Reference Data Utilities - /media/Files/www/NewsEvents/InThePress/...In our Virtual Roundtable (page...

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Special Report

Reference Data UtilitiesUsers and potential users of third-party shared services recognize their value to data quality, regulatory compliance and all financial sectors

November 2016 waterstechnology.com/ird

2 November 2016 waterstechnology.com/ird

10 Utilitize That

Can you afford to stand by and watch competitors share the costs and benefits of managing reference data in a utility?

14 Transforming Technology Financial services firms are increasingly outsourcing technology development and system management to specialist providers.

NEWS 3 Buy Side Picks Up Utility Adoption Pace

3 Utilities Extend Role in Middle Office

3 SmartStream Adds Seven Providers to SPReD Utility

FEATURES

4 The Perfect Storm for Data Utilities There is a growing appetite for moving the management of reference data to a shared industry utility. Now is the time to make a bold move.

5 As Utility Matures, Versatility Emerges and Perception of Value Grows Businesses are figuring out the benefits of the utility, how to apply the service and its usefulness as a risk management tool.

Utility’s Potential Is RecognizedIn this special report focusing on the increasing use of third-party shared services utilities for managing reference data—particularly the Reference Data Utility (RDU) offered by SmartStream—the emerging insight is that data managers are seeing its potential to reduce operational risk and prevent trade breaks caused by bad reference data.

These conclusions are evident in “Utilitize That” (page 10), a story that sums up the conclusions of a SmartStream-sponsored whitepaper on profes-sionals’ perceptions of the uses and effectiveness of the RDU. The opportunity to achieve standardiza-tion of data, and therefore consistency, by working together is now here, in part through the International Securities Identification Number (ISIN). As a result, SmartStream’s RDU is picking up users and support, as recognized at this year’s Inside Market Data and Inside Reference Data awards, in which the service reflected industry support in the form of awards votes and netted two wins.

Of those surveyed for the whitepaper, 65 percent said use of a utility would help source data and meet expectations for delivery, quality and time-liness. Together, 32 percent said a utility would enable a significant reduction of trade breaks caused by bad reference data, and another 58 percent predict at least a moderate reduction from use of a utility. Overall, according to another poll question, reducing operational risk and lowering operational costs are also likely benefits. This

whitepaper shows various types of value and opera-tional improvement becoming evident through use of the RDU, or at least some utility.

In our Virtual Roundtable (page 4), the CEO of the RDU at SmartStream, Peter Moss, and two industry experts share their analyses of the bene-fits the utility provides and the challenges it still has to meet in response to users’ likely demands. Deloitte’s Dilip Krishna and Dun & Bradstreet’s Robert Iati suggest that buy-side or smaller finan-cial firms may find a utility particularly useful and appealing. In Moss’ vision, the RDU can provide “high-quality reference data across most of the capital markets value chain.”

Iati and Krishna acknowledge that the RDU is at a particularly opportune moment to catch on and expand its number of users. Krishna points to regulatory compliance pressures driving firms to leverage the value of their data—with the RDU being one way to do that. Iati emphasizes how the amount of information has increased, as has the speed with which it is generated, making a data utility more useful than before. The recipe for applying a utility should include an enterprise-wide approach, Iati adds. Broad outsourcing is becoming more viable, and as Moss says, “Many organiza-tions have already offshored data management … or relied on outsourcing providers and are running out of options to bring costs down —adopting a utility can help here.”

Michael [email protected]

Editor’s Letter

Contents

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waterstechnology.com/ird November 2016 3

SmartStream has announced the addi-tion of seven major data providers to its RDU, also known as SPReD. According to officials, Euromoney Tradedata, Exchange Data International, Inter-active Data, Standard & Poor’s Capital IQ, S&P Dow Jones Indices, SIX Financial Information and Thomson Reuters have agreed to allow the SmartStream RDU to process their data on behalf of customers.

The addition of these sources is just a starting point for the continued growth of the RDU, according to Joseph Turso, vice president at SmartStream. “These are the vendors that are being requested by our clients as a starting point,” he says. “Between a combination of vendors and exchanges, we’ll probably, over time, be somewhere in the neighborhood of over 400 data sources.”

One of the new providers, SIX Financial Information, sees SPReD meeting customers’ demands for infor-mation. “The question is how we make it easy for them to integrate it and make it useful,” says Phil Lynch, global head of markets, products and strategy at SIX. “The idea of SPReD is to lower the barriers and the cost of integra-tion—and be able to gain value from the information.”

The data providers are receptive to the RDU model because their clients demand easier consumption of data, according to Turso. “As a utility, we take out the complexity of that data integra-tion in terms of symbology normaliza-tion,” he says. “That should make it easier for vendors to actually deliver their data to clients, because we’re doing that heavy lifting.”

