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Rethinking Reference Data Management Are Managed Services the Way Forward?



April 23, 2014

 For years now, faulty reference data has been identified as a leading cause of operational risk within firms. According to Tower Group, in spite of the millions of dollars invested by financial services companies in middleware technologies to integrate key trading systems, one in ten trades still fail due to poor reference data. At a time when regulatory and market pressures are forcing firms to do more with less, the traditional ways of managing reference data are proving to be cost-intensive and inefficient.

Managing reference data effectively has become extremely critical for trading and investment firms in the new business world that demands greater speed, agility and real-time reporting. For capital markets, a large portion of trade records are composed of reference data. As significant amount of transaction breaks are caused by poor quality reference data. In the new automated trading landscape where STP is the golden rule, firms cannot afford inconsistent, incomplete or inaccurate reference data that can generate trade breaks. Therefore, banks, asset managers, hedge funds, and broker-dealers, are taking significant steps towards revamping their data management systems, to receive consistent high-quality reference data that can minimize operational risk, and meet client as well as regulatory requirements.

One of the biggest challenges with reference-data management is the lack of standardization. As trading systems differ across the industry, due to different trading venues, asset classes, and regulatory standards across geographies, data is scattered across different systems with different formats and naming conventions. The key today is to have a coherent data strategy. Market participants need to establish an enterprise-wide data governance framework as well as an appropriate data management model that best fits their business needs. This helps in designing a complete solution that receives instrument and counterparty data from multiple vendors, then cleanses, stores and distributes the golden copy of reference data across the enterprise to deliver high-quality, accurate data at a lower total cost of ownership.

As firms are realizing that there is little competitive advantage derived from managing reference data, many are turning to third-party specialists not only to manage reference data on their behalf, but also to re-architect data systems in such a way that reduces unnecessary costs and operational risks while improving data quality. Since the economic meltdown of 2008, the finances of the financial industry have accelerated the drive toward outsourced reference data management, according to Andy Efstathiou, director at BPO analyst firm Nelson Hall. If done well, firms can reap significant savings, he writes. Reference data management business process outsourcing suppliers can help banks make initial cost savings of 20 to 50 percent and further ongoing annual cost savings of 1-2 percent, Efstathiou wrote in an opinion piece in ComputerWeekly. If capital markets firms continue to face pressure to lower costs, the trend of toward managed data services from third-party vendors will likely continue to gain steam. 



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