The Road to Risk Reduction

The financial crisis has proved that timely access to integrated and high-quality data is essential to mitigate risk and meet regulatory requirements. To discuss ways firms can improve integrated data management strategies, Inside Reference Data gathered leading industry professionals for a web forum on October 14.

In the past year, market participants have been concerned that data management projects would disappear from the agenda due to the turbulent economic environment. But although some initiatives have been postponed, data management as a practice has continued to climb to the top of firms' lists of priorities, a trend fuelled by increased focus on risk.

In fact, the area of focus may have been the same for some time now, but the financial crisis has resulted in increased pressure to make immediate changes. Norman Brower, executive director, enterprise data group, Morgan Stanley, said: "I see the challenges being a continuation of what they've historically been. It is just slightly tenser now." Data management teams are being asked to integrate disparate data sources in shorter time frames - on some occasions in days.

The big bang enterprise data management initiatives are now taking a new shape and form. Integrated data management has perhaps become the new buzz word, and in today's market, projects are more typically split into smaller components aimed at ensuring immediate return on investments. Suresh Jayaraman, manager, enterprise risk management services, AIG, said one of his challenges is now to support the data needs of a global firm that is transitioning towards a de-centralized business and risk management model.

The concept of enterprise data management has not been disregarded in the industry, but some suggest the focus is shifting. Robert Schork, former data administrator at asset management firm Bayview Financial, said: "EDM has gone by the way of the dinosaur. For big companies, it is impossible to do. There are too many integrated moving parts to put together." Instead, Schork said there is more talk about integrating data by section or by grouping, something he suggested is more likely to work. The way different divisions in a firm talk about entities could vary, for example, but within one grouping an entity is more likely to have a consistent meaning. "Nobody backs EDM any more because the times it has been tried, it's failed," said Schork.

The vendors on the panel suggested there are things they can do to help change the situation. Brian Sentance, chief executive, Xenomorph, said data management implementations have a reputation for being time-consuming, and this could change if vendors offer more turnkey options. In an audience poll held during the webinar, 42% of participants said firms will increasingly be looking for vendor offerings to solve their problems in coming years, while only 22% said there will be a growing focus on internal builds.

In the same vote, 17% predicted there will be an industry-wide reference data utility that can solve many of the existing problems. This type of utility could help set standardized definitions, something several large firms have been working on internally. The utility approach would mean the same work is done on an industry-wide scale as opposed to a firm-by-firm basis.

John Mason, CEO DClear Utilities, SmartStream, said it is important to have a utility that can set standard definitions, and SmartStream is working on a shared common source of reference data that hosts all the data necessary to run the back office. The utility could offer a recognized, central definition for how to define data quality and how to define quality improvement, for example. "In terms of enterprise data management, the utility can recognize the fact that there are many versions of the truth out there, and therefore the utility can play a part in enabling cross-referencing," he said.

The utility approach has been much discussed recently, particularly due to regulatory focus on data management. In general, regulation is emerging as a key driver for reference data projects. At AIG, Jayaraman said one of his challenges is to prepare for data demands related to upcoming regulation, such as Solvency II.

Panelists said regulation is driving a lot of budget at the moment. "There is very little choice for some of the institutions," said Sentance. In a poll, 54% said increased regulatory focus on transparency and data quality is necessary for them to sell the business case for integrated data management initiatives internally, while 11% said it is not required as the existing case is already strong enough.

Still, it is not all about regulation. Thirty-five percent of market participants say the existing case for an integrated data management initiative is not strong enough, but increased regulation is not the answer either. At Inside Reference Data's European Financial Information Summit, speakers said senior management now understand the concept of integrated data management strategies, but they are not funding it. Jayaraman said making the business case for integrated data management projects has never been easy, and it has been particularly difficult in this environment. "It is crucial to demystify the concept of data management and articulate the benefits (to sell it to senior management)," he said.

Setting the Agenda

The recent change in the data management industry has been that more people are talking about it. There are simply more business lines that have started recognizing data is a corporate asset that needs to be maintained. "I do see interest from other parts of the business, and it all ties back to risk and regulation," said Jayaraman, adding that tribal knowledge of data assets, and the hunt-and-gather mode of data integration, are simply not acceptable survival strategies in this regulatory climate.

