Reference Data Review Special Report - Impact of Derivatives on Reference Data Management

7/27/2019 Reference Data Review Special Report - Impact of Derivatives on Reference Data Management

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AnA-TEAMGROUPPublication

ReferenceDataReview presents

Impact ofDerivativeson

Reference Data Management

June 2009

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They may be complex and burdened with a bad reputation atthe moment, but derivatives are here to stay. Although Bankor International Settlements fgures indicate that derivativestrading is down or the frst time in 10 years, the asset classhas been strongly deended by the banking and brokerage

community over the last ew months.

The industry is, however, on course or a signifcant overhaulo the regulatory regime governing the OTC derivativesmarket, both in Europe and the US. This, o course, meansthat the post-trade processing o these instruments is set orbig changes. Credit deault swaps (CDSs) are the frst o thecredit derivatives to be ushered onto clearing counterpartiesin a bid to reduce counterparty risk, but they will likely notbe the last.

Moreover, the market is also awaiting the introduction o analternative standard to the current fve character OptionsPrice Reporting Authority (Opra) codes next year. Earlier thisyear, the Options Clearing Corporation (OCC) was named asthe operator o the new options symbology system, whichhas been estimated to cost the industry around US$250million to introduce.

All o these changes are likely to have a signifcant impacton the data management systems or these complexinstruments, requiring the introduction o new processes andprocedures. A challenge indeed or the vendor community.


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is willing to concede that the introduction

o central counterparties (CCPs) or deriva-

tives clearing will reduce counterparty risk

in the market. The WMBA wishes to warn

again that orcing OTC products onto ex-

changes would signicantly reduce li-

quidity in nancial markets, resulting in

increased risks and costs or end usersas their ability to hedge their exposures

would be handicapped, explains Clark.

The association welcomes CCPs or credit

deault swaps (CDSs) and other nancial

products that are suitable or relevant or

clearing, but eels the US governments ap-

proach to the market is unduly harsh. The

association points to the act that most o

the severe losses suered by banks during

the crisis occurred in the structured credit

markets and not in the OTC CDS market.

The OTC world, in the WMBAs view, shouldnot be driven out o business.

The association has also expressed con-

cern that US policymakers have not ac-

knowledged that making markets more

secure can be achieved through the clearing

o products, both OTC and exchange traded,

through recognised CCPs. The implication

being drawn by some market participants

and commentators, is that the only way o

achieving regulators ambitions is to coerce

OTC products onto exchanges, the associa-

tion said in a statement earlier in 2009.The US government is considering

taking a harder line because o the spec-

tre o counterparty risk, which the all o

Lehman Brothers last year threw into the

spotlight. Markets roze and liquidity dried

up because investors were concerned

about whether their deals would be com-

pleted and derivatives are at the heart o

this conusion. Risk exposure and coun-

terparty data tracking is especially dicult

when dealing with derivatives that are

structured in a highly complex manner.The Obama administration and Treasury

secretary Timothy Geithner have thereore

proposed that rms should centrally clear

derivatives trades and that these trades

The last two years have been a roller-

coaster ride or the derivatives mar-

kets. The allout rom the nancial

crisis resulted in the demonisation o the

asset class, which was cited by many as

one o the catalysts or the market troubles

and the all o nancial institutions such

as Lehman Brothers. What once were cel-ebrated as innovative new nancial prod-

ucts, have now been branded as hazard-

ous to a nancial institutions health. The

sector is also acing a barrage o regulation

and intense scrutiny rom the market.

According to the Bank or International

Settlements (BIS), there has been a signi-

cant move away rom the derivatives mar-

kets in terms o trading. Figures or the

second hal o 2008 indicate that the de-

rivatives markets shrank or the rst time

in 10 years, as investors moved away romtrading assets that they considered to

be too risky or their balance sheets. The

amount o outstanding derivatives con-

tracts linked to bonds, currencies, com-

modities, stocks and interest rates ell by

13.4% to US$592 trillion in the second hal

o last year, according to the BIS gures.

However, despite the dip in trad-

ing, some corners o the industry have

staunchly deended the derivatives mar-

kets. The Wholesale Market Brokers Asso-

ciation (WMBA), or one, is critical o thenegative perception that OTC derivatives

markets have garnered as a result o the

crisis. It has warned regulators that overly

restrictive regulation o the sector could be

harmul to the nancial markets at large.

Whist the objective o making markets

more secure is supported by all market

participants, and certainly WMBA mem-

bers, the unintended consequences o

poorly thought through policy decisions

would have a serious impact on the real

economy, says David Clark, chairman othe association.

The WMBA has displayed particular con-

cern about regulators attempts to move all

OTC business onto exchanges, although it

Derivatives Data Management - A-Team Group

June 2009 Issue 072 AnA-TEAMGROUPPublication

should also be recorded to enable supervi-

sory authorities to prevent market abuse.

These rms will also be encouraged to

move these trades onto exchanges where

possible via the imposition o higher

charges or OTC trades. The rules on capi-

tal adequacy or these instruments will

also be tightened and higher reserves willbe required, i the proposals are passed.

