Data and Technology Subcommittee: Standards Recommendation
Published: August 1, 2013
The OFR should focus its immediate efforts to standardize the types and formats of data reported and collected on behalf of the Financial Stability Oversight Council (FSOC) on the content standards for reporting OTC derivative contracts to swap data repositories (SDRs).
The Dodd Frank Act (DFA) specifically requires the Commodity Futures Trading Commission (CFTC) and the Securities & Exchange Commission (SEC) to develop and enforce rules for reporting of OTC derivative contracts to SDRs to facilitate monitoring of market functions and to support systemic risk assessment. There is no current standard for defining the meaning of the data that swap dealers are required to report to SDRs. This lack of standards inhibits the CFTC and SEC from validating and normalizing data across SDRs and across geography, standardizing product identification, consistently aggregating and classifying instruments, aligning reports using various messaging schemas and supporting complex analytics based on ad-hoc scenarios. The pathway to addressing this challenge is aligned with the DTS financial instrument database recommendation and it makes sense to start the process of developing the financial instrument database in conjunction with the immediate requirements of the CFTC and SEC for reporting OTC derivative contracts to SDRs.
The Office of Financial Research (OFR) is directed to implement regulations to standardize the types and formats of data reported and collected on behalf of the Financial Stability Oversight Council (FSOC). The Legal Entity Identifier (LEI) standard was a clear illustration of how the data standardization objective can be implemented and extended. One of the objectives of the Data & Technology Subcommittee (DTS) is to work with the OFR to establish an operational route map on the other core standards needed to support the FSOC and member agencies.
DTS has created a Standardization Working Group to assess the analytical objectives of FSOC (in cooperation with the Risk and Research Subcommittees of FRAC) and translate them into specific standards priorities. The range of standards needed to meet these objectives is broad ranging from standards for loans and loan portfolios to classification to multi-listed instrument identification to derivatives transparency reporting. DTS views the full spectrum of standards as important factors of input for OFR to consider, but concludes that the most immediate problem should be to work with the Commodities and Futures Trading Commission (CFTC) and the Securities & Exchange Commission (SEC) to develop standards for reporting OTC derivative contracts to swap data repositories (SDRs).
The Dodd-Frank Wall Street and Consumer Protection Act (DFA) specifically requires the CFTC and the SEC to develop and enforce rules for reporting of these derivative transactions to SDRs to facilitate monitoring of market functions and to support systemic risk assessment. The CFTC and SEC have the authority under DFA to mandate detailed standards for what data should be reported as well as the format and meaning of the data, but they have not yet specified these standards. This lack of standards (both content and format) inhibits the CFTC and SEC from performing their market oversight and systemic risk analysis objectives. In particular, the lack of standards makes accurate aggregation and complex analytics very difficult because the critical contractual terms are not reported based on a common set of concepts and definitions.
The pathway to addressing this challenge is very much in alignment with the DTS recommendation on the OFR’s obligation to publish a financial instrument database. In this areas of objectives the SEC, CFTC and OFR are closely aligned. The CFTC and SEC need to develop detailed standards for reporting on a specific set of contracts. The OFR needs to develop the concepts, definitions and business relationships (i.e. the contractual ontology) associated with all financial instrument types.
DTS believes that it makes sense for OFR to start the process of developing its financial instrument database by working with the CFTC and SEC to develop the ontology for reporting OTC derivative contracts to SDRs. It is worth noting that this is very similar to the approach that led to the LEI initiative