The Current Landscape
Central repositories, spreadsheets and checklists are the primary tools for handling data relevant to financial product management and investment product management. Yet these approaches vary widely in effectiveness and appropriateness, depending on whether they are being applied to sell side or buy side market activity.
Sell side financial product management creates challenges because of the quantity and hierarchies of securities and the required response times for some processes, such as a product taxonomy service for product stamping. Buy side investment product management has challenges because of the complexity and nuances of the products.
Many buy side investment companies operate without any real central investment data warehouse or operational data store. A lot of their data, including investment products data for investment product management, is stored throughout spreadsheets and multiple standalone systems for which handling product data is a secondary purpose at best. Historically, this approach was supported by the belief that investment products were too individual to be managed in a standard way.
Buy side investment products do have features that make tracking and management possible even without a central repository, however. Features that are useful include the firm’s product classification codes, target (or suitable) investors, investment strategies and geographic focus. But fragmented and siloed data sources have their limitations and manual processes and re-keying are often required to cross reference, analyze and report across any shared attribute. This means inefficiency and operational risk.
Advancing Financial Product Management
To set up new investment products, such as share classes, mutual funds or exchange-traded funds, buy side investment companies must complete compliance approvals and create routes for data to flow to different parts of their operations. While the workflow of this process resembles what sell side capital markets and broker firms do, the types of products being set up are very different. Investment products tend to be multi-share class funds or products that include third-party investment advice, complex fee structures or portfolio management.
Typical triggers for an investment company to consider centralized product data management, also known as a product master, include takeovers, rapid growth or the need for improved operational efficiency and governance. In all these instances, the control, integrity and accessibility of data about the investment products offered by a firm cannot be supported across tools that represent only a single product or part of the business. Cross-referencing of product specifications and classifications, product hierarchies, fee structures, distribution and jurisdictions is required to ensure effective performance, reporting and compliance processes. It impacts product onboarding as well as sales and portfolio management.
As investment companies mature, they will often seek a central product data management solution (whether on-site or hosted and managed in the cloud) that also interlinks their customer and account data. Integrated customer, account and product data management (CAP) then begins to shape the core data management and data warehousing function in a firm. And it often grows to become the central investment data management platform, a comprehensive data hub also for pricing, performance, investment book of record (IBOR) and accounting book of record (ABOR) data.
Also for the buy side, tracking changes in the attributes or structure of investment products is necessary to provide a historical perspective. Seeing what an investment product looked like at any given point in time can help analysts compare performance over time. Bringing together previously scattered pieces of information makes it easier to reconstruct the management structure, benchmarks and other historical aspects of an investment fund.
Conversely, most sell side investment banks and capital markets firms already have product masters – data management repositories of the financial products they work with – to support financial product management. However, many banks have multiple product master data management systems and struggle to manage a consolidated view of them. Although these systems are designed to handle product data, a centralized master of masters often remains an outstanding requirement.
Product codes are needed to indicate types of securities such as derivatives, interest-rate swaps and others. ISDA classifications, CIF codes, ISINs and CUSIPs are a few of the most commonly used code formats. Establishing what classification system an institution will use throughout its operations, and then mapping all other classifications to it, is an important step for making a central financial products data repository work. With investment banks readying themselves for compliance with the Fundamental Review of the Trading Book (FRTB) regulation in 2022, and with the risk data aggregation and risk reporting (RDARR) requirements of BCBS 239 not yet met across all data types in many banks, having consistency in financial product management is a necessary step. Formal product master data management practices and a central product master solution then look like fundamental essentials.
In addition, the sell side needs data consistency to support formalizing new products, in advance of trading. This requires consolidating data from various systems into one location, with a standardized product code set. Without a prescribed, automated process, banks are likely sending forms and emails internally, seeking approval from different departments, before being able to trade new products.
The variety of functional needs and bespoke workflows historically led sell side firms to build product data management systems in-house or to make-do with spreadsheets and check lists. Often, investment banks building their own systems, and maintaining their own product master, find that it doesn’t give them any competitive advantage.
For both the buy and sell sides, the quality of data relating to products is critical and yet hard to measure. This is because metrics around data quality often don’t exist, so improvements are difficult to evidence. A central product master becomes a key component for improving data quality and generating evidence of the extent of quality improvement over time. Overall, a product master data management solution that forms part of the overall enterprise data management platform or investment data warehouse can do much better at ensuring product data is a useful asset across the business, rather than a resource-consuming operational risk.