Solving the reference data problem in financial services – are we on the right path?

Allan D. Grody

Abstract

ABSTRACT

New regulations are imbedding operational risk concepts and the provisioning of operational risk capital in the risk management considerations of globally active financial enterprises. Inherent in new capital calculations is the effect of losses due to faulty reference data – data which is costly to acquire and maintain, duplicative across the industry and of no strategic value, and which comprises 70% of the data content of financial transactions. Faulty reference data has been a persistent impediment to systemic risk mitigation across the global capital and investment markets. Reference data electronically represents financial products and their changing specifications, counterparties, financial intermediaries, corporations, issuers, financial markets, currencies and valuation prices. This paper attempts to illuminate the effect of faulty reference data on operating costs, operational risk and operational capital. It also points toward applying solutions that have proven to reduce costs and risk in other industries and in other segments of the financial industry. Standards for product and supply chain participants, which have long been a staple in the retail industry, are now overdue in the financial services industry. Financial industry-wide cost sharing and risk mitigating approaches have long been organized around shared infrastructure entities but, to date, have only been applied to the value portion of transactions (principally quantities, transaction prices and amounts). This paper argues for these same techniques to be applied to the matching and “clearing” of the reference data components of these transactions.