Forum. dublin. Benchmark Data Governance: Understanding the Costs and Risks SUMMARY

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1 Forum dublin Benchmark Data Governance: Understanding the Costs and Risks RIMES hosted its first Dublin forum in July. Clients and prospects were invited and a good cross-section of buy-side firms and functions was represented. The aim of the forum was to promote open discussion and transfer of ideas about the many challenges of managing index data and benchmarks. SUMMARY Following a brief update on RIMES services, the Dublin forum considered the findings of some independent research managed by Deloitte. A specialist team of Deloitte asset management consultants conducted the survey, believing there to be insufficient research available on the management of index data and benchmarks within the buy-side. The Deloitte study is important to RIMES and its clients because it considers the total cost structure of data management within global asset management firms with a focus on non-license fee costs. The study recognizes that margins are under pressure throughout the industry: all asset management firms are required to achieve more with less. The survey entailed in-depth on-site engagements with 13 major asset management firms, each lasting around three days. Respondents comprised a representative industry sample managing about 5% of global AUM, including fixed income and equities. The majority of respondents were passive fund managers. Attendees ANIMA Asset Management Citi Irish Life Investment Managers Kleinwort Benson Investors Mediolanum Pioneer Investments Prescient Investment Managers The research confirms that many firms recognize the unique challenge of managing an increasing volume of data and benchmarks. Some are addressing this at executive level as a corporate governance issue. However, few firms have teams dedicated to managing index data and benchmarks individuals typically spend only part of their time managing this data. Deloitte therefore measured and reported headcount as full-time equivalents (FTE) or percentages of FTE. The study focused on two essential functions: Data governance: data acquisition, monitoring and control, and compliance management Data processing: data collection, validation, transformation, storage and distribution. Although processing and governance were treated separately for the purpose of analysis, in practice they are inextricably linked. It is impossible to implement strong data governance without robust data processing RIMES Technologies

2 Findings of the Deloitte study The more complex firms have an average of 7 FTEs working on benchmark data management 53% of data processing activity involves data collection and validation many firms are therefore evaluating alternative processing models to reduce costs and boost efficiency 42% of study participants in firms managing over $200B in assets do not have regular processes and procedures to control data usage, so there is scope for rationalization and cost control. "We just grit our teeth and sign the check. You know, it s a business imperative." Index data and benchmarks driven by the business Benchmarks are growing in both volume and complexity. However, the Deloitte study suggests data management costs are more closely correlated to data complexity than volume: Firms with 1-10 sources require at least 3 FTE to manage the data Firms with sources require at least 4 FTE to manage the data Firms with more than 20 sources require at least 7 FTE to manage the data. Firms source index data from a combination of data vendors and integrators. Deloitte defined a source as a distribution channel, which could be a vendor or an integrator. The majority of FTE are involved in collecting, validating and transforming the data before it is used in business applications. Many asset managers are keen to rationalize benchmarks to reduce costs and boost efficiency. However, this can be difficult as indexes and benchmarks are often specified within a mandate. Although a firm may believe it is paying too much for data with only limited use, the asset manager does not always choose sources: I mean, to some extent the sources are often not the choice of the asset management, you know, the benchmark is imposed on the manager by the prospective client often you just don t have a choice. 42 % 42% of study participants in firms managing over $200B in assets do not have regular processes and procedures to control data usage However the total costs of the data are often not apparent until the contract is signed and the data is on board. Total data costs often become apparent in the context of fund profitability: Hang on here a second. Look at that cost. We are not going to make any money on this client. Index data and benchmarks are accepted as an unavoidable cost of being in the investment management business: We just grit our teeth and sign the check. You know, it s a business imperative. All firms need to have a deep understanding of data and the costs of managing it in order to 2

3 reduce costs and tighten control. They need to understand what data they have within the firm and potential uses permitted within the prevailing license agreement. For many firms this is a constant struggle. Aligning benchmark acquisition with business needs The Deloitte study shows that firms with 20 sources of benchmarks or more have an average of seven FTE working in data management. Over time, having a high number of FTE managing data increases a firm s cost base and compresses its profit margin. Good data governance is essential to align benchmark acquisition with business needs. Participants acknowledged that controlling data costs is a continuing challenge: index vendor agreements vary enormously and vendors are showing increasing interest in what data is being used for: All the market data vendors in all parts of the market are looking much more at what the business does with the data. They re starting to segregate their contracts. Although some index vendor agreements are more flexible than others, participants agreed that changing indexes or benchmarks was often unfeasible: "All the market data vendors in all parts of the market are looking much more at what the business does with the data. They re starting to segregate their contracts." To learn more about RIMES or to participate in future forums, marketing@rimes.com The difficulties involved with changing your benchmark are immense. You know, changing prospectuses, for example it s pervasive. In practice, some data licenses permit access to several hundred benchmarks when only a fraction of that number is necessary: So you re buying the department store when you want to buy a fridge. Several participants have initiated projects to improve data governance but it was universally acknowledged that good data governance requires companywide commitment and perseverance: We are working towards the point where, you know, every fund will have a benchmark. We do, to a certain level, but we do not have a process for costing. Decommissioning redundant benchmarks is a universal challenge, particularly in global firms. Firms can easily continue to pay for data that is no longer required. Good data governance also requires transparency and accountability: So every year that the bill comes through the door, I say, this is not mine and the head of the strategy says, well, this is not mine and we have a fight about where it s allocated. Index data validation, TRANSFORMATION, and quality assurance The Deloitte study found that firms spend twice as much resource collecting and onboarding new data sources than they spend validating them. However, s noted that validation and transformation also consume a lot of resource. It was agreed that expert partners could play an important role in helping firms overcome the operational difficulties of multiple data feeds and formats. Using a managed data service can help to insulate a firm from technical change and help improve data governance. Participants spend a lot of time monitoring and validating data to ensure that it is timely and in the right format. Content provided by index vendors has to be trusted but there can be issues with delivery timing: 3

