The ROI From Reference Data Management

Asset managers and other investment management firms recognize the importance of good reference data management. Reference data refers to descriptive information about financial instruments and business partners that trade them. Good reference data management is key to effective risk management and is becoming increasingly important due to regulations such as Alternative Investment Fund Managers Directive (AIFMD) and International Financial Reporting Standard 13 (IFRS 13) which have set up mandates for more transparency and consistency around valuation and accounting. Asset managers, however, struggle to define a strong business case and related Return on Investment (ROI) for reference data management investments. Managing reference data for quality requires significant upfront investment—not just in data management systems and underlying technology infrastructure, but also in standing up governance and management processes to sustain and evolve data quality. Naturally, it is important to articulate the returns that may be expected to accrue from such investments.

A key driver of ROI for reference data management transformation programs is avoidance of capital or reputational loss through mitigation of operational risk, which refers to risk from inadequate or failed internal processes, people and systems. Loss avoidance is achieved through risk preemption—that is, reduction in the probability of risk occurrence, and cost impact reduction, which is reduction in cost impact should the risk occur. Operational failures have been cited as one of the key causes of a majority of recent financial losses as opposed to poor credit decisions or market misinterpretation. ROI of reference data management investment is driven by mitigation of operational risk areas spanning the entire lifecycle of the financial transaction:

  • Portfolio Analysis and Security Selection: Internal controls on security selection, portfolio stress testing, portfolio risk/return limits enabled by standardized portfolio and security reference master data
  • Price, Liquidity, Capacity Discovery: Broker selection and counterparty limits through standardized and rolled up legal entity identifiers
  • Trade and Transaction Execution: Pre-trade and post-trade analysis and risk assessment through high-quality pricing data, reduction in risk of breaks, inaccurate orders, and trade mismatches through standardized product and instrument data
  • Reconciliation, Valuation and Accounting: Reduced risk of cash and holdings reconciliation breaks, NAV errors due to standardized security reference data, corporate action data and pricing data
  • Performance Measurement: Reduction in performance variation, style drift and tracking error due to standardized benchmark and index data

The other factor driving the ROI for reference data investments is cost and capital efficiency which helps reduction of planned cost and more effective deployment of capital. Reference data management programs can drive cost and capital efficiency through the following:

  • Reduction of manual workarounds required to fix data, manual keying and rekeying of data, thus increasing human capital productivity and efficiency
  • Reduction in data sourcing capital and expense charges through rationalization of data sourcing contracts, outsourcing of non-critical functions and data aggregation
  • Increased efficiency through process standardization and consolidation, and headcount reduction in the data management function
  • Reduction in capital and operating costs through elimination of redundant technology infrastructure and technology consolidation of disparate reference data management systems
  • Increased regulatory capital efficiency through accurate and precise risk estimation and associated capital buffers required
  • Enhanced margin and collateral management through enhanced counterparty exposure calculations and risk estimation

Good reference data management also clarifies the operating model, roles and supporting processes of the data management organization. This clarity of work processes can bring about enhanced employee engagement and strategic agility. Qualitative benefits, such as enhanced business satisfaction with data, also contribute to the ROI of successful reference data management programs.

Contributed by Ricardo Vieira.