REUTERS/Tony Gentile
FINANCIAL INFORMATION –
THE CHALLENGES AHEAD
June 2014
FINANCIAL INFORMATION – THE CHALLENGES AHEAD – JUNE 2014
Financial Information –
The Challenges Ahead
The last few years of upheaval in financial services
have radically shaken the industry. As part of its
commitment to continuous engagement with
market participants, Thomson Reuters recently
brought together a number of senior professionals
in EMEA to find what out what issues are dominating
their agenda and how they see market forces and
innovation shaping their world. The individuals
who participated in this process are engaged
in providing operational infrastructure for both
buy- and sell-side firms, all of which are active
participants in the global markets. This document
captures the views expressed so far by this group
on the three main areas which were seen as being
of particular concern:
REUTERS/Tony Gentile
• the changing business environment
• the economics of financial information
• strategic responses and technology
The Changing Business Environment
It is clear that financial services have entered an era where operational strategy and planning must be driven for many firms, not exclusively
by a perpetual expectation of growth, but by the challenges of creating compact, nimble and efficient enterprises. This change represents
a major paradigm shift for the industry. A generation of market professionals have grown up taking for granted the underlying need
to increase scale. Whether it be growth in headcount, increased number of locations or more products, the trend has been for bigger
enterprises with wider reach and increasing demands. Now, however, this growth in size cannot be simply assumed, so many firms are
undertaking major strategic re-appraisals of their organisations.
Why this shift?
We do not have to search far to find the reasons for this change. The experience of the credit crunch and the losses that followed have led
to a reassessment of the operating model of many enterprises. While some market observers may initially have believed that the events of
2007/8 could be seen as a ‘readjustment,’ it is now accepted by many financial industry professionals that the sector has in fact entered a
new age with very different rules, norms and expectations.
What will the new enterprises look like?
There is, as yet, no clear model of what enterprises will look like in this new age, and this presents problems for those tasked with building
and managing enterprise infrastructure. Each must provide a service environment which is appropriate and cost effective, at a time when
the scale of the business, its reach and component parts are, in many cases, yet to be finalised.
A number of firms are clearly still engaged in restructuring which includes rationalising non-core activities. This exercise is not the emergency
stabilisation necessary after 2008, but the more complex task of re-shaping enterprises for the new era. Such a change necessitates refocusing
business units and, in some cases, moving out of business areas completely – not because they are economically unsound, but because they
are no longer core to the new enterprise.
In this fluid situation it is still unclear what the requirements of such reformed firms will be for financial information, not only in content,
but also in terms of delivery, applications, pricing approaches and contracts. What is known is that, as a major component of enterprise
infrastructure, financial market information will have to continue to adapt to this new world.
FINANCIAL INFORMATION – THE CHALLENGES AHEAD – JUNE 2014
The Economics of Financial Information
The challenges of the new business environment have necessitated a thorough review of all aspects of enterprise infrastructure, with the
goal of establishing operational services which are appropriate to the emerging new structures in scale and cost. Financial information is
one element which has been examined in this review, across a number of industry sectors, both buy-side and sell-side. An example of this
process in action may be seen around data licences.
Rationalisation and allocation
Where, in the past, enterprises had grown quickly and through acquisition, the resulting landscape of multiple teams with complex
information requirements inevitably led to overlapping data licences. Realising cost savings through rationalising these licenses has been
one of the first areas addressed in the drive for efficiency.
However, as the industry moves into the next phase of restructuring, the focus has shifted to finding a way to make the economics of
information delivery and management match the business economics of enterprises. At the same time, firms need to innovate both in
technology and products.
One response to this set of challenges which is now gathering momentum is to allocate all costs against internal business units at the
desk level, based on actual use rather than on simple apportionment. This in turn has, in some cases, led to a move away from centralised
decision-making on financial information acquisition, and a move to a model where decisions are made by those responsible for desk P&L.
Attribution of costs
While generally welcomed for its contribution towards financial responsibility and efficiency, this greater role for desk heads in decision
making is not without its challenges for both users and vendors. Multiple decision makers and multiple, overlapping requirements have the
potential to increase cost if not handled well. The complexity of cost attribution based on actual use is still a challenge for many operational
heads. While technical innovation is emerging, it is clear that the process of moving to a more distributed information consumption model
within enterprises may take some time.
