CDOs Elevate Weighty EDM Agendas

Data volumes—for both pre-trade and post-trade activities—have skyrocketed in the last few years. Technology advancements mean firms can process more and more unstructured data in addition to the traditional market feeds and reference data sources. The wave of post-financial crisis regulations—including the Basel Committee on Banking Supervision’s BCBS 239, Basel capital adequacy requirements, the Markets in Financial Instruments Directive II (MiFID II), Solvency II, and the US Dodd–Frank Act—means both the buy and the sell side must demonstrably collect, understand and report substantially more data than ever before, while ensuring optimum data quality. Meanwhile, data costs are exploding, just as increased compliance costs put pressure on firm’s operating margins.

All of this requires increased automation of data management and sophisticated data policies, strategies and processes, with a holistic view of the entire organization. “Without a doubt, the focus on more effective risk and regulations ends up as a focus on effective data management. In order to deliver on all the regulations, you need a handle on data—throwing bodies at it and managing on spreadsheets is not sustainable,” says Marion Leslie, managing director of pricing and reference services at Thomson Reuters.

The Rise of the CDO

Facing these data-centric pressures, more and more firms have chosen to tackle the issues by appointing chief data officers (CDOs) to oversee data strategy, governance, quality and compliance. Firms throughout the industry are at different stages in an evolution toward more unified data management. But their success often hangs on how much influence and seniority the CDO has within the firm to press their agenda and drive decision-making. 

“Is data identified properly, accurately and consistently? Is it accessible from a business perspective? Is there a directory? Is there trust in the data quality and is the source well maintained? The way to ensure that is through business process, and the CDO can have their feet in both camps, influencing the way the business and technology interact to meet business needs.” John Bottega, EDM Council

Historically, data management was perceived as an IT issue, with data management professionals reporting to the heads of technology. However, there is increasing consensus that data is a business challenge, with multiple stakeholders throughout an organization, says John Bottega, senior advisor at reference data industry association the EDM Council, and former CDO at Bank of America, the Federal Reserve Bank of New York, and Citigroup. 

When data management is relegated to a subset of technology, CDOs can lack the true empowerment to effect change, finding themselves serving as little more than an evangelist. However, an EDM Council survey conducted in 2015 found that the CDO role is transitioning out of the technology reporting line, to become more a peer of technology. “Ideally, the CDO would report to the COO, having the broadest view of operations across the organization,” Bottega says. 

When named Citigroup CDO in 2006, Bottega was the industry’s first CDO, and he says the industry and the role have come a long way since then. “Ten years ago, the industry was feeling its way around, people were trying to figure out the difference between a chief information officer and a chief data officer. In the past 10 years, the amount of data has increased 100-fold—we need an ability to process that quickly, and nobody does it better than technology,” he says, noting that the key difference between the two functions is that the CDO is focused on content rather than dissemination. “Is data identified properly, accurately and consistently? Is it accessible from a business perspective? Is there a directory? Is there trust in the data quality and is the source well maintained? The way to ensure that is through business process, and the CDO can have their feet in both camps, influencing the way the business and technology interact to meet business needs.”

Executive buy-in is key. “If data management is in the CEO’s lexicon, you will see a shift in the firm,” says Bottega. But one of the biggest challenges is that data management is not always perceived as being as urgent as something like information security. “Data management is more about hygiene and discipline—if you don’t do data right, it will slowly deteriorate the quality of data, so reporting will not be accurate,” he says. The business case that reporting and decision-making will suffer if data quality is not maintained must be made clearly and consistently to executive management, he adds.

The CDO is now a well-established role at sell-side firms, and as regulators increase their scrutiny of the buy-side—and as asset managers seek to get a handle on the massive amounts of data they must collect and analyze for fund-level and market-risk management, and potentially leverage it for new business opportunities—it is increasingly common on the buy side as well. 

“Asset managers today have access to more data about themselves, their customers and the market than they have ever had. Now firms must figure out how to make the best use of that data to grow their business, and that is where the CDO comes into play,” says Todd Moyer, executive vice president of global business development at regtech vendor Confluence, which predicted the rise of the buy-side CDO two years ago, and now predicts that 2017 will see a tipping point for achieving long-sought efficiency through automation in the back office.

Starting From Scratch

After reviewing CDO remits, focus and seniority levels throughout the industry, State Street appointed its first CDO, James Hardy, just over a year ago, reporting to the firm’s chief administrative officer, who oversees cross-organizational initiatives, including data strategy. Hardy agrees about the importance of not viewing data management as an IT problem. His goals are threefold: to improve data governance, create master datasets or a single source of the truth, and implement enterprise-wide initiatives leveraging this data. 

The data governance piece requires injecting cultural change and understanding of where data is and what it means. This is often preached as a magnanimous and theoretical goal, and is most often attempted with regard to new initiatives, Hardy says. But State Street is also trying to understand what has been done in the past, which is important for regulatory initiatives such as risk data aggregation requirements under BCBS 239. “The challenge is how you demonstrate value—people think it’s an IT problem, and it is hard to get a business person to understand where data goes. Gaining momentum to demonstrate value beyond where regulators feel good is tough,” he says.

