Buy-side Firms Take a Hard Look at Data - GoldenSource

Buy-side Firms Take a Hard Look at Data - GoldenSource

Researched and written by: Derivatives Push the Data Management Envelope! Buy-side Firms Take a Hard Look at Data Practices Commissioned by: June ...

2MB Sizes 0 Downloads 10 Views

Researched and written by:

Derivatives Push the Data Management Envelope!

Buy-side Firms Take a Hard Look at Data Practices

Commissioned by:

June 2008 An A-Team Group Survey Report

Buy-side firms take a hard look at data practices

Table of Contents Table of Charts Introduction & Methodology Executive Summary Insight into Buy-side Data Management OTC Derivatives Push the Envelope Management Moves to Third-Party Solutions Standards Looked at as Part of the Data Management Fix About A-Team Group About GoldenSource

3 4 7 12 13 14 15 16 16

Resounding Theme

“We’re constantly having to upgrade systems to handle OTC derivatives.”

AN A-TEAM GROUP REPORT 

2

Buy-side firms take a hard look at data practices

Table of Charts Chart 1: How would you classify your asset management firm? Chart 2: What Assets Do Your Firm Invest In? Chart 3: Respondent’s Geographical Location Chart 4: Respondent’s Region of Responsibility Chart 5: What Factors, if any, Are Deterring Central Data Management? Chart 6: Are Buy-side Firms Reevaluating Data  Chart 7: What Factors Motivate Reevaluation of Data Management? Chart 8: How are You Using Data Management to Help Control Risk? Chart 9: Where Does Your Firms Still Have Siloed Data Management? Chart 10: How Often Do You Use Excel? Chart 11: How Complex Products Impact Firms’ Data Management Practices Chart 12: How are OTC Derivatives Impacting Data Management Practices? Chart 13: Is Your Firm Using Third Party Data Management? Chart 14: What Budget Does Your Firm Expect to Spend On Third-Parties? Chart 15: Which Standards do Buy-side Firms Want Vendors to Support?

4 4 4 5 5 8 9 9 10 11 13 13 14 14 15

Asset Managers say,

“Automation is no longer a choice, it is a necessity.”

AN A-TEAM GROUP REPORT 

3

Buy-side firms take a hard look at data practices

Impact of Complex Products - OTC Derivatives

Introduction & Methodology

A-Team Group, a publishing, research, and consulting company specializing in financial information technology, was commissioned by Enterprise Data Management specialist, GoldenSource, to continue research into specific challenges faced by global reference data managers which it had launched in 2007. This year’s focus is on buy-side firms. Generally, are industry events encouraging reevaluations of current data management practices? In particular, as buy-side strategies incorporate complex instruments – like OTC derivatives – what impact do they have on data management?



A-Team has now completed its research and structured discussions with a global sample of senior individuals involved in buy-side reference data management directly. These individuals held positions in the top 100 asset management firms – 70% of which were considered traditional institutional or fund managers. Respondents could classify their firms’ style across categories, as illustrated in Chart 1 below.

We need to centralize to meet the growing need of downstream applications, especially for derivatives.

Somewhat surprisingly, 41% of the traditional asset managers also classified themselves as hedge funds, demonstrating the acceptance of alternative investment strategies. The ‘other’ category included one senior manager in asset servicing at a global bank, a vendor that helped asset managers ‘map’ data across databases, and several traditional institutional managers that also had retail businesses.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

78%

33% When asked which asset categories the firm invests in, there was remarkable 11% similarity across 4% firms (see Chart 2 below). This was not surprising because A-Team selected its sample from larger No Yes, forcing central Yes, reversing Yes, reevaluating central data technology, even asset managers. In controls addition, atmanagement least two firms central process management specialized in fixed income.

