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21st July 2022 | Insights

Reference data challenges move from internal to cross-industry

In this quarter’s Clearing Management Insight Report, which was published last week, we take a deep dive into reference data.

The Clearing Management Insight Report is a quarterly publication based on the views and input of the Acuiti Clearing Expert Network, a group of senior professionals in the market from across global banks and brokers. This quarter’s report was produced in partnership with SmartStream.

Previous Acuiti studies into post-trade processing, reporting and reconciliations have all highlighted the difficulties firms face as a result of reference data fragmentation. As such, this report focused on the subject to understand more about the challenges firms face.

The reasons for the fragmentation are well-understood. Myriad symbologies and data protocols have evolved across the listed derivatives industry over the past two decades. Different vendors developed different versions of their software as banks and their clients enhanced and developed the reference data terminology needed to reflect the nuances in how they process trades.

The result is vast operational complexity for firms to normalise and translate different symbologies to efficiently process trades from order to settlement. According to this quarter’s report, reference data errors are a common cause of trade breaks for over half of firms, including three quarters of all multinational banks.

There has been a notable shift in where the challenges caused by fragmentation are being felt. When Acuiti last looked at reference data in 2020, over 70% of respondents cited the processing of data feeds across internal systems as a major challenge.

By 2022 this had reduced to 20%. Although 60% of respondents still cited processing data across internal systems as a small challenge, much progress appears to have been made in terms of the normalisation of different data symbologies.

However, there is still a long way to go before reference data is fully harmonised internally. Only 8% of respondents had a single golden source of reference data across their organisation. Firms also reported sourcing data sources from multiple vendors with 81% working with two to five different third-party vendors.

This is understandable considering the goal is to use specialist data providers to get best information available in the areas they cover. However, it creates additional complexity by requiring a strong set of cross-referenced identifiers to ensure that data sets from disparate sources are effectively linked.

Shifting to external harmonisation

As progress is made to harmonise the flows of reference data within organisations, focus is turning to the process of standardisation across the industry. Standardising data received from clients was said to be very challenging for almost half of the respondents.

One proposed solution to the challenge of data fragmentation is the creation of a single reference data symbology to be adopted by the entire market. In the OTC markets, progress is being made with the initiative to implement a Unique Product Identifier. This represents an example of regulators, and the industry, coming together to drive a solution.

While a single symbology would, theoretically, solve the challenges posed by the fragmentation of reference data methodologies, there are numerous hurdles to realising the goal. Despite these hurdles, just 14% thought that it would be impossible to create a single protocol for reference data.

In terms of the challenges, by far the greatest challenge the industry faces today is gaining agreement on the protocol, with 59% of the Clearing Expert Network listing that as the top challenge. Buy-side adoption was rated a distant second.

Another concern of primary importance was the timing and cost associated with the implantation of new symbiology. Most of respondents cited estimations of between 3 to 5 years to implement at a cost of $250,000-$5m, with some believing costs could run even higher.

Solving the issue of reference data fragmentation across the industry is a high priority for many firms, though the road to realization is fraught with many challenges.

Download the full report here: https://www.acuiti.io/q3-clearing-management-insight-report/