Data Warehousing and Business Intelligence

24 February 2016

Instrument Dimension

Filed under: Data Warehousing,Investment Banking — Vincent Rainardi @ 6:15 pm

One of the core dimensions in investment banking is instrument dimension. It is also known as security dimension. It contains various different types of financial instruments or financial securities, such as bonds, options, futures, swaps, equities, loans, deposits, and forwards.

The term “securities” used to mean only bonds, stocks and treasuries. But today it means any tradable financial instruments including derivatives, cash, loans, and currencies. Well, tradable and “contract-able”.

Where it is used

In an data warehouse for an investment bank, a brokerage or an investment company, an instrument dimension is used in three primary places: in trade fact tables, in position fact tables and in P&L fact tables. Trade fact tables store all the transactions made by the bank, either for a client (aka flow trading) or for the prop desk (bank’s own money), in all their lifecycle stages from initiation, execution, confirmation, clearing, and settlement. Position fact tables store daily values of all instruments that the bank holds (long) or owes (short). P&L (profit and loss) fact tables store the daily impact of all trades and positions to each of the bank’s financial accounts, e.g. IAS 39.

The secondary usages in an asset management or an investment banking data warehouse are risk fact tables (e.g. credit risk, market risk, counterparty risk), compliance fact tables, regulatory reporting, mark-to-market accounting, pricing, and liquidity fact tables.

The niche usages are ESG-score fact tables (aka SRI, socially responsible investing), rating transition fact tables, benchmark constituent fact tables, netting position fact tables, and collateral fact tables.

Data Structure

The business key of an instrument dimension is usually the bank-wide internal instrument identifier. Every instrument that the bank gets from market data providers such as Bloomberg, Reuters, Markit, index constituents, and internal OTC deals, are mastered in a waterfall process. For example, public instruments (debts, equities, ETDs) are identified using the following external instrument identifiers, in order: ISIN, Bloomberg ID (BBGID), Reuters ID (RIC), SEDOL, CUSIP, Exchange Ticker, Markit ID (RED, CLIP), Moody’s ID (Master Issue ID). Then the internal identifiers for OTCs (e.g. CDS, IRS, FX Swaps), FX Forwards, and cash are added.

The attributes of an instrument dimension can be categorised into 9:

  1. Asset Class
  2. Currency
  3. Country
  4. Sector
  5. Issuer
  6. Rating
  7. Maturity
  8. Instrument Identifier
  9. Asset class specific attributes

1. Asset Class

Asset Class is a classification of financial instruments based on its functions and characteristics, e.g. fixed income, equities, cash, commodity. We also have real assets such as land, buildings, physical gold and oil.

It also covers the hierarchy / groupings of the asset classes, hence we have attributes such as: asset class, asset sub class, asset base class. Or alternatively asset class level 1, level 2, level 3. Or asset class, asset type, asset group.

Good starting points for asset class categorisation are ISDA product taxonomy, Barclays index guides, Academlib option pages and Wikipedia’s derivative page. Here is a list of popular asset classes:

FIXED INCOME: Government bond: sovereign, supranational, municipal/regional, index linked, zero coupon, emerging market sovereign, sukuk sovereign. Corporate bond: investment grade, high yield, floating rate note, convertible (including cocos), covered bond, emerging market corporate, sukuk corporate. Bond future: single name bond future, future on bond index. Bond option: single name bond option, option on bond index. Bond forward: single name bond forward, forward on bond index. Credit default swap: single name CDS, CDS index, CDS swaption, structured CDS. Asset backed security (ABS): mortgage backed security (including RMBS and CMBS), ABS (auto, credit card, etc), collateralised debt obligation (CDO), ABS index. Total Return Swap: single name TRS, TRS index. Repurchase agreement: repo, reverse repo.

EQUITY: Cash equity: common shares, preferred shares, warrant, equity index. Equity derivative: equity option (on single name and equity index), equity future (on single name, equity index, and equity basket), equity forward (on single name, equity index, and equity basket), equity swap (on single name and equity index).

CURRENCY: Cash currency: FX spot, FX forward. Currency derivative: cross currency swap.

RATES: Interest rate: interest rate swap, overnight index swap (OIS), interest rate cap, interest rate future, interest rate swaption, forward rate agreement (FRA), asset swap. Inflation rate: inflation swap, inflation swaption, inflation cap, zero-strike floors, inflation protected annuity.

COMMODITY: commodity future: energy (oil, gas, coal, electricity, wind turbine), base metal (copper, iron, aluminium, lead, zinc), precious metal (gold, silver, platinum, palladium), agriculture (grains: corn, wheat, oats, cocoa, soybeans, coffee; softs: cotton, sugar, butter, milk, orange juice; livestock: hogs, cattle, pork bellies). Commodity index (energy, metal, agriculture). Option on commodity future. Commodity forward.