Respondents’ Investment Categories Respondents' Investment Categories

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

96%

92%

92%

88%

84% 72%

OTC Equities Equity Fixed Structured Derivatives Income Finance - Derivatives Type of Asset Managers Derivatives Asset Back Securities

Funds

100% 90% 80% 70% 70% Chart 2: What Assets Do Your Firm Invest In? 70% 60% 50% 41% 40% 26% Because there is a concentration of26% buy-side data 30% 20% management centered in the U.K. and the U.S, 10% 89% 0% of the respondents’ firms fell into these two Traditionalregions Fund(see Hedge Fund Private At least Other geographic Chart 3 below). institutionalManagement Wealth Business

three of the firms had data operations outside these regions as well, in the Netherlands, Brussels, and Bermuda. Geographic Distribution

Geographic Distribution

11%

37%

52%

Type of Asset Managers

Type of Asset Managers

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

70%

Chart 3: Respondent’s Geographical Location

70% 41%

Traditional Fund Hedge Fund institutionalManagement

26%

26%

Private Wealth

Other Business

Not unexpected from A-Team’s previous work with GoldenSource, 70% of the respondents had global data responsibilities. Another 15% had regional responsibility, several of which noted that they would be ‘going global’ within the year (see Chart 4 below).

Chart 1: How would you classify your asset management firm? Geographic Distribution

11%

AN A-TEAM GROUP REPORT  37%

52%

4

Buy-side firms take a hard look at data practices

Geographic Split ofSplit Responsibilities Geographic of Responsibilities

Selected quotes from respondents in each of these three categories best illustrate sentiment. Factors Slowing Central Data Management

15%

Factors Slowing Central Data Management

15% 70%

across the firm?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

33%

28%

11% 0% Time to Lack of IT Implement Resources

Chart 4: Respondent’s Region of Responsibility

22% 0%

Perceived Difficulty in Perceived Fit Vendor Cost Satisfying with Vendor Delivery Models Downstream Solutions

Outsourcing Is Not High On Buy-Side List

Chart 5: What Factors, if any, Are Deterring Background on Current Data 100% 90% Are Asset Managers Reevalutating Data Management Strategies? Central Data Management? Management Practices 80% 71% As in 2007 studies showed, most buy-side firms classified themselves as ‘centralized data manageYes ment’ or ‘decentralized data management with 100% central control’. This year, 28% stated they were No two data management in transition to one of these 0% styles. To add further perspective, 24% talked about putting a spotlight on areas with siloed data management with two goals: 1) to increase efficiency and 2) to manage business risk better.



For firms not moving to central data management, what reasons were holding them back? 33% noted ‘perceived time to implement’ as a deterrent; another 28% talked about ‘lack of IT resources’, a common theme at buy-side firms. 22% designated ‘perceived cost’, and 11% were concerned about the ability to satisfy downstream applications from a central data source (see Chart 5 below). None of the respondents felt that ‘perceived fit with a vendor solution’ or ‘vendor delivery models’ were slowing down a move to data central management.

It’s about efficiencies with the growing need of downstream applications.

Overall, individuals that participated fell into three categories: 1 Those ‘centralized’ and reevaluating for more flexibility and capability; 2 Those in the process of centralizing – in some form; 3 Those not sure about central data management, especially to address OTC derivatives.

AN A-TEAM GROUP REPORT 

70% 60% 50% 40% 30% 20% 10% 0%

33% 1 Those ‘centralized’ and reevaluating for more flexibility and capability: 13% This group emphasized 0% 0%for a long 0% that their firms had been centralized No Other Yes, Yes, ASP Yes, Total Yes, but just time. Current events, new products, inflexibility Business provider data data Process management sourcing with in-house central solutions and the fact that Outsourcer cleansing (BPO) downstream applications that still store – if not enrich – data independently from central repositories necessitated reviews, upgrades, and reengineering. n “We achieved centralized management a long time ago, and current trends have not spoilt this very solid position that we are in. Derivatives are a caveat for us to look at processes again.” n “We’ve been centralized for a long time. It’s the downstream applications that we’re dealing with now. n “Now we’re buying compliance and other applications that deal directly with derivatives. So, the question is how to maintain downstream control of data from central.” n “We’re looking for alternatives to current internal central technology that can include OTC derivatives now decentralized – even siloed.”

