Banking: The Need To Invest In Multidomain MDM

Data 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, maximise operational efficiency and control, and optimise 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 Hazards of Mismanaging Reference Data

The 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 optimise 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.

The main challenge is that key reference information is stored in incompatible data silos. 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. 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. MDM can manage and lead financial institutions around the world, enabling them to leverage connected and consolidated data across the institution to manage and report on their business.
By implementing a solution that maximises investments in existing applications and helps the institution flexibly scale and adapt to continuous changes, it is possible to cut costs. Through improved business agility and speed, as well as delivered new insights about the business, competitive advantages can be achieved.

Five Key Steps to Managing Reference Data More Effectively

To address their reference data challenges, banks can follow five steps to successfully implement a multi-domain MDM system on a single platform:

Step 1: Quantify the Business Value

The 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?

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 Operations

Operational 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 organisation 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 realised by improving a business process than it is to measure the impact of improved control and analytics.

A multidomain MDM system on a single platform can help to maximise 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 Harm

Let’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.

Step 4: Walk, Then Run

Too 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.

• You can make corrections as necessary.

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

• You will have discovered most of the challenges and potential pitfalls in every step of the process.

• You can apply these best practices to subsequent initiatives, which will accelerate their development and heighten their chances of success.

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.

Conclusion

The 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 optimise 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.

_The author is Managing Director - Informatica for South Asia.
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