Reference Data - Hierarchy determines the strength!

Once upon a time : An old farmer called his sons and told them to break a bundle of sticks.

Plot Explained : Whether the sons will be able to break the sticks/bundle depends mainly upon:
a. thickness/quality of the sticks
b. thickness of the overall bundle

Result : When the sons were not able to break the bundle, the farmer untied the bundle and each son was able to break the individual stick easily. Of course, had the bundle contained thick/quality wood sticks it would have been more difficult for sons to break even the individual sticks.

Moral of the story : Financial Institutions should check whether the company with which they are dealing is financially sound or not and is a part of a strong bundle/group or not else Obsolescence, Recession, Political Changes, Ownership changes, frauds, Brain Drain etc. may tear apart the financial soundness of the company and financial Institution may be left with no resort to recover their legal dues. It becomes an utmost necessity to get the hierarchy verified/researched in case the  financial house has the second party to the trade/probable trade:
a. as it’s counterparty.
b. a party to whom loan, is to be disbursed/ has been disbursed.
c. a party whose securities the financial house, is going to purchase/has purchased.
d. not rated during the last 6 months by any rating agency of repute.

Question of the hour : How creditdimensions makes sure that a company is financially sound and belongs to some group or not?

Answer : Actually creditdimensions is into advisory and reference data management business. It has a specific module called ‘ Hierarchy Management’ to take care of the sound group aspect. In order to make sure that:

* A company is financially sound or not? we ensure/report our clients that:
-> Entity is alive/obsolete.
-> Entity is not into Liquidation/bankruptcy/any type of corporate action (merger/acquisition etc). If it is a party to some corporate action, we track the related corporate action from the date of announcement and report the facts to the client. ( Reference : Latest Corporate Actions on our site creditdimensions.com.)
-> Entity’s major financial figures are right or not.
-> Whatever attributes client require to gauge the risk, we’ll provide them.

* A company belongs to a strong/weak group :

We rely upon our Hierarchy management practice( A part of creditdimensions overall legal entity reference data services). With our refined process rules and developed methodology we firstly find out the Legal Hierarchy or Business Hierarchy of the company and report that to the client. It gives client a fair idea about the entity’s strength. To explain :

Legal hierarchy means the chain/group to which the entity in question belongs. The entity which hold more than 50+% of equity stake in the company, is treated as legal parent of the company and the company is treated as subsidiary/’group company’ of the parent. For instance if the immediate parent/holding company of an entity is say ABC Europe PLC and ABC Europe PLC is owned by some strong ultimate parent like Govt. of a country etc. In such case, on the basis of hierarchy reported by us, client can easily place the entity in question into a particular risk bracket as per policies of the organization. Also, some financial houses are keen about knowing the hierarchy as generally financial firms :

~ want to know the number of entities per group with which they have  business, to manage the risk exposure attached with every group in a better way.
~ are interested in consolidated figures to measure the company’s strength.
~ are interested in keeping a track of ownership changes.
~ are simply interested in knowing whether the entity with they are dealing belongs to a financially strong group or not, can they chase the group in the event of default or not?

Business Hierarchy refers to the chain/group which manages the real financial affairs. Generally it is applicable to Funds etc. Clients are keen to know that who manages a particular fund. And accordingly the particular fund gets risk/reward/potentials rating.

Finally : Read somewhere that “Trust in God, but lock your car”. Message ==> play safe in every walk of the life. The same rule is applicable to reference data also. Trust the data you have but there is no harm in getting it verified through Subject Matter Experts.

Pro-Active management of risk exposure is the formula to financial success and Hierarchy Map of the counterparties helps an organization to assess,calculate and manage the counterparty risk perfectly.