The Transformation of Market Data

1
The Transformation of Market Data

• Standards for STP Automation
• Michael Atkin
• Vice President Director
• SIIAs Financial Information Services Division
  (FISD)
• March 11, 2004

2
Agenda

• Standards and STP (the case for efficiency)
• The four pillars of data standards
• Understanding the standards process
• Obstacles to standardization
• Global coordination and the path forward

3
FISD and Standards

• FISD neutral business forum on market data
  issues
• Secretariat of Global Reference Data Coalition
  (REDAC)
• Steering Committee of Reference Data User Group
  (RDUG)
• Direct liaison to ISO TC68/SC4 and member of
  Working Group 8 (entity identification) and
  Working Group 11 (data vocabulary)
• Voting member of ANSI X9D
• Member of SIA Standards Protocols Group
• Member of ISIN User Group within ANNA
• ISITC/REDAC Working Group on Instrument
  Identification
• Originator of Market Data Definition Language
  (MDDL) XML specification for market data

4
The Age of Standards?

• Goals are to reduce costs and manage operational
  risk (efficiency is the mantra)
• Only bad things can happen between trade date and
  settlement
• Information architecture and reference data push
  (normalize data, synchronize master files,
  promote information exchange)
• Shorter cycles mean more automation is needed
• Data standards are needed to facilitate automation

5
Costs are Real

• Inconsistent, incomplete or inaccurate reference
  data is the 1 cause of internal STP failure
• Over 30 of all transaction breaks are caused by
  poor quality reference data
• 59 of instructions need repair
• 10 of transactions result in mismatches
• 15 of trades fail to settle on time
• Costs to repair increase as errors pass through
  the front (6), middle (16) and back (50)
  offices

6
The Reference Data Connection

• It is everywherefront office (sales, research,
  trading, order routing), middle office
  (collateral management, regulatory reporting),
  back office (trade confirmation, asset
  management)
• It is decentralizedMultiple systems containing
  client, counterparty and instrument data up to
  25 different people, processes or systems for
  each cross border trade
• Lacks automationManual operations to scrub,
  update and maintain data

7
The Pillars of Data Standards

• Goal a common infrastructure for securities
  processing automation
• Four components
• Unique instrument identification
• Precise business entity identification
• Terms, definitions and relationships (common data
  model)
• Standard communications protocol

8
Standards for Instrument Identification

• Instrument identification is fundamental
• ISIN alone is not sufficient
• FISD research ISIN OPOL MIC
• Place of trade for intra-day pricing decisions
  and market compliance
• Four criteria for precision
• Unique at all levels/applications
• Intraday allocation for SMF set-up
• All tradable instruments must be numbered
• Proprietary solutions are problematic

9
UII Example
10
UII Status

• UII debate globally (lots of confusion between
  place of trade and place of listing)
• LSE SEDOL extension (meets criteria)
• ANNA Service Bureau extension (meets criteria)
• ISITC/REDAC/RDUG Working Group on UII
  implementation
• Document the errors caused by instrument
  identification problems by asset class and
  function
• Assess how issues can be resolved by adopting the
  UII scheme (at 15022 message level)
• Cost/benefit analysis to articulate the business
  case for implementation
• Comprehensive problem statement and
  prioritization of asset classes/functions by June
  04

11
Standards for Business Entity Identification

• Real processing problems exist
• Identifiers are needed for a variety of functions
• Regulatory compliance and risk management
  objectives
• Efficient transactions processing objectives
• No international standard identification scheme
  for linking legal entities and portfolios under
  management
• Activity approved by ISO TC68/SC4 Working Group 8

12
Financial Institutions interact with many entities
Funds (of various types)
Investment Advisors / Fund Managers
Broker / Dealers
Issuers
Financial Institution
Exchanges Trading Systems
Corporate Clients
Custodian / Agent Banks/ Prime Brokers
Infrastructure / Vendors NNAs
Other Entities in Own Group
Settlement Clearing Organisations
13
Identifiers are Needed for a Variety of Functions

• Counterparty and Issuer
• Risk Management
• Basel II
• Internal risk mgt.

• Counterparty identification
• on Transactions
• Orders
• Trades
• Settlements
• Payments

Collateral Management

• Regulatory Reporting
• KYC and AML
• Financial Services
• Act
• Patriot Act

• Legal Agreements
• Documentation
• Account set-up
• Customer relationship

• Data Management
• Capture / Sourcing
• Look-up Cross-referencing
• Maintenance

Corporate Research
14
No Standard Scheme Exists
15
IBEI Standard is Needed

• Automating the order execution, trade allocation
  and settlement process is the objective of STP
• Instructions come in different formats with all
  sorts of internal identifiers
• The lack of a standard identifier linking legal
  entities, issues, funds and counterparties
• makes it difficult to automate these processes
  (processing efficiency)
• makes it difficult to precisely extract
  reporting, transactional and relationship
  information (compliance requirement)
• Decision to adopt must be based on clearly
  defined ROI criteria

16
WG8 Mandate

• Agreement to provide a global scheme for uniquely
  identifying all business entities playing a role
  in the lifecycle of a financial instrument
• Pools of money
• Beneficial owners
• Entities involved in transfer/management of money
• Focus is beyond concept and on the
  design/structure of the identifier (complete,
  functional, operationally viable, commercial
  acceptable)

