reference data review special report - impact of derivatives on reference data management
TRANSCRIPT
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7/27/2019 Reference Data Review Special Report - Impact of Derivatives on Reference Data Management
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A-TeAmGrou
p
AnA-TEAMGROUPPublication
ReferenceDataReview presents
Impact ofDerivativeson
Reference Data Management
June 2009
Sponsored By:
www.a-teamgroup.com
They may be complex and burdened with a bad reputation atthe moment, but derivatives are here to stay. Although Bankor International Settlements fgures indicate that derivativestrading is down or the frst time in 10 years, the asset classhas been strongly deended by the banking and brokerage
community over the last ew months.
The industry is, however, on course or a signifcant overhaulo the regulatory regime governing the OTC derivativesmarket, both in Europe and the US. This, o course, meansthat the post-trade processing o these instruments is set orbig changes. Credit deault swaps (CDSs) are the frst o thecredit derivatives to be ushered onto clearing counterpartiesin a bid to reduce counterparty risk, but they will likely notbe the last.
Moreover, the market is also awaiting the introduction o analternative standard to the current fve character OptionsPrice Reporting Authority (Opra) codes next year. Earlier thisyear, the Options Clearing Corporation (OCC) was named asthe operator o the new options symbology system, whichhas been estimated to cost the industry around US$250million to introduce.
All o these changes are likely to have a signifcant impacton the data management systems or these complexinstruments, requiring the introduction o new processes andprocedures. A challenge indeed or the vendor community.
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is willing to concede that the introduction
o central counterparties (CCPs) or deriva-
tives clearing will reduce counterparty risk
in the market. The WMBA wishes to warn
again that orcing OTC products onto ex-
changes would signicantly reduce li-
quidity in nancial markets, resulting in
increased risks and costs or end usersas their ability to hedge their exposures
would be handicapped, explains Clark.
The association welcomes CCPs or credit
deault swaps (CDSs) and other nancial
products that are suitable or relevant or
clearing, but eels the US governments ap-
proach to the market is unduly harsh. The
association points to the act that most o
the severe losses suered by banks during
the crisis occurred in the structured credit
markets and not in the OTC CDS market.
The OTC world, in the WMBAs view, shouldnot be driven out o business.
The association has also expressed con-
cern that US policymakers have not ac-
knowledged that making markets more
secure can be achieved through the clearing
o products, both OTC and exchange traded,
through recognised CCPs. The implication
being drawn by some market participants
and commentators, is that the only way o
achieving regulators ambitions is to coerce
OTC products onto exchanges, the associa-
tion said in a statement earlier in 2009.The US government is considering
taking a harder line because o the spec-
tre o counterparty risk, which the all o
Lehman Brothers last year threw into the
spotlight. Markets roze and liquidity dried
up because investors were concerned
about whether their deals would be com-
pleted and derivatives are at the heart o
this conusion. Risk exposure and coun-
terparty data tracking is especially dicult
when dealing with derivatives that are
structured in a highly complex manner.The Obama administration and Treasury
secretary Timothy Geithner have thereore
proposed that rms should centrally clear
derivatives trades and that these trades
The last two years have been a roller-
coaster ride or the derivatives mar-
kets. The allout rom the nancial
crisis resulted in the demonisation o the
asset class, which was cited by many as
one o the catalysts or the market troubles
and the all o nancial institutions such
as Lehman Brothers. What once were cel-ebrated as innovative new nancial prod-
ucts, have now been branded as hazard-
ous to a nancial institutions health. The
sector is also acing a barrage o regulation
and intense scrutiny rom the market.
According to the Bank or International
Settlements (BIS), there has been a signi-
cant move away rom the derivatives mar-
kets in terms o trading. Figures or the
second hal o 2008 indicate that the de-
rivatives markets shrank or the rst time
in 10 years, as investors moved away romtrading assets that they considered to
be too risky or their balance sheets. The
amount o outstanding derivatives con-
tracts linked to bonds, currencies, com-
modities, stocks and interest rates ell by
13.4% to US$592 trillion in the second hal
o last year, according to the BIS gures.
However, despite the dip in trad-
ing, some corners o the industry have
staunchly deended the derivatives mar-
kets. The Wholesale Market Brokers Asso-
ciation (WMBA), or one, is critical o thenegative perception that OTC derivatives
markets have garnered as a result o the
crisis. It has warned regulators that overly
restrictive regulation o the sector could be
harmul to the nancial markets at large.
Whist the objective o making markets
more secure is supported by all market
participants, and certainly WMBA mem-
bers, the unintended consequences o
poorly thought through policy decisions
would have a serious impact on the real
economy, says David Clark, chairman othe association.
The WMBA has displayed particular con-
cern about regulators attempts to move all
OTC business onto exchanges, although it
Derivatives Data Management - A-Team Group
June 2009 Issue 072 AnA-TEAMGROUPPublication
should also be recorded to enable supervi-
sory authorities to prevent market abuse.
These rms will also be encouraged to
move these trades onto exchanges where
possible via the imposition o higher
charges or OTC trades. The rules on capi-
tal adequacy or these instruments will
also be tightened and higher reserves willbe required, i the proposals are passed.
