Part 2 :: Origins
While the word “data” leads people to think of new high-tech approaches such as analytics, machine learning, natural language processing and artificial intelligence, it’s worth remembering that the financial industry has always been based on it. Information such as instrument prices, bid/ask spreads, price/earnings ratios, indices and, of course, P&L have always been at the business’s core. But in the last decade or so have advances in technology allowed the financial markets to use data in increasingly sophisticated ways, globally and at remarkable speed.
Inevitably, regulators began looking for ways to ensure that market players adequately measured, reported and mitigated the risks involved in the use of data. The most well-known results are the Basel Committee on Banking Supervision’s regulation 239 (more commonly known as BCBS 239) and the U.S. Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR).
Implemented in 2013 and 2012 respectively, these regulations are designed to ensure that financial firms don’t use data to take positions they can’t sustain as economic conditions—and capital requirements—change. Their strict requirements and stiff penalties spurred firms—mostly on the sell side and particularly in the U.S.—to create the role of Chief Data Officer to ensure the new regulatory strictures were being met. The situation was particularly challenging in Europe, where even today fewer CDOs are in place as the regulatory landscape continues to evolve.
Not surprisingly, many of the CDOs appointed around that time were the first at their firms to take on the job. Equally unsurprisingly, their initial focus was on compliance. CDOs came from a variety of backgrounds, including operations, risk, analytics, compliance and regulation. While some had backgrounds in technology or data quality, companies looked for CDOs well-versed in areas where regulators often focused their attention: areas that used the data rather than simply compiled, scrubbed and stored it.
Most early CDOs took on their new jobs despite industry-wide uncertainty about how to meet their responsibilities, or even how to describe them. After all, the regulatory regime was new and the market’s technical capabilities were changing fast.
“We were forced into a defensive posture because of regulations and frankly, I think the regulators were brilliant at that,” says one former CDO for a U.S. firm. “They got the industry to move.” According to the head of data strategy at a European investment bank, the creation of a CDO role “was really to get our house in order for data management from BCBS 239."
An uncharted landscape—that’s changing
Even as CDOs moved forward to keep up with regulatory mandates, they began to recognize that data could play a deeper role in their organization’s business. The mission of first-generation CDOs was to ensure their companies met regulatory requirements, a focus often referred to as “CDO 1.0.” Now that they’re meeting those demands, many CDOs, especially in the U.S., are moving into a “CDO 2.0” role, where they extract business value from data by, for example, using it to identify market efficiencies or other insights.
Aided, if not driven, by new technology, they’re moving remarkably fast—so fast others within the organization are having a hard time keeping up. Educating colleagues about their role can take up a notable amount of a CDO’s time. While many see their role as establishing and implementing data quality and governance frameworks across their organization, they often must explain that it doesn’t include the actual aggregation of data or scrubbing it to ensure consistency and quality.
The job is “really more about making sure that the organization understands data better,” explains the head of data support at a European investment bank who says that companies need to build a culture around knowing their data, then demonstrate why that’s important and how everyone contributes to the effort.
CDOs in particular have to drive this conversation with executives so that data quality and reliability becomes a shared responsibility. Part of legitimizing that conversation is building the use case for how the CDO can add value to the business through savings, efficiency and revenue.
The title “should probably be a verb and not a noun because it’s a role that’s under evolution, and it’s under evolution at every organization,” said the head of industry engagement at a U.S. financial firm.
And while different companies may place their CDOs in different parts of the organization—some in IT, others in operations—many believe they’d be better off working between business and IT, developing expertise in both areas and advising them on data-related issues. This is especially true for buy-side firms, where client reporting requirements are encouraging firms to consider creating a separate CDO role for data issues instead of defaulting to Chief Operating Officers, Chief Information Officers or Chief Technology Officers.
Wherever they sit, successful CDOs require a unique mix of experience to succeed: line-of-business knowledge, risk expertise, a collaborative nature and an understanding of technology in a role that relies on—but isn’t about—technology. As one former U.S. CDO puts it: “It’s a very separate and discrete discipline.”