Global Reference Data User Group Inaugural Meeting

1
Global Reference Data User Group Inaugural
Meeting The Impact of Reference Data on STP and
Operational Risk
John Gubert Tony Kirby
Head of Group Securities Services, HSBC Head of
Global STP, Reuters
17 June 2002 - London
2
Agenda

• Introduction John Gubert
• Presentation - Tower Group Results/Recent
  Work Tony Kirby
• Industry Efforts Underway Discussion
• Next Steps Discussion
• Collaboration between industry Participants
• Reference Data Standards
• Helping to Drive Industry Codes of Practice
• Others?

3
Background
4
Straight Through Processing
The seamless electronic process encompassing the
entire life of a trade, end-to-end from execution
to settlement and reconciliation across the whole
financial markets value chain
5
The lack of STP costs the Billions of Dollars in
Frictional Cost every year

• It costs the industry 12 billion each year
• Each cross-border trade can involve upto 25
  different people, processes systems
• 20 of transaction exceptions account for 80 of
  processing costs
• STP spending likely to top US19.1bn from
  2001-4
• Broker/dealers and asset managers will shoulder
  64 and 26 of the spend respectively

Cause
Effect
High fixed costs even for 100 STP
10 fixed cost
59 of instructions need repair and query
6 cost of repair
10 of transactions result in mismatches
16 cost of mismatch
15-20 of transactions fail to settle on time
50 cost of settlement failures
Sources SWIFT reported Aug 01 Tower Group
Global STP Study Mar 2001
6
Challenges Post-Trade - Summary

• No bridge spanning investment decision to
  transaction
• Existing mechanisms supporting interaction
  between sell-side and their customers do not
  enable either party to optimise the return
  on/usage of intellectual capital assets
• Paper-based manual procedures from order onwards
• Fax/telex/email is widespread with multiple
  rekeying a feature
• High error rates are prevalent on account of
  multiple standards/protocols
• Client connectivity is insufficient proprietary
  arrangements in place
• Need a data- and workflow-centric approach to STP
• Many redundant steps separations of duty
• Reference data is poorly managed databases are
  incompatible
• Insufficient accountability, metrics and
  ownership
• Achieving scale STP is not just an enterprise
  issue
• Legacy systems are expensive to enhance
• Politics, vested interests and ignor(e)ance
• 50 of buy-side think its someone elses job to
  provide an STP/T1 environment Source GSTPA

7
The Road AheadCompanies will be compelled to
focus internally as well as externally

• Basle II/Operational Risk
• US Patriot Act
• N2/Know Your Client
• PLUS
• Myners Report
• AIMR Best Effort Execution
• STP Market Practices?

8
Reference Data
9
What is Reference Data? Repeated studies have
demonstrated the fundamental role of
correctly-specified reference data if progress
towards STP is to be realised David Gilks, J
P Morgan
Reference Data
Reference data is too widely distributedwithin
respondents organizations - 31 of trades fail
due to incomplete or inaccurate reference data.
Source Reuters, Tower Group, Capco survey Oct
2001
10
If Reference Data is held on One System only

• Reference data is obtained from one external
  source
• And stored in one single system in one common
  format
• 100 STP is easily achieved

Sample Data vendor
Sample Organizational Source System Infrastructure
Source
C
A
B
Today Industry participants have high quality
data held in only one system that is used in a
consistent manner
11
Problem is that Reference Data is held on Many
Systems within an Organisation

• Reference data is obtained from a number of
  external sources and distributed throughout the
  organization
• Then manipulated into multiple formats according
  to functional requirements and stored in
  multiple systems
• Mergers acquisitions exacerbate complex
  infrastructures

Sample Data vendors
Sample Organizational Source System Infrastructure
A B C D E
Source
Industry participants are today faced with too
much data in too many systems, but not enough
quality information
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Inaccurate reference data cause 30 of trade
failures
Reference data ? Second costliest building block

• Static data comprises 75 of transaction messages
• Key challenges to cleaning data
• Standardization within the industry
• Consistency within the four walls
• Possible industry initiatives and vendor
  solutions emerging

11
Report Trades to Clearing Corps
25
DTCC Trade Guarantee
35
Rewrite CNS
190
Share Immobilization
215
Accelerated Trade Submission
275
Revise IPO Rules
437
Implement Matching Utilities
565
Check Processing
2,855
Standardize Reference Data
3,295
Modify Internal Processes
0
1,000
2,000
3,000
4,000
Source SIA/CapCo/Accenture T1 Business Case 2000
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Reference data The key to quality STP and T1
In a Towergroup survey

• 79 of respondents strongly agreed that
  inconsistent, inaccurate and incomplete reference
  data is the major cause of failing to achieve STP
  internally
• Less than half of respondents believe that their
  reference data was more than 90 accurate

In order to achieve the processing and
settlement of executed trades in a T1
environment, the industry will need to develop
consistent and timely instrument and counter
party reference data, to enable the matching of
trades.
Source SIA T1 Business Case
14
Reference Data Strengthening the Foundation of
STP
Reliable reference data is the lifeblood of the
trade process, yet its management is often
sidelined, exposing institutions to spiraling
costs and incremental business risk
15
Data types blamed for trade failures at
respondents organizations (combined first
second choices)

• Inconsistent data impacts STP and Operational
  Risk
• Excessive cost (duplication, reconciliation,
  manual maintenance fixed costs)
• Sub-optimal controls, with increased operational
  risk and subsequent losses
• Poorer client service

Source Capco/Reuters/Tower Group ResearchSept
2001
16
If Firms Save on Staffing to support Data
Maintenance, watch what happens to Costs -
Illustrative
36 firms
22 firms
21 firms
20 firms
13 firms
11 firms
8 firms
No
0-9
10-19
20-49
50-99
100-200
200
Response
Total Wage Bill could drop from est. 714mio p.a.
to 380mio p.a.
58 firms
21 firms
20 firms
13 firms
11 firms
8 firms
No
0-9
10-19
20-49
50-99
100-200
200
Response
Source Reuters STP ResearchMarch 2002
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Market Focus on Industry Enterprise
STPReference data is not about codes and
structure, but business meaning and integration
into process workflows
Source Reuters/Capco April 2002
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Recommendations

• At Industry (external) Level

• At Enterprise (internal) Level

• Focus has been on improving STP rates
• but will now be on reference data so that
• Static data is consistent and synchronised
• Trade repairs are reduced by up to 30
• Fixed costs can be reduced, improving bottom
  line
• Improved control and risk are achievable

Result A pulling together of the challenges
surrounding data and exception management to
improve STP efficiency across the board
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Discussion of Industry Efforts Underway

• ISITC/IOA
• FIX
• ISO/SWIFT
• GSTPA
• ISSA
• Others

20
Next Steps?

• Collaboration between industry Participants
• Reference Data Standards
• Helping to Drive Industry Codes of Practice
• Others?

21

• Thank You!
• Contact details
• Anthony.Kirby_at_Reuters.com
• JohnGubert_at_HSBC.com