The BP oil spill in the Gulf of Mexico has been gathering its fair share of headlines over the last few months but one of the biggest challenges for financial institutions has been in identifying their exposure to the firm and tracking the relevant entity data across its various subsidiaries. Roger Fahy, director, and Ryan Markwith, assistant manager of the Global Data Solutions (GDS) team within the S&P Valuation and Risk Strategies division, explain how S&P has assisted its customers in tracking this data in order to determine their portfolio risk exposure to BP.
The oil spill occurred on the 20 April and directly following the event and for some time after, it has been imperative for firms to track their exposure to the firm due to its ratings downgrades. Markwith explains: “The onus has been on asset managers, for example, to see whether the securities in their portfolios have exposure to BP due to direct ownership or holdings via subsidiaries.”
To this end, S&P’s Valuations and Risk Strategies division, which was formed earlier this year to replace the Fixed Income Risk Management Services (FIRMS) division and is headed by Lou Eccleston, offers a portfolio of cross referencing services to the market that Fahy says allows firms to convert headlines such as the BP oil spill into a practical response, such as the reassessment of a portfolio’s risk exposure. The cross referencing solutions stripe across a range of S&P’s various divisions, including its numbering agency subsidiary Cusip Global Services (CGS), which is currently expanding its coverage to new sectors such as hedge funds.
Markwith explains that with regards to tracking data connections, firms can either opt for a top down or bottom up approach. The top down approach allows a firm to see the aggregate universe of securities that are related to a particular firm and its subsidiaries. Whereas the bottom up approach allows a firm to focus on a particular security and track it back to its ultimate parent.
For BP, the obvious choice was to take a top down approach in order to structure a linkage pyramid of exposure from the firm at the top, down to the instruments outstanding at the bottom. S&P determined that BP had 17 parent entities, 25 related legal entities (calculated via S&P’s Security to Entity Crosswalk, which maps securities to entities), 56 issuer names linked to 57 Cusip/CINS numbers and 2,795 instruments outstanding. The vendor also offered its clients a proprietary identifier mapping service on a customised basis to their own identifiers and those provided by S&P.
“This endeavour required the efficient linkage of disparate identifiers from across the market including those provided by Fitch, Moody’s, the US Edgar database, Cusips from CGS, S&P Ratings entity identifiers, S&P Compustat issuer identifiers, D&B entity identifiers and Markit RED codes,” explains Markwith.
This data was therefore fed back into S&P’s customers’ risk systems in order to more accurately calculate their exposure to BP as part of their daily data workflow, adds Fahy.
Another recent example of such functionality in action was the tracking of European sovereign credit deterioration and the exposure of firms’ portfolios to certain countries. Markwith highlights actions that were taken on 7 July with regards to a downgrading of certain countries’ sovereigns, including Portugal, Spain and Greece. “In order to track European market contagion and understand their full exposure to these three countries, firms used S&P’s cross referencing solutions to track entity exposure on a country level,” he elaborates.
S&P duly identified a list of 108 banks exposed to their sovereign governments by domicile and allowed its customers to see the relationships of these institutions with their subsidiaries via their Cusip identifiers. The vendor was therefore able to roll up the entity data linkages for example from Waypoint Bank to Sovereign Bank and its ultimate parent Banco Santander, which was exposed to the Spanish sovereign downgrade. “Customers could see the eight major subsidiaries for Banco Santander and the securities outstanding related to these banks, as well as the 124 issuers of these securities,” Markwith explains.
Given the importance of tracking risk exposure across the markets for a firm’s business and the onus being placed on these firms by regulators to prove the robustness of their systems and controls, S&P’s pitch is likely to go down well in the market. It is not alone in the market in offering these services, but the appetite is certainly out there for investment.