The Securities Industry and Financial Markets Association’s 2010 Financial Services Technology Expo this week had a number of presentations that reinforced the fact that lots of activity is underway in the data standards arena.
Spurred on by regulators’ focus on systemic risk, data aggregation failures and data faults have been placed front and center on the minds of industry participants.
But missing from the debate and lacking in inclusion on this issue are the chief executive officers.
In particular, the CEOs of the largest, systemically important financial institutions in whose name regulators are acting to analyze systemic risk; their counterparts, the CEOs of the issuing companies, at whose feet the supply chain of the financial industry starts; and the CEOs of market center owners, where the life cycle of a financial transaction begins. Without their participation this industry is destined to fail once again at setting global standards. And it will fail to learn the lesson of this near-catastrophic financial crisis - that the plumbing needs fixing.
Like the CEOs of retail and manufacturing industries that assembled forty years ago to set their industries on its equivalent of the financial services vision of “straight-through processing” – bar code scanning at check out, direct store delivery, just in time inventory management and automated inventory replenishment, made possible by their industries innovation, the universal product code imbedded in bar codes – financial firms need to do the same.
The broken plumbing in the basement needs to be fixed. If not, the CEOs that populate the top floors will have no water and no way of removing waste.
No doubt great things are underway – Bloomberg Global Head Enterprise Products and Solutions Mark Pesonen presented their open source symbology initiative and Bloomberg’s interest in continuing along this path in providing open source programming interfaces to access its robust data sets. Should the industry accept this as an industry standard is not for the data manager at firms to decide, it’s a CEO decision.
Deloitte’s study of the Information Needs of Systemic Risk Analysis, done under the sponsorship of SIFMA was eye-opening. Deloitte partner Ed Hida illuminated alternatives to the US and EC government’s proposed BIG BUILD data centers and reference data facilities. These alternatives were solicited from 22 CROs, COOs and CFOs, not from CEOs where the decisions ultimately are made.
Deloitte’s eight alternatives ranged from scenario analysis performed by individual firms to collecting transaction data from clearing firms and financial market infrastructure utilities.
These alternatives were contrasted against the US Financial Reform Bill’s proposed Office of Financial Research’s Data Center, a taxpayer funded government start-up “venture,” eventually to be paid for on an ongoing basis by financial industry assessments. A Data Warehouse, of dubious value in mitigating systemic risk, is being proposed to collect position and transaction data, with the speculation by congress of significant savings and risk mitigation for industry members. No CEO of a financial institution was consulted on this legislation, nor did any opine on its value in helping individual firms mitigate systemic risk.
An equally illuminating presentation by IBM Global Director of Financial Markets Keith Saxton at this same Deloitte session encouraged industry initiatives at a global level for setting standards and for developing reference data utilities.
Suggesting traveling down the same path that gave the industry such financial market utilities as SWIFT, CLS and DTCC, the reference data utility was now being repurposed as a Systemic Risk Utility. Speculating that such an industry initiative would force data standards that would produce data consistency and accuracy, the benefit to the industry would come from saving enormous amounts from the industry’s global spend on reference data. Again a decision that only a CEO could make.
A presentation by Chris Church, Global Head of Securities at the Society for Worldwide Interbank Financial Telecommunication (SWIFT), was given on a corporate action initiative dubbed the “Issuer to Investor Initiative” being promoted by SWIFT, DTCC and XBRL US. Described as a game changer, the effort prescribes a template for issuers to map its formerly unstructured corporate events into XBRL tagged scripts. This is an exciting and potentially significant risk mitigation undertaking, removing significant and still largely manual and risky activities from the financial industry.
While a significant starting point, it should recognized that proceeding without early buy-in by corporate CEOs of issuing companies, nor socializing the decision process to other markets has its own risks.
Notwithstanding that DTCC’s participation is important, DTCC is still only one of nearly one hundred CSD’s and clearing houses that would need to buy into this effort.
Further, the success of XBRL for financial reporting depended on already in-place international accounting standards, whereas standards are as yet an unrealized goal for the product and business entity identifiers underlying the corporate action initiative. This still unresolved and most difficult task of standardizing such basics as universal instrument, business entity and supply chain standards to compliment standard templates and messages is necessary to make this a truly global initiative as is intended. This, however, has been left to other unaligned initiatives.
Finally, a session devoted to DTCC’s activities described the corporate action initiative as admittedly lacking a degree of harmonization with market center owners or data vendors. It would be most significant to understand the needs of both of these major stakeholders. Listing exchanges like NYSE Euronext and Nasdaq OMX Group, while headquartered in New York, are global entities whose corporate issuers are required to report corporate actions to them as well as publically. Their global leverage and potential influence with the CEOs of corporate issuers should be embraced early in the development of the methods for this major initiative. No market center CEO has been so embraced.
Finally, when thinking outside the box, as all of these innovative potentially game changing initiatives are doing, one should be cognizant of the box prescribed. Other global industries have dealt with standards and data issues in ways that this industry can learn from.
The current issue of systemic failure in the financial industry recalls the retail industry’s crisis some 40 years ago when it became apparent its “plumbing” needed repair.
Large lines were forming at checkout counters. Inventory management and price-labeling were manual and error prone. Labor intensive check-in processes stymied delivery to outlets. Error rates, pilferage and unaccounted-for inventory discrepancies began to soar. Some of the leading retailers of the time, including The Kroger Co. and A&P, along with manufacturers, such as H.J. Heinz and General Foods, insisted the industry take on the task of solving these problems, for themselves, and leveraged available technologies to create one of the fabled success stories of the information age, the creation of the Universal Product Code (UPC).
Today, the UPC and other standards administered by the not-for-profit GS1 organization uniquely identifies physical products, transportation intermediaries and trade parties. Tightly integrated information systems allow parties to share the information, thus helping to trace recalled products to their origins.
Contrast this with the experience of the financial regulators during the recent meltdown when they could not find the mortgage that was defaulted on in a U.S. city that wound up as a toxic Collateralized Debt Obligation on the balance sheet of a failing bank in Australia nor could they see the counterparty positions allegedly held by convicted financier Bernard Madoff at a London OTC options dealer. They certainly missed the numerous movements of securities bundled into Lehman’s Repo 105 collateral moving from the U.S. to the U.K. and back again to dress up their leverage ratio.
Like Sam Walton, Levi Strauss and leaders of other industries, the CEOs of this industry need to step up to the task, speak out, set the tone and get on with fixing the plumbing. Not just at home.
This article can also be found at SecuritiesIndustry.com.
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