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Page last updated
February 15, 2003




Securities data management


Securities industries throughout the world are currently besieged by new initiatives. The US, for example, is reducing its settlement period to T+1 while the UK follows suit from T+5 to T+3. The European, US and developed Asian markets are working to ensure that their systems can inter-operate with the Global Straight-Through Processing Association's Transaction Flow Manager. And this is all happening in the wake of heavy industry spending on Y2K and the euro. As an increasing number of companies struggle to keep up with the investment required just to stay in the business, the concept of outsourcing technology is coming into its own.

For most firms adopting an outsourcing strategy means outsourcing all or part of the IT infrastructure of the back office and retaining back office staff, who then connect through to systems provided and run by a service provider. The concept of outsourcing is no longer a new idea for players in the US securities market; however, it seems that European and Asian countries are catching on quickly as they see the benefits to their peers and counterparties realised, and as outsourcing services become more readily available.

A number of drivers are currently leading this trend. Cutting costs remains a major focus for securities firms, as trading margins are continually being squeezed and institutional clients are increasingly expecting to trade in global markets and diverse instruments. One of the most persuasive reasons for outsourcing the IT infrastructure, especially for these high risk areas which have still not been fully integrated into the STP environment, is the low investment required, coupled with predictable running costs closely linked to business volumes.

Cost is not the only driver making outsourcing a more attractive strategy. Trading volumes are increasing with the boom of Internet brokerages and the growing retail market, particularly across Europe where would-be state pensioners have realised the need for alternative investment vehicles to plan for their old age. Adding to these pressures is the ongoing climate of mergers and acquisitions, which is placing higher trade processing demands on the remaining players. For the large proportion of players who are still dealing with legacy systems or have merged to find themselves with systems which are not able to communicate, a technological solution must be found.

Among securities firms, there is an increasing desire to focus on core competencies as businesses find themselves spending more staff hours and a larger proportion of their budget on maintaining and running essential but non-core systems. The problem of staff turnover means that too many valuable hours are spent training employees to operate technology rather than focusing on the main business of the firm. Many firms are beginning to look for viable alternatives to running such non-core systems themselves.

All sectors of the securities industry are to some extent working towards achieving STP. Many firms are finding is that outsourcing provides an alternative strategy to sourcing systems which are able to accommodate higher volumes and tightening settlement cycles and which can plug the remaining STP gaps. As the concept of outsourcing becomes more firmly entrenched, the longer established firms are providing increasingly comprehensive and sophisticated services aimed at the global market.

General efficiency also remains an issue for the securities industry and within firms. As the drive towards domestic and cross-border STP continues, the need is for timely and accurate data which can meet the demands of competition, shortening settlement periods and extended trading hours. In addition, operational risk needs to be considered, especially in high-risk areas such as corporate actions.

Given that most firms have adopted some form of STP model, one part of operations that is becoming an increasingly popular choice for outsourcing is that of data management. So why choose data management in particular to outsource?

It is a fact that high quality data is fundamental to efficient STP. With an increase in transaction processing volumes and shorter periods to achieve this in, one principal need is to reduce exceptions to a minimum. Inaccurate or incomplete securities or counterparty data are prime sources of exceptions in the trading lifecycle. Accurate data within a firm's own systems means that all reliant processes should be able to complete without running into the potential bottleneck of exception resolution.

Many types of firms and organisations involved in the securities industry can benefit from outsourcing data management, including banks, brokers, investment managers, global custodians, market data vendors and clearing agents. In short, anyone active in the global financial markets may consider this approach. As operating costs are directly linked to processing volumes, the outsourcing option is relevant to all sizes of firm or organisation.

Paradoxically, while data management is a vital function it is not one that most securities firms would consider to be core business. It cannot be said to directly generate income or market share and, as such, it is in many ways the perfect candidate for outsourcing. There are many advantages to doing so.

The types of data management functions that can be outsourced are wide ranging, but at a high level can be split into four major areas:

n Full maintenance and upkeep of existing securities records

n Data scrubbing

n Data reconciliation

n monitoring, selection and consolidation of market data

Maintenance of existing records has a number of aspects to it, including tasks such as entering missing security reference details; correcting mismatched securities identifiers and maintaining securities cross-referencing. It also encompasses reconciliation across data sources; correction of on field values; removal of duplicates; and standardisation for naming conventions and abbreviations. Even the manual scrutiny of new issue prospectuses is a potential candidate for outsourcing.

