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Global Reference Data User Group

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    • 1. John Gubert Tony Kirby Head of Group Securities Services, HSBC Head of Global STP, Reuters 17 June 2002 - London Global Reference Data User Group – Inaugural Meeting The Impact of Reference Data on STP and Operational Risk
    • 2. Agenda
      • Introduction John Gubert
      • Presentation - Tower Group Results/Recent Work Tony Kirby
      • Industry Efforts Underway Discussion
      • Next Steps Discussion
        • Collaboration between industry Participants
        • Reference Data Standards
        • Helping to Drive Industry Codes of Practice
        • Others?
    • 3. Background
    • 4. Straight Through Processing The seamless electronic process encompassing the entire life of a trade, end-to-end from execution to settlement and reconciliation across the whole financial markets value chain Enterprise STP Establishing seamless processes within the organization with minimum manual intervention Connectivity Interoperability Depository Custodian Custodian Depository Custodian Depository Custodian Depository Exchange Broker Fund Manager Fund Manager Broker Exchange Fund Manager Broker Exchange Fund Manager Broker Exchange Industry STP Establishing connectivity between market participants with rules based management
    • 5.
      • It costs the industry $12 billion each year*
      • Each cross-border trade can involve upto 25 different people, processes & systems*
      • 20% of transaction exceptions account for 80% of processing costs*
      • STP spending likely to top US$19.1bn from 2001-4**
      • Broker/dealers and asset managers will shoulder 64% and 26% of the spend respectively…**
      The lack of STP costs the Billions of Dollars in Frictional Cost every year… Cause Effect Sources: *SWIFT reported Aug ’01; **Tower Group Global STP Study Mar 2001 High fixed costs even for 100% STP* 59% of instructions need repair and query* 10% of transactions result in mismatches* 15-20% of transactions fail to settle on time* $50+ cost of settlement failures $10 fixed cost $6 cost of repair $16 cost of mismatch
    • 6.
      • No bridge spanning investment decision to transaction
        • Existing mechanisms supporting interaction between sell-side and their customers do not enable either party to optimise the return on/usage of intellectual capital assets
      • Paper-based manual procedures from order onwards…
        • Fax/telex/email is widespread with multiple rekeying a feature
        • High error rates are prevalent on account of multiple standards/protocols
        • Client connectivity is insufficient; proprietary arrangements in place
      • Need a data- and workflow-centric approach to STP
        • Many redundant steps; separations of duty
        • Reference data is poorly managed; databases are incompatible
        • Insufficient accountability, metrics and ‘ownership’
      • Achieving scale STP is not just an enterprise issue
        • Legacy systems are expensive to enhance
        • Politics, vested interests and ignor(e)ance
        • 50% of buy-side think it’s someone else’s job to provide an STP/T+1 environment – Source GSTPA
      Challenges Post-Trade - Summary
    • 7. The Road Ahead… Companies will be compelled to focus internally as well as externally…
      • Basle II/Operational Risk
      • US Patriot Act
      • N2/Know Your Client
      • PLUS:
      • Myners Report
      • AIMR Best Effort Execution
      • STP Market Practices?
    • 8. Reference Data
    • 9. What is Reference Data? “Repeated studies have demonstrated the fundamental role of correctly-specified reference data if progress towards STP is to be realised…” – David Gilks, J P Morgan Reference Data Reference data is too widely distributed…within respondents’ organizations… - 31% of trades fail due to incomplete or inaccurate reference data*. Source: Reuters, Tower Group, Capco survey – Oct 2001 Data Transaction record Transaction Reference # Account Identification Buy/Sell Indicator Security Identifier Number of Shares ccy code + Principal Amount ccy code + Commission Trade Date Settlement Date Broker Custodian/Clearing Agent Place of Settlement Data Transactional CLIENT ACCOUNT PROFILES SECURITIES MASTER FILE(S) COUNTER-PARTY DATABASE(S) CURRENCY TABLES
    • 10. If Reference Data is held on One System only
      • Reference data is obtained from one external source
      • And stored in one single system in one common format
      • 100% STP is easily achieved
      A B C Source Sample Data vendor Sample Organizational Source System Infrastructure Today Industry participants have high quality data held in only one system that is used in a consistent manner
    • 11. Problem is that Reference Data is held on Many Systems within an Organisation
      • Reference data is obtained from a number of external sources and distributed throughout the organization
