Understanding reference data and its impact on the risk, costs, and capital of financial enterprises

Across the globe, regulators are taking operational risk into consideration in the overall risk calculations of financial institutions. In the current regulatory environment, financial firms are required to quantify their operational risk based on historical operational loss analysis and key risk indicators, and keep enough capital aside for covering their overall operational losses. Regulators have advised financial firms to identify and focus risk mitigation strategies on high risk areas.

One of the major contributors to the operational risk of a financial institution is loss due to faulty reference data. Estimated to make up 40% to 70% of the data used in financial transactions, reference data helps identify key supply chain participants and may include: counterparty information; financial product specification; issuer detail; currencies; financial market information; corporate actions; and prices. Faulty reference data can cause monetary losses or lead to systemic failure. The financial industry has been working to address these data issues by crafting global data standards and numbering conventions. In addition, financial industry-led agencies such as SWIFT are developing data transport and messaging standards.

This paper explores reference data, its impact on the financial services industry and its role in operational risk management. It also looks at the ways global reference data and messaging standards can help with risk mitigation.