There is no doubt that data management is a critical component of any financial services firm’s risk management strategy in the current market climate. As financial strategies become more complex, new financial instruments are added and businesses continue their expansion across the globe, the need for a coherent and streamlined approach to data management -- potentially including the use of real-time data -- has never been greater.
Bruce Feibel, managing director of product strategy at BNY Mellon, an asset management and securities firm, commented: “Many investors and investment managers find it a challenge to form a complete understanding of their [market] positions and performance on a daily basis across all asset classes and strategies they are managing. The maths isn’t hard, but the data management challenge is there, especially with data inputs at different times and in different formats.”
Counterparty risk -- the risk to each party of a contract that the counterparty will fail to honourits obligations -- is one of the major issues being addressed, in part, by data management strategies. With many European banks exposed to sovereign-debt issues due to the euro zone financial crisis, there is the risk that became fact with the 2008 collapse of Lehman Brothers: If one bank fails, all of its counterparties are left exposed. Additionally, there are a number of related issues, including the lack of a standard de facto provider for corporate information, such as legal entity data or tax liability data. Firms must therefore have a view across their entire business to see their true exposure to counterparties; this is where effective data management has a major role to play.
Real-time data to bolster risk management
One argument being made is that any approach to data management, especially where it impacts the risk management operations of a financial services firm, should ensure that data is available not only in a cohesive form but in real time. “It is critical -- real time means that people can make the decisions that impact their business,” said Yves de Montcheuil, vice president of marketing at data integration company Talend. “Firms can use the rear-view mirror perspective and look at the past, which people have been doing for 20 or 30 years, or look at things in real time, when there is still an opportunity to fix them.”
Many investors and investment managers find it a challenge to form a complete understanding of their [market] positions and performance on a daily basis across all asset classes and strategies they are managing
Bruce Feibel, managing director at BNY Mellon
The pressures of recent and upcoming legislation also appear to point to the validity of the real-time approach, with demands for transparency and increased reporting requirements also coinciding with client demands for greater and timelier access to their data.
On closer inspection, however, it seems impossible to take that view as a wide-ranging statement of fact. “Real time is not very important [per se],” said Gert Raeves, research director for capital markets at The Tower Group’s European headquarters in London. “It is more about being event-driven and about precision and quality of data. The lowest possible latency is important in issues such as price discovery. [Real time] is also technology looking for a problem to solve, and it has discovered a natural problem -- intraday risk and liquidity management.” It is certainly the case that the bulk of reporting often still takes place at the end of the day, while latency has always been more of an issue in trading than in risk management.
That does, however, depend largely on what area of financial services your business is in. “There are many dimensions to banking,” de Montcheuil said. “If you are looking at fraud detection, real time is critical. For example, with a credit card application that may be approved in seconds, all of the data must be ready for that query.” In contrast, an intraday event, such as a counterparty credit downgrade, is about being event-driven, and the system needs to be real time to react to material changes.
Interest spikes in financial services
So how are banks themselves approaching this issue? BNY Mellon’s Feibel believes that the importance of sound data management -- including access and use of data, coherence of format and centralisation -- is gaining traction across financial services: “There has been a sea change in awareness of how important data management is over the last couple of years. It has gained a more formalised role, and many firms are now prioritising it.”
As banks become more aware of data management issues, including how real-time data management can affect their operations, decisions have to be made with regard to technology. BNY Mellon offers its money management clients the data warehouse and data hub approach: Its Eagle PACE system sits in the middle of a firm’s IT infrastructure to provide an integrated picture of positions and performance, according to Feibel. “The technology for the data warehouse is not new -- we have offered Eagle PACE for 10 years and over 150 clients use it,” he said. “What is new is the ability for us to deliver data management as part of a middle-office service.” The system “can be as real time as it needs to be,” he added. “[But] a lot of reporting on the buy-side takes place at the end of the day.”
Data virtualization for a single view?
Some, however, believe that the data warehouse approach is too slow and too costly to be sustained in today’s business environment. “Some firms are still creating data warehouses to physically pull together data sources,” Tower Group’s Raeves noted. “These projects are challenged by maintenance overheads and the latency and timeline aspect, as these are usually batch projects rather than being intraday and event-driven.” As a result, he said, many organizations are now looking at a virtual data warehouse approach, using software that would allow comprehensive data to be accessed as if it were collected centrally; this approach enables “a [dashboard] look-through for business analytics [on data held on different systems].”
“[Real time is a] technology looking for a problem to solve and it has discovered a natural problem -- intraday risk and liquidity management.”
Gert Raeves, research director for capital markets at The Tower Group
This is an area of potential innovation in the financial services industry, and technology supporting it is being offered by a number of IT vendors. There is some opportunity for new technology to be deployed, giving a virtual view of data in a single place with applications on top and offering firms an informed business analytics view with capabilities for meaningful analysis of data.
Culture barrier to real-time data management
Unfortunately, taking either data warehousing approach with a view to real-time risk management is not as straightforward as it may seem. Many banks’ ongoing reliance on the silo-bound approach to managing transactions or market positions can be a problem, as when a firm has an equities system for Europe, a fixed income system for Asia, a derivatives system for North America and every possible permutation of that infrastructure. The issues are not just technology and cost, but can often be cultural -- many institutions would need a shift of culture to allow for such a policy-driven, cross-departmental approach.
Additionally, there is the issue of responsibility. Who can guarantee the quality of the reports, for example, if information is being derived from so many different sources? That is especially a concern when reports are tailored for different customers. Financial services firms need to balance this difficulty with the need to have the usual auditability and transparency.
When considering the data management aspects of risk management, financial services firms must be prepared to take a business-wide approach, yet one that takes into account the differing needs of various parts of that business when assessing the real-time data requirements.
ABOUT THE AUTHOR
Kristina West has worked in financial services journalism for over 13 years. She has served as managing editor of several publications and has contributed to a range of publications, including The Banker, Financial News, Best Execution and Financial-i.
This was first published in November 2011