Securities and Exchange Commission
chairman Mary Schapiro has also suggested
that regulators should use the Financial In-
dustry Regulatory Authoritys (Finra) system
or bond price reporting, Trace, as a model or
transparency and reporting requirements
or OTC derivatives. The Trace system, which
has been in operation since 2005, provides
access to trading inormation on corporate
bonds to anyone with internet access. I
think its something well look at very closelyas a potential model, said Schapiro.
Regardless o Traces uture role, how-
ever, it seems that OTC derivatives regula-
tion is on the cards in a big way. We need
better broader authority, better inorma-
tion, and we need a better commitment
o supervisory authorities to enorce those
laws, said Geithner during the release o
the proposals.
Given the increased costs and poten-
tial limitations on product innovation that
such requirements would involve, it is notsurprising that the industry is ghting back.
The WMBA is, however, less critical o the
approach being adopted in Europe. The
WMBA believes that European initiatives
indicate a rmer grasp o the essential role
o the clearing house, and understanding
o the transparency and post trade secu-
rity inherent in the activities o banks, and
WMBA members that use platorms that
are MiFID compliant in an already regu-
lated environment, explains Clark.
The European approach, thus ar, hasbeen to encourage the use o CCPs and to
initiate a debate about the potential provi-
sion o more data to the regulatory commu-
nity about derivatives products. Committee
Angels or Demons?
By Virginie OShea, Editor, A-Team Group
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Derivatives Data Management - A-Team Group
June 2009 Issue 07 3AnA-TEAMGROUPPublication
Depository Trust & Clearing Corporation
(DTCC), the Financial Industry RegulatoryAuthority (Finra), the Issuer Advisory Group
(IAG) and SFB Market Systems (SFBMS).
The OCC is the clearing house that since
2005 has led the Options Symbology Ini-
tiative (OSI) and was likely chosen because
o this long association with the market.
Last year, the Financial Inormation Forum
(FIF) highlighted in a report that the cost o
the introduction o the new symbology
is likely to be high. Mary Lou Von Kaenel,
managing director, management consult-
ing at New York-based consultancy Jordan& Jordan, which chairs the FIF group, ex-
plained at the release that the industry will
spend an estimated US$250 million in prep-
aration or the new options symbology.
Respondents to the survey on which the
report was based included 46 o the FIFs
members, representing 26 broker-dealers,
12 service bureaus, seven market data ven-
dors and one options market. General indus-
try discontent with a lack o standardisation
was prevalent in the survey and respond-
ents also indicated they are aware o thehigh cost o implementation. The other
interesting, although not surprising, nd-
ing o the survey is the estimated cost to the
industry o US$250 million, which does not
include buy side or custodian implementa-
tion costs, she added. In this market envi-
ronment, with no new revenue that can be
attributed to the expense, cost has become
a signicant challenge or some rms.
The most costly aspects o the changes
were highlighted by Von Kaenel: Looking at
it rom the customer perspective, FIF mem-bers ocused on customer conrmations
and account statements generated by the
back oce. At the ront end, there are more
complex elements to consider, such as ease
o order entry or avoiding input errors.
Currently, most rms are only able to
store nine or 12 digit identication codes
and in order to comply with OSI, they will
have to create proprietary identiers or
listed contracts or purposes including
client reporting and processing. The FIF
survey asked respondents to evaluate thevarious approaches to creating the nine
character dummy codes, including the o-
erings rom Standard & Poors, Symbol
Management Clearing, Interactive Data and
o European Securities Regulators (CESR)
chairman Eddy Wymeersch has indicatedthat the regulator is looking at these inor-
mation requirements at the moment. He has
stated that these instruments can remain
o regulated markets but must use clearing
central counterparties (CCPS) to reduce risk.
The issue o CCPs is denitely on the map
in the near uture or CESR, he said.
It is not just the regulators that are a-
ecting a revamp o industry practices,
however. The International Swaps and De-
rivatives Association (ISDA) has also devel-
oped a new standard protocol or dealingwith CDSs, which was introduced into the
market on 8 April. The ISDA big bang, as
it was dubbed, changed the pricing prac-
tices or single name CDS contracts.
The changes were aimed at reducing
systemic risk by introducing a standard-
ised pricing system or CDSs and making
clear what procedures must be adopted
should a deault occur or a CDS contract.
The new convention means that invest-
ment grade names trade with a xed
coupon o 100bps and high yield namestrade with a xed coupon o 500bps.
According to Robert Pickel, head o ISDA,
the big bang protocol provides a rame-
work or the industry by which it can stand-
ardise the traditionally opaque credit deriv-
atives. It is hoped that the changes will also
assist in the move towards central clearing
or CDSs with the advent o CCPs such as
IntercontinentalExchanges ICE Trust.
Moreover, the industry is also awaiting
the introduction o an alternative stand-
ard to the Options Price Reporting Au-thority (Opra) code in 2010. Earlier this
year, industry participants nally selected
a suitable candidate to operate the new
symbology allocation system.
