Opportunities in Basel II Technology

The advent of new regulations such as the Basel II Accord and the need for more rigor and visibility in managing risk are driving financial services institutions to seek out new systems and processes that decrease exposure to unseen, miscalculated credit and operational risk. One common root cause of miscalculation or operational error is incorrect, incomplete, or inaccessible counterparty reference data.

To address this problem, organizations should implement a reliable, persistent repository (or hub) of counterparty reference data. While many organizations may look to re-purpose existing technology platforms such as CRM applications or Data Warehouses for these requirements, it is not recommended as it is not only a complex and costly exercise but worse it typically achieves only limited success. A new and purpose-built technology is needed; a master data integration and management hub designed to solve these very challenges. Further, the hub will integrate, manage, and share the trusted and globally complete views of the counterparty, the hierarchy of parent/subsidiary relationships, and dynamic links to credit ratings, positions, and transactions.

More specifically, the hub provides financial service companies with valuable capabilities including:

  • Improved accuracy of measuring credit risk
  • Visibility and drill down of counterparty risk exposure by industry concentration, geography, arbitrary rating units
  • Active monitoring of activities triggering business rule driven alerts

These capabilities yield benefits beyond Basel II compliance; in fact, organizations taking this approach can also optimize risks and improve their capital efficiency. They also will have built the basis for improved reference data for CRM, compliance, trading, and risk systems-- thereby transforming their compliance initiatives into a competitive advantage.

The Basel II Opportunity

Today, smart financial institutions are finding ways to leverage compliance initiatives such as Basel II to advance their business and increase competitive advantage. One common theme is maximizing capital efficiency.

With the general requirement for more rigor and visibility in managing credit risk and exposure, financial institutions need new systems to increase transparency and reliability of identifying the counterparty legal entity. Furthermore, risk managers want to view aggregate exposures according to exposure mitigation techniques. This requires flexibility in risk analysis, reporting and drill down to consolidate exposure at different levels such as bank structure, asset class, geography, product attribute, and arbitrary rating units.

The corresponding IT challenge is how to manage counterparty master data and match the counterparty to risk exposures both over time and in real time when that data is dispersed across multiple systems and multiple divisions. Inevitably, there are multiple “unique” identifiers, which means that data is often conflicting, and subsidiaries are not properly grouped. In order to manage market, credit, and operational risk, managers, analysts and trading desks must have an accurate and detailed view of the counterparty, and the ability to link in real time to counterparty transaction and summary data. Without this accurate view for instance, an overly conservative capital allocation policy may result with an attendant reduction in the return on capital.

Having an accurate, global counterparty view yields benefits beyond capital efficiency including:

  • Straight-Through Processing: The trading desk wants Straight-Through Processing although without the accurate counterparty reference data, the trades often require manual intervention. Further, the systems need to be smart enough not to just match on exact names, but rather to use common sense reasoning in finding “fuzzy” matches due to vagaries in data entry.
  • **Adhering to Regulatory Mandates: Compliance managers need to prove they have policies and procedures for a host of regulatory mandates, to know your customer and ensure that all proper procedures are being followed. Without a centralized, online source of client and counterparty activity, compliance failures may go unnoticed, a fraud perpetuated, exposure realized, or an audit failed.
  • **Cross Sell Efficiencies: Whether spurred by acquisitions, partnerships, or internal goals, marketing initiatives to cross sell products across customer bases is a tried and true strategy. But to succeed, customer data must be aligned across channels, integrated, cross-referenced, and correlated to products and services offered.

In order to properly address these challenges, an enterprise needs to create a unified and comprehensive view from its disparate data sources, including customer databases and customer information files, financial and order management systems, product catalogs, and external data services. These unified views can then provide the entire enterprise with the business centric, enterprise wide perspectives such as Customer, Counterparty, Product, Limit Structure, and other reference data matched with associated transaction and activity data. For example, a single unified counterparty view consolidates the complete legal entity hierarchy and matches the credit exposures, collateral, and other information.

In short, a highly disciplined approach to data management is required to solve the ever -increasing data volumes and sources and the complex nested structures covering many jurisdictions and the linkage to increasingly complex credit instruments.

The Counterparty Hub

To solve the problem of miscalculated credit risk and to reduce operational risks, financial institutions should deploy a centralized, counterparty hub that provides a single trusted repository for accurate and globally complete legal entity hierarchies. This accurate view can then be matched with credit risk ratings, exposures and positions. The information can be used to feed risk analytics, trading systems, sales and support desks, fraud and anti- money laundering systems, data warehouses, and other applications.

The foundational problem of conflicting counterparty data is best addressed by consolidating the counterparty reference data from internal and external sources into a master data repository. That system can then serve as the single trusted source of counterparty reference data within the enterprise. This centralized, trusted source of the “master” counterparty data is simple in concept, but difficult to deploy without a Master Data Integration platform. To address these requirements, several technical challenges need to be considered and the subsequent questions answered:

The data required to understand the counterparty exists in many internal and external systems and is recorded differently across those systems.

  • How do I capture all the relevant attributes in a data model that reflect my current business without impeding the future?
  • Are the names and addresses cleansed and standardized?
  • How is the data merged to produce the most trusted data?
  • How are parent and subsidiary organizations related?

This data is constantly changing.

  • How are systems ensured to be up to date?
  • How do I create alternative risk groupings and scenarios?
  • Is the new data coming in better than the existing data?

Can the counterparty master data be offered as a shared service?

  • How is security and access control managed?
  • How do I distribute the data to operational systems across the enterprise?
  • Can other systems access cleanse, match, merge functions in real-time?

Financial institutions seeking to accurately assess the credit risk of its counterparties require a centralized system of record that integrates, manages and shares the counterparty data.


Implementing the right Counterparty hub will yield several benefits, including reduced credit risk exposure and operational risk. From a risk exposure point of view, the delivery of a globally complete view of the counterparty enables institutions to protect and optimize liquidity through a current and a forward view of risk exposure. Additionally, by viewing exposures from different perspectives: entity, asset class, geography, currency, etc., institutions are empowered to manage risk based on business objectives and market conditions.

By leveraging a Master Data Integration Hub, institutions can deploy their counterparty solution rapidly and at a low total cost of ownership. This includes the ability to deploy in incremental phases, thereby reducing project risk while delivering demonstrable value and ROI quickly. With the high cost of capital employed, unforeseen credit risks, and the Basel II deadlines looming, centralizing and consolidating counterparty master data becomes a low risk, high yield and quick payback solution.

About the Author

Michael Destein is Director of Industry Solutions for Siperian Inc., a leading master data integration and management provider. Contact him at mdestein@siperian.com or visit the website at www.siperian.com

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