The Reference Data Imperative

In the early 1970s, as the use of information technology became pervasive within the financial services industry, an oft-heard expression was "Garbage In, Garbage Out". It is still a basic truth. Given the broadening of investment vehicles, the global nature of today's markets, massive volume increases and increased focus on risk and its mitigation, the effect of missing, outdated and conflicting reference data, along with the necessity of mapping between a variety of standards, has drawn industry attention. In the late 1990s, financial services firms threw people and processing resources at this problem.

Today, with the financial markets in a prolonged slump, and with heightened concern over risk management, the focus has shifted to cost reduction and risk mitigation. The industry has found that the hundreds of millions of dollars spent on STP initiatives since the mid-1990s hasn't produced the anticipated reduction in operational expense because the fundamental issue of reference data quality wasn't addressed. As has been widely publicized, inconsistent, missing or conflicting reference data is the leading cause of STP failures, resulting in manual intervention and additional expense and risk. The recent failure of the GSTPA effort highlighted the requirement to get basics right before worrying about external automation. As data quality improves, exceptions are reduced and the efficacy of STP efforts improves.

Risk reduction is also a paramount concern. The Patriot Act, and the recommendations of the Basel Accords require that financial institutions maintain years of cleansed data - some of which may not have been captured by the organization.

There are two broad categories of concern: reference data and the closely associated realm of Corporate Actions.

The reference data conundrum stems from a variety of causes. A significant contributor is the "stove-pipe" nature of most mid- and back-office processing systems. The term "stove-pipe" reflects the reality that the transaction processing chain, from initial transaction through settlement, followed by the position keeping, reporting responsibilities and risk assessment associated with inventory, typically consists of stand-alone applications. Each is likely to have its own sources of reference data, reporting and alerting mechanisms and separate administration. Data maintenance is performed in multiple places, increasing the cost and likelihood of inconsistent data.

To address these problems, Moneyline Telerate has moved beyond its strength in the pre-trade realm of market data, and into the post-trade realm of STP. There are many vendors in this space, so our approach is not to reinvent the wheel, but instead partner with firms that have an impact. To this end, we acquired Market Information Service (MIS) which provides a "golden copy"

reference database that serves as a single, trusted source of reference data for all applications within the processing chain. Recently, we announced the launch of STPConnect, in partnership with PaceMetrics. STPConnect combines the MIS reference database with the data monitoring and exception management capabilities of PaceMetrics, so that both aspects of the "stove-pipe" dilemma are addressed: multiple sources of reference data, and the inability to obtain a life-cycle view of transaction status.

The reference data conundrum stems from several causes:

- differing identification schemes in the trade lifecycle

- insufficient information from a particular information source

- outdated or missing information

- communication of information by non-electronic means

- lack of standards for interpreting the content of a particular field

- lack of a clearly defined market practice for processing multiple aspects of the trade's lifecycle

- failure to comply with standards (where standards exist)

The MIS reference database accepts information from all sources. Using customer-defined filtering and cleansing capabilities, it builds a "golden copy" reference database. It does not force a vendor's proprietary view of the data on the customer. Instead, the customer works with MIS to define a schema that addresses the specific requirements, processing needs and markets that the customer operates in. The customer doesn't find their reference database bloated with unused field definitions or suffer excessive data normalization, resulting in high data storage costs and poor performance. New data is validated, cleansed, reconciled, routed for exception resolution (if needed), cross-referenced, populated into the client model (and into future, industry-agreed models), resulting in a "golden copy". Data can be stored and retrieved using XML, paving the way for the industry's efforts to standardize on ISO 15022 and MDDL. The burgeoning awareness of these issues is reflected in the creation of the FISD's Reference Data Coalition (REDAC) and efforts of other industry bodies. Moneyline Telerate will participate in these efforts and will incorporate emerging standards as they become accepted throughout the industry.

As applications begin to process consistent data, the anomalies that we are accustomed to seeing in the transaction chain disappear. Customers are no longer presented with reports from different systems that may be difficult or impossible to reconcile, and operations staff can be redeployed or reduced.

Corporate actions processing has been excluded from many STP initiatives. This is primarily because of the way they are received. A typical firm will receive notification via S.W.I.F.T., fax, and email or telex from its custodians, and through vendor feeds. Cleansing and interpreting this data to provide a "golden copy" is the largest task facing the Corporate Actions team. Fortunately, the recently introduced S.W.I.F.T. ISO 15022 Corporate Action messages (MT 56x) provide much improved formatting of Corporate Action details. Until Corporate Actions data is cleansed and stored as a "golden copy", this area will continue to experience high expenses and charges related to the fiduciary responsibilities of asset managers. MIS is data type agnostic, and can store a "golden copy" of this information in the same database that holds other reference data.

Many companies are now forming reference data task forces. Firms can confirm the value of STPConnect and MIS by initiating a Proof of Concept project, in which a definable, cost-saving benefit is achieved in a specified amount of time. Once this milest one has been achieved, wider goals are defined and the product is deployed in additional areas of the trade life cycle.

Moneyline Telerate
233 Broadway
New York, NY 10279
Phone: (212) 553-9660

Contact Person: Stanley J. Wine
E-mail: [email protected]