There were ongoing discussions through-
out 2008 about the lack o agreement on
the basics surrounding the introduction o
a new code but it seems that some progress
has been made, including the selection o
the Options Clearing Corporation (OCC) as
the operator o the system.
The OCC was selected by market par-ticipants as the most suitable candidate
to maintain a centralised database o se-
curities symbols, although other players in
the market were considered, including the
an open source code, Mark 1 Algorithm.
According to the survey, 39% o re-spondents would use codes created by
Cusip Service Bureau, 7% would use In-
teractive Datas solution and 2% would
use Symbol Management Clearing. None
o the respondents selected Mark 1 Algo-
rithm, but 17% indicated they would use
their current internal identiers, 7% were
uncertain and 24% declined to comment.
This is indicative o the lack o standardi-
sation across the industry with regards to
tacking the OSI, says the FIF.
In order to meet these requirements,Standard & Poors Cusip Global Services
(CGS) business has recently announced
a partnership with UK-based utures and
options specialist FOW Tradedata to de-
velop a new Cusip identication system
or listed equity options in the US. The
vendor will launch the new service by the
end o June, says Matthew Bastian, direc-
tor o product development at S&P.
The eedback we have received rom
the industry is that a common nine to 12
character identier is a tremendous steporward in standardisation, and is an es-
sential complement to the OCCs planned
21 character OSI code, he explains.
The service is thereore aimed at support-
ing the industry in moving to these stand-
ards and will encompass approximately
one million option Cusips with accompany-
ing ISINs and related data elements. Market
participants who wish to receive the Cusip
Options Service will be able to do so directly
rom CGS or via a properly licensed vendor,
says Bastian. FOW Tradedatas Xymbologyproduct, which maps option contracts to
market data and proprietary vendor codes,
will also contain option Cusips and ISINs.
Regardless o which vendors oering
they choose, rms cannot aord to rest on
their laurels as the rst major milestone o
the OSI comes in September 2009, with
the commencement o industry testing.
To be prepared or testing, rms must
have completed their internal program-
ming changes to allow or several months
o internal testing to insure there is no un-intended impact o changes on adjacent
systems, said Von Kaenel.
It seems that derivatives data will be pro-
viding challenges or some time to come.
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Derivatives Data Management - SIX Telekurs
June 2009 Issue 074 AnA-TEAMGROUPPublication
Impact of Derivatives
on Reference DataManagement
real possibility o the existence o dier-
ent mappings between dierent banks.
This would result in a regulatory authority
receiving a dierent identier rom bank
A to the one received rom bank B, remov-ing any chance o direct comparison.
Another issue, in some way related to
the issue o poor reerence data or de-
rivatives, is the diculty in collecting this
data. Data vendors do their best to carry
relevant and comprehensive derivatives
data. Currently (end April 2009), SIX Tel-
ekurs carries almost 1.25 million utures
and options, nearly 1 million hybrid in-
struments and about 800 thousand war-
rants in our database. Our army o data
experts around the world works valiantlyto make sure that the data is clean and
useul to our customers, but with this
amount o data and with the rate o issu-
ance o new instruments, we clearly rely
on a great deal o highly complex auto-
mation. The 11 exchanges in the MiFID
zone provide data in dierent ormats
and, in some cases, dierent ormats or
dierent derivatives types.
It is obvious here that a single stand-
ard would help along the entire value
chain, but a plethora o standards arein use and more have been proposed.
A standardised data model is not avail-
able and it is this that eeds into the va-
riety o dierent data ormats that exist
today. Creating a single standard would
be a nirvana. Although regulatory atten-
tion seems to be on the rise evidenced
by the release in March 2009 o a white-
paper on this subject by the European
Central Banks Francis Gross, we must be
realistic and recognise that the uptake
o data standards - even those inventedby the industry itsel - remains low. Even
widely accepted standards take a long
time to develop and adopt, leaving eve-
ryone with a problem in the meantime.
MiFID reporting requirements
brought the standard o re-
erence data on derivatives to
the ront o the back oces mind in late
2007. For post-trade reporting purposes,the Committee o European Securities
Regulators (CESR) proposed asking all de-
rivatives exchanges to have ISINs issued
or each delivery/strike o each uture or
option. Ater that idea was rmly reject-
ed by the exchanges, the regulators and
industry worked together and the idea
o an Alternative Instrument Identier
(AII) was born.
The AII would take the existing reerence
data the venues Market Identication
Code (MIC), the product code, a markerindicating the derivative type, a put or
call identier, the expiry or delivery date
and the strike price - to uniquely identiy
a derivative instrument. At 43 characters,
it is not the snappiest o identiers.
Luckily, regulators are not expecting to
receive the data as a single identier, but
thereby hangs another problem what i
some o the underlying reerence data is
incorrect or missing? How many cancel-
lation reports will it take until the report
is right? And perhaps more importantly,given the potential time lags, what value
is that level o correction really going to
provide to the European regulators?
Another issue with the AII is that it
only applies to 11 trading venues in the
European Union. The Options Clearing
Corporation (OCC) and the Options Price
Reporting Authority (Opra) both have
dierent requirements or an identier,
again built on reerence data or the de-
rivative itsel and the trading venue.
