Christian Nilsson of S&P CIQ followed up Richard Burtsal’s talk with a presentation on data management for risk, containing many interesting questions for those considering data for risk management needs. Christian started his talk by taking a time machine back to 2006, and asking what were the issues then in Enterprise Data Management:
- There is no current crisis – we have other priorities (we now know what happened there)
- The business case is still too fuzzy (regulation took care of this issue)
- Dealing with the politics of implementation (silos are still around, but cost and regulation are weakening politics as a defence?)
- Understanding data dependencies (understanding this throughout the value chain, but still not clear today?)
- The risk of doing it wrong (there are risk you will do data management wrong given all the external parties and sources involved, but what is the risk of not doing it?)
Christian then moved on to say the current regulatory focus is on clearer roadmaps for financial institutions, citing Basel II/III, Dodd Frank/Volker Rule in the US, challenges in valuation from IASB and IFRS, fund management challenges with UCITS, AIFMD, EMIR, MiFID and MiFIR, and Solvency II in the Insurance industry. He coined the phrase that “Regulation Goes Hollywood” with multiple versions of regulation like UCITS I, II, III, IV, V, VII for example having more versions than a set of Rocky movies.
He then touched upon some of the main motivations behind the BCBS 239 document and said that regulation had three main themes at the moment:
- Higher Capital and Liquidity Ratios
- Restrictions on Trading Activities
- Structural Changes (“ring fence” retail, global operations move to being capitalized local subsidiaries)
Some further observations were on what will be the implications of the effective “loss” of globablization within financial markets, and also what now can be considered as risk free assets (do such things now exist?). Christian then gave some stats on risk as a driver of data and technology spend with over $20-50B being spent over the next 2-3 years (seems a wide range, nothing like a consensus from analysts I guess!).
The talk then moved on to what role data and data management plays within regulatory compliance, with for example:
- LEI – Legal Entity Identifiers play out throughout most regulation, as a means to enable automated processing and as a way to understand and aggregate exposures.
- Dodd-Frank – Data management plays within OTC processing and STP in general.
- Solvency II – This regulation for insurers places emphasis on data quality/data lineage and within capital reserve requirements.
- Basel III – Risk aggregation and counterparty credit risk are two areas of key focus.
Christian outlined the small budget of the regulators relative to the biggest banks (a topic discussed in previous posts, how society wants stronger, more effective regulation but then isn’t prepared to pay for it directly – although I would add we all pay for it indirectly but that is another story, in part illustrated in the document this post talks about).
In addtion to the well-known term “regulatory arbitrage” dealing with different regulations in different jurisdictions, Christian also mentioned the increasingly used term “subsituted compliance” where a global company tries to optimise which jurisdictions it and its subsidiaries comply within, with the aim of avoiding compliance in more difficult regimes through compliance within others.
I think Christian outlined the “data management dichotomy” within financial markets very well :
- Regulation requires data that is complete, accurate and appropriate
- Industry standards of data management and data are poorly regulated, and there is weak industry leadership in this area.
(not sure if it was quite at this point, but certainly some of the audience questions were about whether the data vendors themselves should be regulated which was entertaining).
He also outlined the opportunity from regulation in that it could be used as a catalyst for efficiency, STP and cost base reduction.
Obviously “Big Data” (I keep telling myself to drop the quotes, but old habits die hard) is hard to avoid, and Christian mentioned that IBM say that 90% of the world’s data has been created in the last 2 years. He described the opportunities of the “3 V’s” of Volume, Variety, Velocity and “Dark Data” (exploiting underused data with new technology – “Dark” and “Deep” are getting more and more use of late). No mention directly in his presentation but throughout there was the implied extension of the “3 V’s” to “5 V’s” with Veracity (aka quality) and Value (aka we could do this, but is it worth it?). Related to the “Value” point Christian brought out the debate about what data do you capture, analyse, store but also what do you deliberately discard which is point worth more consideration that it gets (e.g. one major data vendor I know did not store its real-time tick data and now buys its tick data history from an institution who thought it would be a good idea to store the data long before the data vendor thought of it).
I will close this post taking a couple of summary lists directly from his presentation, the first being the top areas of focus for risk managers:
- Counterparty Risk
- Integrating risk into the Pre-trade process
- Risk Aggregation across the firm
- Risk Transparency
- Cross Asset Risk Reporting
- Cost Management/displacement
The second list outlines the main challenges:
- Getting complete view of risk from multiple systems
- Lack of front to back integration of systems
- Data Mapping
- Data availability of history
- Lack of Instrument coverage
- Inability to source from single vendor
- Growing volumes of data
Christian’s presentation then put forward a lot of practical ideas about how best to meet these challenges (I particularly liked the risk data warehouse parts, but I am unsurprisingly biassed). In summary if you get the chance then see or take a read of Christian’s presentation, I thought it was a very thoughtful document with some interesting ideas and advice put forward.