2 Those in the process of centralizing in some form were intent on implementing a long-term data management solution that offered flexibility to accommodate current challenges and future needs. These managers clearly wanted to upgrade what they termed as ’traditional buy-side data management’ which frequently was based on in-house development. In part, this group was looking for education in 1) what was available in vendor solutions, 2) what other firms had done

5

Buy-side firms take a hard look at data practices

and found successful, and 3) what was needed to ensure new investments could grow with their future needs. n “There’s strong regulatory pressure to have a better understanding of all related reference, market and financial data, and strong internal pressure to get to market quicker with new products. Traditional management of data and back office operations hindered this.” n “Whilst we are in transition, we recognize the need to have a core group or central control to manage data where we are decentralized.” n “We need to centralize to meet the growing need of downstream applications, especially for derivatives. We have trouble handling that data in current systems.” n “Business risk will be reduced.” “We need ‘auditability’ for regulatory requirements.”



3 Those not sure about central data management, especially to address OTC derivatives included firms that were tackling derivatives data management somewhat in isolation of a full review. They felt that they needed to solve the derivates problem first. Others said that derivatives data was being enriched downstream by portfolio managers. These individuals felt they needed to provide a more systematic and robust solution than Excel for the downstream data management of derivatives data before this data could be merged into a central database. Once again, education on data management alternatives and approaches may help this category; however, some firms may not be open to it. n “We’re dubious about a campaign to centralize data because of the complex nature of derivatives. I do not think it is possible to handle alternative investments centrally – they’re just too complex.” n “The strategy is to have one centralized data repository, however currently all data is manually re-enriched downstream within application silos.”

Risk is the major driver for change. OTC derivatives compound risk in data management.

The following report will provide depth behind participants’ perspective and assimilate insight across these interviews. A-Team Group extends thanks to the respondents who shared their thoughts to help move the industry forward. AN A-TEAM GROUP REPORT 

6

Researched and written by:

Executive Summary June 2007

Commissioned by:

Buy-side firms take a hard look at data practices

Executive Summary



This research on current buy-side data management practices extends work that A-Team Group performed in 2007, sponsored by GoldenSource, and focuses specifically on the data management challenges asset managers are facing. How do buy-side findings compare with the 2007 reference data studies?

Our twilight legacy systems cannot handle the new products.

Overall, 2008 results fortify those of 2007 while demonstrating progress and increased awareness of the dual challenges of maintaining central data repositories and satisfying downstream applications. A chief data officer in asset servicing summed it up well, “There’s a thirst for data, and we’re all weeding our way through it. These are real requirements emerging from buy-side front offices wanting to be on the cutting edge. Integration into data management systems is a challenge.” Three independent, but correlated, forces are driving buy-side data management reevaluations: 1 Business Risk: This leading driver across firms is increasing as new regulation and more products with incremental risk move in. Increased regulation has created a chain reaction of proactive risk management at buy-side firms. Data is now considered an asset that a firm can leverage to quantify exposure and make it easier to comply. On the other hand, if not governed consistently, managing data can add unnecessary risk. Savvy managers are taking a hard look at data management operations across the firm, including data silos coupled with a variety of downstream applications. 2 Centralized Data Management, including decentralized management with central control: The majority of buy-side firms are sticking to central practices. In fact some are pulling back on decentralized management to ensure consistency. Asset managers said that the central model helps control risk and cost and provides a window into overall firm exposure. However, recent events, growing business demands, and complex instruments have raised the bar for the flexibility, discipline, and tools necessary to run an effective central data operation. As a result, buy-side firms are reevaluating existing data management approaches in a broad sense.

