PAINTING THE WHOLE DATA PICTURE.
Heather McKenzie looks at the challenges of managing data across the regulatory landscape.
In less than a year, MiFID II and the Regulation on Markets in Financial Instruments will apply in all European Union member states while the main bulk of the European Market Infrastructure Regulation (EMIR) is under way, with initial margining requirements for non-centrally cleared trades is now applicable for the largest institutions. These regulations are putting data – and its management and governance – front and centre of the operations of buyside and sellside firms.
Cian Ó Braonáin, global lead of Sapient Global Markets’ regulatory reporting practice, says the regulatory pipeline has slowed somewhat recently, and firms now need to ensure that they understand the inner workings of the data process. “The Basel Committee on Banking Supervision’s BCBS 239 Risk Data Aggregation and Reporting Principles set the standard for what regulators will want to see in terms of reporting,” he says. “In our view, data management is everything because regulators require senior management to be accountable and that means knowing the data lineage – how it flows through the organisation and who does what to it.”
This knowledge is applicable to any regulation, he adds. “If a firm has completely accurate and timely information about data that is well documented, this will provide a clear and good structure for data governance, which will make data management easier. If that is in place for MiFID, adding projects or data elements will be quite straightforward for other regulatory requirements.
Lightening the load
Regulatory compliance need not be a burden though. A recent report from analysts Aite Group suggests it can in fact be a benefit as well as a challenge. Data Management Technology Trends: Law and Reorder by senior analyst Virginie O’Shea, says if senior management foster a strategic view of data requirements across regulations, compliance can be a source of funding for the data management function. However, if the executive team at a firm approach compliance as “tactical firefighting”, such projects can divert resources that may otherwise be spent on operational efficiency.
The buyside faces far fewer direct regulatory reporting requirements than does the sellside, so it is no surprise, according to Aite Group, that eight of the respondent asset management firms felt that no specific regulations had directly affected their routine tasks. This does not mean, however, that the post-crisis regulatory (and by extension the capital markets industry) focus on transparency has failed to affect them
More than half of the 24 financial institutions studied in the Aite report had a data governance programme in place, two were establishing such a project (in 2016 when the survey was conducted), and three were considering one. Those that had no plans were smaller asset managers and tier two brokers that were at an earlier stage in implementing securities reference data management programmes of work.
Firms face significant regulatory requirements, says O’Shea, which she characterises as posing an “unsustainable amount of work”. This is best illustrated in the report’s findings on chief data officers (CDOs). Just over one third of the top 100 investment banks and brokerage firms across the world have a CDO, however the average tenure of these executives is two years and three months. A handful of these banks have more than one CDO in place, which reflects the regionally or operationally siloed nature of these firms and the data fiefdoms that have grown up around the various business lines.
On the buyside the figures are even lower, with only 24% of the top 50 asset management firms boasting a CDO. Just under one third of Aite Group interview respondents had a CDO in charge of data management.
The short tenure of CDOs, says O’Shea, is due to the huge amount of work they face and the lack of support in terms of funding and time. “CDOs soon realise they have no money, no power and no one really cares about data within the firm,” she says. “There’s an element of panic among CDOs as they come to realise they cannot hope to deliver given the lack of a technology budget or enough time to develop data management and governance strategies.”
Active data management and quality assurance are required to ensure firms stay clear of regulator-imposed financial penalties and reputational damage caused by inaccurate reporting inputs, says the Aite Group report. Data aggregation, which effective risk management and reporting entails, requires a consistent manner of storing and managing data over time. This is a very difficult task for firms to manage across their entrenched operational silos and functionally specific data fiefdoms.
“The establishment of data governance programmes and the installation of C-level executives in charge of communicating and driving data management strategy are two ways in which both sellside and buyside firms have approached this challenge, but these teams have an incredibly difficult set of goals to achieve,” says the report. “Every data chief has and needs a code – a consistent taxonomy and ontology across silos, or at least a method of cross-referencing the existing data sets.”
Dermot Harriss, senior vice-president at OneMarketData, says many buyside firms are not storing data at all. “The regulations require them to go from zero to up to seven years of storage of transaction data – and that includes all parts of the order cycle,” he says. “Firms need to be able to reconstruct a trade and that requires storing context information which can include non-digital aspects such as telephone calls.”
There is no black box solution that will solve all the problems firms face, Harriss adds. Rather, any approach to data management and governance must be strategic and questions to ask include how should data be stored, how much will that cost, can data storage be outsourced, and how much context information also needs to be saved. “All of the transparency regulations are pushing in the direction of requiring the storage of more detailed information,” he adds.” A solution is required that stores everything once along with a mechanism that enables firms to ask questions of the data – and that anticipates the questions regulators might want answered in the future.”
Some of the large sellside firms are building central repositories and Harriss believes the initial focus for firms should be on storage. “Many firms are creating data lakes because they aren’t sure what format to use but realise they need to store it and will try to figure out the best approach later. More sophisticated firms are looking at time series databases, which use time stamps that will help when reconstructing trades,” he adds.
Harriss believes firms must focus on understanding the structure of data from the very beginning. “Regulatory compliance can be a revenue opportunity. As soon as these transparency regulations really take hold customers can evaluate a firm’s business more accurately. There will be standard metrics and clients can quantify the performance of firms. There are ways firms can use regulatory metrics to gain a competitive edge.”
Peter Moss, chief executive of SmartStream’s Reference Data Utility also stresses there should be a focus on getting data right at the very beginning of any data management project. Good quality securities master data will be “absolutely critical” for meeting regulators’ requirements, he adds. “We think having a good quality source of reference data is a critical part of getting data governance right,” he says. “Increasingly the financial industry is recognising the value of the utility approach to some complex issues such as reference data.”