"Quality data essential for credit derivatives," says Xenomorph

Gay Huey Evan’s letter to the CEOs of all financial institutions active in the UK credit derivatives market highlights the difficulties currently being experienced by the back office in keeping pace with rapidly developing front office activity.

It urges greater efforts from market participants to ‘have in place appropriate systems and controls’ to enable them to reduce operational and settlement risk. Mr. Evans is head of the FSA’s capital markets sector.
Whilst the letter was prompted by the unacceptably high level of outstanding unconfirmed transactions in the market, another area earmarked for specific attention from UK FSA supervisors in the future was the quality of management
information in use.

This point has been picked up by Brian Sentance, managing director of Xenomorph, which specialises in data management and analysis solutions for the equities, fixed income, credit and derivatives markets. He is unequivocal
on the need for quality information: ‘In this market, it is vital to have data and pricing consistency throughout the financial institution: on the trading desk, in risk management and across all of the operational systems. Regrettably, this is not always the case and it is costing the banks serious money.’

This is still an immature market, with considerable fluidity in the standards and mathematical models used. There is a need for constant innovation from traders on the front desk, but these new products need to be fully understood and effectively managed by the back office and compliance areas. Failure to do so can be an expensive business: firstly in the opportunity cost of not having quality systems and data in place to enable traders to transact the deals and have them processed quickly; secondly, in the direct costs incurred through the regulatory requirement for additional capital to be allocated when systems and processes are deemed to be below par.

Comments Mr. Sentance: ‘The amount of money which can be saved from a regulatory point of view alone runs into tens of millions of dollars each year. Xenomorph can help firms to achieve these savings and to meet the challenges of operating in the credit derivatives market. Our systems have been designed from the outset to allow our customers to keep pace with financial product innovation, without relying on the ubiquitous spreadsheet. They also offer data management capabilities across multiple asset classes and all types of data - reference entity data, Ts and Cs, market history data, real-time data, derived data and so on. The result is consistency and full auditability.’

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