Given this, the challenge or banks,clearing houses and regulators is that
they potentially need to have three dier-
ent projects or three dierent identiers
based on similar reerence data. There is a
The volume o derivatives has grown at
a steady rate over a number o years and
their growth and use has outstripped the
knowledge o some o the operations
sta that handles data in banks. Knowl-edge is always an issue, especially as
nding time to devote to training is more
dicult as volumes grow and workloads
increase. Again, banks need to be able to
rely on the quality o data they receive
and the systems they employ. We have
already seen how the sourcing o data is
dicult. But systematic issues hamper
the operational and business sta alike
within a bank.
In the same way that human compo-
nents o systems have struggled to keeppace, IT systems have struggled too. The
number o ticks, the number o instru-
ments and the act that most systems
were built to deal with equity and vanilla
bonds inundates day to day operations
and hamstrings developers who have to
squeeze new instrument structures into
systems that simply werent designed or
them. The situation can be urther am-
plied when a receiving system that has
been altered to accept derivatives then
eeds into an internal distribution systemthat is unable to accept these structures
- leading to data udges that can urther
compromise the standard o reerence
data used throughout the business.
So, there are many issues to be re-
solved. As with most issues in our indus-
try, there is no single answer to realis-
ing improvements and there are many
touch points that need attention. In the
meantime, using a stable data vendor
committed to open standards, continu-
ally training sta and making sure thatsystems inrastructure is suitable will all
contribute to eectively managing the
mass o data produced by the worlds
hectic derivatives trading.
By Richard Newbury, market development manager at SIX Telekurs
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www.six-telekurs.com
In challenging times
you need somethingto hold on to.
With inormation on over fve million instruments
SIX Telekurs reerence database will never let you down.
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Derivatives Data Management - London Stock Exchange
June 2009 Issue 076 AnA-TEAMGROUPPublication
to the Futures Industry Association (FIA),
global exchange traded derivative con-
tracts increased by 28% in 2007 and, with
rising volumes, the risks related to identi-
cation issues signicantly increased.
The challenges that derivatives pose
to the market include ensuring the con-
tinued suitability o existing systems,
the availability o skilled resources and
the sourcing o quality and timely data
to ensure clients have the inormation
they need or accurate up to the minute
pricing. Consolidation in the market and
increasing competition rom multiple
exchanges oering competing deriva-
tive products on the same underlying
securities will magniy these challenges.
To better tackle the issues surrounding
the derivatives data management chal-
lenge, SEDOL Masterle has migrated to
the UnaVista reconciliation service plat-
orm, providing customers with a new
website and a global derivatives package.
This enhancement enabled the allocation
o two million SEDOL codes to identiy
unique global exchange traded derivatives
sourced rom over 80 global exchanges.
The Exchanges service aims to help
customers improve eciencies in the
documentation process and minimise
the risks and costs associated with late
settlement and trade ailures. In order to
achieve this goal, every derivative con-
tract is identied at the exchange level by
using the standard SEDOL seven digit al-
phanumeric ormat, providing a common
global identier or all derivatives.
Derivative SEDOL codes cover over 80
global markets including around 30,000
issuers and are linked to the underly-
ing issuer via the ISIN codes provided.
These codes also incorporate GB ISIN or
all derivatives on UK-based markets in-
cluding Lie, EDX and the London Metal
The London Stock Exchange (the Ex-
change) is the UKs national num-
bering agency and has 30 years
o experience in providing the industry
with timely and accurate global reer-
ence data. To this end, the Exchanges
own SEDOL Masterle assists rms with
their unique instrument identication by
supplying unique, market level, global
security identiers designed to lower
costs, streamline post-trade processing
and settlement, as well as minimise the
risk o cross border trade ailures.
However, the Exchanges oering is not
limited to the equities and xed income
world. In January 2009, the SEDOL Mas-
terle allocated SEDOL codes, and ISIN
codes or UK markets, to over two mil-
lion exchange traded derivatives (ETDs).
The derivatives markets can thereore
now experience the same benets en-
joyed by SEDOL code users in the equity
and xed income markets.
Dealing with derivative reerence data
is no mean eat, as it makes up 40% o all
nancial inormation and is considered to
be the building block or the automation
o nancial transactions. Typically, in the
post trade process, the documentation
department needs to use a number o de-
rivative attributes to identiy the security.
The lack o a common identier across
global exchanges, vendors, ront and
back oces creates ineciencies in the
documentation process and hinders STP.
According to the International Swaps
and Derivatives Association (ISDA) 2008
Operations Benchmark survey, mis-
matched identiers and associated reer-
ence data issues are the most common
errors in trade documentation. Moreover,
the growth in the volume and complexity
o derivatives has added urther compli-
cation to data management. According
Exchange (LME). The service provides
additional reerence data required by
regulations such as MiFID, or example
the Classication o Financial Instru-
ments (CFI) code.
SEDOL codes are incorporated into
most major data vendor solutions
worldwide, but there is no substitute or
collecting data directly rom the source.