Securities and Exchange Commission

chairman Mary Schapiro has also suggested

that regulators should use the Financial In-

dustry Regulatory Authoritys (Finra) system

or bond price reporting, Trace, as a model or

transparency and reporting requirements

or OTC derivatives. The Trace system, which

has been in operation since 2005, provides

access to trading inormation on corporate

bonds to anyone with internet access. I

think its something well look at very closelyas a potential model, said Schapiro.

Regardless o Traces uture role, how-

ever, it seems that OTC derivatives regula-

tion is on the cards in a big way. We need

better broader authority, better inorma-

tion, and we need a better commitment

o supervisory authorities to enorce those

laws, said Geithner during the release o

the proposals.

Given the increased costs and poten-

tial limitations on product innovation that

such requirements would involve, it is notsurprising that the industry is ghting back.

The WMBA is, however, less critical o the

approach being adopted in Europe. The

WMBA believes that European initiatives

indicate a rmer grasp o the essential role

o the clearing house, and understanding

o the transparency and post trade secu-

rity inherent in the activities o banks, and

WMBA members that use platorms that

are MiFID compliant in an already regu-

lated environment, explains Clark.

The European approach, thus ar, hasbeen to encourage the use o CCPs and to

initiate a debate about the potential provi-

sion o more data to the regulatory commu-

nity about derivatives products. Committee

Angels or Demons?

By Virginie OShea, Editor, A-Team Group


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June 2009 Issue 07 3AnA-TEAMGROUPPublication

Depository Trust & Clearing Corporation

(DTCC), the Financial Industry RegulatoryAuthority (Finra), the Issuer Advisory Group

(IAG) and SFB Market Systems (SFBMS).

The OCC is the clearing house that since

2005 has led the Options Symbology Ini-

tiative (OSI) and was likely chosen because

o this long association with the market.

Last year, the Financial Inormation Forum

(FIF) highlighted in a report that the cost o

the introduction o the new symbology

is likely to be high. Mary Lou Von Kaenel,

managing director, management consult-

ing at New York-based consultancy Jordan& Jordan, which chairs the FIF group, ex-

plained at the release that the industry will

spend an estimated US$250 million in prep-

aration or the new options symbology.

Respondents to the survey on which the

report was based included 46 o the FIFs

members, representing 26 broker-dealers,

12 service bureaus, seven market data ven-

dors and one options market. General indus-

try discontent with a lack o standardisation

was prevalent in the survey and respond-

ents also indicated they are aware o thehigh cost o implementation. The other

interesting, although not surprising, nd-

ing o the survey is the estimated cost to the

industry o US$250 million, which does not

include buy side or custodian implementa-

tion costs, she added. In this market envi-

ronment, with no new revenue that can be

attributed to the expense, cost has become

a signicant challenge or some rms.

The most costly aspects o the changes

were highlighted by Von Kaenel: Looking at

it rom the customer perspective, FIF mem-bers ocused on customer conrmations

and account statements generated by the

back oce. At the ront end, there are more

complex elements to consider, such as ease

o order entry or avoiding input errors.

Currently, most rms are only able to

store nine or 12 digit identication codes

and in order to comply with OSI, they will

have to create proprietary identiers or

listed contracts or purposes including

client reporting and processing. The FIF

survey asked respondents to evaluate thevarious approaches to creating the nine

character dummy codes, including the o-

erings rom Standard & Poors, Symbol

Management Clearing, Interactive Data and

o European Securities Regulators (CESR)

chairman Eddy Wymeersch has indicatedthat the regulator is looking at these inor-

mation requirements at the moment. He has

stated that these instruments can remain

o regulated markets but must use clearing

central counterparties (CCPS) to reduce risk.

The issue o CCPs is denitely on the map

in the near uture or CESR, he said.

It is not just the regulators that are a-

ecting a revamp o industry practices,

however. The International Swaps and De-

rivatives Association (ISDA) has also devel-

oped a new standard protocol or dealingwith CDSs, which was introduced into the

market on 8 April. The ISDA big bang, as

it was dubbed, changed the pricing prac-

tices or single name CDS contracts.

The changes were aimed at reducing

systemic risk by introducing a standard-

ised pricing system or CDSs and making

clear what procedures must be adopted

should a deault occur or a CDS contract.

The new convention means that invest-

ment grade names trade with a xed

coupon o 100bps and high yield namestrade with a xed coupon o 500bps.

According to Robert Pickel, head o ISDA,

the big bang protocol provides a rame-

work or the industry by which it can stand-

ardise the traditionally opaque credit deriv-

atives. It is hoped that the changes will also

assist in the move towards central clearing

or CDSs with the advent o CCPs such as

IntercontinentalExchanges ICE Trust.

Moreover, the industry is also awaiting

the introduction o an alternative stand-

ard to the Options Price Reporting Au-thority (Opra) code in 2010. Earlier this

year, industry participants nally selected

a suitable candidate to operate the new

symbology allocation system.