Michael Shashoua

Buy Side Picks Up Utility Adoption Pace

For data and operations governance at financial services firms, utility offerings are increasing in popularity, but the value of middle-office activities should not be completely discounted, according to service provider executives and industry profession-als who spoke at the annual conference of the International Securities Association for Institutional Trade Communication (ISITC) in Boston on March 21.

“I wouldn’t say we can completely remove the middle office because utilities will take it over,” said Matthew Nelson, managing direc-tor, global product and strategy at DTCC. “Regulation is often all that gets talked about, for cost structures and an overall operational path forward to cope with [regu-latory] changes. You’ll see more adoption and more utilities. Some will be commercial; some will be industry owned and governed.

There will always be products traded that will require some intervention. There will always be firms that are lagging and firms that are leading.”

The SPReD utility, based on SmartStream’s RDU and launched last fall, is the most prom-inent recent data utility. Robert Moitoso, senior vice president and general manager, financial markets, at major buy-side finan-cial services technology provider SS&C Technologies, said firms will use SPReD to leverage previous technology investments, as his firm is doing with its investment in Financial Information Exchange capability.

“Investment firms are trying to leverage investment in their middle office and move it down to post-trade [functions],” said Moitoso. “They want to employ new tech-nology to streamline a situation.”

Michael Shashoua

While third-party shared services for refer-ence data have existed in one form or anoth-er for years, the concept of data utilities has really gained traction in financial services in the past two years. At a time when the sell side is under increasing regulatory and cost pressures, utilities offer the promise of mutu-alizing the cost of reference data. But are they being adopted as readily as the vendors that offer them would have you believe? And how are they affecting data management in firms?

Delegates at the North American Financial Information Summit, which took place in New York in May, heard from buy-side and sell-side representatives, as well as Philippe Chambadal, then CEO of SmartStream but now the company’s president.

SmartStream partnered with Tier 1 banks last year to evolve the Securities Product Reference Data (SPReD) utility, developed from the vendor’s existing Reference Data Utility (RDU) managed service and intend-ed for the collection, cleansing and valida-tion of reference data across asset classes. In response to a question about whether the pace of adoption of utilities, and the RDU in particular, is slow, Chambadal said

that, on the contrary, change has been fast. “We started this five years ago with refer-ence data management and reconciliation. We went from almost zero percent [then] to 71 percent of revenues last year and 77 percent this year,” he said. “The pace is actually very, very quick. As their reve-nues are not coming back, the firms have no choice other than mutualization and we have seen the pace accelerate.”

Goldman Sachs is a co-founder of SPReD. Chris Sherman, a vice president at the firm, said the rate of adoption is picking up. “With the regulation and the cost-control environ-ment we are in today, there’s more and more need for us to come together. And we are getting to shortening the settlement cycle with T+2,” he said. “There is increasing need for our processes not to chase down excep-tions. The firms that are leveraging like-for-like data are going to be in a better place.”

Don Callahan, global head of market data infrastructure, global banking and markets at HSBC, added that the buy side is starting to recognize the benefits too, as “they use the reference data we source.”

Joanna Wright

Utilities Extend Role in Middle Office

SmartStream Adds Seven Providers to SPReD Utility

News


In the past few years, there has been a significant push within the capital markets industry to automate the back office, with some banks having made significant progress in achieving straight-through processing. Automated processes, however, do not work unless the data feeding the systems is consistent, accurate and up-to-date. This “reference data” needs to be managed carefully if expensive trade breaks are to be avoided.

To ensure the benefits of these automated trade processes are not undermined, many firms have had to set up teams to cleanse, validate and maintain the data they source from the many data vendors, exchanges and specialist providers that are needed to get complete coverage. As a result, firms find they are now employing substantial numbers of data management professionals across their organisations.

These activities are highly duplicative, with each bank cleansing, validating and maintaining the same data records, leading to huge inefficiencies across the industry. Given the acute focus on margins within financial firms, this makes no sense.

Gaining TractionA shared reference data utility that adopts the best practices from its member firms can perform this activity once only, at a much lower cost and with a better overall result—more complete and more accurate data, cleansed for all who sign up.

But the benefits of high-quality reference data do not stop with the automation of trading processes. Regulatory reporting and risk management also benefit significantly from complete and consistent reference

data supporting the increasingly stringent regulatory checks and processes that are critical to a well-run financial institution.

Not surprisingly, the utility approach is attracting significant attention from the CEO downwards and starting to gain real traction. Automation, cost-cutting and regu-latory pressure have created the perfect storm, and financial firms are now heavily motivated to drive the initiative forward.