As such, ETD SEDOL codes are available
in a downloadable ormat and through
a web services API, allowing participants
to access data on a daily basis to auto-
mate their reerence data systems.
Derivative SEDOL codes allow users to
streamline data eeds and trade with con-
dence with the thousands o other SEDOL
and ISIN users across all time zones. It also
enables users ront, middle and back o-
ces to communicate seamlessly with
each other, reducing the dependence on
concatenating multiple reerence data
attributes. Earlier identication o new
issues provides more time or instrument
set-up, decreasing the risk o unwelcome
dummy securities or codes being intro-
duced and identication codes diering
in ront and back oces.
Using SEDOL codes to identiy deriva-
tives enables potential discrepancies
to be identied beore trade inception,
which minimises the need to repair
trade ailures manually. Also, the Secu-
rities Masterle database is cross reer-
enced to alternative industry identiers,
thereby removing the overheads associ-
ated with maintaining direct connectiv-
ity to multiple reerence data suppliers.
Worldwide coverage and open stand-
ards ensures derivative SEDOL codes are
used by most global institutions and
data vendors, helping to assist in cross
border communications and automate
trade processing.
Uniquely Identifying
the Worlds ExchangeTraded DerivativesBy Mark Husler, head of data and software business development, London Stock Exchange
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SEDOL Masterfle two million
uniquely identifed global
derivatives now live
Derivative SEDOL
SEDOL Masterfle recently migrated to the UnaVista reconciliationservice platorm, providing customers with an enhanced website and
global derivatives package.
The allocation o two million SEDOL and ISIN codes to uniquely identiyglobal exchange traded derivatives on over 80 global exchanges allowsyou to:
tradewithcondencewithotherSEDOLandISINusersacross all time zones
enableseamlesscommunicationacrossyourfront,middleand back ofces
revolutioniseyourpost-tradeprocessing.
For urther inormation about Derivative SEDOL, or to arrange
a demonstration o our hosted reerence data reconciliation andcross-referenceservices,pleasecontactuson+44(0)2077973009 or email [email protected].
www.londonstockexchange.com/sedol
May2009LondonStockExchangeplc.LondonStockExchange,SEDOLMasterleand the coat o arms device are registered trademarks o London Stock Exchange plc.
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Derivatives Data Management -Xenomorph
June 2009 Issue 078 AnA-TEAMGROUPPublication
isolated systems? Put another way,
derivative data management systems
need to be business and product o-
cussed rather than technology and
data-type ocussed. This is where the
spreadsheet currently proves to be
a vital tool or business users: it does
not dierentiate by data type; it copes
with a high degree o data complexity;
it is a antastic integration tool or pull-
ing data and analytics together; and it
is ultimately easy enough or users to
develop business solutions within the
rapid timerames they require.
The diversity and complexity o de-
rivatives data management mentioned
previously is also the reason why most
o the data management vendor com-
munity chooses to ignore the problem o
spreadsheet management o derivatives
data. How many centralised data man-
agement implementations are deemed
a success by proud vendors and IT de-
partments, whilst ignoring the reality that
ront-oce sta blithely generate a whole
separate (and to a great extent duplicate)
world o product and market data in desk-
top spreadsheets? Centralised, transpar-
ent data management it most certainly
is not, and it is one actor why we all still
see issues coming out in the press around
ront-oce sta producing misleading
derivative valuation numbers.
O course some o the issues in de-
rivatives data management are more
cultural than technical in nature. De-
rivatives are complex products and as
such the knowledge o what makes de-
rivatives data it or purpose sits with
the ront-oice traders. Back oice/
operations sta have their view on the
processing data they need, whereas IT
sta are oten more ocussed on Tech-
nology rather than Inormation man-
What is Data Management
in inancial markets? The
simplistic, but unsatisying,
answer is probably anything you want
it to be, so long as you can associate
data with it. For many participants it
concerns the management and dis-
tribution o real-time data, or others
the management o security terms and
conditions, the management o coun-
terparty and customer data, corpo-
rate events, security transactions and
their positions, or the management o
prices and valuations etc.
Focussing on the derivatives indus-
try, the answer to my initial question is
probably all o the above, as no other
area is so data intensive, requiring all
types and categorisations o data to
be delivered and linked together in
a consistent, high quality and lex-
ible manner. Given this diversity and
complexity o data requirements, it is
perhaps unsurprising that the spread-
sheet, aka Microsot Excel, is still the
leading platorm or derivatives data
management in inancial markets.
Centralising not SiloingOne o the great ironies o data man-
agement marketing is its desire to im-
press the importance o centralised
data management, and moving away
rom isolated data silos, whilst at the
same time presenting its product oer-
ings to the industry in a manner that is
itsel siloed around speciic types o
data (eg reerence data, market data,
counterparty data etc). I a inancial
product is constituted rom a vari-
ety o data types, curves and pricing
models, how can it be automatically
validated as it or purpose i these
constituents are located in separate,
agement. These siloed participants
in the generation and consumption
o derivatives data should be working
closely together to maximise the e-
iciency and eectiveness o the data
management processes being oper-
ated. At larger institutions it is rare
to ind these departments strongly
aligned and, combined with a lack
o ownership o data management,
this can lead to poor data quality and
much higher operational costs.
