Viewpoint : Managing reference data : Tim Fox

MISSING A TRICK WITH YOUR DATA?

New regulatory reporting requirements such as Securities Financing Transaction Regulation (SFTR) are prompting financial institutions to reassess how they gather and manage reference data. Meeting immediate regulatory demands is essential, says Tim Fox of the SmartStream Reference Data Utility (RDU), but wouldn’t it be smarter to establish an enterprise-wide approach to handling reference data?

Where reference data is concerned, recent rule-making has given – and is still giving – plenty of sleepless nights to those working in financial institutions. The dust may just about have settled on MiFID II, but now firms must get to grips with looming SFTR.

SFTR reporting obligations will kick in next year – April 2020 for banks and investment managers, July 2020 for CCPs and CSDs, and then October 2020 for insurers, pension firms, UCITs, and AIFs. Non-financial companies will have to follow suit in January 2021.

Preparing for SFTR compliance is proving a somewhat frustrating experience for financial institutions. The final version of regulatory guidance, due from ESMA in Q4 2019, has not yet – at the time of writing – been published. A lack of clarity still hangs over certain areas. For example, it remains unclear how parties to an SFT should determine the quality of the security or collateral involved. Should they seek a potentially costly assessment from a ratings agency? Or make use of some other mechanism?

Another pain point is the need to report whether equities belong to a main index or not. Financial authorities have provided guidance as to which indices constitute the main ones – but knowing which are the main indices is simply the tip of the iceberg, and it is quite another matter to identify all the constituents involved and then integrate this information into an SFTR regulatory reporting workflow.

For the buyside – although October 2020 may appear some way off – the present is not too soon to start looking at gathering the data needed for SFTR reporting. Unlike the sellside, the buyside has had relatively little regulation to contend with: coming to the battlefield later on in the day means that it has had less experience in handling the complexities regulation can pose. Data budgets on the buyside also have a tendency to be smaller than those on the sellside, and so the challenge for firms is to meet compliance obligations as cost-effectively as possible.

How does the SmartStream RDU fit into this picture?

The SmartStream RDU was set up to create a comprehensive repository of cross-asset class instrument data. It operates as a provider of not only European, but global instrument reference data. Initially set up by a group of banks and SmartStream, the RDU is very much an industry-led approach.

Although the original intent of the RDU was the creation of a repository of cross-asset instrument data – and having set up an exchange traded derivatives data service, as well as commenced an equities service – the utility diverted into the regulatory space, at the behest of its customers.

A result of this move was the setting up of the RDU’s MiFID II service. The service eliminates the complexity of acquiring, normalising and integrating the complete set of reference data sources required for MiFID II, integrating all MiFID II reference data into a single schema for financial institutions to incorporate into their EDM, regulatory reporting and trading platforms.

More recently, the RDU has collaborated with a number of industry participants to develop an SFTR service. Available via API, it provides a handy solution for firms looking to source the required security data as quickly, accurately and cost-efficiently as possible. For buyside firms, which often have smaller data budgets at their disposal than the sellside, such a solution may be of particular interest.

Having executed its MiFID II plans, and currently rounding out its SFTR offering, the utility is once more focussing on the pursuit of its original course. To this end, the RDU is launching its equities service, and is engaged in the development of an instrument reference data solution for fixed income. In addition, the utility’s ETD service is now mature. It is also quite possible that the RDU will, in the future, deliver further services geared towards other regulations, although none are presently in the pipeline.

Superior reference data – the link to future competitiveness

The author believes it is important for financial institutions to look beyond just satisfying immediate regulatory reference data requirements and should take, instead, a far broader view. Far-sighted institutions, the author feels, recognise that there is an enterprise-wide necessity for high quality instrument reference data – and they also realise that getting this aspect right can play a vital role in maintaining future competitiveness and profitability.

Yet all too often, firms do not give data the attention it deserves. For example, when preparing to meet compliance deadlines, firms frequently downplay the importance of putting their data houses in order in a timely manner. Effort tends to be focussed on the technology involved in reporting, rather than the data that needs be reported, which generally comes as an afterthought.

A typical – and expensive – trap into which firms fall is to put in place the data gathering and managing processes necessary to meet one set of regulatory requirements, and then repeat the same exercise for subsequent pieces of regulation. Unfortunately, taking this type of piecemeal approach, rather than pursuing a coherent, enterprise-wide data management strategy, risks increasing the total cost of ownership.

In contrast, firms that understand their data in greater depth can respond to upcoming regulation by extending existing infrastructure, tackling any new elements as required, rather than building an expensive new silo. This approach allows them to avoid duplicating data costs, or hiring extra personnel to get data into a compliance-ready state. Buyside firms – given their budgetary restrictions – would be especially well-advised to keep this point in mind when devising any future data management strategy.

Of course, investing in superior data and taking an enterprise-wide approach is not just essential for regulatory purposes: having high quality data and sound information management practices in place is vital if firms are to improve overall data quality. Consider a company putting together funds, with exposure to any given sector or issuer. How does it ensure that concentration limits are correct? Without the appropriate data this task becomes very difficult.

The availability of superior data also has the potential to improve firms’ future competitiveness and profitability. For instance, it will allow them to take advantage of developing technologies such as AI. Indeed, if a financial institution is to leverage its AI strategy to the fullest extent, a bedrock of clean data is absolutely vital.

In conclusion

There is no doubt that a regulatory deadline provides a spur for activity. Where data is concerned, however, satisfying immediate regulatory demands should be a starting rather than an end point. Creating an enterprise-wide data management strategy, which makes high quality reference information available across the entirety of the business, is an important tool in firms’ armoury – whether they are looking to cope with future regulation more cost-effectively or to ensure they remain profitable in years to come. The RDU, through its renewed emphasis on delivering a comprehensive, cross-asset set of reference data, is focussing on providing the superior quality information that will enable financial institutions to achieve these goals.

©BestExecution 2020

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