Reference Data Gets Some Much-Needed Attention

Reuters' Reference Data User Group aims to tackle some of the big issues financial-services firms continue to struggle with when managing reference data.

As T+1 deadlines waver, straight-through processing is still a major hurdle that financial-services firms are attempting to clear. And as firms have moved toward automation and straight-through processing, the handling of reference data has become an obstacle in and of itself.

Just one year ago, reference data made its way onto the STP scene, as many firms were finding it to be a major cause of trade failure. (See WS&T's "Reference Data Poses A Stumbling Block on Road to STP," December 2001)

Now, as 2002 comes to a close, reference data continues to be a problem area that firms are focusing intensely on.

In working toward progress, Reuters recently created a Reference Data User Group for industry leaders to explore remedies to reference-data management. The RDUG first met in June to get a feel for the major issues that the group would tackle, or at least to gain focus.

"Reference data is a huge subject and there are grandiose plans but, to be honest, there is little action," says John Gubert, head of group securities services at HSBC Holdings and chairman of the RDUG. "So when we look at some of the basic data requirements in the industry, we have to question why we haven't solved them."

Anthony Kirby, head of the Reuters STP Programme and secretary of the RDUG, says that the main reference-data issues revolve around identifying counter parties and securities uniformly and automating corporate actions. "The reference-data user group is a culmination of a lot of work we've been doing with individual firms, getting them together to see whether we could improve the market practices," says Kirby. "For example, things like who is responsible for what elements of reference data at what part of the trade cycle?"

The group is made up of 12 international money managers, eight broker/dealers and five custodian banks. Kirby says the group is charged with producing a business-issues white paper specifying the main problems firms are having with reference data and what individual players in the industry have to do in order to improve upon them.

Gubert says the RDUG will initially focus on three main areas for reference-data improvement: corporate actions, manual management and aligning relevant instrument-data elements that identify what is being traded and what is being settled. He says work in these three areas is important because they most likely cost the industry hundreds of millions of dollars each year due to the lack of automation.

In the corporate-actions area, Gubert says that while 20 percent or so of corporate actions can't be easily automated because of unique characteristics, the remaining 80 percent can and should be automated. "We have the capability, with ISO 15022, of automating up to 80 percent of the corporate actions that run over our desks," says Gubert. He adds that, at this point, only about 10 percent of those corporate actions are actually automated and that the group will be looking into ways to automate the 80 percent that can be.

Why is so little automated? Gubert says that because the data comes from multiple issuers, there needs to be a set of relevant data elements to standardize these corporate actions. "It involves the industry as a whole - all of the buy- and sell-side firms. There is a relatively simple technological solution here which will not cost a lot or demand the development of a new piece of infrastructure," he points out.

ISIN Codes
Another area of focus for the group will be bringing together the various codes and symbology used today to transmit data through the trade process, as well as and working towards standards as the industry moves to STP.

"When you look at the dealing side of the market - the front-end, the basic trade - people use Reuters codes, Bloomberg codes, etc, in order to identify security numbers," says Gubert. "Well, logically, they should be able to map those codes, if they have to use them, into ISIN codes, which are used in the post-trade process. But, of course, they don't map one to one - it's not possible. So we have to ask ourselves, "Why isn't it possible and what can be done to make it possible?"

Gubert points out that, in order to accomplish this, the industry needs a database that is accurate, up to date, operated in almost real time, and is based on an industry-accepted standard. One idea is for the industry to align itself with ISIN and cut down on the local-number systems.

Gubert asks: Is this idea of a single international code for identifying securities a possibility? "We have the technological capability for providing the infrastructure, the reality is that we have a political problem which stops the infrastructure from being built," he says. The RDUG looks to overcome these political problems and roadblocks that are hindering the handling of reference data. Kirby adds that the group will most likely come up with a series of recommendations for change.

The cost factor
Kirby points out that the cost of managing reference data is holding firms back from other initiatives. "Firms can't afford to move into areas like outsourcing, sending their trades to virtual-matching utilities and getting behind operational risk unless they get control of their reference data," says Kirby. "So we view reference data as a major stumbling block, and a number of these different initiatives depend on it for getting off the ground and being successful."

Gubert adds that the group will be intent on looking into the business questions associated with improving reference data, rather than re-creating the wheel with new technology and infrastructure. In other words, the group will be breaking the task into several smaller issues that will eventually take out larger chunks of cost and effort in the management of reference data.

He says that while it remains to be seen whether or not any recommendations would be implemented on a broad basis, the group is aiming to bring the tools to the industry that would ultimately take out cost and only leave advantages to those that can implement any recommendations.

As for Reuters involvement with the group, Kirby says the vendor is merely there to help support the message of the group. Gubert agrees and says that Reuters works very closely with the financial institutions that are encountering these problems and was a force in bringing them together.

"But the result of the work will in no way be proprietary," says Gubert. "That was actually quite important to the members around the table." He adds that any solutions for reference-data problems will not reside with any single supplier or vendor because the issue impacts too many firms around the world. "Unless you look for a solution that is available to them all, you don't solve the problem," adds Gubert.

Kirby says that the RDUG has given itself a time limit, recognizing the fact that the industry is, "a little tired of lots of user groups and initiatives that don't come to anything." He adds that while no one can predict how the industry will react to any conclusions that come out of the group, he expects RDUG will have the white paper finished by the end of this year.

------------------------------------------

Has Progress Been Made?
As a follow-up to last year's joint TowerGroup, Reuters and Capco reference-data study, TowerGroup recently released a research note entitled "Is the Securities Industry Making Progress on Reference Data Management?" While last year's study first brought to light the problems with reference data, this year's study looked closer to see if firms have made any progress towards improving the management of reference data.

According to the survey, more than 60 percent of firms report that projects to improve reference data were either a top priority or a high priority. In addition, 83 percent of respondents say they are considering new investments in data-management projects despite difficult economic conditions. Centralizing data has also become a top priority as firms are looking to improve reference-data management, with one in four firms consolidating the data-administration function across the enterprise.

Outsourcing data management has also become an attractive option for many financial-services firms. While TowerGroup reports that only a few firms have actually taken the step toward outsourcing, 46 percent of respondents report that they are either seriously evaluating data-outsourcing alternatives or were discussing outsourcing as a concept, but no analysis has begun.

The survey also found that the proprietary nature of reference data was not a big problem for most firms looking into outsourcing the information. Sixty-nine percent of custodians and 60 percent of investment managers disagreed or strongly disagreed that reference data was too sensitive to be managed by a third party. Brokers, on the other hand, were a little more skeptical with 25 percent saying that reference data might be too proprietary to expose to an outsourced provider.

The report found, "Overall, respondents agreed more vehemently with the potential benefits of consolidating or outsourcing data management than with the issues standing in the way." But the report did add that the ultimate trend toward outsourcing remains to be seen in practice.