Resorting to SpreadsheetsSo without a single owner, and with-
out ront-oice knowledge and in-
volvement, traders will resort to using
spreadsheets and the core data man-
agement systems will be ignored, in-
creasing operational risk and missing
a real opportunity to have the people
who know most about the data in-
volved in improving its quality.
So should we continue to ignore the
usage o spreadsheets in derivatives
data management? I think this ap-
proach is to bury our heads in the sand
and hope that the issue goes away.
Should we try to remove spreadsheets
rom derivatives data management?
No, whilst attractive to many in remov-
ing the operational risks o spread-
sheet usage, I think this approach is
impractical and ignores the very posi-
tive beneits o spreadsheet usage.
So should we endorse the benets o
spreadsheet usage? In my view we should,
taking the principles o simplicity, fexibil-
ity and ease o use o spreadsheets with a
view to combining them with the control
and transparency sought rom data man-
agement. It might pain us all to admit it,
but derivatives data management still has
a lot to learn rom the spreadsheet.
Time to Embrace,
Reject, or Ignore theSpreadsheet?Brian Sentance, CEO, Xenomorph
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Xenomorphs TimeScape data and analytics management solution has been designed to support
derivatives and structured products data with ease.
TimeScape provides out of the box support for mainstream and niche derivative data providers,
automated data validation and data cleansing, support for complex data, integrated historic volatility
surfaces, curves and spread curves, easy integration of zero curve and pricing models and a powerful
analytic framework for reporting and decision support.
Email [email protected] to find out how TimeScape can automate and accelerate the management
of your derivatives data.
Call: Europe +44 (0)20 7614 8600 | North America +1 888 936 6457
Email: [email protected] | Web: www.xenomorph.com
Xenomorph. Data and Analytics Management.
innovation
controlledfinancial
designed fordata management
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Derivatives Data Management - Roundtable
June 2009 Issue 0710 AnA-TEAMGROUPPublication
Our panel o data experts discuss
the current market conditions, the
uture ocus o the industry and
how to tackle the tricky area o derivatives
data management.
What is driving investment inderivatives data and/or datamanagement systems in thecurrent market?
Husler: The complications raised bygrowth in the volume, range and complexity
o derivatives and the prolieration o regu-
lation are placing ever-increasing demands
on data management systems. It is widely
agreed that volumes will increase signi-cantly in the coming years, based on an in-
creasing belie in the eciency o including
derivatives in trading strategies, either in con-
junction with cash products, or exclusively.
Lecompte: In a regulatory environmentthat is moving towards more control or
all systemic risk elements, the need or im-
proved data management solutions is a hot
topic now more than ever.
There are multiple causes o the current
nancial crisis and data management isprobably not the main one. The period we
are going through has its roots in a mixture
o global imbalances, interest rates policies
and, more generally speaking, regulations
and governance. It is currently our political
leaders responsibility to lay the ounda-
tions or the sustainable development o
capital markets.
That said, the recent trend we have seen
pushing data management debates higher
up in the banks hierarchy certainly shows
this topic has been underestimated in thepast. In the current economical context,
data is o paramount importance: it is used
to evaluate assets, to eed risk management
systems, is disclosed to investors and de-
manded by regulators. More specically in
our industry, investment is awarded to so-
lutions that can help mitigate risk, improve
operational eciency and, i possible, pro-
vide transparency regarding cost structures.For SIX Telekurs inormation is everything
and truly speaking it is obviously impossible
to build reliable risk management systems
on unreliable reerence data.
Sentance: Risk and regulation, set in thecontext o the current nancial crisis, are
the current drivers behind investment in
derivatives data management. Data quality
and auditability remain important issues or
regulators in assessing the overall risk man-
agement capability o an institution. Coun-terparty risk has understandably become
a key driver behind the need or accurate
counterparty data.
New regulatory initiatives such as liquid-
ity risk and improved scenario management
are presenting new challenges and oppor-
tunities. Greater granularity o data will be
required at a centralised rm-wide level.
Regulation, cost pressures and the need or
greater transparency also present new op-
portunities or data management to gain top
management buy in but rm-wide projectswill continue to rub up against tactical, more
siloed needs o individual business units.
What are the major challengesto be tackled in this area othe market?
Husler: The growth in the volume andcomplexity o derivatives means that the
challenges are likely to be ensuring the con-
tinued suitability o existing systems, the
availability o skilled resources and the sourc-ing o quality and timely data to ensure clients
have the inormation they need or accurate
up to the minute pricing. Consolidation in
the market and increasing competition rom
Reference Data
Review PanelDebate: DerivativesData Management
Mark Husler, head of data and
software business development,
London Stock Exchange
Brian Sentance, CEO, Xenomorph
David Lecompte, market development
manager, SIX Telekurs
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Derivatives Data Management - A-Team Group
June 2009 Issue 07 11AnA-TEAMGROUPPublication
multiple exchanges oering competing de-
rivative products on the same underlying se-curities will magniy these challenges.
