As financial firms consider just how to keep their budgets lean and mean in 2010, they will be facing pretty tough challenges in complying with the requirements of the so-called financial reform.
Particularly when it comes to managing the data involved.
The topic generated plenty of interest among panelists and attendees at the general meeting of the Financial Information Software Division of the Software & Information Industry Association last week.
The U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009 – the most extensive rewriting of financial governance since the great Depression. Its 2,000 pages call for the adoption of a financial products consumer protection agency, a financial stability board, regulation of over-the-counter derivatives market, and the creation of a Federal Insurance Office, to name a few.
Nobody knows what the measure will look like in its final form when it comes out of the balance of the legislative process. The Senate has vowed to rewrite the bill and most on Wall Street shutter to think of just how much additional regulation they will face. Or even if it will prevent another financial crisis.
Then there are about a dozen publications from European supervisory agencies, two major consultations from the Basel Committee on Banking Supervision and over 15 pronouncements from the U.K.’s Financial Services Authority. Just about everything is subject to scrutiny – compensation, large exposures, liquidity and capital ratios, and concentration risk are just a few.
The nut nut: Firms will need to keep closer tabs on their risk management and not just by business line only. The catch-all phrase is enterprisewide risk. To do so they must keep closer tabs on all of their transactions – and value them. They also must know all of their counterparties and their positions. And they must know all this as close to real time as possible. Once done, all this will be subject to lots of scrutiny, as well.
“There will be a lot more reporting and a lot more transparency required,” predicted Richard Hulit Jr., executive vice president of SunGard Data Systems’s brokerage and clearance business, speaking at the FISD event. “Regulators will want to know how changes in the marketplace affect a firm’s risk profile.”
That means more spending on reference data for not only equities and fixed-income instruments but over-the-counter derivatives as well, says Ben Keeler, a director with buy-side consultancy Citisoft in Boston. Independent valuation firms will also gain in popularity as firms try to validate their own calculations.
Of course, firms shouldn’t need regulatory oversight to do their jobs. But as became evident during the months preceding and shortly following the collapse of Lehman Brothers, their analysis of market and credit risk failed. That’s not even counting the failure of firms to catch unauthorized trading, Ponzi schemes and code theft.
What went wrong?
Nobody could collect the necessary information in a consistent form. That means not only getting correct data but data which is consistent among the multitude of applications by asset class, geography and business line. “We’ve moved to the concept of enterprise risk management but haven’t done so when it comes to data,” said Neil Edelstein, vice president at data management software firm GoldenSource in New York in a separate interview.
So much data needs to be compiled from so many technological and organizational silos that firms will have to figure out a way to communicate that data throughout the organization – and to the appropriate parties. None of these systems is likely to share data with each other.
A recently released study of buy-side firms conducted by New York research firm Tabb Group showed that the most significant challenge for enterprise risk management was data aggregation, at 51 percent of respondents. That was followed by accurate business entity data at 43 percent.
To bring such data together in a consistent normalized fashion can no longer be a pipedream. There is enterprise-wide data management software offered by such firms such as GoldenSource, Asset Control, and SunGard to name a few that can help manage such a process.
Technology alone won’t solve the problem. Process change will be required. That means collaboration among business units and C-level recognition of the link between enterprise-wide risk and enterprise-wide data, according to Tabb research director Adam Sussman and Alex Tabb, a managing director.
“Chances are, if you work for an organization at which you are able to quickly gather information from across that organization, you’re able to do so because the executive management committee issued a mandate to make it so,” said the analysts in a report issued on the study.
But simply having the necessary data won’t be enough to please the regulators. “Without financial firms and their regulators agreeing on common formats for producing and receiving data, the clarify sought by the regulatory efforts won’t be achieved,” says PJ DiGiammarino, chief executive of JWG-IT, a London-based think tank specializing in regulatory compliance issues.
Plus, the financial industry is awash with multiple identification codes for securities and counterparties. There are CUSIPs, ISINs, RICs, BICs and Avids, to name a few. All of which must be cross-referenced correctly. Beyond this, firms must link the transactions they execute and process to the firms they do business with. Understanding the ins and outs of a firm’s affiliates and parentage can be pretty mind-boggling. That’s just the beginning of understanding who will be held responsible for making good if a deal goes bust.
So even if financial firms don’t exactly agree with what regulators are now proposing, or even that regulation will prevent another economic crisis, it’s clear that a data tsunami is coming ashore.
You better have data and plenty of it. It better be timely and accurate. And it better be kept in the way the regulators want.
Anything less than that – and a lot of business could get washed away.
Comment on this blog at SecuritiesIndustry.com.
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