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Single Source of Clean Data

Single Source of Clean Data

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Published by tabbforum
Global regulatory reforms have yielded multiple data problems, especially for collateral and margining management. Download this white paper to learn why a real-time holistic view of essential transaction data streaming from traders to operations is critical for firms today.
Global regulatory reforms have yielded multiple data problems, especially for collateral and margining management. Download this white paper to learn why a real-time holistic view of essential transaction data streaming from traders to operations is critical for firms today.

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Published by: tabbforum on May 19, 2014
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Introduction
It’s a given that full automation for many key trading and related operational processes will not be achieved overnight. For many financial services firms, their top concern for securities processing will be the impact of the newly established regime for executed and cleared over-the-counter (OTC), exchange-traded and bespoke bilateral derivatives. Also high on their list is a major opportunity to achieve real straight-through processing (STP) for the new matrix of collateral management. Most firms will also want a real-time, holistic view of the essential transaction data streaming from traders to operations.Each of these operational challenges is a work-in-progress that has data management at its core. In each case, data needs to be pulled from many sources and distributed across the enterprise. For many firms, this still involves many manual steps and obstacles. These problems, however, are not insurmountable.Historically, OTC derivatives trading, clearing, and settlement have been unregulated, bilateral processes. The trade workflow was often handled through manual intervention, pushing data and metrics throughout a bank or other securities trading organization.
MAY 2014 - WHITE PAPER #11
INSIGHTS FOR YOUR INDUSTRY:
Single Source of Clean Data: Modern Data Management
FINANCIAL SERVICES
 The key is to establish a single source of clean data for all financial information shared.
Counterparties then communicated via mail, fax, and phone. The regulators, the markets and advances in technology have made a completely manual approach insufficient for most firms. In order for firms to compete, all departments within a trading enterprise must see the same data from the beginning of the transaction to the final stages of post-trade processing.The key is to establish a single source of clean data for all financial information shared among front-, middle- and back-office operations. The correct data is essential as discrepancies can lead to breaks in the transaction workflow. For instance, when a firm does not have accurate data about its funding position, as evidenced in the collateral management mishaps that led to the collapse of Lehman Brothers, disaster ensues.The Great Recession revealed, among other things, that OTC derivatives processing was based on weak or nonexistent data infrastructures that resulted in a lack of adequate operational and counterparty financial risk management. The missing information about a firm’s exact funding position in the market can have dire consequences.
 
 Data management challenges require firms to maintain a universal clarity in order to transact, manage, and survive in today’s dynamic data landscape.
 The right data will prove to be essential in conquering the new collateral problem.
Single Source of Clean Data: Modern Data ManagementOpenLink InsightsMay 2014 - White Paper #11Page 2The current data management challenges require firms to maintain a universal clarity in order to transact, manage, and survive in today’s dynamic data landscape.
Single Source of Clean Data: Getting on the Same Page
Global regulatory reforms have yielded multiple data problems, especially for collateral and margining management. This has caused an overriding demand for transparency. In particular, approximately $3 trillion to $4 trillion is needed to fulfill collateral obligations for the burgeoning reforms of the OTC swap markets
1
. An additional $10 trillion worth of collateral will be needed by the industry over the next two to three years. However, a collateral shortage is looming as there is only $18 trillion of high quality paper in the world (see figure 1). The right data will prove to be essential in conquering the new collateral problem. The first step will be to retrieve the correct price of an OTC derivative and then source the exact amount of collateral from a diminishing resource to cover a transaction.Finding the best price for an OTC instrument transaction is more than reviewing the latest market data. First, firms have to gather a multitude of data points such as the various margin amounts at competing clearinghouses, collateral eligibility, haircuts associated with collateralized positions and associated processing fees. These information flows have to be synthesized at the front- office in order to understand the true value of entering a new OTC derivative position. Secondly, these data points have to be the same information that the back-office receives to ensure seamless processing throughout the OTC trade lifecycle. At the same time, all parties working in tandem to implement efficient collateral management in a proactive manner must use this same set of clean data. Finally, a trading enterprise that consistently stores data will have far more accurate reconciliations with its elected swap data repository (SDR), an entity that facilitates market transparency and price discovery.But there are other uses for the right data. Firms need to employ data analytics that can be applied to meet the onset of new OTC derivative regulations and guidelines. The
FIGURE 1:
Present and Future Demands for Collateral
$18 TrillionHigh Quality Paper in the World$10 TrillionCollateral Needs in 2–3 Years$3-4 TrillionImmediate Collateral Needs
1
 TABB Group. 2014. Margin Call: Risk Analytics for the Buy Side, www.tabbgroup.com
 