There were ongoing discussions through-

out 2008 about the lack o agreement on

the basics surrounding the introduction o

a new code but it seems that some progress

has been made, including the selection o

the Options Clearing Corporation (OCC) as

the operator o the system.

The OCC was selected by market par-ticipants as the most suitable candidate

to maintain a centralised database o se-

curities symbols, although other players in

the market were considered, including the

an open source code, Mark 1 Algorithm.

According to the survey, 39% o re-spondents would use codes created by

Cusip Service Bureau, 7% would use In-

teractive Datas solution and 2% would

use Symbol Management Clearing. None

o the respondents selected Mark 1 Algo-

rithm, but 17% indicated they would use

their current internal identiers, 7% were

uncertain and 24% declined to comment.

This is indicative o the lack o standardi-

sation across the industry with regards to

tacking the OSI, says the FIF.

In order to meet these requirements,Standard & Poors Cusip Global Services

(CGS) business has recently announced

a partnership with UK-based utures and

options specialist FOW Tradedata to de-

velop a new Cusip identication system

or listed equity options in the US. The

vendor will launch the new service by the

end o June, says Matthew Bastian, direc-

tor o product development at S&P.

The eedback we have received rom

the industry is that a common nine to 12

character identier is a tremendous steporward in standardisation, and is an es-

sential complement to the OCCs planned

21 character OSI code, he explains.

The service is thereore aimed at support-

ing the industry in moving to these stand-

ards and will encompass approximately

one million option Cusips with accompany-

ing ISINs and related data elements. Market

participants who wish to receive the Cusip

Options Service will be able to do so directly

rom CGS or via a properly licensed vendor,

says Bastian. FOW Tradedatas Xymbologyproduct, which maps option contracts to

market data and proprietary vendor codes,

will also contain option Cusips and ISINs.

Regardless o which vendors oering

they choose, rms cannot aord to rest on

their laurels as the rst major milestone o

the OSI comes in September 2009, with

the commencement o industry testing.

To be prepared or testing, rms must

have completed their internal program-

ming changes to allow or several months

o internal testing to insure there is no un-intended impact o changes on adjacent

systems, said Von Kaenel.

It seems that derivatives data will be pro-

viding challenges or some time to come.


4/12

Derivatives Data Management - SIX Telekurs


Impact of Derivatives

on Reference DataManagement

real possibility o the existence o dier-

ent mappings between dierent banks.

This would result in a regulatory authority

receiving a dierent identier rom bank

A to the one received rom bank B, remov-ing any chance o direct comparison.

Another issue, in some way related to

the issue o poor reerence data or de-

rivatives, is the diculty in collecting this

data. Data vendors do their best to carry

relevant and comprehensive derivatives

data. Currently (end April 2009), SIX Tel-

ekurs carries almost 1.25 million utures

and options, nearly 1 million hybrid in-

struments and about 800 thousand war-

rants in our database. Our army o data

experts around the world works valiantlyto make sure that the data is clean and

useul to our customers, but with this

amount o data and with the rate o issu-

ance o new instruments, we clearly rely

on a great deal o highly complex auto-

mation. The 11 exchanges in the MiFID

zone provide data in dierent ormats

and, in some cases, dierent ormats or

dierent derivatives types.

It is obvious here that a single stand-

ard would help along the entire value

chain, but a plethora o standards arein use and more have been proposed.

A standardised data model is not avail-

able and it is this that eeds into the va-

riety o dierent data ormats that exist

today. Creating a single standard would

be a nirvana. Although regulatory atten-

tion seems to be on the rise evidenced

by the release in March 2009 o a white-

paper on this subject by the European

Central Banks Francis Gross, we must be

realistic and recognise that the uptake

o data standards - even those inventedby the industry itsel - remains low. Even

widely accepted standards take a long

time to develop and adopt, leaving eve-

ryone with a problem in the meantime.

MiFID reporting requirements

brought the standard o re-

erence data on derivatives to

the ront o the back oces mind in late

2007. For post-trade reporting purposes,the Committee o European Securities

Regulators (CESR) proposed asking all de-

rivatives exchanges to have ISINs issued

or each delivery/strike o each uture or

option. Ater that idea was rmly reject-

ed by the exchanges, the regulators and

industry worked together and the idea

o an Alternative Instrument Identier

(AII) was born.

The AII would take the existing reerence

data the venues Market Identication

Code (MIC), the product code, a markerindicating the derivative type, a put or

call identier, the expiry or delivery date

and the strike price - to uniquely identiy

a derivative instrument. At 43 characters,

it is not the snappiest o identiers.

Luckily, regulators are not expecting to

receive the data as a single identier, but

thereby hangs another problem what i

some o the underlying reerence data is

incorrect or missing? How many cancel-

lation reports will it take until the report

is right? And perhaps more importantly,given the potential time lags, what value

is that level o correction really going to

provide to the European regulators?

Another issue with the AII is that it

only applies to 11 trading venues in the

European Union. The Options Clearing

Corporation (OCC) and the Options Price

Reporting Authority (Opra) both have

dierent requirements or an identier,

again built on reerence data or the de-

rivative itsel and the trading venue.

