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What is reference data anyway?

Reference data, sometimes referred to as ‘master data’ or ‘static data’, is fundamental to financial trading, with an estimated 70% of data used in financial transactions being reference data*.

Reference data encompasses a range of details such as a unique security number for the financial instrument or product being traded, the name of the buyer, seller, or any other party involved in the contract, and the costs involved in the trade. Reference data can become far more detailed however, sometimes including information regarding the complex conditions of the trade and facts about all the relevant parties involved.

Reference data provides information about three essential things:

  • Financial product information – this includes a security’s asset type, its symbolic identifiers and time-sensitive information such as maturity date
  • Entity information – information regarding the parties trading the financial product and other involved counterparties and financial institutions
  • Pricing information – financial product or instrument pricing, valuing these differently at different times

Reference data is also divisible into two essential types:

  • Static data – this type of data won’t change throughout the course of the transaction, and includes specifications such as the names of the parties contracted in the financial transaction (ie. ‘counterparties’) and those in the financial supply chain, as well as information related to the financial products involved, such as their expiration dates or type.
  • Dynamic data – information that changes throughout the course of the transaction, such as credit ratings or the pricing of the instrument at different times or at the close of the deal.

Practically speaking, reference data can be understood as boundary conditions required to undertake a transaction or trade in the financial arena, with correct data contributing to an environment for smooth transactional flow. Reference data is continuously being accessed and altered by systems linked to trading desks, risk departments, middle and back offices in financial institutions, with new data usually being added constantly throughout the trade.

Reference data and the problem of standardisation

The importance of clear and correct reference data in a financial transaction cannot be understated. A problem inherent to trading with reference data is that it tends to be sourced from a range of different places however, including sources internal to the financial institution, from counterparties and multiple commercial data sources.

New regulation such as FRTB and MiFID II are adding further complication, doubling down on standards for the identification of counterparties, trading venues and financial instruments throughout the course of a trade. Having incomplete, false or badly integrated reference data during a transaction can result in the failure of the transaction, a loss in capital and the additional expense of lost or further unnecessary labour for financial institutions processing the trade.

Where in the trade lifecycle that a fault is discovered is also crucial for limiting costs; the earlier an error is found and corrected, the less processing, time and labour is wasted in correcting that error. It’s always preferable to ensure the integrity of your data to avoid mistakes the first time around however.

https://www.capgemini.com/resource-file-access/resource/pdf/Reference_Data_and_its_Role_in_Operational_Risk_Management.pdf