At the SmartStream Reference Data Utility, which launched in 2015 with backing from Morgan Stanley, JP Morgan Chase and Goldman Sachs, we have seen signif-icant market interest and are engaged in discussions with key institutions that are planning adoption.

Now is the time for bold action. Are you ready to change the game and adopt a reference data utility?

Reference Data Management

The Perfect Storm for Data UtilitiesAutomated processes and stringent regulatory requirements have led to what was once thought impossible—a growing appetite for moving the management of reference data to a shared industry utility. Access to complete, accurate and timely reference data is now critical, and few firms can afford the escalating costs of producing this themselves, writes Peter Moss, CEO of The SmartStream Reference Data Utility

Peter Moss, CEO, The SmartStream Reference Data Utility

About The SmartStream Reference Data Utility

The SmartStream Reference Data Utility (RDU), backed by Goldman Sachs, JP Morgan Chase and Morgan Stanley, is a managed service that delivers complete, accurate and timely reference data for use in critical regulatory reporting, trade processing and risk management operations, dramatically simplifying and reducing unnecessary costs for financial institutions.

The RDU acts as a processing agent for its participants’ selected data sources—sourcing, validating and cross-referencing data using market best practices so that these processes do not need to be duplicated in every financial institution. An experienced global team, which operates under the compliance frameworks of its customers, delivers data that is fit-for-purpose, consistent and in a format that is specific to the financial institutions’ needs.


As Utility Matures, Versatility Emerges and Perception of Value Grows

SmartStream’s Reference Data Utility (RDU) drives the Securities Product Reference Data (SPReD) initiative that has now been in place for over a year. As SPReD’s foundation, the RDU appeals to firms’ need for cost constraints and the management of greater volumes of data. As discussed in this virtual roundtable, businesses are figuring out the benefits of the utility, how to apply the service and its usefulness as a risk management tool. More than just the sell-side firms that backed SPReD are showing interest in the RDU—as panelists recognize, its appeal is spreading to the buy side and beyond

Why is now the right time for a shared reference data utility to gain traction in the financial services industry?

Dilip Krishna, Deloitte: The integration of data is an increas-ingly important issue for several reasons.

First, regulatory pressures are foundationally about how data , and its resulting insights, are integrated across large financial institutions in various dimensions such as entities, geographies, clients and counterparty exposure categories and risk types, among others. Reference data is the basis for integration.

Second, financial institutions are rapidly beginning to work on how they can leverage data to generate top- and bottom-line benefits, which again drives data integration and the need for good reference data.

Financial institutions are also becoming increasingly cost constrained. A good way to solve the imperative for better reference data is to share the costs with other institutions with similar needs, especially since, in many cases, reference data is not a direct competitive advantage.

Robert Iati, Dun & Bradstreet: The information available to insti-

tutions today is bigger, faster and more useful than ever before. Information from social media or about a company’s opaque relationships and payment experiences shows great promise for creating new opportunities for the industry, enabling its abilities to become smarter about the markets and to apply that data intel-ligence to the greatest challenges faced by our business. This is obviously good, and drives banks to value the specialists, such as a data utility, to successfully leverage that data. The insights and benefits gained from a utility become that much more valuable because of the capabilities offered by this more granular data.

Peter Moss, SmartStream Reference Data Utility: There have been talks about the benefits of reference data utilities for many years, but it is only now that there is a real appetite for moving to a reference data utility model.

As firms have improved automation in recent years there is now a critical reliance on reference data; and consistent, quality reference data is necessary to avoid breaks in trade processing.

At the same time as the industry has reached a stage of increased straight-through processing, there is also a heavy focus on margins, and firms are increasingly assessing oppor-tunities to reduce operational costs. A utility approach allows firms to share the costs and burden of reference data manage-ment, putting an end to a situation where firms are faced with ever-increasing data costs and growing data teams in-house.

In addition, regulators continue to put pressure on firms with wave after wave of regulatory requirements to miti-gate risk. Good-quality reference data can be just as important when automating risk management processes and regulatory controls.

Virtual Roundtable

Dilip Krishna, DirectorDeloittewww.deloitte.com


The critical need for high-quality reference data and the heavy focus on margins has created a perfect storm for finan-cial institutions, and moving to a reference data utility is the best way to weather that storm.

What is the best way to build a business case to support adoption of a reference data utility service? Dilip Krishna: There are several dimensions to this, and a timing element as well. One way to build a business case is to consider reference data that may already be used in multiple aspects of a particular type of reference data being used in a financial institution—securities or pricing data are good exam-ples. In this case, there could be a cost uplift by integrating reference data to a single utility.

Another example is customer data. There are huge costs in curating customer data, including onboarding with know-your-customer checks, ensuring proper client legal entity hierar-chies, and so on. In many instances, there could be a case made for amortizing the costs of curation among multiple market participants. Note, however, that there could be potential legal issues in this process.

