The term reference data is most commonly used by information technology (IT) professionals in the financial sector to categorize data that describes financial transactions and helps identify the participants in those transactions. Reference data was established by regulatory agencies in order to increase trade efficiency and to help firms manage risk.
In short, reference data acts as a domain that holds information regarding a firm’s entities. In this sense, reference data acts as a common repository of all data related to financial transactions, such as settlements, corporate actions and pricing. The data is coded, making information universal across exchanges.
Reference data is typically organized as a database, frequently with a two-column format: one for a primary key code and another for a description of the entity.
There are several different kinds of reference data. Some data, for instance, includes a company’s external information, such as the currency they use or the time zone of a company’s location—all of which does not change as a result of financial transactions. Other types of reference data include information known as type codes and status codes, which control entity life histories.
A key aspect of reference data is legal identification of an entity such as a bank or trading firm. As no standard exists for legal entity identification (LEI) multiple ways of identifying an entity are in use. The gross confusion and inefficiencies that this causes became clear when investment bank Lehman Brothers collapsed in 2008 as a result of the Great Recession. A standard for LEIs would allow firms to share the same reference information across borders paving the way for a more efficient market.
The Lehman Brothers fiasco and the Dodd Frank Act sparked a major reform effort for a global LEI system that assigns reference numbers to uniquely identify entities involved in global securities trading markets. The LEI initiative has its main goal of mitigating systematic risk. The SEC, the CFTC and similar organizations anticipate that standardized LEIs will start to take effect during the first quarter of 2013.