As regulatory debates focus on systemic risk, market participants are finding new ways to ensure data becomes part of the legislative agenda. Initiatives in both Europe and the US are focused on building new data infrastructures to mitigate risk and prevent future economic meltdowns.     Tine Thoresen reports.

London-based Alan Greenall, former global head of reference data IT at HSBC and currently independent consultant, is one of the reference data experts that has signed the NIF petition. "I'm not sure whether this will work in Europe, at least not until we have general agreement about fiscal policy throughout the EU. At the moment we seem to go our own different ways," he says.

In Europe, however, the European Central Bank (ECB) is championing a similar proposition to the NIF proposal. It is also proposing setting up a reference data repository - a strategic reference data utility, and has already approached regulators. The main difference is that the NIF proposal is more focused on providing regulators with quality data, while the ECB proposal talks about providing standardized data for the industry. London-based PJ Di Giammarino, chief executive at regulatory think-tank JWG-IT, says both initiatives are playing on the same issue, but "I'm not sure anything has the right formula for the system to hang together."

The core purpose of the NIF is to allow for systemic risk regulation. But Penn State University's Small says there are many IT functions, such as data management and data cleansing, that all firms and regulators need to perform, and it makes more sense to have one shared service organization providing that information. The idea is that the NIF would set standards for reference data, and that they would become the de facto standards for the industry.

The aim of the ECB model is that it would benefit both the institutions that will have to input the data and the regulators. "I think since it is such a difficult endeavour, we need to approach the issue with a win-win model," says Frankfurt-based Francis Gross, who leads the initiative and is head of external statistics at the ECB. Firms will be burdened with reporting, and as a statistician, Gross says, one knows that new reporting obligations are always questioned.

The Data Remit

One of the issues is the scope of the proposals, which can seem enormous, and some are concerned about the complexity of collecting all the data and making it available. "The bigger challenge is not in regulation, but convincing people that this is possible," says Berman, who suggests it has already been done in other industries - even without being regulated.

The ideal proposition would be to have an international reference data repository, which supplied both the industry and regulators with data. Washington, DC-based Bill Nichols, program director at FISD, who recently completed an article on systemic risk together with an industry colleague, says it has yet to be identified what information is needed for the risk analyses and what time frames users need to receive that information in. "But realistically the scope of systemic risk analysis is global, and one government cannot do it," he says.

Yet, at the moment, the focus is more centered on ensuring all efforts are aligned. Professionals on both sides of the pond participate in regular conference calls, and academics, industry associations, data managers and risk managers are all engaged in the discussions. "A lot of academics are starting to look at it. They work on risk processes, and they are now part of the conversation," says Atkin.

There is a growing understanding of the importance data plays. "The good news is that we are all beginning to get the point that systemic risk is about interdependencies, which can only be understood if you can compare data, and data therefore needs to be unravelled from risk and tagged correctly," says Atkin.

At the EDM Council, this growing understanding has been highlighted by interest in the semantics repository, a data dictionary created by the group. Risk management software vendor Algorithmics, software group SunGard and the IBM Models Group are all working with the Council to match metadata against the semantics repository. "They are risk modelling experts, and they need to and want to match up their metadata components with our semantics repository, because everyone now wants to be able to talk about these risk attributes in a common way," says Atkin.

In essence, market participants are going back to basics, and this is the idea behind the utilities. The utilities will define a standard, identify the scope and create a framework. "We have got to quickly get clarity on what data we are trying to collect," says Di Giammarino.

The repository will include all transaction-level data and position data from all major financial institutions. "There needs to be a well-defined network that includes all the systemically important institutions," says Small.

In addition, the repository will cover reference data. Setting standards in this area is seen as an essential part of the work, and is set to help add value to the industry. "Everyone recognizes that a global reference data standard should be the goal, but on the other hand, it is complicated to organize and needs to be backed by law," says Gross, who is also in close contact with the proponents of the NIF with whom he shares the idea that there should be agreement at least on the standard used for inputting data in both proposed facilities. "The concept of a securities reference data utility is narrower than the NIF, as it is strictly focused on reference data," says Gross.

But will any of these proposals result in immediate change? The change might not happen overnight, but the NIF proposal is a direct result of the financial crisis. It addresses existing infrastructure issues, and proposes changes targeted at avoiding systemic crisis of that nature in the future.

In the US, the timing is everything. Congress was initially expected to assess a regulatory restructure before the August recess, but it is now expected to be raised this fall. "We want to get data as part of the regulatory reform," says Atkin.

The NIF group has split into two interconnected committees - data and analytics. The work is focused on legislation and getting this concept onto the regulatory reform agenda. So far, the committees have done multiple revisions of draft legislation. The immediate objective is now to get a legislative sponsor, a member of Congress, who can advocate for the draft legislation.

At this stage, the key is to build awareness. "It would be extremely helpful if people at leading bodies came to mention that high-quality basic data is necessary (for) a healthy financial system. That would generate broader momentum," says Gross. This is currently also one of the NIF's main activities. The group, which is close to getting a sponsor, has met with a number of Senate staff and had one meeting with Mary Schapiro, chairman of US regulator the Securities & Exchange Commission. Small says many understand that without appropriate data and analytics, the promise of a systemic risk regulator that will protect the economy from another financial meltdown is an empty one.

The Long-Term Approach
 
Yet, the changes are not expected to be seen immediately. Market participants often suggest the building of a new infrastructure is not something they do for themselves, but for their children. "I want my daughter to grow up in a country with a functional economy," says Small. The new data infrastructure should eventually benefit regulators and the market alike, and the ECB acts as a catalyst in the discussion.

From an ECB perspective, a future utility could be operated by an independent international entity, which would collect and distribute high-quality, standardized reference data on behalf of national agencies mandated by their national law. Each country could elect to pass a relevant law, then join the utility as they wish; coverage of the utility (for geography, instruments and attributes) would grow over time, driven by demand and feasibility. "This is a tall order if you want to do it all at once, so we work at the European level," says Gross. Yet, the dialogue with the NIF also signals that both sides want to see compatible systems.

In September, both the NIF and the ECB have been invited to present their proposals to the FISD at an issuer briefing in New York. Both proposals are expected to impact the FISD membership, which consists of data consumers and vendors. The ECB proposal, which targets change in the information supply chain, has previously been subject to heated discussions with data vendors, as it could potentially impact existing business models. "The impact of the NIF would be much more spread out across the industry in terms of who it would impact and how. Until you get some of the specifics, it is hard to assess how it will touch different suppliers, or what the overall impact might be," says FISD's Nichols, who also sits on the NIF data committee.

Still, most market participants accept there will be change. Regulators will address systemic risk, and the data infrastructure is starting to be recognized as a significant piece of the jigsaw. It is not necessarily about changing risk management processes, but ensuring the factors that go into the risk management models can be compared and understood. This is not something that should be left to the regulatory community. Now is the time for the reference data industry to have their say.