Rather than thinking about the physical size of data, consider the importance of being able to relate different sets of data. For financial services firms, the complexity isn't found in the need to store more data; it is in how best to link, arbitrate and cleanse all of the data required to support regulatory needs. So, it becomes less about how big the data is and more about its breadth and reach across the organization. The new challenge in the next few years will revolve around managing what could be called Wide Data.
Regulations Influencing the Wide Data Trend
In the next two years, regulations will be enforced across a variety of operational and technical areas. The following regulatory requirements highlight the need for investment into strategic data programs:
Data Retention, Search and Retrieval: The data retention business conduct rules as part of the Dodd-Frank Act require registered Swap Dealers (SDs) and Major Swap Participants (MSPs) to record, store and reconstitute all information related to a trade within 48 hours upon request from the Commodity Futures Trading Commission (CFTC). It is expected that firms will be able to provide complete audit information of a trade, related telephone conversations, analyst reports, sales and marketing documentation, emails, instant messages and any other pertinent information that aided in the investment decision -- including all pre-trade activity (quotes, bids, offers, solicitations) relating to the inception of a deal.
Impact: Firms need a mechanism to correlate disparate transaction records with records of communications -- either through automated or manual processes.
OTC Swap & Derivative Counterparty Identification: Global trade repository reporting requirements mandate using standard counterparty identifiers in order to provide regulators with the ability to aggregate and identify potential risk areas. In the absence of a global legal entity identifier (LEI) as proposed by the G20 Financial Stability Board (FSB), the CFTC has required the use of interim identifiers. In other regulatory regimes, the lack of a global standard may provide greater tolerance and allow the use of existing standard identifiers, like SWIFT BIC codes, as the best available and easiest options for firms to achieve compliance.
Impact: Firms need to make "best efforts" to clean counterparty reference data to support immediate regulatory requirements while maintaining flexibility to transition to a global standard in the near future.
Data Transparency: The Dodd-Frank Act will be followed by other global regulations that require the disclosure of unprecedented levels of detail for each and every derivative transaction. Public dissemination of trade execution data in near real-time will provide all market participants with indications of liquidity and levels of activity. Additionally, the reporting of full primary economic terms and valuations data will give regulators the ability to calculate risk and police markets with greater levels of scrutiny in attempts to mitigate systemic risk.
Impact: Firms must enhance trade capture from both a timeliness and completeness perspective and continually enrich data as it flows through to confirmation and settlement systems. This increases the reliance on data quality, especially as it pertains to counterparty information.
Data Lineage: Perhaps the most critical data element of trade repository reporting requirements is the use of a Unique Swap Identifier (USI) or Unique Transaction Identifier (UTI). The transaction identifier must be shared with the counterparty at or near the point of execution and is of critical importance for regulators seeking to understand "the story" of a derivative transaction over time. Additional requirements necessitate the linking of transactions by USI in order to indicate how risk may have been transferred through novations and other post-trade life cycle events.
Impact: Booking processes and trade capture systems must evolve to support a range of new transaction identifiers with increased functionality to support transaction linkage and life cycle event traceability.
Foreign Account Tax Compliance Act (FATCA): Enacted in 2010, the Foreign Account Tax Compliance Act (FATCA) was introduced to combat tax evasion by US persons through the use of offshore vehicles. Passed as part of the Hiring Incentives to Restore Employment (HIRE) Act in 2012, the final regulations were published at the end of January 2013. FATCA requires Foreign Financial Institutions (FFIs) to identify US accounts and report certain information about those accounts to the US Internal Revenue Service (IRS) annually. Non-compliance results in 30% withholding tax on US clients of FFIs. A number of Inter-Governmental Agreements (IGA) have been signed with the IRS including a reciprocal agreement with the UK. IGAs may provide a slightly less onerous approach than full IRS registration.
Impact: Client data needs to be correlated and cleansed to ensure that the holistic view of a client can be analyzed to determine if the client is subject to the FATCA ruling.
Achieving Control through Data Governance
In 2012, the major investment focus within data management was around Legal Entity data. This was primarily due to the regulations concerning the reporting of OTC derivative trades and FATCA. In both of these situations, investment firms are required to provide a single consolidated view of their customers and to disclose their counterparty. While this might seem like a very simple exercise, the complexity of creating a single customer view is both technically and politically challenging.
[To hear how more firms are tacking the big data challenge, read: Demand for Deep Analytics Challenges Data Managers].
Within multinational banks that run retail and Investment Banking (IB) divisions, the physical technology infrastructure is commonly split by region and business line. Data is commonly duplicated and is often inconsistent. This is not necessarily an IT infrastructure problem, but is likely the result of the manner in which a business operates or has grown (organically or with acquisitions).
In order to break down these barriers, more firms are changing their organizational structures by introducing a Chief Data Officer (CDO). The role of the CDO is to ensure that data is handled consistently throughout the organization -- and with standard policies and measures.
Next: How Does Everything Relate?