Robert Iati: Surely we’ve all seen many cost models showing savings over time. That’s obvious. However, the best business case is about the future, which will see data management play an even larger role in revenue generation. So we need to grow those next-generation reference data management capabilities. Financial institutions will be compelled to maximize control over their reference data to gain competitive advantage.

One could argue that, today, the three most important areas of an investment bank are trading, regulation and risk management. Analytics will be designed using reference data to create new investment strategies from alternative forms of

data, to create more certainty in regulatory reporting using new standards and corporate relationships and to enhance risk management with greater insight into a company’s business performance.

Peter Moss: To build a robust business case for adopting a utility service, I would start with how the organization could benefit from better-quality reference data, focusing on trade automa-tion, regulatory reporting and risk management. A utility can deliver more accurate, complete and consistent data because of its singular focus and its adoption of industry best practice.

This means assessing the costs of handling automation fail-ures, the potential consequential costs of trading liabilities and the impact on customer service—with better-quality reference data the automation failures should reduce substantially.

Then I would look at the benefits that improved reference data would mean to regulatory reporting and risk manage-ment. Many of the recent regulations require increasingly chal-lenging real-time assessments of capital exposures, which are not possible without good-quality reference data.

There are many other digital processes that would benefit from excellent reference data, but the list is too long to go into here and these first two are at the forefront of most people’s minds.

Finally, there is the cost benefit of not having to cleanse the data in-house and keep up with the millions of changes that happen in the market. You can reduce the size of your data management teams or have them focus on higher-value revenue-generating activities.

What is the optimal implementation strategy when making a decision to source reference data from a shared utility?Dilip Krishna: One effective implementation strategy—and strategies must be unique to the financial institution, so this may not apply to all—is to identify the lowest-risk area for migration to a reference data utility. In some cases, consid-erations around internal data ownership may have to be addressed in choosing the type of reference data to start with as a shared utility.

Robert Iati: Implementation requires the development of an enterprise-wide data governance framework using a data management model that fits the reference data utility para-digm. The entire team needs to accept its new role of participa-tion in the utility and to buy into this governance.

Next, create success metrics for all concerned, making the benefits of participation clear and reviewable.

Lastly, to ensure efficient integration of internal data manage-ment processes with the new utility, institutions should form a mutually dependent ecosystem to address the needs of all players so that the metrics can be identified through not only your firm’s tangible benefit but from that of the entire industry. That mutual success will make reference data management better down the road.

“To build a robust business case for adopting a utility service, I would start with how the

organization could benefit from better quality reference data, focusing on trade automation, regulatory reporting and risk management. A

utility can deliver more accurate, complete, and consistent data because of its singular focus and its

adoption of industry best practice”Peter Moss, SmartStream

Robert Iati, Senior DirectorDun & Bradstreetwww.dnb.com


Peter Moss: There are different ways to approaching imple-mentation and identifying the best approach will depend on the organization’s existing data management capabilities. For some, it will make sense to start by selecting one market or business area in which reference data may be particularly bad and have that business consume reference data from the utility partner. It is also possible to take a broader approach and use the data from the utility to populate an existing security master that feeds multiple businesses. In both cases, it is about gently testing the water and taking a step-by-step approach.

The other extreme is to outsource data management completely to a utility. Many organizations have already offshored data management to reduce costs or have relied on outsourcing providers and are running out of options to bring costs down—adopting a utility can help here. For some organi-zations it may make sense to outsource the whole data manage-ment function to the utility, where it can also help to manage the transition.

What factors will ensure that firms can effectively main-tain control and mitigate risk as they move reference data to a utility?Dilip Krishna: While reference data does not typically offer direct competitive advantage, it is still data that needs to be protected. In some cases, such as customer data, there are data privacy concerns that need to be addressed, sometimes with geographic and jurisdictional considerations.

Another issue is, while reference data utilities can be cost-efficient, individual financial institutions will still be responsible for the regulatory obligations, including ensuring that the data is up to the right level of quality.

Robert Iati: Avoid pushing all your reference data management chips to this utility. Instead, leverage the utility to address a particular pain point or gain access to new data or new ways to use that data. Organizations that are prepared to re-eval-uate and alter their reference data management operation will secure greater control over the change. These firms should deploy the utility in a manner that augments their data elements and operations with data complementary to their own—often that means data that is hard to find elsewhere and is different from what they typically use.

Peter Moss: The utility acts as a processing agent for its participants, adopting best practices from the different firms and reducing duplication in the marketplace. It sources, vali-

dates and cross-references the data, using best practices from leading financial institutions.

