What You Don’t Know About Investment Security Master Files

Accurate data is the foundation of your company’s investment portfolio. It drives your knowledge of risk exposures, how you invest in new asset types, how market changes and pricing fluctuations affect your investments, and many more important portfolio details. So, how is your data configured and how do you know if it’s accurate? Accurate data begins with the setup of your security master file.

A security master file may be built and maintained in house or outsourced depending on your accounting provider. When asked about the quality of their security master file, investment accounting managers, chief investment officers, and other key stakeholders typically aren’t able to give a clear answer. Three of the most common problems are:

1. The security master setup is done manually and by different people, each of whom has a different definition of the required fields and may not understand the true benefits of complete and accurate data.
2. The company does not have access to a partner that can provide the necessary data points for complete, accurate, and timely reporting.
3. The user doesn’t understand how to enter the security master file into the investment accounting solution.

All of these issues need to be addressed to reduce the risk of poor data quality and uncertainty about your investment portfolio, and to enhance your organization’s ability to make informed decisions.

Questions to Ask Your Investment Data Provider

To address security master file concerns, it’s important to know exactly how your accounting provider or internal team is gathering your data and validating it to make sure it’s accurate. If there aren’t controls in place to flag discrepancies and investigate them to make sure the data is accurate, you could be making decisions based on the wrong accounting information. Here are two important security master file questions to ask your provider or internal team to ensure you are receiving the most accurate investment data possible.

1. What sources are used for data validation? There are many reputable financial data sources, including Moody’s, Bloomberg, Standard & Poor’s, Fitch Ratings, Barclays, Thomson Reuters, imoney.net, Crosswalk, and Interactive Data. These data sources are the gold standard for providing investment characteristics including pricing, credit ratings, factors, index data, etc. When your security master file is initially set up, you should know exactly which sources are being used to verify your security characteristics. However, if your accounting provider or team verifies investment characteristics with only a single data source, you are at risk for inaccurate security master information. This is because there may be instances when the numbers are off or the data feed is lagging for a particular data source, therefore negatively affecting your accounting calculations, ending balances, risk characteristics, and much more. Your accounting provider or team should be able to verify each security characteristic with multiple data sources to reduce the risk of inaccurate data and lack of coverage for a given security master field. For example, while one data source is known for having the security master interest information, it may not have the ultimate parent or Legal Entity Identifier information. Another example would be if data sources are showing different values for the same field. Your accounting provider or team should do additional research to see which source is accurate and make the necessary correction. Using multiple data sources protects against the shortfall of missing characteristics and allows your accounting provider to proactively monitor any errors. By having a comparison of values and researching these minor but important discrepancies, you are more likely to have accurate and audit-quality investment data. If your investment data provider doesn’t answer with confidence that they use multiple data sources, you should consider the implications and seriously evaluate the risks. Perhaps it is even time to evaluate alternative accounting providers.
2. How is the data processed? There are inherent issues with an accounting provider or internal process that relies solely on manual data entry. These issues include the amount of time and effort required to manually enter the data into the system, the extra time required to fix any human errors, and the risks associated with overlooking errors that continue to compound as time passes. Eliminating manual processes through automation is the best practice that should be adopted in this case. Like all technology, new investment accounting solutions have emerged that automate daily processes, such as entering transactions and maintaining the security master file. These solutions allow investment and accounting teams to focus on more strategic initiatives instead of manually entering data. Automated investment accounting systems can process complex calculations, produce information more quickly, and provide consistent and high-quality data. Ideally, your accounting provider should have a sophisticated, automated solution to perform detailed validation and reconciliation so you don’t have to. The system should have controls in place to flag and resolve any discrepancies, and excellent customer service to answer any questions while relaying important portfolio information to you.

One of the most common issues with understanding how your investment data is configured is a lack of communication during the setup of your security master file. It’s our hope that providing you with these questions will give you more insight into your accounting provider’s or internal team’s process and intent for producing accurate data. Ensuring you receive accurate investment data that you can rely on for accounting and trading purposes is contingent upon having a quality investment data provider, and an understanding of how that data is gathered, reconciled and validated. Partnering with an investment accounting provider that can help you automate manual processes will improve the accuracy of your security master file, while improving efficiency and allowing your teams to focus on more strategic initiatives. Now that you know more about the important components that make up a security master file, can you answer whether or not you have a good investment data provider?