GoldenSource Blog
International Regulatory Strategy Group, Asset Servicers, fatca, data scientist, edm vs mdm

What Will Spur the Adoption of Financial Data Utilities?

By Prashant Kumar – Senior Vice President of Business Development

Banks are looking at a multitude of options in order to increase efficiency and profitability.

To this end, shared utilities come up a lot in conversation as a potential solution.

The Challenge

Data is in the limelight. The challenge is not just about clean data around settlements and clearing, to resolve out trades. There’s ever increasing regulatory reporting too, and greater demands for insightful data for all areas of the business. Reports for regulators have to be immaculate. The scrutiny is high, the consequences are serious.

As a backdrop to this, we have reduced margins, lower commissions, and less capital to deploy. All this is causing a lot of cost pressure. Banks have already moved people and processes to lower cost countries, so geographic wage arbitrage is a done thing. The cloud has already happened, or is happening, so what’s next? It comes down to pooling common resources via shared services – data utilities. So, what’s stopping the adoption of data utilities?

Recent Observations

In recent years there have been some utilities of note. CLS is one, in the foreign exchange space, around intra-day settlement risk. It’s owned by a number of banks. Also, two firms stand out in the document collection process, around onboarding. One is Clarient (DTCC), the other is (Genpact). So we’ve seen a few successes. One common thread of these companies is that they solve a core but non-differentiating (and not revenue generating) problem for member firms. This is true also for data management. It’s a theme I see amongst our clients. When it comes to data management, people acknowledge it as core, but not differentiating. So, a shared service model should suit the needs of many banks.

However, in the recent report from FIMA, A Snapshot of Challenges in Financial Data Management, only 1% of financial data management professionals claim to be using a shared industry data utility. A critical 41% say they don’t believe the utility approach will benefit their organization, while 25% are passively observing the performance of utilities before committing to actively assessing them.

So, what will likely be the pivotal change that will trigger a wave of adoption? The initial enabler sits with the banks, not the utilities. A firm needs to have an internally rationalized system – one scalable platform for data management across most (if not all) lines of business. If there isn’t a platform that scales well across multiple lines of business for millions of securities, a firm isn’t even in a position to consume a feed from a utility. It’s not possible to take a data management system that’s only proven in one line of business and scale it to take a feed for all lines of business.

Solving Enough of the Problem

The key appeal for a new breed of utility will be that it aims to solve as much of the problem as it possibly can. When it comes to data, just bringing a super-feed to your doorstep and walking away solves a piece of the problem, but not enough of the problem. Solving twenty percent or thirty percent of the data management challenge is not good enough. Above all, firms want utilities to appreciate and address the fact that every firm is different. The subtlety is in the data management rules. Being able to recognize that and offer processes for that is critically important.

To deliver on a bigger piece of the data management challenge, accommodating a firm’s particular needs, will require having the same software infrastructure on both sides of the wall, both under the shared service side as well as internal to the firm. This unlocks a number of issues that have previously constrained the appeal of utilities. The first is simply that the same team can support both sides of the architecture. This not only ensures native integration (interoperability) between the utility-side and the firm-side, but it is also more efficient. Second, with a common infrastructure, federated rules can be applied, which ensure that one set of common rules in “the cloud” and another set of firm-specific rules can be supported that can potentially run “on-premise” if needed. Third, certain vendors do not allow their feeds to come directly into a shared service. Those feeds will need to come directly into the firm’s infrastructure, which can of course be still be hosted in the cloud in single tenant mode. The common infrastructure and ability to support federated rules enables the utility, under a separate contract, to manage processes using feeds that come from utility-averse data vendors but which are nevertheless required to run the business well.

Looking Forward

With more regulations coming and pressures on profitability increasing, the appeal of utilities will grow. I believe FRTB & MiFID II are regulations that will tip the balance. FRTB demands integration of market and risk data at a deeper level of granularity than most banks are comfortable with. And with MiFID II’s data needs for pre-trade transparency and Systemic Internalizer eligibility, and post -trade market abuse reporting, even some of the 41% non-believers might rethink their positions on utilities.

The future of data utilities is assured. The industry needs to work together to ensure that the utilities that spring up are fit for purpose and offer an ROI or cost of membership that stacks up.

Contact us to learn more

All Posts