June 15, 2011 – Putting information widely used in capital markets on counterparts, financial instruments, market activity and settlement of trades into the "cloud" will "offers and opportunity to dramatically lower costs" in the securities industry, said the head of an industry utility for managing transactions.
Placing core reference data on transactions and market participants in centrally managed databases will lower operating costs, compliance costs and analysis of risks to the nation's financial system, said Donald F. Donahue, President and CEO, of the Depository and Trust Clearing Corporation Tuesday.
A centralized source of key data will allow securities firms, exchanges and other market participants to "mutualize the access to and costs of core reference data," Donahue told operations and technology executives at the Securities Industry and Financial Markets Association's Financial Services Technology Leaders Forum and Expo at the Hilton New York.
If such data were maintained, for instance, by DTCC or its Omgeo post-trade services affiliate, any industry firm or regulator would have on-demand access to a shared pool of up-to-date data, without duplicating efforts, he said.
Omgeo, he noted, already maintains a database called Alert, that keeps settlement data in the "cloud" for roughly 850 investment managers. The database includes roughly 5 million standing settlement instructions, across stock, fixed-income and foreign-exchange markets. In this database, brokers can add their own account numbers, to make it possible to track settlement data more closely. And the system improves compliance, by flagging information needed by different regulatory bodies in different markets.
If, for instance, one regulator requires the identity of the beneficial owner of shares of a stock to be included in the settlement data, then the manager is notified that the information must be included so that it gets added.
Financial information services provider Markit and Omgeo also are creating a related system, in the cloud, which is creating an efficient way to validate, maintain and exchange documents on customer accounts, as they are opened up.
This can be coupled with the Alert database on settlement and account instructions; and, help firms comply with different "know your customer" regulations.
Such an approach, where widely used and standardized data is centralized and available on-demand when called upon by any firm's own systems, can logically be applied to the maintenance of Legal Entity Identifiers and financial instrument identifiers, Donahue said.
LEIs are now being created, in a competitive process in which SIFMA is involved with a consortium of trade associations. The object is to create a single system for identifying counterparts, worldwide, and attach related reference data on who they are.
A similar system would be helpful in analyzing overall market activity and is long overdue, Donahue said.
This is the establishment of a system and database for giving unique codes, like bar codes, for every type of financial instrument being traded in stock, fixed-income and other markets. This, he said, is especially important as the instruments get more diverse and complex.
Not putting data like this into the cloud and continuing to maintain a hodge podge of systems at every firm and every regulatory body represents a "staggering waste of industry resources," he said. The cloud, where resources are shared and, in the DTCC case, are provided at cost is "far more cost effective."
In fact, in the case of Legal Entity Identifiers, DTCC is working with the Society for Worldwide Interbank Financial Transactions, a messaging body, on establishing a working global system.
SWIFT would be the global registration body and DTCC would be the facilities manager, through its Avox reference data subsidiary.
In this case, Donahue said there would be no licensing, payment required or other restrictions on use of the identification of counterparties involved in transactions.
This story originally appeared on Securities Technology Monitor.
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