The utility is operated by an experienced global team complying with the risk frameworks that are necessary to ensure good regulation. With firms taking data from the same source, there will also be improved consistency in the market and improved efficiencies, resulting in simplified regu-latory reporting.

The high-quality reference data can also deliver real benefits across a bank or other financial institutions’ regulatory and risk processes, making it much easier to comply.

Apart from sell-side institutions with large-scale refer-ence data operations, what industry participants do you think could benefit from a shared reference data utility? Dilip Krishna: Buy-side institutions are the obvious candidate, especially for securities, pricing reference data, and so on.

Robert Iati: The first that come to mind are regulators and governments, for the same reasons as the sell-side institutions. Their oversight is often focused on how entities are linked through their relationships, and what their risk exposure is.

The next segment of beneficiaries is companies that create new technologies that can work effectively with the utilities to create new solutions to build on top of the commonly used data. For instance, firms developing solutions to address risk work more efficiently with a single utility than with each bank.

Furthermore, small institutions and the buy side, with lesser data management systems but rigorous compliance mandates, can take smaller segments of the utility’s offering now and add more as needed.

Peter Moss: We see opportunities for this high-quality refer-ence data across most of the capital markets value chain. It could be used by banks, brokers, clearing houses, custodians, exchanges, fund administrators, investment firms and many other specialist service providers, including other utilities that are beginning to gain traction.

Almost everywhere you look there is a need for accurate, consistent reference data, and we are already seeing interest from many different types of players.

The commentary and responses to this virtual roundtable are personal and do not necessarily reflect the views and opinions of the respondents’ respective organisations.

“These firms should deploy the utility in a manner that augments their data elements and operations with data complementary to their own—often that

means data that is hard to find elsewhere and is different from what they typically use”

Robert Iati, Dun & Bradstreet

Peter Moss, CEOSmartStream Reference Data Utility www.smartstreamrdu.com

Established as an industry utility based on the principle of market commonality, collaboration and contribution, The SmartStream Reference Data Utility (RDU) delivers a cost efficient approach to realize the truth of the data contained within the industry with guaranteed results.

Managing data holistically across legal entity, instrument and corporate action data, this shared service model promotes fixes to data processing across the instrument lifecycle and the events that originate and change data.

Join the revolution, contact us today: [email protected]

Simplifying Reference Data.Together.

smartstreamrdu.com


Utilitize That

In 2015, the first fully operational indus-try-led reference data utility, The SmartStream Reference Data Utility (RDU), was launched, backed by Morgan Stanley, JP Morgan Chase and Goldman Sachs. The introduction of a true utility with support from Tier 1 organizations was groundbreaking in a market that has discussed the topic in industry forums for the past 15 years, and the launch has resulted in sell-side firms realizing that the utility model is one to watch.

In fact, utilities are no longer confused with vendors who aggregate data and deliver a reference datafeed to clients. Users now recognize that utilities are for firms that want better and cheaper data, avoiding a scenario where each organi-zation manages the same data in-house.

With this in mind, it may not come as a surprise that a recent WatersTechnology survey reveals that close to 30 percent of firms plan to evaluate a move to a utility in the future.

By moving data to a utility, firms share the data costs related to cleansing, consol-idating and normalizing legal entity, secu-rity, instrument, corporate action and pricing data, and the result is improved quality and consistency and less duplica-tion in the market. Managing reference data in-house is no longer considered a compet-itive advantage, and utilities are increas-ingly recognized as the way forward.

The difference now compared with 15 years ago, when the concept first became topical, is the appetite for change. Firms have high expectations of how a move could

benefit both individual organizations and the industry as a whole, with risk and cost being seen as the most important reasons for taking the leap. The WatersTechnology survey showed almost 40 percent think the most important way a utility could deliver value to their business is by helping reduce operational risk and the cost of trade breaks caused by incorrect data (see figure 1).

Existing users of RDU have highlighted the same point, suggesting the SmartStream utility showcases how the industry can come together to address important industry issues. “With the growing challenges around regulation, risk management and product diversity, working together to ensure high-quality reference data is in everyone’s best interest,” said Eric Suss, managing director and head of institutional reference data at

Several firms have made the move to a reference data utility, and others can no longer afford to stand by and watch competitors share the costs and benefits of managing reference data in a utility. Now is the time to take action and find out what to expect from utilitizing

Utilitizing Reference Data

38.9%

7.4%

13.7%

8.4%

29.5%

2.1%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Help reduce operational risk and cost oftrade breaks caused by incorrect data

Offer improved customer service

Make it easier to meet changingregulatory requirements

Facilitate business change

Lower operational costsand improve efficiencies

Other

Figure 1: The most important ways for a utility to deliver value to your business


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Jac

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Morgan Stanley, commenting on the utility earlier this year.

