Home Brokerage Navigating Unpredictable Content Licensing Models in Financial Services

Navigating Unpredictable Content Licensing Models in Financial Services

by internationalbanker

By Martijn Groot, VP Marketing and Strategy, Alveo


Indices summarise the performance of asset classes, industry sectors, geographies, investment strategies and market segments across the financial services sector and are an indispensable foundation for product development, asset allocation and performance benchmarking.

They might be used, for example, to summarise the UK equity market (via the FTSE 100 share index), or the US equity market (in the form of the S&P 500 or the Dow Jones Industrial Average). They could also be employed in tracking other asset classes, including returns from fixed incomes for instance.

Indices might also be used to monitor asset performance in specific industry sectors. The Baltic Shipping Index in London, for instance, tracks the rates for freight and the cost of shipping a container across the world.  There are even indices for fine wines that track auction results!

Indices can also help with product development. Some are investable in the sense that there are investment products that mimic and closely track them by investing in all the index constituents. These typically include exchange-traded funds (ETFs) such as iShares by BlackRock, or S&P 500 iShares. We are seeing the proliferation of indices over time. The advent of environmental, social and governance (ESG) has triggered entirely new indices families. 

In summary, indices are widely-used and are becoming ever-more prevalent and visible. Index data products are in high demand and the use of specific providers is often contractually required. There are concerns though about the price that consumer firms have to pay for using them.

Paying the price

The cost of data overall is rising across the financial services industry. Fixed income data spend for sell-side institutions has increased by half in the last five years according to a recent report by AFME, with market data spend rising by a quarter. Spend on data from exchanges has also risen by 42% since 2017 and information services are becoming an increasingly central piece of the business of exchange groups.

The cost of indices has increased particularly sharply though and the most popular index providers often come with significant licence fees attached. There is a lot of value in indices partly because investment products are created to track them. Often there is a contractual requirement which makes their use all but essential. A pension fund that has its assets managed by a specific asset management group may stipulate that the asset manager to whom they gave a mandate reports on their performance against a specific index. Indices are indispensable in tracking performance and comparing between asset managers.

The specific issue with indices also relates to pricing variability. Recent analysis by consultancy Substantive Research found that prices for licensing index data for similar bundles of products and services varied by a factor 13. The use of complex pricing models by providers will be a concern for some, given that the cost of using indices often remains a closely guarded secret. When it comes to indices, that is a concern but it won’t stop them being used by financial services companies.

In this scenario it is critically important that organisations track the usage and consumption of their data and make sure they make the most of it. This includes tracking which members of staff have direct access to this data, the downstream applications and reports that indices are used in, and whether data from third-party providers is fed into calculations, i.e. used to derive new data.

To do this, firms first need to ensure that they have their permission and access rights in place. If an organisation buys data, there will be content licence restrictions. If organisations use the indices to create an investable product, for example, they may need to pay a royalty for the privilege of utilising it. In this event, licence costs are likely to be more significant and tracking data will be more important.  

But how specifically can index data be tracked across an organisation? Comprehensive data lineage and data usage tracking will be critical to achieve this. Firms need to be clear about how they buy the data in the first place and how it enters the organisation. They need to understand where it is going: how many and what kinds of users can access it, what applications and databases it is sitting in and whether it is used in external reporting. That all needs to be tracked using appropriate data management and data lineage tools and techniques.

It is not easy for firms to do, of course. Many have low data management maturity. They may struggle to collect and aggregate data or integrate it seamlessly into their workflows. Data quality could also be an ongoing challenge. These are difficult enough issues for firms to deal with even if they are just focused on internal data sets. Problems are exacerbated by the fact that indices are typically used in business functions that interact with clients and third parties: from product development to client reporting. That means a lot of the content goes out externally and there are likely to be multiple entry points.

There could be a lack of discipline in centralising these processes or keeping track of them. Siloed working processes are likely to be prevalent. Critical information is sometimes even included in emails and forwarded internally, which could lead to firms inadvertently violating usage restrictions. 

How data management and tracking can help

So how can firms best overcome these problems and start to ensure they are managing indices efficiently?  First, they need to ask themselves are they planning to use the data to derive their own blended indices, or composite benchmarks. Again, tracking will be key as this may have licence implications.

Tracking data efficiently will help organisations stay in compliance with their licence agreements but is likely to bring a host of other benefits. The firm will be able to exercise tighter discipline over what it is buying and how it is being used. It is good for organisations to know all this, whether or not they have to pay for the data. With data tracking, they can trace their data flows and carry out root cause analysis if there is an enquiry from an internal source, a customer, an investor or a regulator. Such analysis is key for organisations to do in order to explain the decisions they have made.

A good data management solution can help to effect this of course, acting as a central funnel, tracking permissions and where the data is going when it leaves the central repository to avoid surprises and being on the wrong side of content vendor audits, for example. Such a centralised system is key in helping also to provide data lineage capabilities and tracking and tracing of data flows: in short having a clear and complete view of data usage and distribution. And by opting for a Data-as-a-Service solution from a managed data services provider, financial services firms can effectively manage their use of indices and keep costs under control while at the same time, eliminating the day-to-day burden of data processing and platform maintenance.

By opting for this approach, firms will have taken a major step forward in overcoming the ongoing index data management challenge, helping to ensure compliance and good cost control and giving them the peace of mind of knowing that they can use indices positively for their own business benefit without unduly worrying about the price they may have to pay.    

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