In today's market, 54% say the risk and reporting units are driving the data management agenda, while 19% suggest the C-level is getting involved. Morgan Stanley's Brower said risk is becoming the pre-eminent sponsor of most data management projects, and these divisions are shaping the direction and scope of the projects.

In terms of projects likely to be prioritized going forward, Mason said it boils down to risk, revenue and regulation, and projects that touch on any of those business areas are still on the agenda. "Revenue, even in the current climate, is still a major focus, but we do see those projects that get driven by risk or regulation as those where organizations are committed to spend and are putting budget in place for 2010," he said.

This means it is becoming vital to align integrated data management projects with activities in other business lines, particularly risk management initiatives. Schork said data managers need to identify the organization's risk issues, and "implement governance and good data and metadata strategies around that." Data mapping tends to be a key part of this work, according to Schork, who said: "That is a monumental undertaking."

This trend has also been picked up by SmartStream, which is about to launch a data dictionary utility. Mason said the new dictionary will enable users to map provider feed terms to the actual business terms they use internally. "We recognize that those sorts of standardized approaches and standardized definitions are what organizations are after," he said.

Standardization is typically seen as one of the best strategies for managing data-related risk. Following the fall of Lehman Brothers, panelists said these activities have often been seen in the counterparty data space. In a poll, 48% of market participants said counterparty data and entity exposure is currently the most important area when it comes to data management initiatives aimed at mitigating risk, while 10% said securities reference data. "As far as the terms and conditions data, from the point of view of STP and supporting products within risk management, it's a fundamental," said Xenomorph's Sentance.

Yet, many claimed the budgets to support these initiatives have been difficult to secure in the past two years. This is now seen to be changing. In 2010, 76% say the budget is likely to increase, while 15% say it is expected to remain flat and only 3% say it is decreasing. "Having an uptick over 2009, is probably predictable," said Brower, adding that everyone was pulling back on the spend and getting down to bare bones last year and "now that the market has had some recovery, there's a little bit of get-back-to-business (mentality)."

But this does not mean the focus on cost management has disappeared. Some suggest the cost of data management activities can go down in the future. "I think a well thought-out data management and governance strategy can result in decreased costs over time, but adequate up-front investments have to be made," said Jayaraman, explaining that successful projects do not have to take a big bang approach, but need to include a road map, identifying costs and benefits. These types of initiatives can also help identify potential cost savings. Sentance said there is a lot of data duplication. "They're buying data from the same vendors over and over again," he commented.

From a vendor perspective, there has been more talk about flexible pricing structures in the past year. Mason said organizations have been asking the vendor to make the up-front investment in the utility, for example, and there is a move towards a variable pricing mechanism for customers. The variable pricing replaces the need for customers to put up a large cost that needs to be depreciated over two to three years or allocated across business lines.

In terms of the utility, SmartStream is also reviewing creative pricing structures that would offer a form of royalty to the provider of the data. Mason, who was asked by a webinar participant if trends such as social networking are influencing how data is managed, said SmartStream is not just trying to do data management better, but "trying to put a fundamental shift in the industry."

In terms of social networking, the company is looking to embrace some of the concepts people are familiar with in today's market. "All these interactions affect people in how they look at data," he said, explaining that SmartStream is, for example, exploring opportunities for implementing a revenue-sharing model for its reference data utility.

Panelists said this type of revenue-sharing is an interesting concept, particularly if the system can also rate the credibility of different sources to provide more transparency to the users. Brower suggested there should be some insight into who is submitting the data. "Give higher presence to sources with higher credibility," he said, explaining that consumers need to know if the data sources can be trusted.

In fact, increased transparency into where the data is coming from has been a key theme in the past years. The data is being used differently in different business lines, and information on data origin is becoming increasingly important from a risk management perspective.

The data experts might have spent several years trying to persuade the business that data quality is an instrumental part of any risk strategy, and also necessary to meet regulatory requirements, but for some, they have really only started to succeed in getting their message across this year. The results are even starting to be seen now. Despite the tight economic environment, firms expect to see significant improvement in the near future - 12% by the end of this year, and 53% next year. It is now up to the data management community to ensure this level of progress continues.

View archives of Inside Reference Data web seminars at www.irdonline.com/audio.

View the article on the Inside Reference Data website.