AN A-TEAM GROUP REPORT 

3 OTC Derivatives: Even buy-side firms with well-established data practices are experiencing uncertainty in how to manage the businessdriven take-up of complex instruments. Growing acceptance of alternative investment is pushing complex instruments into investment strategies and portfolio holdings. OTC derivatives appear here to stay with growing interest in spite of the challenges they bring. As predicted in 2007, derivatives are playing havoc with existing data management solutions, particularly older inhouse systems. Exacerbating the derivatives data challenge are the specialty application software services, that are brought into buyside firms to facilitate investment in complex products, particularly in front and middle offices. These services frequently house and enrich data, creating new silos for firms. A senior manager summed up the impact of derivatives, “OTC derivatives have caused greater insight on markets. Firms are now forced to understand structures behind instruments.”

Highlights from the Research

When asked directly if they were reevaluating data management strategies, 100% of the participants responded “Yes” (see Chart 6 below). It seemed like a straightforward conclusion until almost all respondents went on to clarify and qualify their responses. Are Asset Managers reevaluating data Asset Managers Reevalutating management Are strategies to gain more central Data Management Strategies? data management control across the firm?

Yes 100%

No 0%

Chart 6: Are Buy-side Firms Reevaluating Data Management Practices? One respondent said, “It’s about efficiencies with the growing need of downstream applications. They’re forcing us to reevaluate how we manage data and communicate downstream.” Another qualified it with, “The combination of legacy systems, the firm’s strategic drive to improve systems,

8

Buy-side firms take a hard look at data practices

and the respect with which the industry now treats securities reference data with, are driving new initiatives forward.” The conclusion is that there is a definite move to reevaluate data management practices at buy-side firms, but it is not necessarily tied to centralization. Rather, results from the confluence of a number of factors that facilitate growth, streamline operations, reduce and manage risk, and deliver consistent data needed by downstream areas. Once again, a respondent said it for us “We’re seeing the advantages of centralizing. There are drivers coming from the front office which wants access to data they use quickly and accurately.” And a manager in asset servicing reinforced these findings, “Investment managers are reevaluating data strategies - reevaluation is not necessarily driven by need to centralize – but rather other factors like new investment strategies and risk management.”



How did specific factors rank in motivating data management reevaluations? 63% of the respondents ranked ‘growth and scalability’ as a top priority factor, and 84% said it was at least average in priority. ‘Front-to-back consistency’ was next with 54% ranking it top and 96% ranked it at least average. One respondent commented, “When it comes to derivatives, front-to-back consistency’ and data feeding STP systems are moving to the top priority. We need consistency to help manage high risk.” This sentiment on risk was reaffirmed with 46% stating ‘perceived risk’ is top priority and 92% stating at least average (see Chart 7 below). ‘Automation-operational efficiency’ was also ranked at least average by 92% of the respondents with 44% ranking it a top priority.

We’re looking for alternatives to current internal central technology that can include OTC derivatives now decentralized – even siloed.

The tight distribution across factors also illustrates correlation among them – which makes sense for the list of factors. One respondent’s comment illustrates this correlation, “Risk is the major driver for change. OTC derivatives compound risk in data management.” It was somewhat surprising to see OTC derivatives and structured products lower in priorities – with 28% ranking them as top priority for reevaluating data management practices, but 84% ranking

AN A-TEAM GROUP REPORT 

these products at least average as a driving factor. Respondents suggested reasons for the resultant lower ranking of complex products as a driver: 1) Enabling growth, in general, was the top priority, and these products were one element of growth and 2) there was still a lot of uncertainty surrounding derivatives. In the next year, derivatives and complex were expected to move up in priority as the plethora of data behind them was understood better and standards emerged. Motivation for Reevaluating Data Management Practices Motivation for Reevaluating Data Management Practices 100% 90% 80% 70%

4% 13% 0% 21%

0% 4%

0% 8%

0% 8%

17%

12%

16%

25%

60%

35%

4% 8% 21%

30%

38% 63%

20%

54%

46%

29%

Growth Scalability

28%

44%

10% 0%

28%

13%

12%

25%

23%

29%

31%

13%

15%

32%

50% 40%

4% 12%

28%

21%

Front-to- Perceived Automation - Cost of OTC Legacy back Risk Operational Incremental Derivatives - Systems Consistency Efficiency Resource Structured 1 Top Priority

