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Five Steps to Managing Reference Data More Effectively in Investment Banking

The Key to Optimizing Capital, Improving Operations and Analytics, Managing Risk, and Supporting Compliance

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This edition published June 2010

1Five Steps to Managing Reference Data More Effectively in Investment Banking

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Table of ContentsExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Hazards of Mismanaging Reference Data . . . . . . . . . . . . . . . . . . . . . . . 3

The Five Key Steps to Managing Reference Data More Effectively . . . . . . . . 8

Step 1: Quantify the Business Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Step 2: Focus on Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Step 3: Do No Harm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Step 4: Walk, Then Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Step 5: Generate Results Quickly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

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Executive SummaryData is one of the most strategic assets of today’s financial services companies and investment banks. However, when it comes to managing data to drive the business, many are constrained by old technology. The recent banking crisis highlighted the importance of effectively managing data to navigate the business through up and down cycles. In the current low-growth environment, companies must be able to quickly process customer requests, identify holdings and positions, assess and adjust risk levels, maximize operational efficiency and control, and optimize capital—all while supporting compliance.

A consistent, correct, and current view of financial reference data will drive efficiency and insight while increasing day-to-day control, enabling everything from quickly trading on a new instrument to complying with a spate of new regulations to spotting suspect trader behavior. Visionary financial services and investment bank executives are leveraging twenty-first century technology to simplify the management of financial instruments, counterparties and their related settlement instructions, currencies, locations, and identifiers.

The aim of this white paper is threefold: 1) Explain the implications of mismanaging reference data. 2) Outline the factors that make handling reference data such a challenge. 3) Share the five steps that leading investment banks have followed to implement a multidomain master data management (MDM) system on a single platform to: manage a host of third-party feeds, accommodate diverse trading and settlement systems, and reconcile of multiple security master applications. This approach unifies risk management and analysis silos, not only increasing their accuracy but also making the results actionable.

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The Hazards of Mismanaging Reference DataThe recent banking crisis underscored the importance of effectively managing data to navigate the business through up and down cycles. The current down cycle has fallen further and lasted longer than any previous recession since the Great Depression. Economists and bankers agree that the road ahead is a bumpy one and a quick economic rebound is unlikely.

In the current low-growth environment, it’s even more important for institutions to be able to quickly process customer requests, identify holdings and positions, assess and adjust risk levels, and optimize capital, while supporting compliance. Bank executives agree that data is one of their most strategic assets and they need to better leverage it throughout the institution to achieve their goals. However, many institutions are ill equipped to properly manage reference data to drive their business.

In recent years, the pace of financial innovation has increased dramatically. Financial instruments—and the relationships among them and counterparties—have become vastly more complicated as a result. The patchwork of national and international financial regulations adds yet another dimension of complexity. These factors make managing financial reference data somewhat daunting.

Consider a few examples:

A structured instrument is composed of five index options:• 3 puts and 2 calls, 2 knock-out, 1 knock-in, 2 simple. Each of the options has a strike between 78 and 122 percent of the index. The index is composed of a basket of variable-rate bonds.

Two of the bonds that make up the index:• a Belgian government bond, with a 30/360 day count convention, 30 days between fixing days, subject to Belgian bank holidays, and a U.S. corporate bond, with a calendar-year day count, rates fixed on the 15th of each month, subject to U.S. banking holidays.

Two swaps:• an interest-rate swap with the variable-rate leg tied to the Belgian bond, and a credit-default swap for the U.S. corporate note, each with the same protection buyer and seller.

Due to a bankruptcy, the investment banking (IB) arm of a financial services firm is acquired •by Company A, while its wealth management (WM) division is acquired by Company B . The IB arm was the protection buyer for the swaps, and Company B was the seller. Company A is the issuer of the structured instrument, 20 percent of which was purchased by the WM division.

According to the American Bankers Association, banks are under more pressure than ever before because of:

Continuously changing regulatory •requirements

Increasing physical and information •security issues

Banks require new approaches for risk management, including new technology to deal with the increased complexity.

Incomplete, incompatible operational systems produce inaccurate and often misleading analytics and end-of-day reports, which introduce significant risk to institutions that may over- or under-allocate capital reserves based on this information.

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Without a multidomain MDM system in place, the reference data for these instruments and counterparties is likely managed in the following way:

The structured instrument• would have been drawn up as a term sheet and filed.

The Belgian bond• might have been put in a regional security master application serving E.U. that stores the first fixing date, days in between, day-count convention, and other indicators, while the U.S. note might be stored in the U.S. security master that stores the sequence of fixing dates that it receives from Bloomberg.

The two swaps• might be stored in a security master application as well, but as debt instruments, because the application does not include swaps among the instruments it can manage. The protection buyer is represented as the debtor and the seller as the owner of the note.