Given this, the challenge or banks,clearing houses and regulators is that

they potentially need to have three dier-

ent projects or three dierent identiers

based on similar reerence data. There is a

The volume o derivatives has grown at

a steady rate over a number o years and

their growth and use has outstripped the

knowledge o some o the operations

sta that handles data in banks. Knowl-edge is always an issue, especially as

nding time to devote to training is more

dicult as volumes grow and workloads

increase. Again, banks need to be able to

rely on the quality o data they receive

and the systems they employ. We have

already seen how the sourcing o data is

dicult. But systematic issues hamper

the operational and business sta alike

within a bank.

In the same way that human compo-

nents o systems have struggled to keeppace, IT systems have struggled too. The

number o ticks, the number o instru-

ments and the act that most systems

were built to deal with equity and vanilla

bonds inundates day to day operations

and hamstrings developers who have to

squeeze new instrument structures into

systems that simply werent designed or

them. The situation can be urther am-

plied when a receiving system that has

been altered to accept derivatives then

eeds into an internal distribution systemthat is unable to accept these structures

- leading to data udges that can urther

compromise the standard o reerence

data used throughout the business.

So, there are many issues to be re-

solved. As with most issues in our indus-

try, there is no single answer to realis-

ing improvements and there are many

touch points that need attention. In the

meantime, using a stable data vendor

committed to open standards, continu-

ally training sta and making sure thatsystems inrastructure is suitable will all

contribute to eectively managing the

mass o data produced by the worlds

hectic derivatives trading.

By Richard Newbury, market development manager at SIX Telekurs


5/12

www.six-telekurs.com

In challenging times

you need somethingto hold on to.

With inormation on over fve million instruments

SIX Telekurs reerence database will never let you down.


6/12

Derivatives Data Management - London Stock Exchange


to the Futures Industry Association (FIA),

global exchange traded derivative con-

tracts increased by 28% in 2007 and, with

rising volumes, the risks related to identi-

cation issues signicantly increased.

The challenges that derivatives pose

to the market include ensuring the con-

tinued suitability o existing systems,

the availability o skilled resources and

the sourcing o quality and timely data

to ensure clients have the inormation

they need or accurate up to the minute

pricing. Consolidation in the market and

increasing competition rom multiple

exchanges oering competing deriva-

tive products on the same underlying

securities will magniy these challenges.

To better tackle the issues surrounding

the derivatives data management chal-

lenge, SEDOL Masterle has migrated to

the UnaVista reconciliation service plat-

orm, providing customers with a new

website and a global derivatives package.

This enhancement enabled the allocation

o two million SEDOL codes to identiy

unique global exchange traded derivatives

sourced rom over 80 global exchanges.

The Exchanges service aims to help

customers improve eciencies in the

documentation process and minimise

the risks and costs associated with late

settlement and trade ailures. In order to

achieve this goal, every derivative con-

tract is identied at the exchange level by

using the standard SEDOL seven digit al-

phanumeric ormat, providing a common

global identier or all derivatives.

Derivative SEDOL codes cover over 80

global markets including around 30,000

issuers and are linked to the underly-

ing issuer via the ISIN codes provided.

These codes also incorporate GB ISIN or

all derivatives on UK-based markets in-

cluding Lie, EDX and the London Metal

The London Stock Exchange (the Ex-

change) is the UKs national num-

bering agency and has 30 years

o experience in providing the industry

with timely and accurate global reer-

ence data. To this end, the Exchanges

own SEDOL Masterle assists rms with

their unique instrument identication by

supplying unique, market level, global

security identiers designed to lower

costs, streamline post-trade processing

and settlement, as well as minimise the

risk o cross border trade ailures.

However, the Exchanges oering is not

limited to the equities and xed income

world. In January 2009, the SEDOL Mas-

terle allocated SEDOL codes, and ISIN

codes or UK markets, to over two mil-

lion exchange traded derivatives (ETDs).

The derivatives markets can thereore

now experience the same benets en-

joyed by SEDOL code users in the equity

and xed income markets.

Dealing with derivative reerence data

is no mean eat, as it makes up 40% o all

nancial inormation and is considered to

be the building block or the automation

o nancial transactions. Typically, in the

post trade process, the documentation

department needs to use a number o de-

rivative attributes to identiy the security.

The lack o a common identier across

global exchanges, vendors, ront and

back oces creates ineciencies in the

documentation process and hinders STP.

According to the International Swaps

and Derivatives Association (ISDA) 2008

Operations Benchmark survey, mis-

matched identiers and associated reer-

ence data issues are the most common

errors in trade documentation. Moreover,

the growth in the volume and complexity

o derivatives has added urther compli-

cation to data management. According

Exchange (LME). The service provides

additional reerence data required by

regulations such as MiFID, or example

the Classication o Financial Instru-

ments (CFI) code.

SEDOL codes are incorporated into

most major data vendor solutions

worldwide, but there is no substitute or

collecting data directly rom the source.

As such, ETD SEDOL codes are available

in a downloadable ormat and through

a web services API, allowing participants

to access data on a daily basis to auto-

mate their reerence data systems.

