The Need for ApiroRates

INTRODUCTION

For banks that have survived the worst financial crisis of our generation, the credit squeeze and the ensuing fallout have kept them busy with activities to increase capital, balance credit portfolio and prepare to pass stress tests. Seven years after the crisis, rather than competing with each other on efficiency or productivity, many still appear to be playing catchup and passively reacting to regulatory changes, including Dodd Frank and Basel III.

Some banks, however, have started to look deeper into the cause of the GFC and have identified areas of systematic importance for the bank, where improvements made will not only help in preventing a future reoccurrence of a GFC but also create an opportunity to gain significant competitive advantage and internal benefits.

The key to success here is data management or, rather, the ability to accurately capture, clean, aggregate, report on and share various classes of market data (and metadata) consistently across the entire organization without delay. For front office users, this includes spot prices for a myriad of financial instruments. For treasury, it’s end-of-day data for their Profit & Loss calculation. For middle office groups who are focusing on risk management, this will be reference and historical data for their models. Each business line within a bank can have different format, use or providers of their data but, fundamentally, they all reflect the market that the bank operates in and should be consistent throughout the organization. Without an effective market data platform and central source of truth, any infrastructural or management overhaul will not be complete.

BASEL III AND THE IMPORTANCE OF DATA INFRASTRUCTURE

A recent white paper released by the Basel Committee on Banking Supervision (BIS), titled “Principals for effective risk data aggregation and risk reporting”, started with the following statement:

“One of most significant lessons learned from the global financial crisis that began in 2007 was that banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks.” (Basel Committee on Banking Supervision, 2012)

For most existing banks in the developed world, redesigning how data fundamentally flows between all of its applications is a monumental task. Ever since banking became computerized, every 10 years or so a new initiative or paradigm would come into the market which promised to solve this problem once and for all; the last three significant waves were:

  • enterprise data integration in the 1990’s
  • Service Oriented Architecture (SOA) in the 2000’s and
  • the still ongoing intranet cloud

Each time, change management and data migration have always proved to be painful and tremendously expensive for banks so many data redesign projects were not very successful. Significantly altering the way multiple complex legacy systems consume and output data is both difficult and highly risky. As a result, many organizations have either only implemented enhancements to satisfy regulatory requirements or gained quick-wins and left the total redesign for a later date.

The BASEL committee outlined 14 principals in the whitepaper, all except one of these described how banks should improve their data governance and management capabilities while ensuring data quality. The exception, principal 14, was for the bank to “co-operate with relevant supervisors in other jurisdictions regarding the supervision and review of the principles, and the implementation of any remedial action if necessary”. The following diagram provides an overview of the principals highlighted in the white paper.

Figure 1: Principals for effective data aggregation and risk reporting

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INTRODUCING APIRORATES

ApiroRates was designed as a source of truth for various market information that a bank might want to collect, including (but not limited to) risk data. It is a highly scalable, flexible, and robust platform leveraging a state-of-the-art unstructured data store and the latest user interface (UI) technology. The system comes with pre-built data feed & distribution modules and, hence, can be rapidly deployed within an enterprise environment.

An overview of the platform architecture is shown below:

Figure 2: ApiroRates Architecture

There are five (5) major logical components to ApiroRates:

  1. Data Feeds: Source data from various data providers, i.e. Reuters, Bloomberg, Files, Data bus, etc., and internal applications such as Trading systems, Data Warehouse, etc.
  2. User Interface: Provides users with browser-based web UI for operations such as rates process monitoring, rates configuration, sourcing/distribution scheduling and exception processes.
  3. Core Processing Engine: Handles the sourcing, cleansing, validation, aggregation, enrichment, calculation and distribution of different data, including both template asset classes and user-configurable custom data types. The core engine also manages sub-processes such as scheduling, workflow, auditing, logging and notification.
  4. High Performance Data Store:The system utilizes the best-of-breed unstructured database to achieve extremely high performance and scalability.
  5. Distribution: Handles the distribution of rates to downstream bank applications (historical data for risk, reference rates for finance, intraday prices for rading, etc.)

ApiroRates is highly-configurable which facilitates the addition/removal/update of algorithms, data feeds and distributions without the need for system development and downtime.

ApiroRates also does not lock the bank into vendor propietory technology or data structures. It based solely on Open Source technologies and, hence, can be extended by in-house development if the bank requires this.

The diagrams below exemplify how ApiroRates maps to the 14 BASEL principles:

NEW DATA PLATFORM AS AN OPPORTUNITY

Implementing a new computerized system always requires strong leadership and support from various parts of the business, however, the introduction of a new data management platform also creates a rare opportunity for banks in developing nations. Unlike their counterparts in developed countries, where many middle and back office processes have long been automated, banks in developing nations still heavily rely on manual processes for many day-to-day activities. This advantage allows them to adopt next generation technology without the significant system migration costs associated with changing a large number of, often difficult to change, legacy systems. Therefore, Banks in the newly wealthy parts of the world can start with a much cleaner and technologically advanced slate. By implementing a data platform which satisfies key criteria of the principals recommended by the Basel Committee now, banks can also position themselves to supply accurate and consistent data to all of their applications across business lines, departments and groups. In its follow up white paper (released in December 2013) creatively titled “Progress in adopting the principles for effective risk data aggregation and risk reporting”, the Basel committee highlighted the original intent for the Principals as to:

“improving bank’s ability to rapidly provide comprehensive risk data … will enhance banks’ decision-making process and improve their resolvability”. (Basel Committee on Banking Supervision, 2012)

It expects banks identified as global systemically important banks to comply to the recommendations by 1st January 2016 while national supervisors can delay the application to banks identified as “domestic systemically important banks” 3 years later.

The report noted low compliance on a number of key principals based on questionnaires sent to 87 banks, matching our assessment that, while some improvements can be quickly made, there are more structural difficulties with implementing new data architecture at existing banks that have many complex legacy systems.

CONCLUSION

Over the coming years, as technology breaks down traditional banking barriers and customers become increasingly sophisticated, the banking industry will likely enter into an era of hyper competition. In this environment, the ability to properly and promptly manage data will become a key differentiator. After all, even your best executives and decision-makers will rely on quality and timely data to implement their strategies.

The ApiroRates system discussed in this paper not only adheres closely to the best practices standard set by the BASEL Committee but also provides banks with a state of the art data platform to manage their most critical asset, market data.