The IB arm may be added as a new entity• in the corporate hierarchy of Company A, as will the WM division within Company B.

The main challenge is that key reference information is stored in incompatible data silos (or not at all, in the case of the structured instrument). See Figure 1. Therefore, it would be a huge undertaking to collect the information required to provide a clear picture of risk and exposure—to a particular counterparty, a region, an index, or an adverse event. Paradoxically, the bank will have overestimated its capital reserve requirements for the bonds and options, yet underestimated its exposure on the exotics. Incomplete, incompatible operational systems produce inaccurate and often misleading analytics and end-of-day reports, introducing significant risk to institutions that may over- or under-allocate capital reserves based on this information. Finally, this type of Balkanized IT infrastructure exponentially raises the cost of automating new security introduction, trade processing, settlement, and other core business processes.

ExternalData Providers

Client

Counterparty

Security Client

CounterpartyMarket Data

Currencies

Security

ClientAccount

Client

Counterparty

RiskManagement

TradeExecution

RegulatoryCompliance

ClientExperience

Pro�tability &Segmentation

Figure 1. Data Silos Impede Key Initiatives: Employees spend excessive time consolidating data across the institution

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This figure illustrates the root cause of the problem. Key reference data—such as client, account, counterparty and security— is stored in incompatible data silos. Employees spend excessive time and effort searching for and reconciling data across these silos to provide a clear picture of risk and exposure—to a particular counterparty, a region, an index, or an adverse event.

A multidomain MDM system can effectively manage all of the complexities, idiosyncrasies, interrelationships, regional variations, and details inherent in financial reference data. The instruments, counterparties, and relationships in the preceding example are a small part of what Informatica MDM is managing in leading financial institutions around the world, enabling them to leverage connected and consolidated data across the institution to manage and report on their business. Informatica MDM for multidomain master data management (MDM) delivers consolidated and reliable business-critical data, such as reference data to improve business operations and reporting.

Without visibility into connected and consolidated data across the institution, how can you achieve the following strategic imperatives?

Better Manage Risk:• More accurately assess and adjust your risk levels.

Optimize Capital Reserves:• Avoid over- or under-allocating capital reserves.

Improve Operations & Analytics:• Ensure that end-of-day reports are accurate and complete.

Automate Key Business Processes:• Empower every broker to quickly trade on a new instrument.

Improve Confidence in Control:• Uncover all red flags that may be buried somewhere inside all of the cautionary yellow flags.

Support Compliance:• Enhance your ability to report on and adapt to new and evolving regulations.

To execute these strategies, you need to leverage a consolidated and reliable view of financial reference data with visibility and insight into:

your holdings and positions on each instrument •

the counterparties associated with each instrument •

the relationships among all instruments•

the relationships among all counterparties•

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This figure illustrates how Informatica MDM overcomes the challenges associated with reference data stored in incompatible data silos—such as client, account, counterparty, security, etc. It eliminates the need for employees to spend excessive time and effort searching for and reconciling data. With Informatica MDM, banks get a clear picture of risk and exposure—to a particular counterparty, a region, an index, or an adverse event.

However, a non-scalable point-to-point integration environment with inflexible legacy security master applications makes it difficult for the IT organization to consolidate and connect the data housed in different formats and multiple data silos across the institution. Costs increase exponentially when you need to create customized connections from each data source to downstream systems. IT lacks the flexibility, time, resources, and budget to enable access to a consolidated and reliable view of financial reference data in this environment. But ripping out and replacing existing applications is not an option. So, what can you do?

ExternalData Providers

Client

Counterparty

Security Client

CounterpartyMarket Data

Currencies

Security

ClientAccount

Client

Counterparty

RiskManagement

TradeExecution

RegulatoryCompliance

ClientExperience

Pro�tability &Segmentation

Informatica MDMClient Account Counterparty Security ...

Figure 2. Empower Your bank with Informatica MDM: Deliver desktop access to consolidated and reliable data

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The IT teams at visionary Fortune 50 investment banks decided to use an alternative approach to manage reference data more effectively—one that didn’t require the time, resources, and budget that they originally estimated using typical approaches. By implementing Informatica MDM, they were able to consolidate and connect the data that resided in different formats and multiple systems across the institution. See Figure 3.

This figure illustrates how visionary Fortune 50 investment banks are using Informatica MDM to manage reference data more effectively—one that didn’t require the time, resources, and budget that they originally estimated using typical approaches. They have access to consolidated and reliable client, account, counterparty, security data as well as the relationships between the data to get a clear picture of their risk exposure.