      • Then manipulated into multiple formats according to functional requirements and stored in multiple systems
      • Mergers & acquisitions exacerbate complex infrastructures
      Sample Data vendors Sample Organizational Source System Infrastructure Industry participants are today faced with too much data in too many systems, but not enough quality information Source A B C D E…
    • 12. Inaccurate reference data cause 30% of trade failures $3,295 $2,855 $565 $437 $275 $215 $190 $35 $25 $11 $0 $1,000 $2,000 $3,000 $4,000 Modify Internal Processes Standardize Reference Data Check Processing Implement Matching Utilities Revise IPO Rules Accelerated Trade Submission Share Immobilization Rewrite CNS DTCC Trade Guarantee Report Trades to Clearing Corps Reference data ― Second costliest building block
      • Static data comprises 75% of transaction messages
      • Key challenges to cleaning data:
        • Standardization within the industry
        • Consistency within “the four walls”
      • Possible industry initiatives and vendor solutions emerging
      Source: SIA/CapCo/Accenture T+1 Business Case 2000
    • 13. Reference data: The key to quality STP and T+1 In a Towergroup survey :
      • 79% of respondents strongly agreed that inconsistent, inaccurate and incomplete reference data is the major cause of failing to achieve STP internally
      • Less than half of respondents believe that their reference data was more than 90% accurate
      “ In order to achieve the processing and settlement of executed trades in a T+1 environment, the industry will need to develop consistent and timely instrument and counter party reference data, to enable the matching of trades.” Source: SIA T+1 Business Case
    • 14. Reference Data: Strengthening the Foundation of STP “ Reliable reference data is the lifeblood of the trade process, yet its management is often sidelined, exposing institutions to spiraling costs and incremental business risk” Source: Reuters/Capco/Tower Group Oct 2001 Static or non-variable information describing assets & account entities used in the processing of transactions, compliance measurement, analytics, risk management & client reporting
    • 15. Data types blamed for trade failures at respondents’ organizations (combined first & second choices)
      • Inconsistent data impacts STP and Operational Risk:
      • Excessive cost (duplication, reconciliation, manual maintenance = fixed costs)
      • Sub-optimal controls, with increased operational risk and subsequent losses
      • Poorer client service
      Source: Capco/Reuters/Tower Group Research—Sept 2001 10% 22% 25% 25% 38% 42% 44% Corporatel Action-specific Data Account-specific Data Instrument Data No Response Client /Counterparty Data Settlement-specific Data Trade-specific Data
    • 16. If Firms Save on Staffing to support Data Maintenance, watch what happens to Costs - Illustrative… Response 36 firms 0-9 10-19 20-49 50-99 100-200 200+ No Source: Reuters STP Research—March 2002 22 firms 21 firms 20 firms 8 firms 13 firms 11 firms Response 0-9 10-19 20-49 50-99 100-200 200+ No 11 firms 21 firms 20 firms 8 firms 13 firms 58 firms Total Wage Bill could drop from est. $714mio p.a. to $380mio p.a.
    • 17. Market Focus on Industry & Enterprise STP Reference data is not about codes and structure, but business meaning and integration into process workflows Source: Reuters/Capco – April 2002 Enterprise Investment Decision Trade Reconciliation Settlement & Clearance Allocation Confirmation Trade Execution Order Management Transaction Workflow Market participants Industry Asset Managers Brokers Banks Regulators 3rd Party Data Providers Data Management & Sources Primary Reference Data SSIs Trade Execution Counterparty IDs Legal Hierarchies Asset IDs CORAX Data Other Data
    • 18.
      • At Industry (external) Level
      Recommendations At Enterprise (internal) Level Result: A pulling together of the challenges surrounding data and exception management to improve STP efficiency across the board
      • Focus has been on improving STP rates
      • but will now be on reference data so that
      • Static data is consistent and synchronised
      • Trade repairs are reduced by up to 30%
      • Fixed costs can be reduced, improving bottom line
      • Improved control and risk are achievable
      • Focus has been on creating data field and transactional standards but will now be on Best Practice to ensure
      • Consistent usage of accepted standards
      • Clear definition of those standards
      • Facilitation to monitor agreed performance within those standards
    • 19. Discussion of Industry Efforts Underway
      • ISITC/IOA
      • FIX
      • ISO/SWIFT
      • GSTPA
      • ISSA
      • Others…
    • 20. Next Steps?
        • Collaboration between industry Participants
        • Reference Data Standards
        • Helping to Drive Industry Codes of Practice
        • Others?
    • 21.
      • Thank You!
      • Contact details:
      • [email_address]
      • [email_address]