2

3

4

19%

35%

22%

30% 13% 0%

Fixed Mergers Income Risk

5 Lowest Priority

Chart 7: What Factors Motivate Reevaluation of Data Management? Since risk was an identified as fundamental driver throughout the interviews, respondents were asked to rank three specific areas in which data management could assist in managing risk. 96% of respondents firms have either connected their accounting systems to reference data systems or plan to do so to get better picture of exposure (see Chart 8). This statistic, from a broader universe of participant firms, is up from 91% in the 2007 work. Stressing the perceived importance of firm-wide consistency in managing risk, 96% of the respondents said they had or planned to ensure firm-wide consistency through centralized data management. “Firms are reevaluating to gain more central control [and consistency] because of a need for risk reduction.” Automated workflow management ranked third with 92% of the firms stating they had or planned to implement this level of automation. It is interesting to note that 58% were planning to implement workflow solutions. This illustrates progress from 2007, when participating firms were only evaluating the role of workflow management software.

9

Buy-side firms take a hard look at data practices

Key Decision Factor for Centralizing

How Data Can Help Manage Risk How Data Can Help Manage Risk

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

4% 29%

4%

8%

42% 58%

67%

54% 33%

Extent of Siloed Data Management Extent of Siloed Data Management

Connect Accounting Centralized data Automated Workflow Positions with Firm-wide Consistency Management Reference Data Have Done

Planning To

No Plans

Chart 8: How are You Using Data Management to Help Control Risk?



100% 90% 80% 72% 68% 70% 60% 52% 50% ment was specific to an application only, and 25% 40% 40% 32% stated that most of their data management was24% 30% 20% still siloed (see Chart 9 below). On the other hand, 10% 0% investment innovation required flexibility in the ROI Cost Cost of Operational Business risk Growing central data management solution. Reduction Legacy Efficiency Need of Downstream Systems Data Sharing

One respondent responsible for centralized data operations added a general comment, “We are improving risk management controls between downstream applications and central data area.”

The strategy is to have one centralized data repository, however currently all data is manually re-enriched downstream within application silos.

In fact, the research revealed that 74% of the respondents are already using thirdparty solutions or are evaluating them for future use to: n manage central data repositories n deal with new product complexities and n provide assistance with distribution to downstream applications. Most respondents suggested the importance of standards in facilitating a data management solution, particularly for data types like corporate actions. All commented on the need to include business units and downstream applications in a robust data management solution.

Downstream Data Silos Complicate Data Management Controls

Respondents highlighted downstream data silos in two areas, long-standing legacy systems with embedded data stores and investment innovation, like moves into complex products. They also noted legacy systems (or any application software) with embedded data was very difficult to control and change. 38% stated that siloed data manageAN A-TEAM GROUP REPORT 

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

38% 25%

Specific to application only

Most

21%

Some

17%

Differs by asset class

Chart 9: Where Does Your Firms Still Have Siloed Data Management? “OTC derivatives are forcing asset managers to create alternative data management solutions –sometimes temporarily breaking rules of central management practice,” stated the asset servicing respondent. Comments on derivatives breaking rules were offset by concerns over the magnitude of financial loss that a mistake in derivatives – due to inconsistent data across systems or even just a bad identifier – could bring to a firm. Recent events, like Société Générale, personify losses. And closer to home, a senior manager at a buyside firm recounted what inconsistent derivatives data meant to the firm, “We’re not sure where it happened… whether the trading desk put in a bad identifier or the back office had their own data or the counterparty made a mistake. We had to pay a lot of money!” Yes. Excel is technology used frequently to accommodate new products, like derivatives. Excel is the quick fix that is here to stay and, to respondents’ dismay, may be the solution that endures. “People cannot get away from it,” and “It’s the quant’s way around IT,” the respondents chanted as 64% said their firm’s use Excel on a regular basis and another 44% said it is used systematically for some applications (see Chart 10 below); some respondents selected both categories. Only 4% said their firms didn’t use Excel.