By implementing a solution that maximizes investments in existing applications and helps the institution flexibly scale and adapt to continuous changes, they were able to cut costs. Because they improved business agility and speed and delivered new insights about the business, they achieved a competitive advantage.

Figure 3. Manage Reference Data More Effectively: Provide access to reconciled and related reference data

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The Five Key Steps to Managing Reference Data More EffectivelyTo address their reference data challenges, these leading investment banks followed five steps to successfully implement a multidomain MDM system on a single platform:

Quantify the Business Value1.

Focus on Operations2.

Do No Harm3.

Walk, Then Run4.

Generate Results Quickly5.

Step 1: Quantify the Business ValueThe first, most important, and least-followed step is to identify the specific problem or problems you want to solve and then estimate what you would save by fixing them.

Does introducing a new security to trade take too long? How much money is the business •losing because of a slow procedure?

How many settlements need to be fixed manually and what’s that costing? •

How many redundant third-party data feeds do you have, and how much could you save by •eliminating the extras?

How much fat is there in your capital set-asides, and how much revenue are you losing as •a result?

How many times over the past 12 months should a few yellow flags have been consolidated •into one red flag? What was your exposure?

How accurate and complete is the data that goes into the end of day report? How long would •it take to calculate the company’s exposure if another Lehman stopped trading? Do you have enough detailed information to design a strategy to reduce risk and exposure and see that it’s executed? How much is it worth to have the right information at your fingertips?

Reference data cannot be separated from operations, control, compliance, and analysis—in essence, reference data is the foundation on which you can run your business successfully. Poor-quality reference data leads to inefficient and costly operations. Fragmented data silos detract from the value of analysis and the effectiveness of compliance. Identifying the business problem first and then estimating the value of a solution set the stage for making and measuring progress.

Step 2: Focus on OperationsOperational systems are generally data producers; data flows downstream from the operational systems into reporting and analytical systems. The most effective means of improving data quality in an organization is to pay attention to the producers. By perfecting the data as far upstream as possible, the downstream, consuming systems benefit as well. Perhaps just as importantly, it’s usually simpler to estimate the cost savings that will be realized by improving a business process than it is to measure the impact of improved control and analytics.

A consistent, correct, and current view of financial reference data will drive efficiency and insight while increasing day-to-day control, enabling everything from quickly trading on a new instrument to complying with a spate of new regulations to spotting suspect trader behavior.

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Securities master applications, such as Golden Source and AssetControl, are neither precisely operational nor analytical. They tend to act as producers of data within an organization (although they consume data from external sources). If an organization includes more than one security master, it’s likely that they’re inflating the cost of the business processes they touch and acting as a drag on analysis. A multidomain MDM system on a single platform can help to maximize the investment in existing security master applications by acting as a “master of masters” and thereby ensuring that they are complete and consistent, plus increasing their penetration to operations, reporting, and analytics.

Step 3: Do No HarmLet’s say you’ve identified a business process to improve and the source systems involved. What’s next? While it may be tempting to start tearing out or modifying the existing systems and putting in new, improved ones, it’s best to proceed without disrupting the processes you’re trying to improve. By increasing the correctness, consistency, and completeness of the data, you will have effectively improved the business process. As a side benefit, you will also have improved the accuracy of reports and the effectiveness of analytics.

One Global 50 investment bank used Informatica MDM as the central point of integration among a handful of security masters, trading systems, settlement systems, accounting and portfolio management systems, and a data warehouse. This multidomain MDM system acted behind the scenes at first—receiving data from all of the sources and circulating it back out to them as the clean, consistent, de-duplicated, and correct golden copy. All of the systems continued to operate as before, but operational efficiency, control, and analytics all benefited from the improved data quality.

Step 4: Walk, Then RunToo many initiatives collapse beneath the weight of their own ambitions. Start small—a few systems, one or two business processes, a single department. There are a number of benefits to this approach:

You will have demonstrable, measurable results, which will build confidence in the approach. 1.

You can make corrections as necessary. 2.

You will have built a working system, which is the most effective internal sales tool. 3.

You will have discovered most of the challenges and potential pitfalls in every step of the 4. process. You can apply these best practices to subsequent initiatives, which will accelerate their development and heighten their chances of success.

For example, one successful Informatica MDM implementation at a large investment bank focused on mastering financial instruments. The first phase of the project focused exclusively on equities and completed the entire process—from data modeling, cleansing, and standardization to de-duplication—before moving on to other instrument types. This focus exposed and addressed problems quickly. And because the group could demonstrate a working system, it helped them to secure funding for the subsequent phases of the project. The implementation is currently responsible for mastering every instrument type in the bank, as well as counterparties, settlement instructions, portfolios, customers, and accounts.