Unlike the retail industry, the financial services industry has never managed to get product identification under control, and many have put it down to the lack of collab-oration and each firm finding it necessary to process data in-house. As utilitizing becomes the norm, it should be possible

to turn the situation around, ensuring everyone is looking at the same data—whether it is legal entity data, corporate actions or basic instrument identifiers.

The lack of consistency in the market is proving increasingly costly for firms, as growing volumes of data entering an orga-nization continue to rise, meaning there is more data to manage—and more opportu-

nities for expensive errors. In fact, close to 30 percent say the most important way a utility could deliver value to the busi-ness is by lowering operational costs and improving efficiencies.

The cost proposition has also been essen-tial for SmartStream from the get-go, and the intention of RDU has always been to bring savings and operations improvements

31.6%

57.9%

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I would expect to seea significant reduction

I would expect to seea moderate reduction

I would expect the samenumber of trade breaks

I would expect to see anincrease in trade breaks

Figure 2: How would a move to a reference data utility help reduce trade breaks caused by incorrect reference data?


to all capital markets firms. Commenting on the RDU, James Trait, managing director at JP Morgan Chase, said: “This is a great example of how our industry can partner to improve effectiveness and reduce costs.”

The potential cost savings are not only linked to taking data processing work outside the organization and sharing costs with other capital markets firms, but also to the potential savings from a reduction in trade breaks. According to the survey, consensus is that there are clear opportu-nities for a utility to play a part in reducing the number of trade breaks caused by bad data, and almost 90 percent of respondents say they would expect to see a moderate to significant reduction in trade breaks caused by incorrect reference data after moving to a reference data utility (see figure 2).

Tackling RegulationWhile cost-cutting has been prevalent in financial services in recent years and many have had recruitment stops, budgets have been reoriented towards compliance. Regulation is hitting financial services firms left, right and center, and for most it has been impossible to comply with new regulation without seeing compliance costs increase. By moving data to a full-ser-vice reference data utility, the majority of respondents to the WatersTechnology survey expect to have a better ability to react to changing regulatory requirements,

which could put an end to a scenario of rocketing compliance costs.

Firms are also accustomed to collab-orating at an industry level when dealing with new regulation, and Tier 1 firms are continually dedicating resources to industry working-groups and communi-cating with regulators to understand new requirements. By adopting a utility model, many foresee this process becoming more straightforward, as the industry could have one voice—a potential win-win for regula-tors and capital markets firms alike.

In fact, the current market environment and regulatory pressure on firms to miti-gate risk have resulted in the perfect storm for a reference data utility to make a differ-ence in the data space. The retail industry has had success with the barcode from the first time a pack of Wrigley’s chewing gum was scanned in the 1970s, and the lack of this level of standardization and consis-tency in the financial market continues to surprise professionals outside of the capital markets industry.

Now that there is an opportunity to get it right in unison, the WatersTechnology survey shows that users expect to benefit from moving, in particular, traditional reference data—security data—to a utility. It makes sense that the financial services industry’s nearest equivalent of a barcode, an International Securities Identification Number, should be easier to determine

if firms sign up to a utility that cleanses, normalizes and produces a single version of the truth.

This is only a first step, however, and the survey shows users see the utility having a widespread impact on their organizations. It is not one single part of the business that would benefit from a move to a utility, say around 50 percent of respondents, but everywhere—from risk and compliance to trading and sales. Peter Moss, CEO, The SmartStream Reference Data Utility, says the RDU has the opportunity to reduce inef-ficiencies on a large scale, as it is supported by an expert team and data is cleansed once, made consistent once, and delivered with much greater quality and greater efficiency.

Existing stakeholders have also commented on the potential value the utility could deliver to the industry, with Julie Harris, managing director and head of operations data quality management at Goldman Sachs, saying she believes this solution presents great value for the orga-nization as well as the broader industry.

When asked about the potential indus-try-wide benefits the market could see from organizations moving reference data to a utility, the most popular answer in the survey was sourcing data from vendors and ensuring data vendors meet expecta-tions for delivery, quality and timeliness (see figure 3). Moss says vendors have traditionally not been good at working with

44.2%

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Adoption of the LEI and problems associatedwith correctly identifying legal entities

Lack of standardization of corporate actions notifications and inconsistency in the marketplace

Communication with regulators about reference data concerns and the ability of organizations to meet

deadlines for changing regulatory requirements

Sourcing data from vendors and ensuring data vendors meet expectations for delivery, quality and timeliness

Other

Figure 3: Which industry-wide reference data challenges could benefit from organizations moving reference data to a utility?


each other to make life easy for customers, and this is why banks have had to step in, cleanse where there are gaps and map the data. “Being unable to match in a consis-tent way is part of the problem,” he says, explaining that the RDU offers a cross-ref-erencing capability that allows users to compare a security record from one vendor with the record from another.

