Insuring Market Data: A Modest Proposal?

An executive at the Bank of New York has posed the idea of creating insurance contracts to guarantee the quality of market data, now that greater emphasis and responsibility is being placed on accurate and timely data.

Companies in the outsourcing business can spend vast quantities of time on pricing on behalf of a client, says Matthew Cox, head of securities data management in London at Bank of New York. If an outsourcer gets that price wrong for whatever reason, the bank may have to reimburse the affected funds. "If the market data was insured, then you would be somewhat covered from the liability for paying out for errors," Cox says.

With insurance, it could be possible to obtain a premium in relation to potential errors or past errors, which Cox says might be worth paying to mitigate against any risk. "For me, that would be important to have something like that in place. However, it would all be geared around annual premiums versus how much I am likely to pay up based on historic issues of errors," he says.

He suggests that if a company took in multiple feeds from different data providers, there would need to be separate policies in order for a single insurance company to insure each set of market data. The insurance company would look at all asset universes that the company covers and insure it for the entirety. "It would be independent of [data] vendors," he adds.

The policies could also be broken down by type of data, such as reference data, static data and security prices policy, Cox says.

But problems quantifying costs could create practical difficulties. "The question you have to ask is how you quantify how much an error is going to cost you," Cox says. It would also be difficult if an insurance company asked for an estimate of the number of errors a company might make in the year, he adds.

"The only way you could possibly do it is to go back historically over the last five years and see how many errors you have made and X amount has cost me X amount," Cox says. "It's like investing in a portfolio though, the past is no reflection."

Cox says he has not spoken to any of Bank of New York's clients about the concept because "there is not an insurer out there willing to cover you owing to liability issues. However, if there was a company that came up with a reasonable premium, I would imagine that it would certainly attract some interest."

However, he admits that "there has never been anything like this before where someone has insured market

Inside Market Data

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