4.0 KYS Sourcing For the Future, Trials and Validations
The Internal View
Where do the internal impacts come from when ensuring you know your suppliers?
Market Data Consumers will have to make more stringent assessments of their market data needs and sources potentially down to the instrument level, certainly beyond the asset class level.
Inevitably, this will initially increase overall costs, however in the medium term it will emphasise smarter sourcing of market data with greater value placed on quality.
An inversion effect will occur which shifts sourcing from the current top down process, i.e. vendor to instrument level to bottom up, i.e. instrument upwards. The reason for this change in magnetic poles is because regulatory due diligence will drive sourcing from the basic element in the market data sourcing chain, which is naturally the instrument.
This is why knowing your data source is such a critical component of the sourcing strategy. Justifying and validating the pricing needed to value portfolios, capital books, trading books, and risk literally starts at source.
Costly By-Products, Eliminating Discretionary Sourcing
An intriguing by-product is this will remove to a large extent the current ability of end consumers allowing discretionary selection of market data by individual users, especially for reference data and use in risk management. In many sections of businesses, middle managers can, and do, make substantial and costly ad hoc purchases of data without having to go through normal channels because the data they seek to source is wanted right at that moment to fulfil an immediate business need, i.e. valuations.
Often the decision to go outside the business mandated golden hierarchy is driven more by keeping clients happy and having an easier life than because the data from an external source is better than what is already available. Keeping within enforced business parameters will remove the ability of middle managers to go outside the system to source data.
However, given the over-spend that does occur when users have free rein, the negative aspects of this limit to flexibility is more than offset by consistent levels of quality and lower spend.
- This needs to be backed by effective market data sourcing methodologies, on-going validation of suppliers’ data and knowledge of what type of price is being used for each business purpose.
- Maintaining a comprehensive document management system (DMS) based on best practice management methodologies.
- Maintaining an up to date contract management system (CMS) based on best practice management methodologies.
- Create a matrix which details and describes the relationships between suppliers and sources.
- To an extent the Golden Hierarchies which many institutions use are a start.
- In a more complicated relationship environment understanding how a market data consumer interacts with its supply chain at all points from source to delivery onsite is a critical business requisite.
- Relationships change, there are takeovers, mergers, and divestments, therefore the relationship matrix must be maintained as these will eventually feedback to costs and contracts.
- Develop a full end to end data governance view of data sourcing and supply.
The External View
Moving to more consolidated views of sources is easily within the grasp of any institution or vendor determined to understand their exposures.
This will only increase in importance to risk and compliance officers as the distinction blurs between data sources and aggregators, i.e. ICE’s purchase of Interactive Data, or Bloomberg and Thomson Reuters having their own trading venues.
The importance of knowing these distinctions comes when understanding which supplier provides what data, defined by type of data (IOIs, tradable prices, traded prices), and exactly where that price data, or any other kind of information, was originally created.
An effective implementation of a ‘Know Your Source’ strategy can provide positive and very practical business benefits:
The Ultimate Objective
Know your source exposure intimately from contract to group level.