Appetite for ChangeRelationships with data vendors are clearly a big headache for firms today, and vendor management would be a lesser concern if there had been a single utility ensuring vendors deliver quality data on time. A full-service utility manages the direct contact with all the data vendors, while the users only deal with a single utility. Moss says it is important that the utility is led by the banks because the market data ecosystem is competitive, and it is not necessarily in the commercial interests of the data vendors to make their data consistent.

At the Inside Reference Data and Inside Market Data Awards 2016, where the RDU won in both the Best Enterprise Data Management Initiative Vendor and Best Reference Data Initiative Vendor categories, judges praised the initiative for its existing customer base. Support from Tier 1 organi-zations sets the RDU apart, and new joiners will benefit from the fact that the RDU is built on best practices from member firms.

In fact, the judging panel at the 2016 awards called the RDU an “innovative project that should be considered across the industry”, and this is now exactly what is happening in the reference data market.

Based on the survey results, it seems as if a number of firms will consider joining the three Tier 1 organizations that were involved in the RDU launch. Close to 30 percent of survey respondents say they have a data project in 2017 that they think could benefit from a utility reference data solution, and the same number of users say their organization plans to evaluate a utility solution in the future (see figure 4).

Moss reiterates that there is significant support for the RDU in the market, and some banks are now relatively well-orga-nized when it comes to data operations and, as a consequence, they can manage a transition to a utility in a controlled way.

As long as firms are assured the reference data utility offering they are considering moving to has all the pillars in place—including robust service-level agreements, first-class technology, experienced staff and strong relationships with data vendors and exchanges—the appetite is there. The next step for those who consider taking data from a utility now, however, is to assess the implementation strategy and identify quick wins.

Few would want to move unless the finan-cials add up, and the majority of users rate

the pricing structure designed to deliver cost savings to user firms as important for supporting the business case. Because the move to a fully operational shared service for reference data could be an extensive project and a big decision for firms, the potential for a reduction in cost by sharing the bill with other firms remains a key selling point.

A genuine reference data utility has been a long time in the making, and every capital markets firm now has the oppor-tunity to move reference data to a utility and take enterprise data management to an industry level. Now that a utility is a reality, it is unsurprising firms want to pool resources—and benefits such as data stan-dardization, consistency and quality fixed in unison. Utilitizing is the strategy and reduced risk is the goal.

27.4%

43.2%

29.5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Yes

No

Not sure

Figure 4: Do you have a data project in 2017 you think could benefit from a utility reference data solution?

This is an abstract of a whitepaper, Utilitizing Reference Data, which can be downloaded from Risk Library at http://tinyurl.com/zcn54r2

SmartStream and WatersTechnology conducted a survey into the benefits of moving reference data management to a utility during July 2016. Responses were received from banks, asset managers, hedge funds and securities services across Asia-Pacific, Europe and North America. Respondents represented a wide cross-section of functions from C-level executives to managers and professionals involved in data management, IT, finance, reference data and market data.

14 October 2016 waterstechnology.com/ird

Outsourcing has become an attractive option for many organizations in today’s financial markets. There is growing demand for smarter technology that can support data management systems and processes in a more cost-efficient and effective way, satisfying regulators, shareholders and investors, but also enabling the organization in question to remain nimble and open to new invest-ment opportunities. However, choosing the right partner is crucial.

“Financial firms want to make sure they are working with a reliable vendor with systems that can cope with pres-sure,” says Haytham Kaddoura, the newly appointed CEO of SmartStream. “Developing this technology is not part of a financial firm’s day-to-day activities, nor do they want it to be—they want to give that up to concentrate on more strategic opportunities. So whether it’s a relatively quiet day or an exceptional event, such as the market anomaly following the UK’s Brexit referendum in June, financial firms want to make sure the vendors they are working with are capable of supporting their operations under any circumstances and across multiple geographies.”

This trend towards outsourcing is

particularly relevant in relation to recon-ciliations, according to Julian Trostinsky, director of client services at SmartStream. He believes SmartStream attracts clients that are looking for solutions to help clear reconciliations backlogs caused by organizational growth and new financial regulations. These clients need a more standardized approach to reconciliations processing and also want to outsource the burden of providing production support, optimization services and reconciliation services internally.

“Three years ago, we created our Central Onboarding Utility (COU) to concentrate primarily on the services of onboarding reconciliations for clients with such problems,” Trostinsky says. “Since then, the COU has evolved into a true center of excellence, hosting and managing SmartSteam’s Transaction Lifecycle Management software for clients, onboarding reconciliations and providing production support services, as well as performing level 1—manual—reconciliations.”

