OFR Teams with Fed to Fill Key Gap in Financial Data

In a presentation earlier this week to the Financial Stability Oversight Council, I announced an important initiative of the Office of Financial Research in partnership with the Federal Reserve to fill a key gap in our ability to measure financial activity.

Filling key gaps in financial data, such as through this project, is an essential element of OFR’s mission. The Office was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to promote financial stability by delivering high-quality financial data, standards, and analysis for the Council and the public.

The project focuses on repurchase agreements, or repos, which are a major source of short-term funding for the financial system. A repo is essentially a collateralized loan — one party sells a security to another party with an agreement to repurchase it later at an agreed price.

Repos are instrumental in providing funding and liquidity — the lubrication that helps to keep the global financial system operating. The U.S. repo market efficiently provides more than $3 trillion in funding every day.

However, vulnerabilities in repo markets can also contribute to risks to financial stability. The concern arises because of the potential for shocks to the financial system during times of market turbulence to cause repo liquidity to dry up.

The repo market is divided into three parts: (1) the triparty repo market, where transactions are centrally settled by two large clearing banks; (2) the general collateral financing, or GCF, market, where interdealer repo transactions are centrally cleared; and (3) the bilateral market, where repo transactions are conducted privately between two firms.

Information and data on the triparty and GCF markets are published regularly, but information about bilateral repos is scant.

In its 2014 Annual Report, the Council recommended that the OFR and Council member agencies work together to fill gaps in data related to the repo market. The project follows that recommendation by focusing on the bilateral repo market.

The Securities and Exchange Commission is a key contributor on this initiative and will have access to the data collected.

The project marks the first time that the OFR is going directly to industry to gather financial market information. Participation is voluntary, and participating companies will be asked for input on what data should be gathered. We expect to begin gathering data early next year. Aggregated data from the survey will be published to provide greater transparency into the bilateral repo market for participants and policymakers.

At the OFR, our job is to look across the financial system and shine a light into its dark corners. Collaborating with our colleagues at the Fed and SEC, we hold great hope for the insights that illumination from this pilot project will yield in promoting the stability of short-term financing markets and our broader financial system.

Richard Berner is Director of the Office of Financial Research