Back in June, when commenting on a lawsuit brought by a group of pension and retirement funds which amusingly accused Wall Street and its progeny Markit of conspiring to monopolize the CDS market to the detriment of potential new entrants that we’re sure had only the best intentions (like Citadel), we said [6] the following:
While the entire world is now, with the benefit of hindsight, able to see how a setup that allowed rate traders to communicate with benchmark submitters might have been a recipe for disaster, what should be even more obvious is that allowing a firm controlled by Wall Street’s largest banks to effectively monopolize the market for the derivatives that not only played a rather large role in the financial crisis but also serve as the go-to instrument for hedging tail risk is likely also a bad idea and could very well lead to manipulation and all sorts of other nefarious things like, for instance, attempts to create and preserve a lucrative monopoly by adopting anti-competitive practices.
We were of course referring to Markit, the Wall Street-backed provider for CDS data, and as WSJ reports [7], it now appears that Wall Street will conspire to form another reference data entity in which everyone will have a stake. The project is called "SPReD" and it will be implemented by SmartStream Technologies ltd. Here are the (convoluted) details:
The initiative is currently dubbed "SPReD", which stands for Securities Product Reference Data, and is likely to be launched as a new entity in the next six to 12 months, the people said. Each founding bank is investing “seven figures” for the entity, the people said.
The company will work specifically with reference data on financial instruments, including identifiers like names, codes and symbols that each institution already buys. It will start with listed derivatives and equity data, with fixed income-related data added later.
The project would consolidate efforts to clean and store the vast amount of data, centralizing a function that many banks have previously done individually, with some housing data in a variety of units within their organization.
Banks typically use market data from vendors and glean it from public sources, run it through their systems and "scrub" the data to get so-called "golden copies" that are consistent and ready for use across the business, one of these people said. That consistent data can help save on transaction costs across the organization.
The new entity will create tailored data feeds for each client using existing sources of data that firms receive from a variety of vendors. Each bank or client will continue to negotiate those data vendor relationships themselves.
Earlier this year J.P. Morgan created a central system within the bank that pulled streams of reference data from all of its providers into one hub, a person familiar with the process said. The new entity will take over scrubbing reference data for the bank, ultimately feeding it back into J.P. Morgan’s system, as part of its cost savings initiative.
Using consistent data allows the banks to form accurate pricing for trades and can be essential for risk and compliance reviews that could arise.
While it's not entirely clear from the above exactly what all will be included in the data sets that comprise SPReD - and we'll probably never know until someone gets caught manipulating something - this seems to be an attempt to standardize data across markets in a way that allows the banks to control the tracking.
What that will mean going forward is anyone's guess but as is clear from the last line excerpted above, standardizing this data will supposedly help banks "form accurate pricing for trades", and we all know what can happen when Wall Street gets together to "standardize" a reference point on which trades are based.