Derivative SEDOL codes allow users to

streamline data eeds and trade with con-

dence with the thousands o other SEDOL

and ISIN users across all time zones. It also

enables users ront, middle and back o-

ces to communicate seamlessly with

each other, reducing the dependence on

concatenating multiple reerence data

attributes. Earlier identication o new

issues provides more time or instrument

set-up, decreasing the risk o unwelcome

dummy securities or codes being intro-

duced and identication codes diering

in ront and back oces.

Using SEDOL codes to identiy deriva-

tives enables potential discrepancies

to be identied beore trade inception,

which minimises the need to repair

trade ailures manually. Also, the Secu-

rities Masterle database is cross reer-

enced to alternative industry identiers,

thereby removing the overheads associ-

ated with maintaining direct connectiv-

ity to multiple reerence data suppliers.

Worldwide coverage and open stand-

ards ensures derivative SEDOL codes are

used by most global institutions and

data vendors, helping to assist in cross

border communications and automate

trade processing.

Uniquely Identifying

the Worlds ExchangeTraded DerivativesBy Mark Husler, head of data and software business development, London Stock Exchange


7/12

SEDOL Masterfle two million

uniquely identifed global

derivatives now live

Derivative SEDOL

SEDOL Masterfle recently migrated to the UnaVista reconciliationservice platorm, providing customers with an enhanced website and

global derivatives package.

The allocation o two million SEDOL and ISIN codes to uniquely identiyglobal exchange traded derivatives on over 80 global exchanges allowsyou to:

tradewithcondencewithotherSEDOLandISINusersacross all time zones

enableseamlesscommunicationacrossyourfront,middleand back ofces

revolutioniseyourpost-tradeprocessing.

For urther inormation about Derivative SEDOL, or to arrange

a demonstration o our hosted reerence data reconciliation andcross-referenceservices,pleasecontactuson+44(0)2077973009 or email [email protected].

www.londonstockexchange.com/sedol

May2009LondonStockExchangeplc.LondonStockExchange,SEDOLMasterleand the coat o arms device are registered trademarks o London Stock Exchange plc.


8/12

Derivatives Data Management -Xenomorph


isolated systems? Put another way,

derivative data management systems

need to be business and product o-

cussed rather than technology and

data-type ocussed. This is where the

spreadsheet currently proves to be

a vital tool or business users: it does

not dierentiate by data type; it copes

with a high degree o data complexity;

it is a antastic integration tool or pull-

ing data and analytics together; and it

is ultimately easy enough or users to

develop business solutions within the

rapid timerames they require.

The diversity and complexity o de-

rivatives data management mentioned

previously is also the reason why most

o the data management vendor com-

munity chooses to ignore the problem o

spreadsheet management o derivatives

data. How many centralised data man-

agement implementations are deemed

a success by proud vendors and IT de-

partments, whilst ignoring the reality that

ront-oce sta blithely generate a whole

separate (and to a great extent duplicate)

world o product and market data in desk-

top spreadsheets? Centralised, transpar-

ent data management it most certainly

is not, and it is one actor why we all still

see issues coming out in the press around

ront-oce sta producing misleading

derivative valuation numbers.

O course some o the issues in de-

rivatives data management are more

cultural than technical in nature. De-

rivatives are complex products and as

such the knowledge o what makes de-

rivatives data it or purpose sits with

the ront-oice traders. Back oice/

operations sta have their view on the

processing data they need, whereas IT

sta are oten more ocussed on Tech-

nology rather than Inormation man-

What is Data Management

in inancial markets? The

simplistic, but unsatisying,

answer is probably anything you want

it to be, so long as you can associate

data with it. For many participants it

concerns the management and dis-

tribution o real-time data, or others

the management o security terms and

conditions, the management o coun-

terparty and customer data, corpo-

rate events, security transactions and

their positions, or the management o

prices and valuations etc.

Focussing on the derivatives indus-

try, the answer to my initial question is

probably all o the above, as no other

area is so data intensive, requiring all

types and categorisations o data to

be delivered and linked together in

a consistent, high quality and lex-

ible manner. Given this diversity and

complexity o data requirements, it is

perhaps unsurprising that the spread-

sheet, aka Microsot Excel, is still the

leading platorm or derivatives data

management in inancial markets.

Centralising not SiloingOne o the great ironies o data man-

agement marketing is its desire to im-

press the importance o centralised

data management, and moving away

rom isolated data silos, whilst at the

same time presenting its product oer-

ings to the industry in a manner that is

itsel siloed around speciic types o

data (eg reerence data, market data,

counterparty data etc). I a inancial

product is constituted rom a vari-

ety o data types, curves and pricing

models, how can it be automatically

validated as it or purpose i these

constituents are located in separate,

agement. These siloed participants

in the generation and consumption

o derivatives data should be working

closely together to maximise the e-

iciency and eectiveness o the data

management processes being oper-

ated. At larger institutions it is rare

to ind these departments strongly

aligned and, combined with a lack

o ownership o data management,

this can lead to poor data quality and

much higher operational costs.