Using UtilitiesWhile outsourcing certain elements of technology development and manage-

ment to a third party has become common in recent years in the financial sector, organizations at the leading edge of innovation in this area have gone a step further by taking advantage of mutual-ization. A utility model allows financial organizations to outsource middle- and back-office systems, gaining crucial cost-efficiencies and access to shared knowledge and experience.

Data is maintained on a group basis and overseen by a vendor with the neces-sary expertise. The benefits of using a mutualized solution include improved data quality, timeliness and consistency. In the area of reference data specifically, utilities provide financial firms with access to information that has already been normalized and validated, saving users from the need to use their own time and resources to manage this type of data.

SmartStream launched its Reference Data Utility (RDU) in October 2015 in partnership with Goldman Sachs, JP Morgan Chase and Morgan Stanley. The solution was developed as a multi-tenanted service that is scal-able and auditable. Kaddoura believes that SmartStream’s utility is able to

Transforming TechnologyFinancial services firms are increasingly looking to outsource their technology development and ongoing system management to specialist service providers, while fintech innovators are creating a new approach by transforming how solutions are developed and delivered.SmartStream discusses the benefits of moving to mutualization

Mutualization


support the core aims of most financial firms in the current market environ-ment: meeting regulatory requirements and shareholder demands while still maintaining margins by supporting higher revenues and more cost- efficient operations.

“The utility model has been on the radar of banks for the last few years and, given our expertise in reference data management, we joined forces with these top-tier banks to formulate an industry utility in that space,” Kaddoura says. “The idea is to have the banks co-operate with our technology on something that could serve other industry players. And they are not only investors in the first

industry-backed utility—they are also the first customers, which is a validation of our solution.”

Looking to the FutureThe utility concept will be central to SmartStream’s business model going forward, according to Kaddoura, who calls it “one of our core foundations, alongside our reconciliations busi-ness.” Indeed, building on the RDU, SmartStream has further challenged traditional delivery methods for tech-nological solutions by establishing the Centre of Excellence (CoE) for recon-ciliations processing. Through the CoE, SmartStream works with a range of financial services organizations across geographies and product types that have handed all or part of the reconciliations process over to the vendor.

“The beauty of this solution is that we have standardized the operational processing of reconciliations [across all asset classes], as well as exceptions management,” Trostinsky explains. This,

he says, creates significant time and resource efficiencies, adding that the aim of the process is to use automation to reduce costs by a minimum of 20 percent, although the reduction is often closer to between 30 and 40 percent. For one large global bank, SmartStream’s optimization process has already met its auto-matching target of 90 percent and is now on course to reach 97 percent auto-matching.

Trostinsky says: “Our engagement with this organization began about three years ago, with our first challenge being to migrate all of its legacy reconciliation systems on to our Transaction Lifecycle Management Premium solution in order to cut costs relating to the hardware needed to host this older technology. Migration took about nine months and then we concentrated on the optimiza-tion process.” He adds that this process significantly reduced the costs previ-ously incurred by the bank due to the use of multiple vendors for onboarding, reconciliations and support.

In a bid to further satisfy demand for

greater third-party vendor involvement in technology development, SmartStream has also recently launched its own inno-vation center, SmartLabs. According to the company, its mission is to “proac-tively investigate and evaluate emerging and disruptive technologies,” using SmartStream’s market experience and knowledge to ensure new solutions are delivered with speed. The first SmartLabs solution, SmartRecs OnDemand, is a hosted reconciliations service designed with smaller firms in mind.

Experience and ExpertiseThe utility, the CoE and the SmartLabs initiative now comprise the major elements of SmartStream’s drive to bring solutions to market in a faster and more responsive way, while also offering clients a customized experience.

SmartStream’s ability to read the market and deliver in this way can largely be attributed to more than 20 years of experience in the market, according to Kaddoura. “We are not a company that has been set up in the last three or four years – we’ve got a long history in this business,” he says, adding that SmartStream employees come from a range of financial services firms, which provides the development of its products and services with a valuable user perspective.

Interest in these solutions and services from technology providers is certainly growing as the groundswell of change within the financial services sector in recent years has led market participants to reevaluate their business activities. The increased use of outsourcing that has come about as a result has led to the development of the utility model. The benefits of this type of structure are clear, as financial firms streamline their operations and create more time for core activities. Vendors at the leading edge of this movement will continue to look for new ways to develop and deliver technology solutions. Financial firms will benefit from more opportunities to take a step back and entrust these key back- and middle-office processes to estab-lished, experienced technology partners.

“The utility model has been on the radar of banks for the last few years and, given our expertise in reference data management, we joined forces with these top-tier banks to formulate an industry

utility in that space. The idea is to have the banks co-operate with something that could serve other industry players”

Haytham Kaddoura, SmartStream

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