Legal Entity Data Management: More than an Afterthought

by Virginie O'Shea Apr 22, 2012

Legal entity data has come a long way. Virginie O’Shea, an analyst at Aite Group, explains the regulatory and business drivers behind new entity data management initiatives as financial institutions ramp up resources and technology to support a more efficient entity data management operation.

The industry’s perception of the importance of the management of legal entity data has come a long way since Aite Group first covered the space back in August 2006 (Managing Risk Beyond Market Data: Practical EDM Strategies for Improving Legal Entity Information). At that point in time, many firms were just beginning to explore the area and a few had been compelled to kick off programs designed to enable the centralized management of counterparty and client data. These programs, however, were primarily second tier investments and the drivers behind them from a compliance and risk perspective were largely related to anti-money laundering (AML) considerations and meeting the anti-terrorist financing requirements of regulations such as the U.S.A. Patriot Act. Any business benefits were essentially an afterthought.

Today, there are much more compelling reasons for financial institutions to invest in a robust legal entity data management environment. Not only are there more regulatory drivers on the scene (a result of the fall of Lehman and the financial crisis in the interim period), firms are also keen to steal a march on their competition by obtaining a single view of their customers and to be much more proactive in supporting the risk management function via a consolidated view of their counterparty interactions.

On the regulatory front, there are a whole host of new reporting requirements related to areas such as systemic risk monitoring, recovery and resolution planning, OTC derivatives data transparency and transaction reporting under the next incarnation of MiFID in Europe, to name just a few. For example, in order to meet the reporting requirements under the incoming recovery and resolution regimes in Europe and the United States, firms will need access to consolidated data about their counterparties on an on-demand basis in order to prove to regulators that the unwinding process could proceed in an orderly fashion (read more about these requirements and their relevance to entity identification standardisation in Aite Group’s report Legal Entity Identification: The Long and Winding Road Towards a Global Standard).

There are certainly many regulatory drivers for investment in the management of legal entity data, but whether these drivers are considered in a holistic fashion is another matter entirely. For example, Aite Group expects that firms aiming to comply with the Commodity Futures Trading Commission (CFTC) July 16, 2012 deadline for the reporting of OTC derivatives data to trade repositories using a prescribed legal entity identification (LEI) standard will view this requirement as a cross-referencing exercise. Rather than investing in their legal entity data architectures, firms will therefore instead opt to build or buy in a solution to be able to report using the new identifier (whatever form it takes).

It is also not immediately obvious in many other pieces of regulation how the incoming requirements will impact the counterparty and client data space directly. The barrage of regulatory requirements affecting so many disparate parts of financial institutions’ businesses does not therefore necessarily translate into a cut and dry business case to take to senior management at the outset for investment in this space.

On the business side of the coin, making the client onboarding and account management process as painless and seamless a process as possible is certainly a compelling argument for investment in customer data management systems in general. Nevertheless, there remains some reluctance on the part of firms to go down the centralized data management route because of other priorities taking attention away from this type of internal infrastructure investment. Preparing for a new clearing environment is one such priority. 

Even though a more robust data infrastructure would actually better support the risk management and client support requirements of the clearing process, firms have focused on the main challenges of technology support for the process itself (such as connectivity to clearing counterparties) due to pressing deadlines.

The visibility of legal entity data management may have come a long way over the last six years, but there is much still to be done. Many firms, especially at the smaller end of the scale, continue to rely on customer relationship management (CRM) tools such as Salesforce and data workarounds in order to manage this data and meet their reporting requirements.

Aite Group expects that once pressing regulatory deadlines pass and the dust settles, firms will be compelled to revisit their management of client and counterparty data for business and efficiency reasons. Legal entity data management teams or individuals responsible for this area will appear in firms that do not currently have such a function and spending on technology to further automate the space will gradually rise.

* Aite Group’s upcoming report on trends and spending within the arena of legal entity data management will highlight the progress that has been made thus far and the pain points being experienced by a range of buy and sell side firms active in the capital markets. It will also signal the priority areas for investment that have been identified by these firms for the next 12 to 18 months and which regulatory requirements have been flagged as relevant to the data management function.

 

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Image of Virginie O'Shea

Virginie O’Shea is an analyst with Aite Group covering data management and post-trade technology. She brings more than eight years of experience in tracking financial technology developments in the capital markets sector, with a particular focus on capital markets and data management. Ms. O’Shea has spoken at industry conferences including Sibos, FISD events, and ISIPS.

Most recently, Ms. O’Shea was managing editor of A-Team Group’s flagship publication, A-Team Insight, where she covered financial technology from the front to back office, including trading technology, market data, low latency, risk management, regulatory impacts on IT, and reference data. During her time at A-Team, she was heavily involved in planning A-Team Group’s risk and data management events and creating multimedia offerings, including podcasts, webinars, and video interviews. Prior to her appointment at A-Team, Ms. O’Shea was group editor of Investor Services Journal and Alternatives magazine. Before that, she was editor of STP Magazine and online service stpzone.com, where she focused on financial technology in the capital markets.

Ms. O’Shea holds a Master’s degree in English Literature from the University of Edinburgh.

 

Comments

Comment: 

By creating the right data structures, organisations can minimise the impact of adding Legal Entity Identifier data, and maximise the benefits.

The cost of putting in place a managed data solution for LEI (and, by extension, for other Party identifiers like TIN / EIN) can probably be spread across several different projects.  OTC reporting, FATCA and Solvency II are just 3 regulatory driven changes that require consistent (and potentially consolidated) party data.  If each takes its own approach, not only will the cost be multiplied, but there will be a subsequent overhead of reconciling and consolidating the data (again...!).  A well designed solution will ensure that there is only one relevant set of Party data, that it is cross referenced to existing sets of Party data (this should fall out of the consolidation process) and that the core data and cross references are available to all of the reporting and consolidating processes that require it; including internal risk reporting as well as external regulatory reporting.

The advent of the LEI is therefore an ideal opportunity to push for (and cost justify) a managed Party data solution.

For a little more detail on this approach see http://www.citisoft.com/content/whos-who-how-leverage-lei-investments-fatca-compliance

Comment: 

Dear Virginia - excellent commentary.  A question around your comment "Rather than investing in their legal entity data architectures, firms will therefore instead opt to build or buy in a solution to be able to report using the new identifier (whatever form it takes)" .  Would it not be the case that by mapping to  the new identifier,enabling easy identification and consolidation  of customer information,  a firmcould achieve the same results as building a whole legal entity data structure? Thank you.