Resorting to SpreadsheetsSo without a single owner, and with-

out ront-oice knowledge and in-

volvement, traders will resort to using

spreadsheets and the core data man-

agement systems will be ignored, in-

creasing operational risk and missing

a real opportunity to have the people

who know most about the data in-

volved in improving its quality.

So should we continue to ignore the

usage o spreadsheets in derivatives

data management? I think this ap-

proach is to bury our heads in the sand

and hope that the issue goes away.

Should we try to remove spreadsheets

rom derivatives data management?

No, whilst attractive to many in remov-

ing the operational risks o spread-

sheet usage, I think this approach is

impractical and ignores the very posi-

tive beneits o spreadsheet usage.

So should we endorse the benets o

spreadsheet usage? In my view we should,

taking the principles o simplicity, fexibil-

ity and ease o use o spreadsheets with a

view to combining them with the control

and transparency sought rom data man-

agement. It might pain us all to admit it,

but derivatives data management still has

a lot to learn rom the spreadsheet.

Time to Embrace,

Reject, or Ignore theSpreadsheet?Brian Sentance, CEO, Xenomorph


9/12

Xenomorphs TimeScape data and analytics management solution has been designed to support

derivatives and structured products data with ease.

TimeScape provides out of the box support for mainstream and niche derivative data providers,

automated data validation and data cleansing, support for complex data, integrated historic volatility

surfaces, curves and spread curves, easy integration of zero curve and pricing models and a powerful

analytic framework for reporting and decision support.

Email [email protected] to find out how TimeScape can automate and accelerate the management

of your derivatives data.

Call: Europe +44 (0)20 7614 8600 | North America +1 888 936 6457

Email: [email protected] | Web: www.xenomorph.com

Xenomorph. Data and Analytics Management.

innovation

controlledfinancial

designed fordata management


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Derivatives Data Management - Roundtable


Our panel o data experts discuss

the current market conditions, the

uture ocus o the industry and

how to tackle the tricky area o derivatives

data management.

What is driving investment inderivatives data and/or datamanagement systems in thecurrent market?

Husler: The complications raised bygrowth in the volume, range and complexity

o derivatives and the prolieration o regu-

lation are placing ever-increasing demands

on data management systems. It is widely

agreed that volumes will increase signi-cantly in the coming years, based on an in-

creasing belie in the eciency o including

derivatives in trading strategies, either in con-

junction with cash products, or exclusively.

Lecompte: In a regulatory environmentthat is moving towards more control or

all systemic risk elements, the need or im-

proved data management solutions is a hot

topic now more than ever.

There are multiple causes o the current

nancial crisis and data management isprobably not the main one. The period we

are going through has its roots in a mixture

o global imbalances, interest rates policies

and, more generally speaking, regulations

and governance. It is currently our political

leaders responsibility to lay the ounda-

tions or the sustainable development o

capital markets.

That said, the recent trend we have seen

pushing data management debates higher

up in the banks hierarchy certainly shows

this topic has been underestimated in thepast. In the current economical context,

data is o paramount importance: it is used

to evaluate assets, to eed risk management

systems, is disclosed to investors and de-

manded by regulators. More specically in

our industry, investment is awarded to so-

lutions that can help mitigate risk, improve

operational eciency and, i possible, pro-

vide transparency regarding cost structures.For SIX Telekurs inormation is everything

and truly speaking it is obviously impossible

to build reliable risk management systems

on unreliable reerence data.

Sentance: Risk and regulation, set in thecontext o the current nancial crisis, are

the current drivers behind investment in

derivatives data management. Data quality

and auditability remain important issues or

regulators in assessing the overall risk man-

agement capability o an institution. Coun-terparty risk has understandably become

a key driver behind the need or accurate

counterparty data.

New regulatory initiatives such as liquid-

ity risk and improved scenario management

are presenting new challenges and oppor-

tunities. Greater granularity o data will be

required at a centralised rm-wide level.

Regulation, cost pressures and the need or

greater transparency also present new op-

portunities or data management to gain top

management buy in but rm-wide projectswill continue to rub up against tactical, more

siloed needs o individual business units.

What are the major challengesto be tackled in this area othe market?

Husler: The growth in the volume andcomplexity o derivatives means that the

challenges are likely to be ensuring the con-

tinued suitability o existing systems, the

availability o skilled resources and the sourc-ing o quality and timely data to ensure clients

have the inormation they need or accurate

up to the minute pricing. Consolidation in

the market and increasing competition rom

Reference Data

Review PanelDebate: DerivativesData Management

Mark Husler, head of data and

software business development,

London Stock Exchange

Brian Sentance, CEO, Xenomorph

David Lecompte, market development

manager, SIX Telekurs


11/12


June 2009 Issue 07 11AnA-TEAMGROUPPublication

multiple exchanges oering competing de-

rivative products on the same underlying se-curities will magniy these challenges.

