Tag Archives: transparency

Leveraging Technology to Reduce Credit Ratings Reliance

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In our previous blog post we talked about ending the over reliance on the ratings agencies as the sole source of information for making critical investment decisions. To gain a comprehensive, 3D version of a market, a sector or even an individual asset, which let’s face it is exactly what clients are paying for, we believe it’s important the industry looks at a broad set of data in addition to the AAA rating.

But with the volume of data now available and the required speed to market, taking a multi-source approach can cause quite the operational headache.

Manually compiling and filtering data for these purposes is very costly and time consuming. And, it’s not a problem that can be overcome simply by adding more people to the process – it’s about arming the people you have with the tools that allows them to harness more information more effectively.

Not surprisingly, technology can bring relief and a solution that can consolidate, compare and contrast a multitude of disparate data sources and deliver these in a consistent and validated manner to multiple consuming systems. This is the only way to arm market participants with relevant and necessary information.

Indeed, the fundamental things that deliver value in the long-term, such as research, analysis and due diligence are fuelled by access to accurate, accessible and accurate information…Triple A, but not just in the conventional sense.

These are the components that ultimately drive value across a trading or investment business to create unique intelligence that generates alpha. However, the capability to efficiently pull a wide variety of data from more than one source demands investment in appropriate infrastructure. Without it, market participants are trading with limited intelligence.

The Case for Reducing Over Reliance on Credit Ratings

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Credit Rating StampThe recent financial crisis has made credit rating agencies the target of greater scrutiny. There is no denying that closer attention needs to be paid to the business models of the big three agencies and, the push for greater transparency around these organizations is certainly justified.

However, by placing the blame solely on credit agencies, the industry is ignoring a much bigger issue: how financial services firms have become dependent on credit ratings as a single source of data for making key trading and investment decisions.

Over reliance can be a dangerous game in any situation, let alone when the markets can move drastically at the drop of a hat (or rating), and there is increasing pressure from regulators and investors to obtain the best possible outcomes for clients under best execution requirements.

So we suggest looking at a credit rating assessment as just one piece of the puzzle. Comparing multiple data sources and importantly, critically analyzing the results, is the only way to achieve a truly accurate assessment of investments.

Indeed, credit rating analysis should be checked against sales data, historical data and pre-payment information as well as data from niche providers to create well-rounded, validated intelligence that can properly inform decision-making.

It’s time for firms to consider the steps that need to be taken to end the over reliance on the ratings agencies that has characterized the industry for too many years.

FATCA: ingredients for compliance

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Are you sitting comfortably? Are you ready to be served another regulatory delight?

In the spotlight this week, we’ve brought some tax regulation to the forefront. The Foreign Account Tax Compliance Act, or as it’s more commonly known, FATCA, requires foreign financial institutions (FFIs) to gather sensitive data, including balances, receipts and withdrawals, on US account holders and identify accounts for the purpose of reporting to the Internal Revenue Service (IRS). As is commonplace with regulatory changes of all flavours, data requirements go far beyond the current mandatory tax requirements on financial institutions.

However it’s not just more data that binds together the plethora of new regulations facing the financial markets, but also the increasing focus on the quality of data held and analysed by financial institutions. Indeed, as regulators strive for transparency, quality data is the fundamental ingredient to ensuring that new regulations, from FATCA to Form PF, effectively measure and manage what they propose to.

At Asset Control the importance of quality data – what we call Triple A rated data (that has no chance of being downgraded) – has never been underestimated.

Although investment is required to achieve Triple A rated data, the cost of not having it is even bigger; for example, under FATCA, a withholding tax of 30% will be applied to payments made to FFIs if they fail to report or inaccurately classify clients, and that’s without even mentioning the reputational damage that can far outweigh any fines or other financial penalties.

So, if your systems are feeling the stress with FATCA compliance then the indigestion will only persist when it comes to stomaching the full menu of regulatory initiatives being served to the global financial markets. Firms must ensure they have the key compliance ingredient in stock if they are to confidently manage the onslaught of regulatory changes they face in 2012 and beyond.