REAL ASSET: Property: Agricultural land, residential property, commercial property. Art: paintings, antique art. Collectibles: fine wine, rare coins, antique cars, jewellery (including watches and precious stones).

FUND: money market fund, equity fund, bond fund, property fund, commodity fund, currency fund, infrastructure fund, multi asset fund, absolute return fund, exchange traded fund.

OTHER: Private equity. Venture capital.

Note on differences between asset class and asset type: asset class is usually a categorisation based on market, i.e. fixed income, equity, cash, commodity and property; whereas asset type is usually a categorisation based on time and structure, i.e. spot, forward, future, swap, repo, ETD, OTC, etc.

Note on overlapping coverage: when constructing asset class structure, we need to be careful not to make the asset classes overlapping with each other. If we do have an occurrence where an instrument can be put into two asset classes, make sure we have a convention of where to put the instrument. For example, an IRS which is in different currencies are called CCS (Cross Currency Swap). So either we don’t have CCS asset class and assigned everything to IRS (this seems to be the more popular convention), or we do have CCS and make sure that none of the swaps with different currencies are in IRS.

2. Currency

For single-legged “hard” instruments such as bonds and equities, the currency is straightforward. For multi-legged, multi-currency instruments such as FX forward and cross currency swap, we have two currencies for each instrument. In this case, we either have a column called “currency pair”, value = “GBP/USD”, or two column marked as “buy currency” and “sell currency”.

For cash instruments, the currency is the currency of the cash. For “cash like” or “cash equivalent” instruments such as CP, CoD, T-bill, the currency is straightforward, inherent in the instrument. For multi-currency CDS Index such as this (i.e. a basket of CDSes with different currencies), look at the contractual currency of the index (in which the premium leg and protection leg are settled), not the liquid currency (the currency of the most liquidly traded CDS).

For derivatives of equities or fixed income, the currency is taken from the currency of the underlying instrument.

3. Country

Unlike currency which is a true property of the instrument, country is a property of the issuer. There can be three different countries in the instrument dimension, particularly for equities, i.e. country of incorporation, country of risk (aka country of operation, country of domicile), country of listing.

Country of risk is the country where if there is a significant business changes, political changes or regulatory changes in that country, it will significantly changes the operation of the company which issues this security. This is the most popular one particularly for portfolio management, and trade lifecycle. It common for a company to operate in more than one country, in this case it is the main country (from revenue/income point of view), or set to “Multi-countries”.

Country of incorporation is the country where the issuer is incorporated, not the where the holding company (or the “group”) is incorporated. This is used for regulatory reporting, for example FATCA and FCA reporting.

Country of listing depend on the stock market where the equity instrument is listed. So there can be two different rows for the same instrument, because it is listed two different stock exchanges.

The country of risk of cash is determined by the currency. In the case of Euro instruments (not Eurobond*) it is usually set to Germany, or Euroland (not EU). *Eurobond has a different meaning, it is a bond issued not in the currency of the country where it is issued, i.e. Indonesia govt bond issued in USD.

An FX forward which has 2 different currencies has one country of risk, based on the fixed leg (not the floating leg) because that is where the risk is. The country of risk for cross currency swap is also based on the fixed leg. For floating-for-floating CCS, the convention is usually to set the country of risk to the least major currency, e.g. for USD/BRL, USD is more major than BRL, so Brazil is the country of risk. For non-deliverable forward and CCS (meaning the payment is settled in other currency because ND currency can’t be delivered offshore), the country of risk is set based on settlement currency (usually USD).

Like currency, the country of a derivative of equities or fixed income instrument is taken from the country of the underlying instrument.

4. Sector

These attributes are known with many names: sector, industrial sector, industry sector, or industry. I will use the term sector here.

There can be many sector attributes in the instrument dimension, e.g. Barclays level 1/2/3, MSCI GICS (and S&P’s), UK SIC, International SIC, FTSE ICB, Moody’s sector classification, Factset’s sector classification, Iboxx, etc. They have different coverage. Some are more geared up towards equities, some more towards fixed income.

The cash instruments and currency instruments usually have either no sector (blank), or set to “cash”. Rates instruments, commodity futures and real asset usually have no sector.

The sector of fixed income derivatives, such as options and CDSes are determined based on the sector of the underlying instrument. Ditto equity derivatives.

5. Issuer

All equity and fixed income instruments have issuers. This data is usually taken from Bloomberg, or from the index provider if the position is an index constituent.

All corporate issuers have parents. This data is called Legal Entity data, which can be obtained from Bloomberg, Thomson Reuters, Avox/FT, etc. From the Legal Entity structure (parent-child relationship between company, or ownership/subsidiary to be more precise) we can find the parent issuer, i.e. the parent company of the issuer, and the ultimate parent, i.e. the parent of the parent of the parent (… until the top) of issuer.