 The best response to these challenges is a front-to-back IT solution that covers the entire value chain of execution, clearing and post-trade processing of OTC derivatives.
 Data for risk management must serve limit controls, reconciliation and accounting.
 Firms need data to underpin securities lending for collateral purposes and for repo market access with the attendant funding and haircut treatments.
goal of risk analytics is to optimize trading activity while minimizing risk. A broad category, risk analytics can be applied to calculating the effect of price fluctuations on portfolio performance, sourcing the cheapest, most abundant source of collateral and monitoring trade workflows. Furthermore, risk analytics need to be available to traders, operations, accounting, corporate finance, and other groups within a firm that facilitate securities processing. This is to ensure that all of these parties are sourcing collateral by using the latest best practices while mitigating the associated uncertainties. The ultimate goal of risk analytics is to understand the fundamental and idiosyncratic characteristics of the pledged collateral and acquire a holistic view of present and near-term risks.Unfortunately, time is of the essence for price discovery, risk analytics, and other functions that have to occur at the utmost speed. The U.S. Commodity Futures Trading Commission’s Rules 1.73 and 1.74 specify that futures commission merchants (FCMs) and clearing brokers must accept trades for clearing within 60 seconds. The same rules state that derivatives clearing organizations (DCOs) have 10 seconds to accept transactions. Given the parameters, OTC market participants require assurances that the clearinghouse will not reject the trade. If a trade is rejected, firms are obligated to meet an immediate margin call or possibly face repercussions that include and are not limited to breakage costs and penalties to unwind the position, not to mention the price impacts of re-entering the trade.The best response to these challenges is a front-to-back IT solution that covers the entire value chain of execution, clearing and post-trade processing of OTC derivatives (see figure 2). It must also support the following transaction lifecycle processes:
• Pre-trade Analysis:
 Data coverage begins with activities done before a transaction is executed. This includes investment research, sales and marketing of new collateral assets like corporate bonds, position review for managing portfolio line items on a daily basis, risk limit compliance to ensure proper risk-taking activity and liquidity sourcing for margin-efficient transactions.
• Trade Execution:
 This refers to capturing data at or near the time that a transaction is consummated. Key information is needed for order management, routing, and execution.
• Middle Ofce:
 This level is the first line of post-trade analysis and processing. This encompasses the booking and accounting of positions and facilitating allocations. The financial instrument’s valuation is used for benchmarking and measuring performance. The risk analytics at this stage are used to optimize the investment activity and help minimize market risk while optimal collateral management compels firms to do a better job of record-keeping, valuation, risk, and posting of collateral.
Back Office:
 Data for risk management must serve limit controls, reconciliation and accounting. Desk-level risk data is aggregated and monitored to make certain that financial thresholds are not breached. The back office plays an important role in the firm-wide auditing and reconciling of all account activity. Back-office staff members also handle trade break procedures and interact with all parties, for example SDRs, to fully resolve trade failure issues.
 Asset Servicing/Custody:
 Data can ensure transparency, safekeeping, accounting, and efficient transfer of collateral.
Ancillary Services:
 Firms need data to underpin securities lending for collateral purposes and for repo market access with the attendant funding and haircut treatments.May 2014 - White Paper #11Page 3Single Source of Clean Data: Modern Data ManagementOpenLink Insights

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