Coping with Complex Content Licensing Models in Financial Services

by | Jun 7, 2023

Written by Martijn Groot, VP Marketing and Strategy, Alveo

Indices play a critical role in the financial services industry by tracking the performance over time of asset classes, industry sectors, market segments, and a wide variety of other physical and virtual data sets.

Stock market indices such as the FTSE 100, Russell 2000 Index and the Straits Times Index serve as prime examples of this, although other asset classes such as Returns from Fixed Income are also bundled as indices. Product development, asset allocation, and performance benchmarking are all built on indices, cementing their value within financial services firms. Exchange-traded funds (ETFs) like Vanguard Total Stock Market ETF are instruments that directly follow price movements in indices, either directly, in multiples, or in some cases, inversely. And it doesn’t stop there, indices are now created to track ever more exotic assets such as rare whiskey.

The increased usage of indices as a measure of value has resulted in rising demand and inflated prices that has caused concern among financial services firms. The FCA just embarked on a Wholesale Data Market Study, that investigates the market data space including index data.

Monitoring the cost of index data

According to a recent AFME report, sell-side institutions’ spending on fixed income data has increased by half in the past five years. This is a general trend noticed across the financial services sector. Since 2017, spending on exchange data has also increased by 42%, as information services have become an increasingly important business model for exchanges.

In particular, licensing costs for indices have skyrocketed. Financial services providers cannot do without index data since investment products rely on this information, especially if they are contractually required to report performance against a particular index as part of a mandate or other contractual obligations. This use case is frequently insisted upon to enable manager-to-manager performance comparisons. The number of index providers is fairly small and the barriers to entry are high as the use of specific index data is often hardwired into reporting requirements or other obligations.

Tracking data consumption is critical as – due to various usage restrictions – index data is a scarce resource. This process implies being able to track who uses the data within an organisation, the downstream applications and (internal and external) reports in which the data appears. In addition, it needs to be clear whether new data is derived (such as custom benchmarks) taking the underlying source data as input.

Ensuring that license restrictions are adhered to and that the data is appropriately permissioned within the organisation is essential to comprehending how it is used. Royalties may be due to the content owner when additional products are created on top of the licensed product – a usual condition within the licensing model.

How can an organisation best keep track of its data usage and distribution? Implementing or making use of comprehensive data lineage and data usage tracking tools is one way of doing this. To enable this, companies need to be clear about how they acquire data, where it enters the organisation, and how it flows through the organisation. This requires an understanding of who uses the data, the systems on which it is stored, and whether it is used for external reporting. Special tools are needed in this area to allow this.

It will naturally be difficult for businesses with low data management maturity to collect, aggregate, and integrate data into their workflows. When examining how the data is utilised not only internally but also in interactions with third parties, there are challenging to preserving the data’s integrity and quality.

Complications ensue when an organisation has silos in terms of different scattered databases where index data is stored, as this can complicate the tracking or ascertaining whether the data even stays internal to the company, or if it is fed into external reports or via email to third parties. In this way, working practices and a lack of detailed knowledge of the license rights can create additional complications.

Tracking information usage through the company

The key to solving these issues and ensuring that index data is being managed correctly, is to understand whether the data is being used to derive proprietary blended indices or benchmarks as this typically has its own licensing implications.

Being able to track data utilisation is fundamental to adhering to license agreements. Other advantages of tracking include greater control over what the business purchases, how much data it uses, and whether or not it has to be paid for. Companies that can manage their data in this way, will be able to justify and explain their decision-making in response to inquiries, from investors, regulators, and customers through undertaking root cause analysis.

A sound data management solution will be the required basis to execute this strategy, through acting as a central pathway, tracking permissions and mapping data as it travels from system to system and department to department. A centralised solution will track lineage and flows end-to-end, providing a single clear view of data usage and distribution. Opting for a Data-as-a-Service solution from a managed data service provider gives financial services companies the ability to effectively manage their data, increase agility and flexibility, and remove the unnecessary expenditure of data processing and platform maintenance.

By providing new control methods, easing concerns about opaque pricing, and ensuring compliance, this strategy is a significant step toward simplifying index data management.

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