Infrastructure issues in the securities industry: The case for a central counterparty for data management

Abstract

Collaboration and risk sharing through industry-sponsored centralised facilities, ie clearing houses, central securities depositories, payment and netting systems, and central counterparties, has been used extensively in the financial services industry. However, it has only been applied to the variable value portion of transactions (principally quantities, transaction prices and monetary values). This paper proposes the same techniques be applied, separately and earlier in a financial transaction's life cycle, to the matching and settling of the non-valued (referential) data components of these transactions. These data components comprise upwards of 70 per cent of a financial transaction's assembled parts. Faults in properly identifying this data, as well as mismatches that occur in separately sourced and assembled financial transactions that counterparties attempt to match prior to payment, are a large source of matching errors. The result is significant imbedded industry-wide operational costs, individual firm monetary loss and counterparty risk, and global systemic risk.This paper advises that a new facility, the Central Counterparty for Data Management (CCDM) be established to access and match multiple incoming sources of referential data at the pre-trade financial transaction assembly point, 'clear' this data through best-of-breed computer analysis, and 'settle' (distribute) industry accepted, CCDM-assured data sets to participants, making it available to be attached to the variable, value portion of the transaction at transaction assembly time. By doing so at the immediate front-end of a financial transaction's life cycle, significant improvements can be made in lowering operational costs, reducing transaction failure rates, and reducing operational losses resulting from data failures in the post-trade matching, clearing, settlement and reporting environment.