Mark Bouchea
Director of Product Management

Maintaining Data Quality to Manage Operational Risk

8 December, 2010

The economic events of the past two years have shown us that there are many business processes we cannot control. Things we thought were statistically impossible – such as the failure of the largest brokers or poor loan batches labeled with good credit ratings – and other uncertainties have now become the norm when evaluating risk. In our business, the financial services industry, one of the ways we can deal with the new reality of uncertainty is to control the operations process, ensuring we have the best procedure and controls in the middle and back office to reduce the risk and costs associated with exception processing and failed trades

While there are many reasons for high exception processing costs and failed trades, one common culprit is that firms have inaccurate or inadequate settlement instructions. Settlement instruction data includes information such as place of settlement, account name and number, market, security type, bank identification codes and more. Not surprisingly, settlement instruction data quality is crucial to the industry as well as its ability to control the operations process and accelerate the trade lifecycle. By ensuring that all participants in a trade have clear and accurate settlement instructions, firms can process their trades with more accuracy and efficiency. To achieve this, proactive firms often choose to leverage a standing settlement instructions (SSI) data repository, such as Omgeo ALERT, to assist in this critical area.

For the past year, we have seen a significant change in the capital markets community members’ desire to standardize and automate the SSI process. Although much of the procedure is still manual – with instructions being sent via email and faxes and entered by hand – the industry is overwhelmingly ready to make a change. In fact, we have seen our community embrace a more proactive role in educating government bodies and regulators to demand stricter enforcement of standards.

Evolutionary Road

We weren’t always in this place as a community. Nearly 10 years ago, there were no standards or best practices in place for SSI. The formation of the Securities Market Practice Group (SMPG) and its place as the defacto global standard definitely helped the market. However, to achieve more effective operational risk management, we need to take these standards a step further. Some argue that we need a forced application of the standards to ensure that all participants comply.

There are, however, a few challenges to gaining a wide consensus for SSI data management. For example, some firms in the industry do not have a seamless, automated process for ensuring settlement instruction data quality. They may not have a point person or a set of internal processes to ensure SSI data is updated regularly. Another roadblock to having standardized and correct data is the simple fact of varying interpretation – different firms or organizations might interpret certain information in varying ways or deem some crucial data to be irrelevant.

There are several things that play into maintaining SSI quality. First, making sure that industry members are educated about the proper way to enter SSI information is crucial. For example, we need to ensure firms know how the data should be structured, managed, scanned and analyzed for compliance purposes. Although it will take work on the industry’s part, designating an operations manager within an organization to oversee the SSI process can be a critical component of success. Another important data quality assurance process is to continually scan the SSI information for validation purposes. This step can guarantee there are no missing variables and that all the records are updated.

Moving in the Right Direction

In general, the responsibility of making sure the data and the process is accurate rests on the entire community. Nevertheless, each player must cooperate for the benefit of the industry as a whole. Custodians have taken a big step in the right direction by moving towards a more structured process. They now recognize the need to establish a common practice to deliver SSI data to their investment managers.

One solution would be to leverage a central SSI data repository, such as Omgeo ALERT, where custodians could update their settlement instruction information. Investment managers could access ALERT as well, and automatically attach their fund details and receive the custodian updates. The community would be assured that the SSI data was authentic, up-to-date and compliant with SMPG standards.

Without such a central repository, the problem will only continue to grow. For example, on average, broker/dealers pull 35,000 SSI details on a daily basis from ALERT, and that’s approximately 60% of the total data they get. ALERT stores 5 million instructions within its database, with approximately 3,500 to 4,000 new accounts and 30,000-40,000 SSIs added monthly, including equity, fixed income and foreign exchange instructions. As any market participant can see, maintaining this much data on a manual basis would be daunting, costly and risky task.

A Standardized Future

Although we, as an industry, have made significant strides over the past 10 years around SSI data, we still have a ways to go. SSI data accuracy is a journey, not a destination. Yet automated solutions, such as ALERT, offer an existing way to standardize processes and improve risk management capabilities. Driven by the increase in risk failure costs and the availability of sophisticated technology, the industry is now banding together on this issue, while participating in forums and working towards a solution.

Creating global SSI standards is a lifetime commitment and several factors make this initiative a long-term project with many moving parts. The way to achieve this global and market-wide unity must start by agreeing on a common language and common data representation. To achieve this goal, several industry groups have been working on creating SSI data unity in the market. Essentially, accurate SSI data can be leveraged to ensure that trades settle cost-effectively and on time, which will lead to a more efficient, lower-risk marketplace – something we can all get behind.

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