10

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

79%

63% look at data practices Buy-side firms take a hard 33% 21%

SQL

Oracle

Linux

A BPM solution

Excel as Data Collection/Transfer Excel as Data Collection/Transfer

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

64% 44%

4% Ad Hoc

Systematically for some applications

None

Chart 10: How Often Do You Use Excel?



This 2008 research, sponsored by GoldenSource, validated new products, like OTC derivatives, will continue to challenge data management in the future, and buy-side data management firms are preparing for a future that will include complexity and change. Data Management solutions will have to be sufficiently flexible to handle ongoing and changing demands.

Reevaluation is not necessarily driven by centralization – but rather other factors like new investment strategies and risk management.



The cost of a mistake in derivatives – due to inconsistent data across systems or even just a bad identifier – is very high.

AN A-TEAM GROUP REPORT 

11

Researched and written by:

Insight into Buy-side Data Management June 2007

Commissioned by:

Buy-side firms take a hard look at data practices

OTC Derivatives Push the Envelope



As one respondent put it, “The front office will continue to invest in complex products to gain incremental return.” Derivatives are here to stay and accelerating in acceptance. Vital to data management, these complex products personify the industry’s struggle to couple downstream applications with central data management practices and controls. They are forcing buy-side firms to think about whether or not systems can currently accommodate them.

We’re in a review of best practices. There is risk involved with loading different data into different systems.

Senior managers expressed concern over the impact that derivatives would have on data management controls. “Systems brought in to tackle derivatives should at least siphon off data from central systems to gain efficiency in derivatives processing and track products centrally.” And another said, “Our twilight legacy systems cannot handle the new products. They’re the focus of the firm’s data management reevaluation.” A common theme articulated by one data manager and repeated by many stated, “As we see more specialized products, more complex systems become common practice.” In fact, 78% of the respondents said they were reevaluating data management technology because of derivatives; 33% said derivatives were forcing controls (see Chart 11 below). Impact of Complex Products - OTC Derivatives 78%

33% 11%

Yes, reevaluating technology, even central management

Yes, forcing central controls

Yes, reversing central data management process

Chart 11: HowRespondents' Complex Products Investment Categories Impact 96% 92% 92% Practices 100% Data Firms’ Management 88% 84% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

4% No

72%

“Just reiterate OTC derivatives and a sub-prime crisis have heightened need to reevaluate practices,” one respondent emphasized. Funds OTC Equities Equity Fixed Structured Finance - Derivatives Asset Back Securities

AN A-TEAM GROUP REPORT 

Derivatives

0%

0%

OTC Under Derivatives’ Impact Data $250,000 $250,000 - $1mm on $1mm -$3mm Management

$3mm- $5mm

OTC Derivatives' Impact on Data Management 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

9% 35%

57%

14%

14%

14%

38%

43%

50%

81%

48%

43%

36%

10% 10%

ReImplementing Evaluating evaluating new ‘central’ third-party data management vendors management solution processes Have Done

Planning To

Sourcing Outsourcing additional OTC third-party Derivative data management process No Plans

Chart 12: How are OTC Derivatives Impacting Data Management Practices? Participant firms reminded us to keep derivatives in perspective. They are not the only driver to data management reevaluation, and there is also a lot of correlation across drivers.

Impact of Complex Products - OTC Derivatives

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Respondents then summarized the breadth of alternative solutions buy-side firms were reviewing to resolve challenges poised by derivatives. A first step for 91% was too reevaluate current data management – with 57% already completing that step. Implementing a new central solution followed closely with an 86% vote and 48% already completing implementation. Third-party vendor Expected Spend on Third-Party Solution data management solutions were the choice of 100% 86% that were investing in derivatives. Clearly, 90% additional data sources were also necessary with 80% 70% many firms still determining which source to use. 60% Outsourcing was not54% a major option. Those that 50% use 40% outsourcing or plan to use it – 20% -- predom31% 30% inately went through their custodian banks (see 15% 20% Chart 12 below). 10%

n Derivatives are a major source of incremental business risk which is a primary driver for reviewing data management practices. n A majority of firms are inserting manual practices to address derivatives. Manual processes and Excel spreadsheets interfere with and decrease operational efficiency. n The cost of a mistake in derivatives due to inconsistent data across systems or even just a bad identifier is very high. This possibility gets the attention of highest management levels at the asset management firm. It also can impact reputation, as the industry has seen too well in recent time.