Sentance: I think the challenges areboth cultural and technological. The cultural

challenge is that each party has dierent

viewpoints on the data and needs o it. This

is not surprising given the number o par-

ties involved in generating, managing and

consuming data. For instance, operations

sta is typically ocused on data relating to

trade processing; ront oce and risk sta

are more ocused on pricing and sensitivitydata; and technology sta might be more

interested in the management o a data-

base, rather than the management o the

data contained in it.

Furthermore, it may also be the case

that no one clear overall owner o the data

management process has been set. In data

management, or EDM, we oten talk about

technical architecture, but I think investing

in understanding and managing the people

architecture o a data management project

is vital to its success.From a technological point o view, I be-

lieve that there will be an increasing con-

vergence o the silos within the data man-

agement industry itsel that users need

systems that combine reerence data, prod-

ucts data, counterparty data, market data or

derived data. Risk and regulatory reporting

will drive this more integrated view o all

the data to be analysed and processed. This

does not necessarily lead to the need or a

single system that does all, but rather means

that all these dierent types o data must beknitted together in an easy to understand

orm or end users such as risk managers.

I also believe that the principles (consist-

ency, transparency) o centralised data man-

agement will have to extend to the man-

agement o pricing model analytics and

zero curve calculators. Why create a great

data management inrastructure i you then

rely upon pricing or valuation numbers pro-

vided rom a desktop spreadsheet? Put an-

other way, the investment in the quality o

instrument data is wasted i the process isnot carried through to the valuation num-

bers derived rom this data. In my view, this

disconnection in the management o de-

rivatives needs to be corrected by bringing

data and analytics closer together.

Lecompte: Volumes and complexity aretwo major challenges in derivatives data man-

agement. I we consider our own database

only, traded utures and options account or

more than a quarter o the ve million nan-

cial instruments we hold. And on an annual

basis the highest growth rate in the number

o instruments is or exchange traded deriva-

tives, structured products and warrants.

There are specic issues when dealing

with derivatives rom a data processing

point o view. For exchange traded deriva-tives, although processing can be automat-

ed or creation and maintenance o such

instruments, it still requires a high degree

o involvement rom the back oce teams

in order to set up new series o instruments.

The core o the data challenge is to cope

with ever-increasing volumes and a need or

ecient data updates. When you need to re-

resh prices in a snapshot mode or 100,000

derivatives at a pre-dened point in time,

you obviously expect reliable systems and

precise timestamps rom your data provider.Our Intraday Pricing Service (IPS) caters par-

ticularly well to this kind o requirement.

For more complex structured products,

the challenge is dierent and lies in the ca-

pacity to capture terms and conditions so

that they can be disseminated to down-

stream systems. For example, at SIX Telekurs

we have always worked on coding complex

structured products redemption conditions.

It requires highly skilled operation teams,

however the benets are worth the eort.

Processing derivatives and complex nan-cial instruments is a challenge but it is the

necessary oundation upon which sound

risk management practices can be built.

How does your oering com-pare/dierentiate itsel romeverything else on the market?

Lecompte: SIX Telekurs is a global nan-cial inormation provider and, in saying that,

we mean that our aim is to deliver sustaina-

ble solutions to our clients in the eld o datamanagement. More precisely, thanks to our

expertise, we can contribute to operational

eciency and compliance with regulations.

Having operations in all major nan-

cial centres around the world also means

we are close enough to our customers toensure that our product oering adapts to

specic business needs and relevant regu-

latory environments.

Right now, what we hear rom our cus-

tomers is a need or increased timeliness in

the delivery o reerence data. This goes or

derivatives as well as plain vanilla underly-

ing instruments. To address this business

issue we will introduce an add on to our re-

erence data eed VDF.

VDF Pulse will deliver basic reerence and

cross reerence data on new institutions, in-struments and listings every 15 minutes, in

other words, as soon as we capture the data in

our database. We believe this will enable our

customers to satisy their needs across their

organisation. More specically it will contrib-

ute to narrowing down the inormation gap

between ront and back oce areas.

Husler: At present we are the only vendorto oer an open standard, unique identier

widely distributed by all major global ven-

dors, covering all instrument types, includ-ing ETDs.

Sentance: In the derivatives data man-agement area, I would say that ease o use

and the customisability o the data model

is a key dierentiator. Our clients nd it easy

to add new asset classes, add new elds and

support complex data structures without

having to return to us to make the customi-

sation each time. This increases eciency

and reduces the operational running costs

o the system. Operational risk is reducedalso, since ront oce sta can be reassured

that the new data management system has

the fexibility to adapt with their needs, re-

ducing the need or spreadsheet-based

management o data.

Combined with this ease o use, our

TimeScape product supports simple

through to very complex data types (matri-

ces, curves, baskets) and can optionally store

them on both a historic and multi-sourced

basis. One o the main reasons spreadsheets

are still used extensively to manage deriva-tives data is the fexibility they oer, and in

this regard we have extended the complex

data types TimeScape supports to include

spreadsheet-like data and calculations.


12/12

Derivatives Data Management - Roundtable

What are the major trends in

the market that are likely toimpact your oering in theuture? Increasing complexity oderivatives or example?