Legal entity data is not only used in instrument dimension. The main use LE data within an investment bank is for credit risk and KYC (know your customer), i.e. customer due dilligence. PS. LEI means Legal Entity Identifier, i.e. BBG Company ID, FATCA GIIN (Global Intermediary Identifier Number), LSE’s IEI. But LEI also means ROC’s Global LEI – the Regulatory Oversight Committee.

6. Rating

Like sector, there are many ratings. Yes there are only 3 rating providers (S&P, Moody’s, and Fitch), but combined with in-house rating, there can be 15 different permutations of them, i.e. the highest of SMF, the lowest of SMF, the second highest of SMF, the average of SMF, the highest of SM, the lowest of SM, the average of SM, the highest of SMFH, the lowest of SMFH, etc. With M = Moody’s and H = House rating.

Plus we have Rating Watch/Outlook from the 3 provider. Plus, for CDS, we can have “implied rating” from the spread (based on Markit CDS prices data).

7. Maturity

Almost all fixed income instruments have maturity date. Maturity is how far is that maturity date from today, stated in years rather than days. We also have effective maturity, which is the distance in time between today and the nearest call date, also in years.

8. Instrument Identifier

This is the security identifier as explained earlier, i.e. ISIN, Bloomberg ID, Ticker, Markit ID, Sedol, CUSIP, Reuters ID, Moody’s ID.

9. Asset Class Specific Attributes

Each asset classes have their own specific attributes.

For CDS we have payment frequency (quarterly or bi-annually), standard coupon payment dates (Y/N), curve recovery (Y/N), recovery rate (e.g. 40%), spread type (e.g. conventional), restructuring clause (Old R, Mod R, Mod-Mod R, No R), fixed coupon convention (100 or 500), succession event, auction settlement term, settlement type (cash/physical), trade compression, standard accruals (Y/N), contract type (e.g. ISDA).

For IRS we have amortising swap flag, day count convention, following convention (Y/N), no adjustment flag (Y/N), cross currency flag (Y/N), buy currency, sell currency, mark-to-market flag, non-deliverable flag, settlement currency.

Debt instruments such as bonds have these specific attributes: coupon type (e.g. fixed, floating), seniority (e.g. senior, subordinated), amortising notional, zero coupon. Funds also have their own specific attributes, such as emerging market flag, launch date, accumulation/income, base currency, trustee, fund type, etc.

Granularity

The granularity of an instrument dimension can be a) one row for each instrument (this is the norm), or b) one row for each leg. This is to deal with multi-leg instruments such as CDS (3 legs) and cross currency swap (2 leg). The asset class of each leg is different.

If we opt for one row for each instrument, the asset class for each leg needs to be put in the position fact table (or transaction fact table, compliance fact table, risk fact table, etc).

Coverage

There are millions of financial instruments in the market and through-out the life of an investment bank there can be millions of OTCs created in its transactions. For investment companies, there are a lot of instruments which they had holdings in the past, but not any more. Coverage of an instrument dimension means: which instruments are we going to maintain in this dimension? Is it a) everything in the market, plus all OTCs, b) only the one we ever used, c) only the one we hold in the last N years.

We can set the coverage of the instrument dimensions to cover all bonds and equities which ever existed since 1900, but this seems to be a silly idea (because of the cost, and because they are not used), unless we plan conduct specific research, e.g. analyse the quality changes over a long period. The most popular convention is to store only what we ever used.

SCD

Most of instrument dimensions are in type 2, but which attributes are type 2 are different from project to project, bank to bank (and non-bank). Most of the sector, rating, country attributes are type 2. Maturity date is type 2 but maturity (which is in years) are either type 1 or kicked out of this dimension into a fact table (this is the more popular option). Next coupon date and effective date are usually type 1.

Numerical attribute

Numerical attributes such as coupon, rating factor, effective maturity, etc. are treated depending on their change frequency. If they change almost every day, they must be kicked out of the instrument dimension, into a fact table. For example: effective maturity, maturity, holding positions.

If they change a few times a year, or almost never change (static attribute), they stay in this instrument dimension, mostly as type 2. An example of a static numerical attribute is coupon amount (e.g. 6.25%). An example of a numerical attribute is rating factor (e.g. 1 for AAA and 3 for A), and associated PD (probability of default, in bps, e.g. such as 0.033 for AAA, 0.54 for AA, and 10 for BBB), which on average changes once every 1 to 3 years.

The difference between a numerical attribute and a fact is that a numerical attribute is a property of the instrument, whereas a fact is a measurement result.

System Columns

The usual system columns in the instrument dimension are: created datetime, last updated datetime, and the SCD system columns e.g. active flag, effective date, expiry date.

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