With ever-changing commercial models and more stringent licensing agreements, market and reference data costs and usage compliance are big focus areas for most financial institutions. However, while keeping costs down is a priority, getting data usage under control can prove a significant challenge.
All capital market participants depend on market and reference data to fuel their investment operations. When data providers apply changes to their licensing agreements, the effect on financial institutions can be significant. From increasing costs, compliance risks, or even the threat that the data tap gets turned off – the potential impact on the business is very real.
Several of the commonly used data vendors have recently taken steps to make their usage agreements more stringent. Compliance investigations, or a “letter-of-understanding”, are becoming increasingly common. Firms are being forced to get a grip on their data usage, or risk a break in operations and a 6-digit “back-billing” fee.
The challenge of understanding data usage and costs
Pressured to keep operational costs down, and faced with compliance risks, firms need to be able to adapt quickly to new licensing agreements. In essence, this means getting vendor data usage under control at an enterprise level. Easier said than done, this typically represents a significant challenge for three main reasons:
Inefficient sourcing Market and reference data is typically sourced at the business unit level with disparate sources of data residing in multiple systems across the enterprise. This approach is highly inefficient, with overlapping data contracts, and multi-hits resulting in unnecessarily high costs.
Information about data usage and lineage is not easily accessible Information relating to usage tracking and monitoring is typically spread across multiple business units and hidden within technical logs.
Gaps in data ownership, standards and enforcement processes Without mature data governance, getting this firm-wide view of data requirements and usage is extremely difficult. Unless each data request is centrally recorded and its usage tracked, it becomes very difficult, if not impossible, for financial institutions to prove that they are complying with the usage and distribution terms of their licensing agreement.
When data usage and costs are unknown, several “hidden costs” can also occur, including:
a) Difficult contract negotiations with vendors Not being able to relate data provenance and usage exposes the firm to difficult contract negotiations.
b) Difficulty in switching vendors The lack of transparency around data usage makes it very difficult to make an informed decision about whether or not it makes sense to switch to a different data provider. As firms become more dependent on a particular vendor, they become increasingly vulnerable to any future vendor changes.
c) Unrealised savings Savings are often not realized because the potential scale of savings is unclear.
d) Redundant data activities In the absence of a centralized data sourcing strategy, the same activities around sourcing, validating and distributing the data are often performed several times over, driving up operational costs.
e) Operational risk Data vendors have demonstrated several times that they are able to turn off the data tap in the event of a compliance breach, with significant financial and reputational consequences for the business.
f) Impact on growth & competitiveness Many of our clients look to source new data feeds to create new unique products or when expanding into new markets. Bringing on new feeds has a cost impact and increases the complexity of compliance risk. Staying on top of changing data requirements (assessing, contracting, but also removing unused data) and changing licensing agreements is key to driving growth and competitiveness.
Without reliable information linking usage metrics and lineage, firms are unable to challenge the invoices received. Potential savings are often not realized because the data usage and potential scale of savings are unclear.
Taking control with a strategic approach to sourcing and distribution
The challenge isn’t just to keep the data invoice down; over the next few years, the challenge will largely revolve around the need to react promptly to changing data requirements and licensing agreements, while also limiting the cost impact.
To prepare for constant change, firms should design and plan for a consistent and compliant way to source their market and reference data, while enforcing data governance standards. The firms who come out on top will adopt an enterprise-wide strategy, establishing a centralized repository of data that is accessible across the firm.
Firms who establish such a global data management organization not only achieve maximum data sourcing efficiencies and have a reduced reliance on terminals; they are also faster at assessing new data requirements, identifying redundant data requests, and responding to changes to licensing agreements. This centralized approach also ensures compliant usage, helps with the monitoring of vendor SLAs and provides complete transparency over data usage at the account, business unit and group level.
Finally, establishing a centralized approach to data sourcing and distribution sets the foundation for a more strategic approach to data management generally. The business case should, therefore, go beyond vendor data cost optimization and be extended to support further data initiatives across the organization, addressing - for example - data quality, data lineage and data governance.