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Step 5: Generate Results Quickly By appropriately sizing the first initiative, the number of source systems, instruments, and counterparties will be more manageable. Every multidomain MDM implementation begins by creating a data model. Unfortunately, data modeling has a reputation for being difficult—especially when the focus is on complex financial instruments. In our experience, a data modeling exercise should take no more than 10 to 15 percent of implementation time. Keep in mind that, while important, a data model in a flexible multidomain MDM platform can also be modified; so if you get something wrong on the first pass, you can easily and quickly change it later. When in doubt, choose rapid prototyping over analysis paralysis.

Two examples will illustrate the business benefits achievable by leveraging a multidomain MDM system on a single platform:

A large, U.K.-based investment bank implemented Informatica MDM to manage its counterparty data. The business side was looking for a way to improve the efficiency of its operations—in particular, to reduce its straight-through-processing failure rate due to incomplete and incorrect counterparty information. The failure rate was reduced by more than 50 percent as a direct result of improved counterparty reference data. The business benefits included:

A one-time savings of $12.5 million in its IT capital expense budget by replacing an antiquated •system; an annual savings of around $2 million due to the reduction in the number of failed trades that had to be fixed manually

An annual reduction of $50 million in the cost of capital due to increased liquidity that resulted •from fewer “stuck” trades.

A large multinational bank implemented Informatica MDM as a central integration point for a number of trading, settlement, accounting, and security-master applications. Prior to the implementation, the bank’s process required a trader who wanted to trade on a new security had to ask for the instrument to be entered manually into a securities master application and into an accounting system. The average response time for such a request was more than 12 hours. The bank was considering a point-to-point integration for a few common instrument types among three of the systems, at an estimated cost in the tens of millions of dollars. The lengthy turnaround time had resulted in $23 million annual lost revenue, when the traders followed the process. When they bypassed the process by entering minimal information into a trading system themselves, it resulted in duplicated, inconsistent, dirty data. Consequently, the end-of-day and weekly holdings and exposure reports took an average of three days to produce and had a margin of error of +/- 50 percent. After Informatica MDM was put into place, the bank realized a number of benefits:

New security introduction was automated. What had taken overnight now happened in minutes. •This automation eliminated the lost revenue due to inability to trade.

The holdings and exposure reports are produced in hours, and the margin of error is less than •1 percent.

The entire implementation, which handles all instrument types and all operational systems, cost •far less than the point-to-point integration, which included far fewer systems and instruments.

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ConclusionThe current low-growth environment punctuates the need to quickly process customer requests, identify holdings and positions, improve operational control and efficiency, assess and adjust risk levels, and optimize capital, while supporting compliance. Although bank executives agree on the importance of better leveraging data to achieve these goals, many are not equipped to manage reference data effectively to execute on these strategies.

By implementing a multidomain MDM system, some financial services executives were able to bring order to the chaos of managing a host of third-party feeds, diverse trading and settlement systems, and reconciliation of multiple security master applications. By highlighting the five steps that these leading investment banks followed, this white paper outlined key requirements for managing reference data more effectively.

About Informatica MDM Informatica MDM empowers businesses to improve operations with desktop access to consolidated and reliable business-critical data—such as customers, products, channel partners, suppliers and employees—as well as the relationships between data. Flexible and proven, Informatica’s multidomain master data management (MDM) system provides comprehensive support for all MDM requirements—data integration, profiling, quality, and master data management—on the same platform. Best-in-class companies choose Informatica MDM because they can start small by addressing any pressing MDM-related business problem with rapid implementation and then expand to address additional business problems across the enterprise realizing fast time-to-value, lower TCO, and superior ROI. Visit www.informatica.com.

About InformaticaInformatica Corporation (NASDAQ: INFA) is the world’s number one independent provider of data integration software. Organizations around the world gain a competitive advantage in today’s global information economy with timely, relevant and trustworthy data for their top business imperatives. More than 4,000 enterprises worldwide rely on Informatica to access, integrate and trust their information assets held in the traditional enterprise, off premise and in the Cloud.

Learn MoreLearn more about the Informatica Platform. Visit us at www.informatica.com or call +1 650-385-5000 (1-800-653-3871 in the U.S.).

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Worldwide Headquarters, 100 Cardinal Way, Redwood City, CA 94063, USAphone: 650.385.5000 fax: 650.385.5500 toll-free in the US: 1.800.653.3871 www.informatica.com

© 2010 Informatica Corporation. All rights reserved. Printed in the U.S.A. Informatica, the Informatica logo, and The Data Integration Company are trademarks or registered trademarks of Informatica Corporation in the United States and in jurisdictions throughout the world. All other company and product names may be trade names or trademarks of their respective owners. First Published: June 2010 7149 (06/03/2010)

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