ELEPHANT IN THE ROOM
In my 5 predictions for what will happen in the market data world for 2021, (www.marketdata.guru/2021/01/05/2021-market-data-predictions-5-crystal-balls) my fifth flight of fantasy is the exchanges and vendors will learn that the IP elephant in the room is most market data contracts, licences, and data usage policies are not fit for existing purposes, let alone being adaptable to service new markets with different types of clients exhibiting alternative behavioural characteristics.
Intellectual Property Rights are the foundation stones of the information business and need to be constantly cross-examined.
These legal documents represent snapshots in time, so are too often out of date by the time they have been introduced. Why? Because the data suppliers are playing permanent catch up with the myriad of ways clients invent to consume data
This means data sources and vendors have a choice of either replacing IP documents in shorter time frames, with all the administrative work, and obstructionist tendencies that entails, or introducing smarter processes by constructing greater cohesion between applying IPR structures to their new business models.
2021’s question is what 5 specific areas are likely to be of interest and why?
SITTING IN THE DOCK
Maintaining a fair and level IP playing field is becoming an increasing burden for all signatories to data agreements, and there are, unfortunately, parties with no respect for the presiding judge. One area of concern is where data consumers sign an agreement and then later commence out of scope usage. Existing processes and agreements make it far too easy for such events to occur
2021 gives the opportunity to overhaul IP frameworks and related processes
What are our 5 witnesses saying?
- Designer Agreements. The realisation that an one contract fits all types of users to be reviewed then abandoned as counter-intuitive. Agreements will be re-designed allowing core terms and conditions to be maintained in the text’s main body, with specific terms relating to multiple types of client and usage added on a case-by-case basis to cover such varied areas as display usage, non-display, index creation, and mass media re-distribution.
This will aid transparency, improve compliance, and connect consumers to data usage, with the added benefit of making agreements simpler to update.
2. New Contracts For Old. Exchanges and vendors will quicken the contract, licence and policy replacement process. Contracts will enter into 3 year re-evaluation cycles with regular updates replacing wholesale overhauls. However, this is easier said than done, but it will remove the current long lead times needed to produce then introduce new contracts which often results in that by the time all clients have signed them it becomes time to start work on its replacement. Options are in 2021 will remain limited:
• Implementing a ratchet clause so when updates are introduced clients are deemed to have accepted them by continued usage. This is common practice in the internet world
• More transparent clauses better defining data usage removing ambiguities
3. Automation of the IP Process. Existing methods of managing the IPR world of agreements, licences, and policies are tediously manual and inefficient. RegTech is definitely a catalyst for change, and the current COVID environment encourages the transition to automation.
An easy win is to shift documents into a digital environment where solutions such as ‘DocuSign’ enable the management of electronic agreements and the use of e-signatures. This is already creeping into the exchange space and 2021 will highlight the value of automating systems and procedures by speeding up the sign on process. Other practical benefits include document consistency and related audit trails
4. Compliance & Liabilities. Regulators like ESMA in 2021 are taking a critical of data compliance and audits which could well invoke the law of unintended consequences. Many audits conducted are anything but thorough (external auditors are rarely renumerated well), and most exchanges and vendors will negotiate reduced dollar back payments, unfairly rewarding non-compliance. Both of these approaches will disappear, with these likely results:
• Switching from audits seeking to discover non-compliance to identifying non-compliant clients before engaging with them
• Retirement of negotiated liability settlements, 100% of findings to become standard practice
• Expansion of the audit net to smaller financial institutions and specialists lacking internal compliance resources
• Adoption of a hard line approach to out of scope usage, and non-signatories to contracts and cut them off, a nuclear option rarely executed, until now
5. Improved Control, Monitor, Reporting. 2021 will place an emphasis on improved reporting deepened and broadened to cover all types of data usage to eliminate non-compliance. ‘Honesty Statements’ will finally be retired to be replaced by better automated reporting. This means:
• Mapping the entire data flow down river from source to consumption
• Permissioning/Entitlement systems to come under new scrutiny
• Renewed attempts to track data usage, perhaps by a workable water-marking process
Improving the management of IP is fundamental to the data business, and its frameworks need to adapt quicker to changing usage built around defining the clients better. These include:
• Better IP management = maximising revenue
• A more transparent IP environment increases data usage benefitting data sources, vendors, and the data consumers
• Continuous assessment of contracts, licences, and policies keeps them relevant
• Automation of processes reduces cost and speeds them up
• Adopting a scientific, analytical approach to compliance will significantly reduce non-compliance and out of contract data usage
A progressive approach to IPRs, contracts, licences, and policies will not be welcomed by those who benefit from the current inefficient environment. What should be looked out for?
• Educating exchanges, vendors, financial institutions, and regulators on how the changes are beneficial
• Overcoming initial resistance, especially if a ‘ratchet clause’ strategy is adopted
• Obtaining expert and legal advisory resources which understand the market data world. This is a rare commodity
• Effort is required to better understand data workflows from source to consumption and time required to investigate how clients control, monitor, and report data usage along with the systems they use to do so
• Increased cost of compliance, though this would be more than offset by higher revenues
Transforming the existing contentious and opaque world of IP to one that promotes innovative data usage will sadly meet resistance from parties that believe they benefit from the existing set up, including from all the links in the data workflow chain, i.e. exchanges, vendors, and the data consumers. Such a blinkered approach ignores the opportunities a more enlightened and realistic approach to IPR enables.
Protecting the data owners is paramount, but of little use if either:
- IP cannot be efficiently policed
- IPR inhibit the data consumers ability to maximise revenue from using the data
It will be interesting to review what happens in 2021 at the end of the year
Keiren Harris 31/01/2021
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