Data scrubbing involves taking data such as prices or corporate actions data, often from multiple sources, comparing these and dealing with any exceptions using the client firm's own operational practices.

The outsourcing of data reconciliation enables manually intensive tasks such as security record comparisons and mismatches to be handled by the firm's service provider. This offers the advantage of the outsourcing service provider working as an extension of the client's own operations department.

The maintenance of composite records by service providers is a more recent development, one which many firms are currently evaluating. Data is taken in from multiple market data providers, and the outsourcing service provider acts as a filter, scrubbing, merging and comparing data, resulting in a full composite securities record. Essentially this is adopted to achieve the position where any problems are dealt with at the outset, so that systems downstream are all fed with the same high quality information. This is best implemented with a central data repository publishing required data to subscribing systems to maximise operational efficiency, user satisfaction and client service.

The advantages of outsourcing data management are already strong enough for many firms to consider it as a valid option. A firm evaluating this approach should be seeking to reduce its operational costs, minimise risk from inaccurate and incomplete data, and free users to concentrate on core competencies and value-added client services. It should benefit from a solution with scaleable running costs linked to the volume of data that is handled, and operational risk should be minimised as data is delivered in a timely, accurate and complete manner.

A comprehensive outsourcing environment offers competitive advantage by delivering cleansed data of the highest quality to support a securities firm's position in the market and increase both client-facing and internal efficiency. To ensure that these benefits are consistently delivered, a firm considering outsourcing should carefully investigate what resources and IT infrastructure a service provider has and what procedures they adopt to maintain high quality of service and ensure total security.

The main focus of a data management outsourcing service is to provide a range of flexible, advanced tools to automate the extraction, transformation and cleansing of data. This may include securities references, pricing, corporate actions or any other form of securities related data. Exceptions must be identified automatically, and the majority rectified automatically according to a firm's business processing rules. Potential users should also expect regular analyses of exceptions to identify exception patterns and so provide the information needed to tackle and rectify these exceptions at source.

Just as securities firms cannot run efficient operations by throwing staff at the problem, neither can service providers. A service provider must be able to accommodate data from different sources, with predefined checks to ensure the integrity of the data. To address the imperative of quality data, an outsourcing service provider should continually refine its tools for the extraction, transformation and cleansing of data.

An efficient service will also provide a comprehensive daily breakdown and analysis of all processing, allowing a securities firm to monitor performance and trends across all aspects of the data management service. On the systems and communications side, dedicated database servers and high performance links to users' systems are needed to ensure fast processing and communications.

A dedicated data management group should have professional expertise in client services and IT operations, as well as in IT developments for data modelling and structuring, and integration of external vendor feeds. The provider should have direct experience of data handling for international operations.

A support team must be available to provide a 24-hour, seven-day response to clients globally, with direct helpdesk access to a provider's expertise for users' operational and technical support requirements across all aspects of their data management service.

Some firms may be concerned that outsourcing in-house processes can result in a loss of control and uncertainty about the level of security. Specific and targeted service level agreements (SLAs) play a vital role in providing the guarantees of service and security that firms seek. Full back-up facilities should guarantee continuity of service, and data security is provided through the segregation of data environments, strict password control and firewall protection.

SLAs should cover a broad range of subjects and set specific targets such as response times. They should also set the stringent quality procedures to be followed within the outsourcing provider to ensure a consistently high level of service.

The sorts of procedures that an outsourcing service provider should be offering may include assignment of a dedicated manager to supervise each client's operations, peer review of all manual intervention and full testing of all automated data management tools prior to live running. Firms may also wish to consider whether live systems are monitored to predict and avoid performance degradation; whether ongoing review procedures are carried out with each client, and whether full life-time control is maintained on all static data changes.

The ongoing development of quality, professional outsourcing services should give a potential user full confidence in outsourcing its securities data management to an established service provider, confident that this will result in the major benefits of reduced costs, timely and accurate data and the ability to return its focus to its core competencies.

Erlend Linklater
Product Manager
Securities Data Management
Wilco International


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