Income Derivatives

13

Buy-side firms take a hard look at data practices

Respondents' Investment Categories 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%



96%

92%

92%

88%

84% 72%

Management Moves to Third-Party Solutions

As such, the reevalution to address data management ‘issues’ expand, and the spend increases in parallel. About three-quarters of the participants Based on this research, larger buy-side firms are responded on how much their firms expected to turning to third-party data management solutions OTCwith new Equities Fixed Structured spend improved data spend would stay under $1 to help deal productEquity complexities and Funds Derivatives Income Finance - Derivatives million. 31% predicted it could be as high as $5 for assistance with distribution to downstream Derivatives Asset Back million (see Chart 14 below). In general, buy-side applications. 74% of the respondents are already Securities firms predicting spend over $1 million were further using a third-party solution or are evaluating them along in detemining what changes to make and for future use (see emphasized structured finance as well as derivaChart 13 below). Data Management Strategy tives. “It’s not about just solving the central storThis number is very 100% age problem. We need to accommodate downsignificant – espe90% stream applications – even those with imbedded cially when you add 80% 70% data storage,” stressed a data manager at a global the one or two other 60% 44% 50% asset manager. firms that were look32% 40% 28% 24% 30% ing at third-parties 20% Another respondent linked spending back to the 4% solutions just for 10% overall scope of their reevaluation, “We’re in a 0% derivatives. Of the Centralized – Central data Decentralized Siloed – Transitioning: review of best practices. There is risk involved with 26%downstream that said ‘No’, Central firm- repositories – with central Centralized or loading different data into different systems.” As wide data each asset control Decent several wereforoutsourcing referencemanagement data managesuch, the research suggests that ultimate spendrepository class ralizedment to custodians or still working on their overall central ing at buy-side firms would be higher than initial data management strategy or, as noted above, control estimates. would consider a third-party solution to tackle derivatives data management. Expected Spend on Third-Party Solution

Many of us are finding the data problem we’re solving is bigger than we first thought. It’s like unfolding the layers.

Third-Party Third-Party Data Management Data Management

Expected Spend on Third-Party Solution 100% 90% 80% 70% 60% 50%

No 26%

Yes 74%

54%

40% 30% 20% 10% 0%

31% 15% 0% Under $250,000

$250,000 - $1mm

$1mm -$3mm

$3mm- $5mm

OTC Derivatives' Impact on Data Management

Chart 14: What Budget Does Your Firm Expect to 100% 9% 14% 14% 14% Spend 90% On Third-Parties? Chart 13: Is Your Firm Using Third Party Data Management? Diving into the magnitude of buy-side data management reevalutions and what firms are spending to achieve goals led to consistent messages on the industry ‘discovery process.’ As one CTO put it, “Many of us are finding the data problem is bigger than we first thought. It’s like unfolding the layers.” Specifically, as firms attempt to accommodate new complex products, they are realizing that they are dealing with challenges in both centralized systems and downstream applications. Downstream applications, many of which are legacy, lack flexibility and can contain siloed data repositories.