Sentance: I think the challenges areboth cultural and technological. The cultural
challenge is that each party has dierent
viewpoints on the data and needs o it. This
is not surprising given the number o par-
ties involved in generating, managing and
consuming data. For instance, operations
sta is typically ocused on data relating to
trade processing; ront oce and risk sta
are more ocused on pricing and sensitivitydata; and technology sta might be more
interested in the management o a data-
base, rather than the management o the
data contained in it.
Furthermore, it may also be the case
that no one clear overall owner o the data
management process has been set. In data
management, or EDM, we oten talk about
technical architecture, but I think investing
in understanding and managing the people
architecture o a data management project
is vital to its success.From a technological point o view, I be-
lieve that there will be an increasing con-
vergence o the silos within the data man-
agement industry itsel that users need
systems that combine reerence data, prod-
ucts data, counterparty data, market data or
derived data. Risk and regulatory reporting
will drive this more integrated view o all
the data to be analysed and processed. This
does not necessarily lead to the need or a
single system that does all, but rather means
that all these dierent types o data must beknitted together in an easy to understand
orm or end users such as risk managers.
I also believe that the principles (consist-
ency, transparency) o centralised data man-
agement will have to extend to the man-
agement o pricing model analytics and
zero curve calculators. Why create a great
data management inrastructure i you then
rely upon pricing or valuation numbers pro-
vided rom a desktop spreadsheet? Put an-
other way, the investment in the quality o
instrument data is wasted i the process isnot carried through to the valuation num-
bers derived rom this data. In my view, this
disconnection in the management o de-
rivatives needs to be corrected by bringing
data and analytics closer together.
Lecompte: Volumes and complexity aretwo major challenges in derivatives data man-
agement. I we consider our own database
only, traded utures and options account or
more than a quarter o the ve million nan-
cial instruments we hold. And on an annual
basis the highest growth rate in the number
o instruments is or exchange traded deriva-
tives, structured products and warrants.
There are specic issues when dealing
with derivatives rom a data processing
point o view. For exchange traded deriva-tives, although processing can be automat-
ed or creation and maintenance o such
instruments, it still requires a high degree
o involvement rom the back oce teams
in order to set up new series o instruments.
The core o the data challenge is to cope
with ever-increasing volumes and a need or
ecient data updates. When you need to re-
resh prices in a snapshot mode or 100,000
derivatives at a pre-dened point in time,
you obviously expect reliable systems and
precise timestamps rom your data provider.Our Intraday Pricing Service (IPS) caters par-
ticularly well to this kind o requirement.
For more complex structured products,
the challenge is dierent and lies in the ca-
pacity to capture terms and conditions so
that they can be disseminated to down-
stream systems. For example, at SIX Telekurs
we have always worked on coding complex
structured products redemption conditions.
It requires highly skilled operation teams,
however the benets are worth the eort.
Processing derivatives and complex nan-cial instruments is a challenge but it is the
necessary oundation upon which sound
risk management practices can be built.
How does your oering com-pare/dierentiate itsel romeverything else on the market?
Lecompte: SIX Telekurs is a global nan-cial inormation provider and, in saying that,
we mean that our aim is to deliver sustaina-
ble solutions to our clients in the eld o datamanagement. More precisely, thanks to our
expertise, we can contribute to operational
eciency and compliance with regulations.
Having operations in all major nan-
cial centres around the world also means
we are close enough to our customers toensure that our product oering adapts to
specic business needs and relevant regu-
latory environments.
Right now, what we hear rom our cus-
tomers is a need or increased timeliness in
the delivery o reerence data. This goes or
derivatives as well as plain vanilla underly-
ing instruments. To address this business
issue we will introduce an add on to our re-
erence data eed VDF.
VDF Pulse will deliver basic reerence and
cross reerence data on new institutions, in-struments and listings every 15 minutes, in
other words, as soon as we capture the data in
our database. We believe this will enable our
customers to satisy their needs across their
organisation. More specically it will contrib-
ute to narrowing down the inormation gap
between ront and back oce areas.
Husler: At present we are the only vendorto oer an open standard, unique identier
widely distributed by all major global ven-
dors, covering all instrument types, includ-ing ETDs.
Sentance: In the derivatives data man-agement area, I would say that ease o use
and the customisability o the data model
is a key dierentiator. Our clients nd it easy
to add new asset classes, add new elds and
support complex data structures without
having to return to us to make the customi-
sation each time. This increases eciency
and reduces the operational running costs
o the system. Operational risk is reducedalso, since ront oce sta can be reassured
that the new data management system has
the fexibility to adapt with their needs, re-
ducing the need or spreadsheet-based
management o data.
Combined with this ease o use, our
TimeScape product supports simple
through to very complex data types (matri-
ces, curves, baskets) and can optionally store
them on both a historic and multi-sourced
basis. One o the main reasons spreadsheets
are still used extensively to manage deriva-tives data is the fexibility they oer, and in
this regard we have extended the complex
data types TimeScape supports to include
spreadsheet-like data and calculations.
