Global Reference Data User Group

STP - REUTERS GROUP

John GubertTony Kirby

Head of Group Securities Services, HSBCHead of Global STP, Reuters

17 June 2002 - London

Global Reference Data User Group – Inaugural Meeting

The Impact of Reference Data on STP and Operational Risk

2 AWK – “Serving You to Serve Your Customer Better…”REUTERS CONFIDENTIAL 170602

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?


Background


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

Enterprise STPEstablishing seamless processes within the organization with minimum manual intervention

Tradeexecution

Executionsupport

OperationsSupport

Portfoliomanagement

IPO’s

Static Data

Relationship management

Pre-Settlement Settlement

Asset Servicing

Stockmanagement

TreasuryFinancial control

Risk / ControlCompliance

Source Source Source Source Source Source Source Source Source Source

Connectivity

Interoperability

Depository

CustodianCustodian

Depository

Custodian

Depository

Custodian

Depository

Exchange

Broker

Fund ManagerFund Manager

Broker

Exchange

Fund Manager

Broker

Exchange

Fund Manager

Broker

Exchange

Industry STPEstablishing connectivity between market participants with rules based management

(Receiving globalcustodian)

Receiving localcustodian

(Foreign asset manager )Receiving global

custodian

Foreign sellingasset manager

(Foreign selling assetmanager)

Delivering globalcustodian

(Delivering global

custodian)Delivering Local

custodian

(Foreign buying assetmanager)

Local buying broker

(SE trading member)

(Foreign selling asset

manager)Local selling broker

(SE trading member)

Central bank payment system

(Local buying broker)Receiving

clearing agent

(Local selling broker)Delivering

clearing agent

Stock Exchange

Clearing House

(I)CSD

1 1

4 4

2 23 3

56 6

7 7

8 89 9

10

10

10

10

5 5

11

12 1314 14 14

14

14141414

15

15

15

15

1515

Tradeexecution

Executionsupport

OperationsSupport

Portfoliomanagement

IPO’s

Static Data


Pre-Settlement Settlement

Asset ServicingStock

management

TreasuryFinancial control

Risk / ControlComplianceSource Source Source Source Source Source Source Source Source Source


• 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 US$19.1bn from 2001-4**• Broker/dealers and asset managers will shoulder 64% and 26% of the spend respectively…**

Cause Effect

The lack of STP costs the Billions of Dollars in Frictional Cost every year…

Sources: *SWIFT reported Aug ’01; **Tower Group Global STP Study Mar 2001

High fixed costs even for 100% STP*High fixed costs even for 100% STP*

59% of instructions need repair and query*59% of instructions need repair and query*

10% of transactions result in mismatches*10% of transactions result in mismatches*

15-20% of transactions fail to settle on time*15-20% of transactions fail to settle on time* $50+ cost of settlement failures

$10 fixed cost

$6 cost of repair

$16 cost of mismatch


• 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 it’s someone else’s job to provide an STP/T+1 environment – Source GSTPA

Challenges Post-Trade - Summary


The Road Ahead…Companies 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?


Reference Data


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

Data

Transaction record

Transaction Reference #

Account Identification

Buy/Sell Indicator

Security Identifier

Number of Shares

ccy code + Principal Amount

ccy code + Commission

Trade Date

Settlement Date

Broker

Custodian/Clearing Agent

Place of Settlement

Da

ta T

ran

sa

ctio

na

l

CLIENT ACCOUNTPROFILES

SECURITIES MASTER FILE(S)

COUNTER-PARTYDATABASE(S)

CURRENCY TABLES

Reference data is too widely distributed…within respondents’ organizations… - 31% of trades fail due to incomplete or inaccurate reference data*.

