What Data Is at the Heart of the Problem?
While the terms "reference data," "customer data" and "counterparty data" often are used interchangeably -- some consider customer and counterparty data to be subsets of reference data -- there are key distinctions. In its simplest form, reference data comprises descriptive information about a security, whereas customer data describes a client's account and relationship, and counterparty data generally refers to the entities with which a firm does business, such as trading partners and other market intermediaries.
Counterparty risk derives from the exposure to a single party in a financial transaction, especially when that party is unable to perform in accordance with the established agreements. Excessive exposure to counterparty risk has the potential to cause significant financial loss to an institution and its shareholders. Ramifications of such risk can shake the very foundation of the financial market in which the trade was executed -- hence the need for regulations such as Basel II and Sarbanes-Oxley, for example.
It therefore is important that each financial firm in a transaction has the right data to help measure accurately and manage effectively exposure to its counterparties. It is equally important that there are policies in place stating appropriate limits to ensure that counterparty risks are consistent with the institution's risk-bearing capacity.
These same factors also have contributed to the need for financial services firms to be able to link all customer information, no matter how broadly spread -- regardless of the number of business lines and physical locations -- together in order to track total business, revenues and costs related to that firm. And beyond that, there is even a further requirement related to identifying securities, transactions, linked securities, securities issuers' hierarchies and valuations consistently in order to fully track customers, their activities and their exposures -- industry, geographic, credit and counterparties.