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Derivatives Data Management - Roundtable
What are the major trends in
the market that are likely toimpact your oering in theuture? Increasing complexity oderivatives or example?
Lecompte: Regulation and pressure oncosts are without a doubt two major busi-
ness drivers or investment in data man-
agement. For instance, nancial institutions
will have to develop an in-house capacity
to understand and evaluate all the assets
they hold and possibly compare their nd-
ings to external providers data. The big play-ers will have no problems putting together
the right resources to perorm those tasks.
Smaller players might want to rely on third
party or valuation services.
Concerning costs, many companies right
now are embarking on some cost control ex-
ercises. The short term eect might be a de-
crease in new projects. But in the long term,
more ocus on data management at nancial
institutions is leading us towards building
stronger relationships with our customers,
working together to develop solutions, de-livering more training and advice. This period
is an opportunity or providers like SIX Tele-
kurs to show the real value we can oer with
a ully coded reerence data eed like VDF.
As or the complexity o nancial instru-
ments, there is a trend towards increased
data exchanges across organisations. This
calls or more automation, more standardi-
sation and should continue to be a source o
data management projects. Overall there is
a need or more inormation. But this means
better quality inormation, more standard-ised inormation avouring STP and more
value added inormation.
Sentance: The regulators decision onwhether OTC derivatives are to be central-
ly cleared or maybe put on an exchange
is vital to how things will develop in the
uture. Product standardisation inevitably
leads to higher transaction volumes and
hence more data to be managed and ana-
lysed. In contrast, product innovation and
customisation will continue to present itschallenges in the management o unusual
or non-standard data.
I personally do not believe that complex
derivatives will disappear, just that they will
12
be done in less size and there will be more
regulatory pressure to quickly move stand-ardised products through to central clear-
ing on to exchange trading. Maybe we now
need a new verb or this but vanilla-ise
doesnt work or me!
At a recent update meeting by the EDM
Council it was also mentioned that the regu-
lators are considering the creation o a data
utility to sit between the exchanges and the
distributors and consumers o data. Stand-
ardisation eorts like this will bring unda-
mental change but as ever only time will tell
what will work.
Husler: The main trend will be the sheergrowth in volume. There are expectations
that the cost eciency and control provid-
ed by exchanges means that the volume o
exchange derivatives will increase at the ex-
pense o OTC derivatives. Having said that,
our next challenge is to proactively oer
Sedol codes to OTC derivatives.
How is the vendor community
evolving in this area? What canwe expect the landscape tolook like in the next fve years?
Lecompte:The growth in derivatives hasled to an increase in the number o technol-
ogy providers in derivatives valuations and
data management space.
I we only ocus in on the assets valuation
area, there are multiple actors in this eld,
traditional data vendors, sotware providers,
research companies, risk specialists, market-
places and banks securities services. In a wayit is good to see that nancial institutions
now have access to a wide choice o busi-
ness partners to ull their valuations duties.
Now, the essential part here is to assess
which partners can oer reliable data,
secure processes, transparent methodolo-
gies and the nancial soundness to work
with a sustainable view. Indeed, there is a
new market space or providing valuation
services and, to some extent, data man-
agement solutions, but our customers will
always avour long term partnerships, com-mitment and independence.
Prospective is a very dicult exercise right
now, but there is room or both global data
vendors and more specialised niche players.
At SIX Telekurs we maintain one o the big-
gest reerential database with more than vemillion nancial instruments. This includes
derivatives as well as equities, bonds, unds,
orex and also companies. We pride ourselves
in providing quality data. In order to satisy
our customers needs in asset valuations,
we have chosen to broaden our oer in that
eld. Our Fair Value Pricing Service now pro-
vides our times a day price updates or about
90,000 bonds in 11 dierent currencies.
Husler:The vendor community has long
recognised the advantage o ISIN and Sedolcodes as a cross platorm, multi-asset iden-
tier, enjoyed in particular by the sell side
and increasingly used by the buy side. To
this extent, all the major vendors carry the
ISIN and Sedol codes and we expect this
to continue. In the next ve years it is pos-
sible the number o dierent identication
codes will have been much reduced to just
a handul, helping clients to reduce costs,
increase eciency and minimise trade ail-
ures through misidentication.
Sentance: The landscape or data man-agement will obviously depend on how the
nancial markets develop in the next ew
years and given the number o regulatory
initiatives proposed at the moment, it will be
an interesting time. Despite this uncertainty,
I think that certain aspects o data manage-
ment will become commoditised as they
become more standardised, and as a result
the data management vendors will end up
moving urther up the ood chain with the
centralised management o more complexbusiness objects, analytics and processes.
It is certain that there will be more stand-
ardisation o data driven by both the regula-
tors and industry (take or example current
initiatives on standardised business entity
identiers), increased volumes o data and a
more integrated approach to risk manage-
ment, with all that entails in data quality and
auditability. Data management systems will
become real-time and not just batch, a-
cilitated by grid, distributing caching and
cloud computing. To summarise, I think thecurrent crisis presents a real opportunity to
get the technical and human inrastructure
in place to manage data and analytics more
eectively than ever beore.