Lecompte: Regulation and pressure oncosts are without a doubt two major busi-

ness drivers or investment in data man-

agement. For instance, nancial institutions

will have to develop an in-house capacity

to understand and evaluate all the assets

they hold and possibly compare their nd-

ings to external providers data. The big play-ers will have no problems putting together

the right resources to perorm those tasks.

Smaller players might want to rely on third

party or valuation services.

Concerning costs, many companies right

now are embarking on some cost control ex-

ercises. The short term eect might be a de-

crease in new projects. But in the long term,

more ocus on data management at nancial

institutions is leading us towards building

stronger relationships with our customers,

working together to develop solutions, de-livering more training and advice. This period

is an opportunity or providers like SIX Tele-

kurs to show the real value we can oer with

a ully coded reerence data eed like VDF.

As or the complexity o nancial instru-

ments, there is a trend towards increased

data exchanges across organisations. This

calls or more automation, more standardi-

sation and should continue to be a source o

data management projects. Overall there is

a need or more inormation. But this means

better quality inormation, more standard-ised inormation avouring STP and more

value added inormation.

Sentance: The regulators decision onwhether OTC derivatives are to be central-

ly cleared or maybe put on an exchange

is vital to how things will develop in the

uture. Product standardisation inevitably

leads to higher transaction volumes and

hence more data to be managed and ana-

lysed. In contrast, product innovation and

customisation will continue to present itschallenges in the management o unusual

or non-standard data.

I personally do not believe that complex

derivatives will disappear, just that they will

12

be done in less size and there will be more

regulatory pressure to quickly move stand-ardised products through to central clear-

ing on to exchange trading. Maybe we now

need a new verb or this but vanilla-ise

doesnt work or me!

At a recent update meeting by the EDM

Council it was also mentioned that the regu-

lators are considering the creation o a data

utility to sit between the exchanges and the

distributors and consumers o data. Stand-

ardisation eorts like this will bring unda-

mental change but as ever only time will tell

what will work.

Husler: The main trend will be the sheergrowth in volume. There are expectations

that the cost eciency and control provid-

ed by exchanges means that the volume o

exchange derivatives will increase at the ex-

pense o OTC derivatives. Having said that,

our next challenge is to proactively oer

Sedol codes to OTC derivatives.

How is the vendor community

evolving in this area? What canwe expect the landscape tolook like in the next fve years?

Lecompte:The growth in derivatives hasled to an increase in the number o technol-

ogy providers in derivatives valuations and

data management space.

I we only ocus in on the assets valuation

area, there are multiple actors in this eld,

traditional data vendors, sotware providers,

research companies, risk specialists, market-

places and banks securities services. In a wayit is good to see that nancial institutions

now have access to a wide choice o busi-

ness partners to ull their valuations duties.

Now, the essential part here is to assess

which partners can oer reliable data,

secure processes, transparent methodolo-

gies and the nancial soundness to work

with a sustainable view. Indeed, there is a

new market space or providing valuation

services and, to some extent, data man-

agement solutions, but our customers will

always avour long term partnerships, com-mitment and independence.

Prospective is a very dicult exercise right

now, but there is room or both global data

vendors and more specialised niche players.

At SIX Telekurs we maintain one o the big-

gest reerential database with more than vemillion nancial instruments. This includes

derivatives as well as equities, bonds, unds,

orex and also companies. We pride ourselves

in providing quality data. In order to satisy

our customers needs in asset valuations,

we have chosen to broaden our oer in that

eld. Our Fair Value Pricing Service now pro-

vides our times a day price updates or about

90,000 bonds in 11 dierent currencies.

Husler:The vendor community has long

recognised the advantage o ISIN and Sedolcodes as a cross platorm, multi-asset iden-

tier, enjoyed in particular by the sell side

and increasingly used by the buy side. To

this extent, all the major vendors carry the

ISIN and Sedol codes and we expect this

to continue. In the next ve years it is pos-

sible the number o dierent identication

codes will have been much reduced to just

a handul, helping clients to reduce costs,

increase eciency and minimise trade ail-

ures through misidentication.

Sentance: The landscape or data man-agement will obviously depend on how the

nancial markets develop in the next ew

years and given the number o regulatory

initiatives proposed at the moment, it will be

an interesting time. Despite this uncertainty,

I think that certain aspects o data manage-

ment will become commoditised as they

become more standardised, and as a result

the data management vendors will end up

moving urther up the ood chain with the

centralised management o more complexbusiness objects, analytics and processes.

It is certain that there will be more stand-

ardisation o data driven by both the regula-

tors and industry (take or example current

initiatives on standardised business entity

identiers), increased volumes o data and a

more integrated approach to risk manage-

ment, with all that entails in data quality and

auditability. Data management systems will

become real-time and not just batch, a-

cilitated by grid, distributing caching and

cloud computing. To summarise, I think thecurrent crisis presents a real opportunity to

get the technical and human inrastructure

in place to manage data and analytics more

eectively than ever beore.

Documents

Reference Data Review Special Report - Impact of Derivatives on Reference Data Management