A Cautionary Tale for Data Users

Market data is coming under scrutiny in the battle against operational risk and compliance.

Market data is coming under scrutiny in the battle against operational risk and compliance. Many financial services firms do not understand that using data only licensed for a front office or desktop application also in its middle- and back-office systems often constitutes a breach of contract - both with data vendors and with third party data suppliers such as exchanges.

This potential breach brings the world of market data under the umbrella of operational risk. Under the Bank for International Settlements Basel II regulatory framework operational risk is defined as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events". In re-using market data from a real-time vendor, the buyer may be liable for additional payments. Since these payments were neither expected nor budgeted for, this constitutes an operational risk.

Majority of data users are in breach of their contracts either due to functional, geographic or redistribution contraventions

According to Reuters experience, more than 80 percent of data users are not currently operating within the boundaries of their contracts. These breeches typically fall into three broad categories:

Functional: buyers of market data are potentially breaching their data contracts by taking snapshots from front-office systems and feeding that real time licensed data into middle- or back-office systems for automated straight through processing. Software vendors have created programs that automate the data infilling for risk management systems, databases and back-office accounting systems, and these processes can easily contravene the data client's contractual agreements for data usage.

Geographic: buyers using data licensed for use within one country or region to support international operations may contravene contractual rights.

Redistribution: buyers redistributing data from third party providers, such as exchanges, to their customers without prior consent also often trigger a breech of contract.

Kevin Bradshaw, Global Head of Enterprise Information Products, Reuters says, "Anyone who is taking information out of one environment and putting it into another environment is potentially in breach of contract. It is a myth that customers who purchase the rights to use real-time data can then assume the same rights for use in middle- and back-office applications." Market data managers, chief financial officers and compliance officers all carry the responsibility of ensuring their firm's data usage is in keeping with contractual terms.

One major area of confusion relates to users' contracts " do they state what you can or cannot do with the data? Bradshaw says, "Vendors must provide clear guidance to clients on the extent to which they can use third party data. Pricing data, whether real-time, end-of-day, or delayed, all has a price tag associated with it." Much of this data is subject to fees, as defined by the exchange or third party provider. Vendors have to reconcile data usage with the exchanges and third party information suppliers. Customers will have to reconcile with the vendors.

Review Your Contractual Agreements

As a user, a pro-active review of your data usage is a great start in helping to identify areas of contract non-compliance. You will need to review not only your contractual agreements, but also your internal usage of data to help identify contraventions.

The most effective way to conduct a data review is to contact your main market data provider and ask for its help. It is a data client's responsibility to ensure it is doing everything possible to mitigate breaching data usage contracts. "If you are not sure, better to ask for clarification," says Bradshaw.

Some market data vendors have specific data products that deliver the most relevant content, and commercial agreements that deal with usage rights. Reuters is able to offer cleansed and validated end-of-day or snapshot intraday data via its Reuters DataScope product range. Reuters DataScope enables clients to calculate profit and loss, risk analysis or bottom line accounting, without incurring possible fines or fees for unauthorized use of data.

Bradshaw says that clients can avoid the pitfalls of breaching data usage contracts by explaining their requirements and possibly negotiating an enterprise deal with Reuters. In this way, the client controls its data costs for all internal and external usage for front- to back-office under one umbrella. "Reuters is probably the only vendor that can offer this solution," says Bradshaw. "It's about collaboration. We want to work with our customers to provide products and commercial agreements that can rationalize data and save them money."

Reuters DataScope is an historical and reference data product that offers validated and intraday, cross-referenced securities data for middle- and back-office systems.

Reuters DataScope offers three components: content, delivery and above all usage rights to provide a complete front- to back-office data usage service that avoids any contractual exposure to data abuse.

Reuters
3 Times Square
New York, NY 10036

Contact: Rowland Dickens
646-223-4432
[email protected]