After a long, drawn-out battle there are often a clear winner, a few defeated souls and some unintended consequences. In the debate over implementing new regulations such as Dodd-Frank, EMIR, Basel III and others created in the wake of the 2008 financial crisis, the focus has often centered on the accuracy of the required cost/benefit analysis that often accompanied each new rule. Economists at the various regulatory agencies found themselves under fire for the assumptions and methodologies used in their calculations in preparing the CBAs.
As the dust settles and firms are now meeting the new reporting requirements, one of the greatest benefits not considered by either the regulators or market participants has been revealing itself. To report on their transactions, positions and risk exposures, the financial industry as a whole is undergoing a revolution in how it collects, aggregates and distributes its most precious resource: data. By taking advantage of simultaneous advances in Big Data and cloud technologies, financial services firms are seeing not only opportunities for cost reductions, but revenue generation opportunities as well.
Data standards such as the Legal Entity Identifier have motivated firms to aggregate client activity data across business units, giving them the coveted 360 degree customer view. At the same time, noncompetitive customer information is likely to be outsourced to cloud-based services such as the Depository Trust & Clearing Corp. client reference data service or the Genpact-Markit centralized client onboarding solution for the capital markets. Both of these services were announced in late 2013 to help firms meet regulatory Know Your Customer requirements. Other examples of cloud-based shared services that were spawned from regulatory pressures include Markit Credit Centre and Traiana CreditLink for pre-trade credit checks, and the Nasdaq OMXs FinCloud R3 Storage Solution and Bloomberg Vault to help firms meet record requirements such as Securities and Exchange Commission rules 17a-3 and 17a-4.
Customer data is proving to be a prime source of new revenue opportunities. Firms are using semantic technologies like RDF, SPARQL and OWL to integrate unstructured and semi-structured data sources such as news feeds and social media, with their existing data being stored in relational databases. By applying predictive analytics and visualization technologies to this data, traders are able to both identify new investment and risk mitigation strategies for their clients. Some firms are applying tools such as Complex Event Processing to give them real-time feedback on how market conditions are affecting their overall exposures. The combination of structured and unstructured data with CEP and predictive analytics is giving some firms advantages in decision support for both automated and manual trading. Some of this technology is being used for internal monitoring to keep firms from becoming the next Knight Capital.
This better data is also helping the traders and their IT counterparts. Existing and proposed regulatory requirements are forcing firms to address data quality and software testing issues that were often only looked at after an error was detected. These same technologies are also being applied to meet regulatory stress testing requirements. Stress testing is another example of how regulations have motivated firms to examine their data at an enterprise level.
Finally, quality of data is being used as marketing tool to retain and attract customers. A key component of establishing the institutional credibility required by most investors is the ability to demonstrate timely and accurate reports. As the proliferation of the chief data officer position in the financial industry shows, regulation has helped moved data to the boardroom as well as the trading floor.
Speaking of regulatory debates, in my Research Desk column last month, I referred to the Modern Markets Initiative as a lobbying organization. An MMI representative contacted me to clarify that they do not consider themselves a lobbying firm. The representative added that MMI is in the process of registering as a 501(c)(4)and educating and engaging public audiences on todays modern markets-and being a resource to the media, industry leaders, lawmakers and regulators-is the groups main focus.
On a personal note, I recently left the financial services industry research firm Aite Group to pursue other interests. I will be splitting my time between academia and being a consultant with Brook Path Partners, the firm I cofounded more than 12 years ago. A better, more informed group of analysts than those that I had the pleasure of working with at Aite you will not find anywhere.