Anthony Kirby, secretary and founder of the Reference Data User Group (RDUG) used last month’s Finexpo 2004 conference in London to outline new initiatives in the corporate actions area. Kirby said the industry group was looking at corporate actions as a possible area for new activity.
In a wide-ranging presentation to industry participants at the event, Kirby underscored the importance of accurate handling of corporate actions. “Misinformation, at a minimum, may cause customer service issues or, even worse, huge losses through claims, if an event is missed or mishandled,” he said.
Kirby quoted a recent survey of 242 firms in 33 countries jointly commissioned by Swift, Smartstream and CityiQ in May 2003. This survey concluded that although corporate actions is acknowledged as being manually intensive, 57% of firms have at least some automation, operated by small teams of less than 10 people. A further 79% of respondents anticipate substantial automation across the entire corporate actions process.
The survey found that 41% of firms were considering automating the corporate actions process, although their expected implementation timetables are protracted: more than 51% were not expecting to select a solution for at least 12 months.
Elsewhere in the presentation, Kirby discussed the growing realization of the importance of reference data. In addition to direct industry participants, Kirby said, regulators and central banks have put reference data “on their radar screen.”
As such, Kirby said, regulators should consider a number of factors when auditing firms:
- Do firms use data scrubbing tools for validating data for accuracy and completeness?
- Do they employ data cleansing techniques around a single ‘accepted reference source of truth’ and how is this maintained?
- Do they use algorithms or business logic for how to process data from various sources in case of lack of agreement?
- Do firms deploy business rules and adopt acceptable tolerance levels?
- How do they build data integrity built into their processes and how do they benchmark quality?
- Do they employ independent data sources for verification?
Financial firms “need to rethink the entire value chain of reference data procurement, cleansing and distribution,” said Kirby. In addition, “each element of reference data requires a unique business definition, to be interpreted correctly by a machine.”
Global e-commerce and STP requires reference data standards for content and identification, said Kirby. Content standards need to ensure “there is a common understanding of all terms definitions and relationships so firms will know what they are receiving at a very granular level and with absolute precision,” he said.
“ISIN (International Securities Identification Number) alone is not sufficient,” said Kirby. He added that RDUG’s position is that a workable solution to the identification problem is ISIN, plus OPOL (Official Place of Listing) and MIC (Market Identifier Code).
In addition to the technical problems of providing, unique, timely and common identifiers to every traded instrument, there are business and legal entity problems. “With client and counterparty data, the data set describing the information is owned by various parties within the trading lifecycle,” said Kirby.
He called for international standard identifiers linking legal entities, issues, funds and counterparties. “There are two perspectives,” said Kirby. “The need to link companies with legal entities with issues for risk management purposes and to meet regulatory compliance requirements, and the need to link investment programs and funds with counterparties to promote processing efficiency when cross-referencing bet-ween proprietary internal identifiers.”
RDUG is preparing a white paper, currently in draft form, discussing the legal entity problem. Topics include:
- The reality that some sell-side firms have completed extensive automation efforts on proprietary terms in order to meet regulatory compliance;
- The industry-wide approach to compliance research not in place yet;
- Moves toward establishing a definitive source of legal entity relationships being co-coordinated through RDUG/REDAC/SIA;
- Is there a standard cross-referencing scheme/account number for settlement and allocation instructions (legal entity to funds)?;
- The relationship between Omgeo Alert Codes, ISO WG8 (IBEIs), Crosswalk (S&P/Telekurs/D&B) and FIX 4.4.
Kirby concluded, that while reference data is a critical enabler for STP, different firms define STP differently depending on their role.