Uncertainty & flexibility
There is a third effect of the move towards an increased role for the desks in information decisions: the need to deal with business uncertainty.
As firms are changing in response to strategic re-focusing, it is increasingly difficult for business-unit heads to model future costs or, when
necessary, reduce them quickly in line with new enterprise strategies. In this situation there is a danger that desk heads will become risk
averse and increasingly resistant to new products. This may in turn have the effect of reducing innovation and efficiency.
Efficiency through innovation has been one of the notable features of information delivery in recent years and if this is to continue, the
response to an increased need for business flexibility on the customer side must clearly be increased agility on the part of suppliers of
financial information.
Strategic response and Technology
The new business environment requires strategic responses from both information users and suppliers, and it is clear that the selection of
appropriate technology will be a key factor in achieving success. Choice of technical architecture in areas such as data storage, distribution,
managed services and enterprise-wide information platforms will have to reflect changing market demands and the specific requirements
of users.
Local data storage
With data storage, it is clear that no solution has emerged which fits all enterprises and all cases. Although regulatory change is seen
by all as the key driver (especially in terms of best execution, storage and valuation rules), different companies are addressing their
responsibilities in different ways. Some feel that it is vital to establish secure local data servers in all key locations to ensure that there is a
clear correspondence between local regulation and customer data.
This ‘local regulation – local data storage’ approach brings with it some problems, notably it has the potential for increasing network
complexity and pushing up data usage charges, as portfolios are updated in multiple places. Continued communication and flexibility on
the part of information suppliers and customers is likely to be an important feature of successful implementation of such strategies.
Managed services
Not all enterprises feel that the ‘local regulation – local data’ model is essential. For some, the preferred approach is an increased use of
managed services and cloud-based solutions. These can potentially provide both the security necessary for regulatory compliance and the
flexibility so vital for desk profitability.
FINANCIAL INFORMATION – THE CHALLENGES AHEAD
Clearly the different shape and scale of enterprises remains the critical factor in making decisions between the two approaches. What seems
to be broadly accepted is the case for core reference data being located out-of-house in a managed services environment to increase efficiency.
However, in the future an important feature of managed services must be that they can show efficiencies, not only for organisations which
are increasing in scale but also for ones which are reorganising: scaling down some areas while promoting growth in others. Flexibility is
again likely to become a key requirement for users of such services.
For many enterprises the end-position for data storage and distribution is likely to be a hybrid model with a mix of in-house and managed
facilities, reflecting local and global needs, different regulatory environments and economic drivers.
Infrastructure implementation
A number of financial services enterprises indicate that they are moving towards a ‘buy more - build less’ model. High cost, uncertain
delivery and long development cycles are clearly a disincentive to invest in large-scale, in-house infrastructure.
This move will be a major undertaking, especially for banks which have invested so much in integrated information and application systems.
To unpick such systems will be difficult and will require cooperation with the suppliers of services and information if it is not to undermine
business profitability.
Business growth
At the same time as enterprises face the challenges of scale reduction it must be remembered that business goes on and there is a constant
requirement to improve customer service. There is noticeably increasing pressure on operational and information platforms to develop and
support sophisticated multi-asset strategies requiring more and different information, while at the same time efficiently servicing specialist
users with narrow data requirements.
These developments have brought with them an increasing demand for data sharing, both within enterprises and between businesses,
especially in the post-trade stream. This has intensified the pressure on in-house data management, and demonstrated that the
requirement for suppliers’ products to allow the efficient sharing of data is greater than ever.
A need for growth is seen as creating an inevitable tension in enterprises focusing on cost reduction at the same time as developing new
structures and approaches. New technologies in data management may offer some possibility of resolving this difficulty. For example, tools
which monitor actual usage of information at the desk level and services which support this are generally seen as useful additions to the
product mix of the information industry, especially where they are supported by flexibility in pricing models.
The successful enterprise
It is clear that in this new business environment the key elements of success for both information suppliers and information users are
remarkably similar. Both sides will need to be more agile in their response to change and focus on whatever mix of products, services and
information best fits their constantly evolving requirements. The old certainties of growth and expansion have been replaced by a keen focus
on efficiency and providing value to end users. The successful enterprises and suppliers will be the ones which embrace this new paradigm.
Thomson Reuters would like to thank all those who contributed to this paper.
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