17
Standard Market Data Model and Vocabulary

• Standard terms, definitions and relationships for
  all market data elements
• Eliminate confusion about the meaning of terms
  regardless of source
• Ensure completeness of terms required for any
  application
• Common data format for efficient processing
• Logical basis of any reference data strategy
  within financial institutions
• Activity approved by ISO TC68/SC4 Working Group
  11 (and my pick as the most important standard
  activity underway)

18
WG11 Approach
Processes/Functions 17 financial processes Set-Up (data to build and populate security master files) 10 characteristics of set-up Price (prices to buy, sell, settle, report and value instruments) 8 characteristics of price Maintain (data/corporate events required to keep master files updated) 8 characteristics of maintain
Issuance
Pre-trade thru trade execution
Post-trade execution thru settlement
Reporting
Ownership/asset servicing
Goal is to define the data model components with
enough precision to cover the full range of
processes and applications
19
Standard TDR Component Parts are Real

• ISO TC68/SC4 WG11 has bought into the concept!
• Business process model already exists from WG10
• 15022 Data Field Dictionary already exists
• MDDL specification and TDR for market data
  already exists
• FISD, FIX and SWIFT are all participating in the
  development of the standard

20
Industry Standard Protocol

• Strong business case for a standard distribution
  protocol for market data (static and streaming)
• Reduce costs -- one set of software to receive
  and distribute data means less infrastructure
  costs for integrating data from multiple sources
• Close gap between realtime and static
  applications standard XML distribution strategy
  help ensure that the same standard can be applied
  to both reference data and realtime pricing
• Economies of scale are possible in design,
  production and maintenance of data feeds,
  processing systems and applications
• fisdMessage at proof of concept stage and
  generating a lot of interest

21
15 Minutes of Fame for Market Data

• Goal is a common data and protocol infrastructure
  for securities processing automation
• Four components
• Identify all financial instruments with precision
• Identify all business entities for efficient
  processing with counterparties and risk
  management
• Identify all data elements associated with a
  financial instrument lifecycle with absolute
  precision
• Define a common distribution protocol for
  efficient processing
• Broad industry consensus is emerging standards
  processes are in place timing is right this
  is our opportunity to lay the infrastructure
  groundwork!

22
Obstacles to Standardization

• Standards development processes are fragmented
• ROI is hard to measure
• Organizational inertia is difficult to overcome
• Questions remain about operational viability and
  commercial acceptability
• Standards processes are slow (todays solution
  for yesterdays problem)

23
The Standards Landscape
Ownership Stake
Telekurs
American Bankers Assoc. (ABA)
SP
CUSIP
Contracts
Maintains
ISO Standards
Part of ISIN
Local Identifiers(65 in total)
LSE
DB
SEDOL
CFI
ANNA
DUNS
Maintains
Developed
Ownership Stake
Registration Authority
BSI (UK)
ISIN
Business Entity Identification
Legal Entity Identification
Instrument Identification
ISO
ASB
SWIFT(Network)
MIC
US Representative to ISO
RDUG
REDAC
SWIFT(Reg. Authority)
BIC
Registration Authority
Facilitation
TC68
ANSI X9D (US)
SIIA
15022
Agreement to make ISO 15022 XML Aware
Membership
WG11
FIX Protocol Limited
WG8
CFI
WG10
TBMAAMF
ConvergenceISO 15022 XML
FISD
Adopting
Membership
Owns
Omgeo
Recommenda-tions
ISDA
FIX
ALERT
Developed
Adopting
Owns
Membership Involvement
ISTIC-IOA
Developed
Standard (Reference Data or Message)
XML Conformance Standards
OASIS(XML Conformance Standards)
MDDL
FpML(Derivatives)
XML Conformance Standards
Organization
24
Global Coordination is Required

• Reference data and standards discussions are
  pervasive (SIA, ISITC, SMPG, SWIFT, BMA, ISO,
  LSE, RDUG, FISD, ASB, ANNA, DTCC, vendors)
• Global coordination across all functions in the
  transactions lifecycle is required
• Formation of the Reference Data Coalition
• Ensure that data reference requirements are well
  defined and clearly articulated
• Ensure that operational and commercial issues are
  addressed
• Evaluate and promote coordination among standards
  activities

25
Open Issues

• STP as a business priority (whats the ROI and
  how do we deal with the chicken/egg problem)
• Global industry coordination (how do we get the
  problem defined and the business case developed
  for action)
• Standards processes (Whats the difference
  between a standard, a utility function and a
  value-added proposition)
• Viability and importance of the core standards
  activities (instrument identification, entity
  identification, data vocabulary and messaging)

26
Final Thoughts

• Cost containment and risk mitigation is still the
  mantra
• Standards are the key to achieving automation
  objectives but problems exist and global
  coordination is difficult
• The financial industry is paying attention we
  have a window of opportunity
• Get engaged

27
Contact Information

• Michael Atkin
• Financial Information Services Division
• Software Information Industry Association
• (p) 202-789-4450
• (e) matkin_at_siia.net
• (web) www.fisd.net, www.mddl.org