Pricing Catalysts

What do you see as the main regulatory developments driving changes for reference and market data operations at investment firms?

Regulation continues to have a profound impact on financial institutions and their operations. That said, every regulation is different-with different goals, targeting different business activities, in different jurisdictions-so it is impossible to generalize on the ‘top' impacting changes. A consistent outcome is, however, that the length of a security or a customer record is getting longer and longer. Each new disclosure or regulation demands new reference data and fields.

The Foreign Account Tax Compliance Act, for example, requires declarations of US nationality and other documentation not previously needed in client onboarding, and requires a firm to establish whether a security creates a source of US income that needs to be reported, or if that security is grandfathered. Solvency II demands specific classification of instruments in disclosure templates so concentration of risk and solvency levels can be determined. French and Italian securities need to be classified as eligible for transaction taxes, while other securities need to be classified regarding whether shorting is allowed.

Sanctions against Russia require specific entities, their affiliates, and individual securities to be classified [by] whether they can be owned by investors. Firms will be required to change the way they operate to meet these regulations. Tactical processes to meet deadlines will need to give way to strategic changes in processes and operations to manage the impact sustainably. Regardless of the regulation, firms will need to source and manage the relevant content, ensuring it is fit for regulatory reporting and compliance purposes.

How are those regulations driving changes in the markets? What do you see as the end result for data operations once compliance is complete?

I see this as an evolving agenda, rather than one which ends with ‘compliance is complete'. Markets, customer needs, and business practices are all changing, and regulations will need to evolve with them. Regulation is a catalyst in terms of a firm's ability to monitor risk and capital levels accurately and, in many ways, regulations are driving best practice. Capital adequacy directives and the need for improved risk management are certainly driving the need for better data governance, integration, and management. Developing a sustainable infrastructure to capture and normalize transactional and positional data across the enterprise, and then link exposure to issuers and counterparties is an essential requirement driving enhancements in data management.

What challenges from risk or regulatory risk are at the forefront for Thomson Reuters in serving its clients?

Regulatory risk is certainly one of the biggest challenges impacting our customers and the markets as a whole right now, coupled with enterprise efficiency and holistic, high-quality data management. As a firm, we seek to add value to our customers when it comes to regulatory challenges. We are in contact with the regulators, review publications, participate in briefings and working groups, work with industry bodies, consult the experts and engage closely with our customers, sharing as much information as possible. We retain representation in Brussels and Washington to ensure we gain insights into the objectives of regulators and understand how it might impact financial entities. These groups are critical to creating our network of expertise that we draw on to design our data products.

When it comes to data management, we understand that our clients are burdened with disparate data, multiple vendor environments, complex business structures and operations. Our regulatory solutions are very much the result of customer, regulatory input and consultation as well as the ability to use the assets we have across the firm, such as our legal business, which has information on laws and regulations as it unfolds.

What is most likely to affect pricing and valuations in the immediate future?

Regulation and the need to comply play a key role when it comes to pricing and valuations. The need for transparency will continue, whether in the form of increased due diligence-mandated by auditors and regulators such as the Securities and Exchange Commission and Public Company Accounting Oversight Board-which leads to a reliance on pricing vendors, or the requirement for additional information beyond the security identifier and the price. We also see the daily price challenge process as important to the daily net asset value pricing function. Clients are looking for more real-time information before challenging a security, including inputs used to price the security, and market color sourced to support the price. The price challenge process remains a critical communication function between market participants and pricing vendors in calibrating fair value to market. Clients are also interested in price challenge metrics, including the number of total challenges for asset class types and number of changed or confirmed prices.

How is data management likely to change in 2015?

Looking back at the industry events I have participated in this year around the globe, regulation has been the consistent theme and will continue to be in 2015 and beyond. Firms will need to manage their deliverables to the regulatory agenda, while keeping a constant eye on the efficiencies they can bring to bear across the enterprise for data management. That said, and moving beyond the tactical response, I firmly believe true benefits lie in wait for those who do this well. A comprehensive, high-quality data management strategy across the firm can only serve to give greater returns on investments in data, create greater ease in delivering the reporting that regulations demand, and generate fresh insight to firms as they start to use improvements in risk analysis to drive their business-rather than simply to respond and mitigate.