). We had a cluster between USD$250,000 and USD$1 million, a cluster between USD$3 million to USD$5 million and a few in between. I think part of that, one respondent noticed, was understanding the true depth of the problem and what needs to be done to solve it.”
Outsourcing was not high on the buy side list as an option, she said: “When we asked whether outsourcing had a part to play in the picture, 71 per cent said no. Several had looked at alternatives and decided they did not work for them or were outsourcing only one small piece of their business.”
Despite the benefits of centralisation, the panel agreed that it is not the solution to the challenge of dealing with derivatives data. “The decision to centralise is only the beginning, if it doesn’t get down to the downstream applications in a way that they can use it, then you are going to see some deviation,” added Houglet.
Low tech solutions have far from disappeared and Excel is here to stay, Houglet stressed: “Although from an operations point of view people are concerned about the risk that it brings in, 64 per cent use Excel as a data collection or transfer mechanism, as well as for analytics.”
Edelstein agreed: “We see an industry that is plagued by manual operational deficiencies – particularly on the derivatives side, fax seems to be the technology of choice.”
However, Mike Atkin, managing director of the EDM Council, was positive that the future would bring change: “I think that executive management of financial institutions will begin to understand that data is an asset and needs to be properly managed. It is the lynchpin to all of the business processes in the firm – from investment strategies to risk mitigation.”