4 If it s coming directly from the index owner or vendor, you know, what are we going to compare that to? We should be able to rely upon the vendor-provided data. The only issues that might arise that would compromise that are a failure of a file delivery or, you know, a delay in the delivery of the data. There is general concern about increasing levels of resource necessary to validate data and prepare it for use in business applications: I ll be honest, I m shocked at the data validation, how low it is, and I can t believe it s that low the validation process would be, certainly on the performance team, it s two people full-time: one on equity and one on fixed income. External regulations are having a major impact on all aspects of data management with a general need for more transparency and proof of benchmark provenance. This challenge is likely to increase over time: I strongly suspect Solvency II will generate a lot of insurmountable problems come and may indeed change how the monies are managed. Participants agreed that managing data quality is closely related to controlling its use but control comes at a cost: You have put another layer of administration on top of that to be able to - it just gets more and more complex and to be able to actually rely on your report and let the business keep functioning is this huge expense. The forum concluded that firms could achieve more by adopting a holistic approach to data management. Education is vital: Education is one way to do it. When you take people on board, during their introduction or induction process you explain to them that the data is not theirs. It s not ours. We rent it. You can download more RIMES Forum synopses from our website /news "I strongly suspect Solvency II will generate a lot of insurmountable problems come and may indeed change how the monies are managed." Conclusion Our first Dublin forum shows a keen awareness of the importance of good data management and data governance in particular. Strong data governance is essential to ensure they align data acquisition with business needs while remaining compliant with license agreements. The forum suggests that firms recognize the importance of checking and validating index data and benchmarks, and also the potential downside of not doing so, reflected in increased operational, financial, and reputational risk. Although firms may wish to rationalize sources, benchmark acquisition is often driven by mandates making this impractical. The Deloitte research highlights that many firms are questioning whether inhouse validation is really a good use of their time and capital. Data governance is moving rapidly up the corporate agenda in the buyside community. In the post-financial crisis environment, all asset managers are being forced to navigate an increasingly complex regulatory framework and demonstrate strong management practices for key investor information. Meeting regulatory requirements is costly and time consuming, so having a good handle on data management costs has never been more important. It was agreed that most firms are better at procuring and adding data than they are at monitoring its use and decommissioning redundant sources. As volumes of index data and benchmarks increase, so do license costs and the overheads of managing the data. With margins under pressure, firms need to invest in data governance to align costs with business objectives. RIMES continues to drive industry best practice for index and benchmark data management. Our fully managed services help to maximize data quality and optimize efficiency. We also provide firms with the tools to improve their data governance, and increase transparency, which is necessary for both regulatory reporting and effective cost management. We would like to thank all participants for their enthusiastic contributions so far and look forward to engaging further with all of you in the future. 4

5 About RIMES RIMES Technologies Corporation was founded in 1996 in New York City specifically to meet the specialist data needs of the buy-side. The company was a pioneer provider of managed data services, using cloud-based technology to deliver highly customized financial data over the internet. Providing world-class data, supported by first-class service remains a prime focus of RIMES today. The success of RIMES reflects a unique practical approach that combines the right technology with the best people. Our suite of services are designed, delivered, and supported by an expert team recruited from the heart of the industry. As a global company, RIMES serves over 200 institutions in 36 countries. RIMES offers several solutions ranging from data processing to data governance. RIMES Benchmark Data Service provides index and benchmark data in a format that is ready for use in third-party or proprietary client applications. RIMES Reference Data Service helps buy-side firms optimize data services to cut costs and boost efficiency. And RIMES Data Governance Service enables firms to monitor data use, tighten control and maintain compliance. Banking & Finance 2011 B&F ICT Innovation Award RIMES Technologies All our solutions are fully managed and deliver more than 500 data sources from over 100 data vendors in one single, fit-for-purpose feed. We currently feed data into more than 30 third-party data warehousing, risk, performance and compliance solutions, and many in-house systems. We enable buy-side firms to benefit from a world-class data operating platform without a major investment in people or technology. Firms that choose RIMES can achieve more with less. RIMES has earned several industry awards over the years: the Inside Reference Data Award for Best EDM Initiative, the Banking & Finance Award for Innovation, the Best Product Implementation at a Buy-Side firm and Best Data Provider to the Buy-Side the latter for the 7th consecutive year at the Waters Buy-Side Technology Awards. North America New York (Headquarters) 84 Wooster Street New York NY Seattle 1700 Seventh Avenue Seattle WA Boston 101 Federal Street Boston MA EMEA London No. 1 Cornhill London, EC3V 3ND, UK +44 (0) Paris 13 avenue de l'opéra Paris, France +33 (0) Nicosia Gerasimou Markora 3 Nicosia 1075, Cyprus Asia Pacific Sydney Australia Square 264 George Street Sydney, NSW 2000 Australia +61 (0) Shanghai China Insurance Building, Suite E. Lujiazui Rd. Shanghai, China marketing@rimes.com 5 Find out more at /what-we-do