In Every Challenge Lies an Opportunity

The struggles firms went through to understand their exposure to Lehman Brothers have become the stuff of legends in data management circles, and hardly a conference or industry gathering goes by without somebody referring to the fallout from the bank's collapse in 2008.

Since then, the introduction of new regulations and the development of the legal entity identifier have helped to raise standards of counterparty risk management. However, the situation is still unsatisfactory, as was highlighted in a report on the subject by an international group of market supervisors earlier this month.

The report concluded that: "Five years after the financial crisis, firms' progress toward consistent, timely, and accurate reporting of top counterparty exposures fails to meet both supervisory expectations and industry self-identified best practices. The area of greatest concern remains firms' inability to consistently produce high-quality data."

There are many causes for these shortcomings. Some practitioners explain they face serious challenges sourcing the data they need from vendors. They say it is impossible to rely on one vendor for all their counterparty data needs and rather than expanding their coverage, many data vendors are competing on the same attributes. They complain that while new regulations are putting an emphasis on funds, this area in particular is poorly served by data vendors.

Others suggest the problem is more a question of maintaining good counterparty data, at a time when the budgets of operations teams are being reduced. While firms would traditionally employ a large operations team to manually review counterparty data, budget cuts are making this impossible and, as a result, firms are increasingly turning to technology vendors for data quality tools that can help them automate the validation process.

Whether the counterparty data problems facing firms are a question of data sourcing or data maintenance, it is clear that, with regulators breathing down firms' necks, there are many opportunities for data and technology vendors to help.