AN A-TEAM GROUP REPORT 

80% 70% 60% 50% 40% 30% 20% 10% 0%

35%

57%

38%

43%

50%

81%

48%

43%

36%

10% 10%

ReImplementing Evaluating evaluating new ‘central’ third-party data management vendors management solution processes Have Done

Planning To

Sourcing Outsourcing additional OTC third-party Derivative data management process No Plans

14

Buy-side firms take a hard look at data practices

Standards Looked at as Part of the Data Management Fix

Buy-side firms in this research clearly felt that standards could help resolve data management challenges. Leading the way with 80% vote were the ISO 15022 and new ISO 20022 for corporate actions. This 2008 finding is quite consistent with findings from the 2007 work. This year, the impact of cross-border trading on reference data was more evident in the 76% vote for ISO currency. Like XML support received a 76% vote (see Chart 15 below). Business entity is an emerging standard viewed by almost all as a future requirement. The 48% vote reflects that some buy-side firms have not tackled the problem as yet and others were not sure where to find reliable data sources. Which Standards are Important? What Standards Are Important?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

80%

76%

76% 48% 36% 20%

ISO ISO 15022 Currency - ISO 20022

XML

Business Entity Identifier

ISO 10383 (MIC)

MDDL

16%

FpML

Chart 15: Which Standards do Buy-side Firms Want Vendors to Support? Several respondents commented they expected standards to emerge that would help cope with derivatives and, thereby, mitigate risk. They added that it was important for data management solutions vendors to support these –once again reinforcing the role of third-party data management vendors in solving new challenges.

AN A-TEAM GROUP REPORT 

15

Buy-side firms take a hard look at data practices

About A-Team

About GoldenSource

A-Team Group offers its clients deep expertise in business intelligence, market research, strategic consulting, and communications in the field of financial information and trading technology. With years of experience in analyzing the use of information technology in financial markets, and a sound understanding of how and why IT is used in finance, A-Team Group helps suppliers and users make informed decisions about products, strategies, and deployments. A-Team Group services clients with three levels of capabilities: A-Team Consulting offers custom consulting services helping customers understand their markets, position their offerings, and get their message out to the right audience. n A-Team Group has hands-on, in-depth domain experience and is experienced and skilled in research targeting the financial services industry n A-Team Group is considered a widely respected and authoritative commentator on financial information technology services, including enterprise applications and their evolution within financial services. n Consulting services include strategic marketing and planning, market research, marketing assistance, and events.

GoldenSource provides an integrated enterprise data management (EDM) platform for the securities and investment management industry. Our software and expertise help our customers benefit from better management, storage, and distribution of their data company-wide. A consolidated, centralized data foundation layer for securities and other products, clients, and counterparties combined with positions, balances, and transactions enables firms to show a real time aggregated view of risk and exposure. GoldenSource products are mature, proven solutions to support cost-effective growth strategies and stringent regulatory demands.

A-Team Research collects detailed data for proprietary or customized needs, performs business and technical analyses, and publishes reports and other products for targeted delivery, examples include: n Static Instrument Data Becomes Dynamic – OTC Derivatives, Securities Linkages, Shake Up Instrument Data n Buyer Persona - The Influence Behind Data Management Decisions n Fixed Income Pricing: Are Evaluations Gaining Value?; n Reference Data Now; Business Drivers and Approaches to Data Management; n Securities Administration Data – The Essential Piece of the STP Puzzle; n Software Providers: Working with Reference Data; and n Faster Than a Speeding Bullet… Low-Latency Architectures and Building Blocks for Tomorrow’s Trading Applications.

GoldenSource EDM supports all the critical business functions of a proven enterprise data management platform. This includes data acquisition, cleansing, normalization, validation, enrichment, and distribution. We deliver the unique ability to link product and entity information with real time transactions and positions. This granularity of information helps our clients to better manage exposures and liquidity, control risks, and maximize opportunities. Trading, risk management and compliance, settlement, portfolio accounting and other front, middle and back office functions all benefit from improved data management. www.thegoldensource.com [email protected]

A-Team Publishing provides a range of electronic and print media including business briefings, narrowly focused news services, and in-depth studies of specific IT challenges, including: n Reference Data Review n Market Data Insight n MiFID Monitor n Electronic Trading n Asia Markets IT n A-Team Insight Quarterly (IQ)

AN A-TEAM GROUP REPORT 

16