The credit crisis has been hard not just on buyers and sellers of securities, but also those who safekeep financial assets and process transactions.
In the case of Clearstream International, one of the world's largest global securities depositories, the huge burst of market activity caused by the credit crisis in the fall of 2008 brought the potential for pricing errors even for the most liquid securities. Those pricing errors could have affected Clearstream's securities financing, credit and collateral management services.
Clearstream quickly went on a hunt for pricing software which could be less costly and quicker to implement than rejiggering a home-grown system. In October 2009, it replaced its proprietary market data scrubbing system with a licensed software package called GAIN from Vienna-based AIM Software.
The new platform allowed Clearstream increase the number of market data vendors used, reduce the number of prices it had to correct daily and cut down on some manual work. The installation took seven months in total to complete.
Jean Marie Piquard, head of custody and reference data products for Clearstream, insists that the depository never experienced any pricing errors, but acknowledges "there was some manual intervention involved in validating the data and in inputting the data from some vendors whose feeds the proprietary system was not programmed to accept.."
Clearstream, which settled 114 million transactions on behalf of its 2,500 customers last year, prices about 300,000 securities every day. Those prices are needed to value collateral used in securities lending and triparty repurchase agreements and to determine the custody fees which Clearstream charges its customers monthly.
AIM's software, says Piquard, also lets Clearstream improve the quality of its market data by quickly increasing the vendors used from four to eight.
Clearstream reduces the average number of securities for which it must "fix" prices each day from, to 450 from 1,500 because the new platform evaluates the accuracy of prices coming from these vendors, based on a sophisticated rules methodology set up by the depository. Because the pricing data can be consolidated into a single database instead of multiple databases, downstream applications can obtain the data in a real-time and synchronized mode.
While the securities industry has centered much of its attention during the financial crisis on the risks involved with valuing semi-liquid or illiquid assets such as credit default swaps and collateralized debt obligations, coming up with accurate prices on even liquid securities can be challenging.
There can be discrepancies depending on which exchange a security is listed on, when the price was established and whether the price is a bid or ask price. Fixed-income prices vary because they are marked to a model. Firms must also keep track of the source of the prices and ensure that the same prices are fed to multiple applications so there won't be discrepancies in prices between different business units. Bad margin calls, wrong net asset valuations, and wrong fee calculations are just a few of the damaging effects of erroneous prices.
Clearstream's decision to use a third-party data cleansing engine reflects a growing trend among financial service firms to ensure accurate and consistent enterprise wide data. Doing so mitigates market, credit and operational risk.
While some firms opt to reengineer their own systems others rely on third party vendors to reduce cost, increase scaleability and improve business logic. AIM's competitors include Asset Control in New York, GoldenSource in New York, Bank of New York Mellon's Eagle Investment Systems in Boston and Netik in London.
"There are plenty of judgment calls involved with pricing a security and cases where multiple prices can be correct," says Rick Enfield, product manager for Asset Control. "Banks with large asset servicing arms are compelled to follow the requirements set up by their clients as to which data vendor's price to use in the event of a discrepancy between market prices and keep an audit trail.'
The more data vendors used, the greater the potential that a data feed won't make it into a firm's pricing engines, says Enfield. Relying on proprietary technology which requires custom development can drain a firm's manpower and isn't always feasible when data volume is high, as occurred during the financial crisis.
"During the credit crunch, we got concerned about how we would price exotic contracts and couldn't spend the time figuring out data quality on basic financial instruments," one market data expert at a New York bank told Securities Industry News.
Although none of the customers actually complained about any errors, there would have been plenty of damage to the firm's reputation - and potential legal liability -- had mistakes crept into any customer reports. Regulators can take swift action as evidenced by the recent $2.9 million fine imposed on Nomura Securities by the Financial Services Authority in London for mispricing an equity derivatives contract in its Hong Kong office in 2008.
Clearstream's rival, Euroclear Bank in Brussels, which prices about 250,000 liquid securities daily, relies on a combination of third-party software and a proprietary rules-based data scrubbing engine to reconcile discrepancies. Of the 250,000 securities, about 1,000 are flagged as requiring repair. Software from Sterci standardizes the format of the information each vendor sends in disparate fashion while a proprietary platform and staff pick the ultimate price.
This article can also be found at SecuritiesIndustry.com.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access