Data Management: Regulation, Problems and Solutions For the Buy Side

Waters' editor-in-chief, Victor Anderson, chaired the panel discussion ─ Collateral Damage? The Impact of Regulations on Data Management and Data Governance within Investment Management Organizations ─ as Vipul Chandna, head of business solutions at London-based asset manager Sarasin & Partners, and Steve Cheng, global head of data management solutions at RIMES Technologies, discussed the impact of regulations on data management and data governance practices across the buy side. Due to security issues in Brussels over the weekend, Agathi Pafili, senior regulatory policy advisor for the European Fund and Asset Management Association (EFAMA), was not able to participate in the panel discussion as originally scheduled.

In response to the global financial crisis of 2008 and the ensuing global recession, regulatory changes have forced buy-side firms on both sides of the Atlantic to implement new technologies and develop operational procedures to comply with a number of new regulatory mandates.

The regulatory agenda is to reduce systemic risk by introducing a framework requiring financial organizations to implement best practices with respect to the way they consume, digest and disseminate the various data types they need in order to transact their business. This regulatory and operational framework has the dual effects of keeping participants on the right side of their respective regulatory bodies, in addition to providing asset owners with greater transparency into the various money management activities for which they are paying.

Complex Issues
Data management and its governance are complex issues that tend to be experienced and hence addressed differently for each buy-side firm. However, the consensus from those in attendance at the event is that the necessary data management technologies already exists, even though only approximately 10 percent had already implemented firm-wide data governance frameworks. However, at least 60 percent of the asset management firms represented at the RIMES event had already started down the data governance road, an endorsement that such frameworks are necessary for optimal data management practices across the buy side.

So what are the specific data management and data governance challenges facing buy-side firms, and what are the industry's regulators looking for? "The focus for buy-side firms is being able to report data when they are asked to produce reports on the value of their assets in a timely fashion," explained Chandna. "Most buy-side firms are not geared up for this challenge because the focus from the C-level is not pointed in this direction."

"Staying up until 3 a.m. fiddling with data formats is not the answer ─ we are not data managers, we are asset managers, so we should focus on managing assets." ─ Vipul Chandna, head of business solutions, Sarasin & Partners.

Evidence Required
RIMES Technologies' Cheng recounted a meeting with a data specialist from the Bank of England's Prudential Regulation Authority (PRA), where he explained that the PRA is looking for themes in order to formulate a common response to the types of questions being asked. In short, Cheng said, the challenge boils down to a transparent and timely demonstration of what buy-side firms are doing with their data and why they are doing it. "What they're looking for is evidence of good processes and procedures around data. They can't check the quality of the data themselves, but what they can do is look for evidence of good processes and procedures," said Cheng

Data in One Place
When faced with a challenge as complex and as vast as meeting various data management requirements, buy-side firms appear naturally inclined to turn to data warehouses as centralized repositories for the storage of their data assets. Like tipping a puzzle out of a box, turning the pieces face-up, and building it out from the corners, there's a tendency for buy-side firms to want to house all their data in a single repository before embarking on the challenges ahead, although implementing a data warehouse is anything but a trivial undertaking, both in terms of budgets and time. "Most buy-side firms are realizing that the quality of data and getting that data from silos into a centralized location is their most difficult challenge," said Chandna.
"There's a debate as to whether we should have a single source of information or more [than one]. Each system needs different levels of information; you can't have one source feeding the entire system ─ that's very difficult to do. So that's where we talk about hybrid models and new big data technology, and how you actually collect information."

Cheng agreed that a change of approach is needed in terms of how to manage and where to store data, and that the industry as a whole needs to think about doing things differently and not looking for a one-size-fits-all solution. Cheng recalled Porsche, the German car manufacturer, and its "pure engineering" culture in the 1970's where it made each part fit perfectly, even if it meant modifying the componentry by hand, a strategy that was costly, time-consuming, and manually intensive. Some organizations, according to Cheng, apply this approach to data management. "There's a lot of work being done by end-users to actually get the data in the right place so that they are able to produce their performance, risk or regulation reports," he said. "Of course, what's important is to acquire the necessary data required early in the supply chain so that all the work isn't being done too late in the day."

Costs and ROI
Another perennial issue concerning the buy side is that of cost, where, especially when it comes to data, significant "downstream" costs are incurred over and above visible data costs. Should buy-side firms soften their profit targets for the year until they've met the challenge of regulatory change, and if they do, how might they go about making the business case for outsourcing certain aspects of their data acquisition and management?
Chandna noted from his experience at Sarasin & Partners of seeing data-related bills arrive, which, at one time were moderate, but now ran into the "millions." Only after the bills arrived were the following questions asked: "Where is this information ending up, where are we sourcing it from, and why do we need it?"
Another challenge for the buy side is acknowledging that various data management issues are hugely complex and resource-intensive, while data costs can be similarly debilitating, leading to the admission that firms can't manage these processes alone, leading them to look for their hands to be held by a specialist provider.

Seeing the Positive
As an example, Chandna cites Solvency II requirements and the fact that no buy-side firm holds all the data on the underlying holdings of a third-party fund. This is where a provider might be able to step in and assimilate all of the information and publish it to the regulator.
But providers themselves are also at risk. There is no point having a fluid internal data governance framework in place if the data needed for regulatory compliance doesn't match those standards.
"How do you ensure that the data they're submitting on your behalf is good?" asked Chandna. "The answer is in actually doing the due diligence on a few providers to see how they are collecting that information on a regular basis. When we talk about data governance we always look inwards, but my advice would be to look at your partners."

Upheaval
With all this forthcoming upheaval, it's easy to focus on the costs and the negative implications of regulatory change. Cheng, however, makes the case for seeing the positive ─ a deeper understanding of the quality of data at source, where it comes from, and what the potential is for its use. He advises the buy side when making the business case for partnering with a specialist provider, not just to focus on the costs, but to look at the associated benefits, even though they might be difficult to quantify.
Cheng suggested that benefits to the business can come from "getting faster to market with new products or be able to implement strategic changes more efficiently and quickly."
Chandna agreed, adding that it's important to always consider where and how an asset manager can add the most value. "Staying up until 3 a.m. fiddling with data formats is not the answer ─ we are not data managers, we are asset managers, so we should focus on managing assets," he concluded.