Hardy’s early initiatives include revamping State Street’s anti-money laundering (AML) and know-your-customer (KYC) infrastructure, establishing a single source of truth of the customer record, and making the fastest changes with the highest quality. But creating a single source of the truth when there is no singular enterprise truth to reference against is more complex than people understand, and requires diligent work from data quality teams who triangulate multiple sources and use judgment to assess which record constitutes the truth, he says.

However, he adds that creating master data sets and a single source of the truth for applications across the organization to consume is seeing significant interest and adoption. “If you tap into the middle of the organization—where the work is done—and get people to understand the better outcome of their own work, there is a greater sense of ownership and collaboration. If you tap into that, it’s easier than I thought to drive change,” he says. In fact, his greatest challenge on the master data side is that momentum is building too fast. “There is a gravitational effect—people see the value and everyone wants it. If you are replacing many independent things with one new thing, it must work well.”

As data is increasingly viewed as a key strategic asset, many firms, especially on the sell side, have moved beyond having a single champion of data best practices, appointing CDOs to each business unit under the global CDO. At State Street, which is in the earlier stages of its evolution, Hardy is first looking to hire regional heads of data strategy and governance that report to him, and regional business executives to embed data governance approaches into an overall risk and control framework.

Vendor Impact

The rising prevalence—and responsibilities—of the CDO is changing the communication line between vendors and who they talk to within financial services firms, while also giving firms some increased purchasing power. Vendors such as Thomson Reuters and Asset Control may continue to have relationships with business individual lines, whose data needs can differ greatly, but CDOs or their surrogates now sit in on discussions. From a purchasing perspective, it makes sense for different business lines to negotiate together, and a CDO has an overview of data vendor relationships that didn’t exist before. But the CDO’s main focus is less on data purchasing than on ensuring best practices, and making sure data quality and processes satisfy the regulators.

Connectivity and scalability are important today, as firms move away from silos, says Thomson Reuters’ Leslie. Individual desks still have their own requirements and drive the roadmap, but firms are seeking to leverage CDOs to manage data across the firm in a scaled way so they can roll up their global exposures to currencies and entities across business lines—both for regulatory compliance, and so they can make better business decisions, she says, adding that Thomson Reuters’ machine-readable Permanent Identifier (PermID) symbology enables firms to tag a wide variety of entity types to track enterprise-wide relationships between organizations, instruments, funds, issuers and people. 

Rather than seeking large-scale, enterprise-wide projects, the CDO tends to focus more on regulatory or operational efficiency use cases, and can see where a specific use case might transfer well from one department to another, says Mark Hepsworth, chief executive of Asset Control. “We see situations where if we’ve started something for one department—for example, feeding validated pricing data into a risk system—maybe someone wants to use that same data for a valuation or accounting system as well,” he says. “The CDO helps guide the overall vision and encourages this sort of common use, but they are generally not going to transform the whole organization with one project.”

Indeed, the job of CDO is something of a thankless task, says Octavio Marenzi, CEO and founder of capital markets consultancy Opimas. “It is very difficult to coordinate the data requirements of different business units,” to cut across business lines and manage exploding data costs, he says. “It is difficult to have a centralized function imposing an architecture on business units—it’s an enormous and expensive undertaking, and eliminating duplication slows down development.” 

For example, a corporate bond trading application and an equities trading system both consume similar customer and reference data. “If I have to rip the data out of those apps and create an internal data bus, it’s an enormous undertaking, and it’s risky—will we save money, and do we want to run the risk?” Marenzi says, noting that a centralized data architecture to anticipate future regulatory requirements is essential, whereas most CDOs today are focused on documentation—figuring out what they have, and who are the consumers of different data. “For transaction reporting under MiFID II, firms have to send information to regulators, including the trader’s national identification number, which has to be pulled from human resources systems. No one would have envisioned they would need that a couple of years ago.”

EDM Vision vs. Reality

While the goals of improved data quality, governance, and automation might be the same at different firms, the architecture methods may vary. While some firms may look to create a single repository, others might use semantic technology to create an abstracted middleware layer. Bottega says there is no right or wrong way to get there, but the role of the CDO is to define the requirements and make sure technology adheres to them.  

Despite the growing acknowledgment of the importance of automated enterprise data management to meet compliance needs and lower total costs of ownership, there is a big gap between where firms are and where they would like to be in terms of data management. In financial services, some 95 percent of financial institutions agree that significant benefits can be gained through a harmonized approach to data management for multiple regulations, but only 12 percent currently have a fully strategic approach, according to a recent report commissioned by Thomson Reuters, Harmonizing the Approach to Regulatory Compliance.

Bottega agrees that there is still a long way to go before firms have reached the end goal of enterprise-wide data management and a unified data architecture. But the industry has made massive strides in the right direction over the past decade since he was its first CDO. “We’ve been doing data management for 30 years. It is unrealistic to think banks will fix everything in two years. The first thing is raising awareness; the second is deciding what the targets should be. It takes a while to unwind legacy architecture, but the industry is on the right path,” he says.