Source: Reuters, Tower Group, Capco survey – Oct 2001


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

AA BB CC

Source

Sample Data vendor

Sample Organizational Source System Infrastructure

Today Industry participants have high quality data held in only one system that is used in a consistent manner


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

Industry participants are today faced with too much data in too many systems, but not enough quality information

Source

A

B

C

D

E…


Inaccurate reference data cause 30% of trade failures

$3,295

$2,855

$565

$437

$275

$215

$190

$35

$25

$11

$0 $1,000 $2,000 $3,000 $4,000

Modify Internal Processes

Standardize Reference Data

Check Processing

Implement Matching Utilities

Revise IPO Rules

Accelerated Trade Submission

Share Immobilization

Rewrite CNS

DTCC Trade Guarantee

Report Trades to Clearing Corps

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

Source: SIA/CapCo/Accenture T+1 Business Case 2000


Reference data: The key to quality STP and T+1

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 T+1 environment, the industry will need to develop consistent and timely instrument and counter party reference data, to enable the matching of trades.”

Source: SIA T+1 Business Case


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”

Source: Reuters/Capco/Tower Group Oct 2001

Static or non-variable information describing assets & account entities used in the processing of transactions, compliance measurement, analytics, risk management & client reporting


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

10%

22%

25%

25%

38%

42%

44%

Corporatel Action-specific Data

Account-specific Data

Instrument Data

No Response

Client /Counterparty Data

Settlement-specific Data

Trade-specific Data

Source: Capco/Reuters/Tower Group Research—Sept 2001


If Firms Save on Staffing to support Data Maintenance, watch what happens to Costs - Illustrative…

Response

36 firms

0-9 10-19 20-49 50-99 100-200 200+ No

Source: Reuters STP Research—March 2002

22 firms 21 firms 20 firms

8 firms13 firms 11 firms

Response0-9 10-19 20-49 50-99 100-200 200+No

11 firms

21 firms 20 firms

8 firms13 firms

58 firms Total Wage Bill could drop from est. $714mio p.a. to $380mio p.a.


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

Enterprise

InvestmentDecision

TradeReconciliation

Settlement& Clearance

AllocationConfirmation

TradeExecution

OrderManagement

Transaction Workflow Market participants

Industry

Asset Managers

Brokers

Banks

Regulators3rd Party

Data Providers

Data Management & Sources

Primary Reference DataSSIsTrade ExecutionCounterparty IDsLegal HierarchiesAsset IDsCORAX DataOther Data


At Industry (external) Level

Recommendations

At Enterprise (internal) Level

Result: A pulling together of the challenges surrounding data and exception management to improve STP efficiency across the board

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

(Receiving globalcustodian)

Receiving localcustodian

(Foreign asset manager)Receiving global

custodian

Foreign sellingasset manager


Delivering globalcustodian

(Delivering globalcustodian)

Delivering Localcustodian

(Foreign buying assetmanager)

Local buying broker

(SE trading member)


Local selling broker

(SE trading member)

Central bank payment system

(Local buying broker)Receiving

clearing agent

(Local selling broker)Delivering

clearing agent

Stock Exchange

Clearing House

(I)CSD

1 14 4

2 23 3

56 6

7 7

8 89 9

10

10

10

10

5 5

11

12 1314 14 14 14

14141414

15

15

15

15

1515

TradeexecutionExecutionsupportOperationsSupportPortfoliomanagementIPO’s

Static Data


Pre-SettlementSettlement

Asset ServicingStockmanagementTreasuryFinancial control

Risk / ControlComplianceSource Source Source Source Source Source Source Source Source Source

Focus has been on creating data field and transactional standards but will now be on Best Practice to ensure

• Consistent usage of accepted standards

• Clear definition of those standards

• Facilitation to monitor agreed performance within those standards


Discussion of Industry Efforts Underway

• ISITC/IOA

• FIX

• ISO/SWIFT

• GSTPA

• ISSA

• Others…


Next Steps?

- Collaboration between industry Participants

- Reference Data Standards

- Helping to Drive Industry Codes of Practice

- Others?


Thank You!Contact details:

[email protected]

[email protected]