December 2, 2010 – Investor demands, regulatory requirements and the financial crisis. They have all contributed to improving how financial firms ensure the accuracy and consistency of the data they store about the transactions they execute and the customers and trading parties they deal with.
But the securities industry still has a long way to go. A study of 371 financial firms worldwide released last week by AIM Software, the Vienna-based enterprisewide data management software firm, showed that about 48 percent are still using terminals to look-up data and process it manually.
"So, despite progress in data management platform technology and the growing experience within financial institutions of implementing them and managing their teams and projects, still nearly half are continuing with manual processes," said the report written with SIX Telekurs, the global information firm.
What else is still amiss?
The study showed that half of the respondents use proprietary data models for managing their reference data while a fifth do not have any data models. Translation: lots of trouble and expense in integrating data among multiple applications and translating multiple external data formats. And that spells lots of dollars in cleaning up potential errors.
Next up: only 17 percent of the respondents said they used the International Standardization Organization (ISO) compliant 15022 standard for corporate actions and eight percent use the more advanced 20022 compliant message formats. Translation: There is still plenty of manual processing of corporate actions, which likely leads to errors and potential liability for financial firms which have to make their clients whole
The positive news: Financial firms are taking measures to address reference data. About 52 percent of respondents said they feed reference data into a centrally managed database. About 40 percent of firms said they are either planning to buy a data management program or are developing a proprietary one.
The reasons for progress differ by region: reducing errors and costs related to poor data quality appear to be paramount in North America, Europe, the Middle East and Africa.
By contrast, in Latin America and Asia-Pacific, adoption of the Basel II Accord is more critical. That's the legislation requiring financial firms to set aside regulatory capital to account for credit and operational risk. The relationship: poor data quality can increase the number of failed transactions and costs involved with cleanups.
Why is change so slow in coming? The research report doesn’t exactly provide a reason but it suggests that financial firms are still hard-pressed to prove the business case for improving the quality of their data. And during an economic downturn they are reducing the number of staffers dedicated to data governance and maintenance.
Time is running out. Notwithstanding that more savvy investors are demanding a better understanding of the risks involved with their transactions and the firms with which they are doing business, so are regulators.
Financial firms will need to present far more reference, position and transactional data to regulators on both sides of the Atlantic for both exchange-traded securities as well as over-the-counter derivatives. They also have to substantiate their valuations, which in turn requires them to have a better understanding of the terms of their deals.
And let’s not forget that to measure enterprisewide risk, firms can't rely on either inaccurate or inconsistent data among different applications and geographical locations.
While financial firms are still spending much of their IT budgets on the most sophisticated algorithmic trading, execution and order management systems, they are shortchanging themselves on the basics. Without clean data, firms cannot keep a lid on market, credit, counterparty and operational risk. They won’t be able to measure it. And that’s a pretty sad state of affairs.
This story originally appeared on Securities Technology Monitor.
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