Data Management

05:59 AM
Stephen Engdahl
Stephen Engdahl
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Financial Data Supply Chain, Part 1: A Common Foe Requires a Common Language

Many national financial markets have developed unique standards for how transactions, instruments, and entities are classified. As an inevitable result, things get lost in translation.

In this first installment of a two-part blog series, Steve Engdahl examines how banks can find their own "financial data supply chain" by taking tips on communication standards from other sectors.

Enterprise risk in financial services is often characterized by unknowns. What's our exposure to this institution? Can we identify whether we have collateral with that firm?

In light of this, the humble identifier -- likened to bar codes in the retail world -- has had something of a renaissance over the last year, as financial tech media headlines can confirm. As cost pressures persist and regulators continue to hit major banks for poor risk and reporting practices, the financial industry has rallied around efforts to increase the development and adoption of identifiers like the LEI.

These institutions may share a common foe, but that's about all they're sharing at the moment. Most firms and countries are going at the problem individually, not recognizing that identifiers like the LEI will deliver the greatest impact if utilized among the individual parties that share financial data with one another.

Connecting these parties requires uniform application and global adoption of these identifiers and other communication standards. The financial services world is making progress, but more can be done -- and the retail world can offer a source of inspiration.

The issue is that many national financial markets have developed their own unique standards for how transactions, instruments, and entities are classified. The inevitable result is that things get lost in translation. Just like the American sales assistant who furrows her brow when a British tourist rejects her offering of trousers (you asked for pants, ma'am?), an American bank may struggle with the language its British counterparty has applied to a derivatives transaction.

Retail organizations, and their associated suppliers and distributors, operate in the same diverse range of countries and languages as their financial services counterparts. Nevertheless, retail has managed to create a set of common standards for communication of a wide range of information. These standards are the foundation of the supply chain model, where inter-company cooperation, effective communications, and efficiency are crucial.

The key to "Which it is it?" -- identification
Creating a common standard for identifiers of entities, instruments, and all their associated attributes is a daunting task. But great enemies are slain over time with collaboration, and many financial parties are already working together to harmonize communication standards. The Legal Entity Identifier (LEI) initiative, designed to create a global reference data system that uniquely identifies every legal entity or structure in any jurisdiction that is party to a financial transaction, is a great example. The establishment of a Global LEI System (GLEIS) is critical to improving the measurement and monitoring of systemic risk. Global, standardized LEIs will enable regulators and organizations to measure and manage counterparty exposure more effectively while resolving longstanding issues on entity identification across the globe.

The key to "What does it mean?" -- definition
Another collaborative endeavor is common data dictionaries like the Financial Industry Business Ontology (FIBO). In creating a common, easy-to-understand definition, described in business terms, for every attribute and characteristic of a transaction, a person, a corporate entity, or a financial instrument, FIBO participants are working toward an environment where multiple, diverse data businesses and their data repositories can be seamlessly aligned. This results in global data harmony and comparability across all institutions. This, in turn, enables consolidated views of activity and risk across the financial system.

The value of the "financial data supply chain" is starting to be realized. Once common standards are established and globally adopted, and common definitions of terms are understood and shared, firms can better integrate individual elements of data acquisition, management, delivery, and inter-firm communication to the level of efficiency that the retail and other industries enjoy. As we'll see in the next installment of this blog series, the benefits of this chain filter down to another universal foe of banks: operational risk and cost.

Stephen Engdahl is senior VP of Product Strategy at GoldenSource. Steve is responsible for defining and articulating the company's global product strategy, aligning the company around opportunities to increase clients' value, product experience, and return on investment. View Full Bio
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User Rank: Apprentice
1/24/2015 | 12:07:44 PM
Access to global markets
While it's true that there are very few agreed upon standards for indentifiers globally, there is an even greater and striking lack of access to global markets by individuals or small players in any given country or region.  

Have you ever tried to purchase a Eurobond, or a stock in any country in Africa or Asia?  It's even hard to do it in Canada (I'm in New York).  

A little off topic, but related, is that the stock exchanges are really anachronisms, products of a bygone age.  Peer to peer networks are what's happening.   I want to buy a stock in public trading company based in Shanghai, why should that process be any different from buying a frying pan?  I should be able to perform this transaction PTP; the clearing of monies could be done DVP/RVP using a whole host of PTP technologies such as BITCOIN.  

Of course none of this will ever happen unless agencies like the SEC would step aside and let the natural innovation tendencies of the free market bear fruit.
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