The onslaught of new regulations and pressing calls for greater transparency from investors following the financial crisis has changed the way firms are addressing data management.
As the U.S. struggles to emerge from its worst economic crisis in 80 years, capital markets organizations have been forced to re-examine the way they report financial information. Regulators are continuing to ramp up scrutiny of exchanges, brokerages, hedge funds and every financial firm in between. What has become crystal clear, in light of post-financial-crisis economic conditions as well as a slew of recent high-profile technology glitches, is that the tolerance for risk is at an all-time low.
Today, financial institutions realize that electronic trading risk doesn't exist in a vacuum, suggests Neal Goldstein, managing director of electronic execution at JPMorgan and co-chair of the FPL Americas Risk Management Working Group, which recently published a set of risk guidelines for the global financial industry.
Treasurers, CFOs and chief investment officers need to understand risk in real time. As such, firms are increasingly focused on cross-asset aggregation of risk exposure. "At the large bulge bracket banks, clients often have trading relationships across multiple desks and lines of business," Goldstein says. "The holy grail is to be able to quantify a client's aggregate risk exposure across asset classes. This is particularly important if these risk checks may result in a kill switch being applied when a client's trading position exceeds a given exposure threshold." For instance, without a cross-asset class view of risk, a broker wouldn't know that a client was overexposed to a certain type of debt.
Larry Tabb, CEO and founder of advisory firm TABB Group, agrees: "It's about aggregating terms and positions, analyzing what they're worth, trying to create a value on them, doing analytics on them. And trying to see what's the sensitivity if interest rates or market conditions change and understand how this all fits together with your financial conditions. All these rules are intrinsically intertwined with data management and data clarity."
To really be able to assess risk clearly across all asset classes and geographies, banks need to have disparate systems that can publish an open order and execute trade information to a central system, Goldstein states.
Meanwhile, given tighter capital rules, investment banks have been forced to slash costs and shed thousands of jobs across all departments. Technologists haven't been spared. As such, firms are looking for more efficient ways to address their IT issues, including data management processes. "They are looking into new ways of approaching macro data management," Tabb says.
Some financial institutions have started focusing on higher-grade analytics to try to find patterns in data, Tabb notes. One of their current priorities is trying to gain analytical insight into unstructured data, with open source platforms such as Hadoop rapidly gaining popularity across the capital markets.
Firms also have been investing in areas such as reference data, particularly given real-time reporting requirements for swaps under the 2010 Dodd-Frank Act, which is aimed at preventing banks from taking risky bets for their own gain rather than on behalf of their customers, as well as the Office of Financial Research's role in establishing a global legal entity identifier for systemic risk management.
Since budgets aren't cooperating, firms are shuttering other initiatives and focusing on infrastructure and data infrastructure, says Tabb. "To a certain extent they're trying to rob Peter to pay Paul."
In the current environment, smaller is sometimes better. For instance, firms are no longer spending money on gigantic warehouses and agreeing on a single data model that would fit all the data in one place, says Amir Halfon, CTO of financial services at MarkLogic, a provider of database technology. "It's that aspect that introduces the most cost. The traditional approach of a big data warehouse doesn't cut it anymore."
As they strive for greater efficiency, firms are looking at more messaging-oriented data management, where the reference and infrastructure lie in the systems of record, and they then pass that information to subsequent systems instead of trying to create a complete set of terms and conditions for everything within the organization, Tabb explains.
"Those things get massive and hard to cost-justify," Tabb says. "You can invest in making your fixed income system as robust as possible. And then if the equities system needs some fixed income data, you can pass that data across and let the fixed income system be where the data of record lies." As a result, more work is being done on the messaging infrastructure "so that firms no longer have to build those massive databases that are almost obsolete by the time they're created."
Dodd-Frank Rules Loom
As rolling deadlines for Dodd-Frank continue to approach and regulators define rules, experts are keenly tracking ongoing regulatory developments for clues into which new data management processes and technologies firms will be required to adopt next.
Some regulatory changes are making banks happy. Notably, global regulators have just eased a key capital requirements element of Basel III that was designed to create a safer financial system and ensure that big banks could survive a future financial crisis without running short of cash.
"We've already seen Basel III water down a little bit their liquidity coverage ratio," Tabb says. "How much more is this going to be watered down?"Experts are also watching the Volcker rule, named for former Federal Reserve Chairman Paul Volcker and mandated by Dodd-Frank.
From a regulatory standpoint, if banks are forced to maintain high capital requirements and spend billions more on compliance, they'll likely start to reduce the number of products they cover and go back to focusing on their core business, says Tabb. Ultimately, regulations and onerous data management requirements could change the capital markets landscape.
"You're going to see newer firms develop that are only going to create the infrastructure they need for specific products," he says. "You're going to see a whole bunch of new businesses come up, and it's going to be the next-generation banks, but they're not actually going to be banks. Meanwhile, bigger banks are going to pare back, burdened by new regulations around financial reporting and new risk management infrastructures."
Global Risk in the Coming Year
The World Economic Forum recently cited massive digital misinformation and stress on the global economic system as two major areas of risk in the coming year.
“The global risk of massive digital misinformation sits at the center of a constellation of technological and geopolitical risks ranging from terrorism to cyber attacks and the failure of global governance,” says the WEF report, which was developed from an annual survey of more than 1,000 experts from industry, government, academia and other areas who were asked to review 50 global risks.
[The Road to Big Data]
Financial firms are currently focusing much attention on sifting through massive amounts of unstructured data to get actionable information. Yet the Internet remains an uncharted, fast-evolving territory, the WEF says. “Social media increasingly allows information to spread around the world at breakneck speed,” the report says. “While the benefits of this are obvious and well documented, our hyperconnected world could also enable the rapid viral spread of information that is either intentionally or unintentionally misleading or provocative, with serious consequences.”
Meanwhile, survey respondents suggested that the economic risk that would have highest impact if it were to manifest in major systemic financial failure. “Global resilience is being tested by bold monetary and austere fiscal policies,” the report states.
Another risk that firms must take into account — particularly in light of the devastating impact of Hurricane Sandy — is environmental risk, which in conjunction with financial risk could create what the WEF describes as a “perfect storm.” “Continued stress on the global economic system is positioned to absorb the attention of leaders for the foreseeable future,” the report says. “Meanwhile, the Earth’s environmental system is simultaneously coming under increasing stress. Future simultaneous shocks to both systems could trigger the ‘perfect global storm,’ with potentially insurmountable consequences.”
A sudden and massive collapse on either the economic or environmental front would doom the other's chance of developing an effective, long-term solution, the report says. Given the likelihood of future financial crises and natural catastrophes, the report goes on to suggest that we need find ways to build resilience into our economic and environmental systems at the same time.
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio