Discussion Topic: Visualization Tools for Monitoring Systemic Risk: Money Funds and CDS
Published: February 24, 2015
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Office of Financial Research (OFR) to identify and monitor potential financial stability risks. Developing better data sources and tools to monitor opaque instruments and institutions is part of the OFR’s market surveillance mission.
Our 2014 Annual Report to Congress provided a list of the market monitoring products we have under development. Today we will discuss two of those tools: a money market fund monitor that examines holdings of individual funds and the industry as a whole, and a credit default swap monitor that analyzes financial stability metrics in the credit derivatives market.
Money Market Fund Monitor
The OFR’s prototype Money Market Fund (MMF) Monitor has key metrics to monitor exposures, counterparties, rates, and other relevant metrics about money market funds. The MMF Monitor’s objective is to enhance our ability to monitor cash and liquidity management across short-term markets. It will also help us track connections and funding and liquidity risks among issuers, investors, and financial intermediaries.
The prototype MMF Monitor draws on Form N-MFP data collected by the Securities and Exchange Commission (SEC) and includes:
- a dashboard focused on specific risk parameters in the money market fund industry;
- a series of interactive visualizations applying filters to track specific exposures; and
- metrics to monitor each fund’s mark-to-market net asset value.
In the future, the OFR plans to expand the MMF Monitor with other regulatory and market data, including:
- repo and other short-term market rates;
- information about commercial paper, deposits, and other cash management vehicles; and
- other regulatory reports filed by short-term funds that are similar to money market funds, such as bank-owned short-term investment funds that report to the Office of the Comptroller of the Currency, private liquidity funds that file the SEC’s Form PF, and European money market funds.
We intend to share the current version of the MMF Monitor, which relies exclusively on public data from Form N-MFP, with other researchers and regulators focused on monitoring risks in MMFs and other short-term funding markets. However, if any additional datasets contain nonpublic information, we will use appropriate restrictions to safeguard confidentiality.
Credit Default Swap Monitor
The Credit Default Swap (CDS) Monitor provides insights into the risks that financial institutions take through credit derivatives. Credit derivatives help mitigate credit risks, but also can increase interconnectedness among financial institutions and concentrate risks. The CDS Monitor enables the OFR to investigate risks associated with specific counterparties or reference entities. As this inquiry uses sensitive and confidential information, we use appropriate restrictions to safeguard the use of and access to this data. The OFR will not reveal any confidential information in our CDS Monitor.
The prototype CDS Monitor draws on detailed CDS data collected by the Depository Trust & Clearing Corp. and visualizes two forms of risk:
Concentration: The monitor identifies specific concentrated positions established by individual counterparties in the CDS market. It also can analyze data across multiple dimensions, such as by counterparty (e.g., dealer versus non-dealer), positioning (e.g., sale versus purchase of protection), and credit (e.g., index or single name, and sector).
Interconnectedness: The CDS Monitor incorporates a novel visualization approach, a hive representation, to concurrently view several networks: the interdealer market; interconnections between dealers and non-dealers; risks non-dealers transact; and risks dealers intermediate. The monitor computes scores to capture an individual participant’s importance within each of these four sub-networks.
This tool will help identify concentration risks and transmission channels within the CDS market. The CDS Monitor also can assess exposures to macroeconomic and geopolitical developments, the growth of central clearing, and the reduction in risk-taking among dealers since 2007-09.