Promoting Higher Quality and Lower Cost in Financial Regulatory Reporting
Published: January 12, 2017
Data are the lifeblood of finance, and the volume of financial data is staggering. On a routine day, close to $15 trillion in payments settle across the world, according to a 2016 report that OFR staff helped prepare. Firms depend on data to confirm transactions and manage risk. Regulators need data to oversee firms and markets. High-quality data are essential for both.
But data collection is not always smooth or efficient. The U.S. regulatory system is fragmented, so in some cases, firms must report the same information to different regulators in different ways. This inefficient reporting can be costly and undermines quality.
For example, our 2016 Financial Stability Report described risks from high levels of debt among nonfinancial corporations. Differing definitions of leveraged lending in regulatory reporting among banks and nonbanks created challenges in monitoring and setting policy in response to potential risks. (Generally, leveraged lending means loans to companies or individuals already carrying significant loads of debt.)
A key role of the OFR is to help improve the quality, scope, and accessibility of financial data. Data standards are critical to achieve quality. The OFR is part of several standardization efforts. We have led the push to develop a global standard to identify legal entities in financial transactions. The Legal Entity Identifier (LEI) now marks almost half a million legal entities in almost 200 countries. We have worked to develop, harmonize, and bridge disparate standards for derivative instruments. And we are developing financial reference data, as well as tools to catalog and curate them.
Standards are necessary but not sufficient to avoid duplication. Firms complain about unneeded costs from reporting similar but slightly different information to two authorities. They also complain about reporting data to more than one regulator, because it can require different reporting technologies.
The OFR collates the reporting requirements of U.S. regulators and collects them in our data inventory. The inventory, which is public on our website, shows that although regulators require many data collections, each collection derives from a distinct authority and has a distinct purpose.
On the surface, no redundancy is apparent. But a closer look reveals that the lack of shared data standards among all financial regulators can lead to inefficient, costly, and overlapping collections of data.
Despite convergence toward an identification standard — the LEI — regulators currently require other identifiers. Firms report to the Securities and Exchange Commission (SEC) using their central index key, to the Federal Reserve with their RSSD ID number, and so forth. Companies must manage even basic information in multiple ways for multiple regulators. This redundancy and extra cost is why industry groups have called on authorities to universally adopt the LEI.
The LEI is the most basic of data reporting standards for entities. It is just a single data element. Analogous identifiers are being developed to report transactions and their terms and conditions, but are also not universally adopted.
Current regulatory reporting often involves multiple technology platforms, creating unneeded costs and risks. A bank might use one platform to report to the Federal Reserve Bank of New York, a second to the Commodity Futures Trading Commission, a third to the SEC, and a fourth to a state regulator. It makes no sense for firms to maintain multiple platforms just to meet reporting requirements. Multiple platforms can introduce errors into data, and may have little to do with the way a firm runs its business.
Despite these problems, there are positive developments. The Federal Financial Institutions Examination Council (FFIEC), a formal council of bank supervisors, has developed standards for bank reports to federal supervisors and a common infrastructure for reporting obligations, such as Call Reports using XBRL (extensible business reporting language).
This reporting requirement is an example of moving from reporting on unstructured forms to reporting structured data based on a common data dictionary. Structured data lend themselves to harmonized and precise definitions, giving regulators the ability to share, compare, exchange, and aggregate data.
But more must be done to rationalize data reporting. Technologies for creating regulatory reports should align to other reporting needs, including a firm’s own risk management. Technologies should align among regulators. And all regulators should appropriately require the use of data standards. More broadly, the efficiencies banks realize through the FFIEC can be extended to other types of firms through collaboration among their regulators.
Through the Financial Stability Oversight Council, regulators are collaborating to improve reporting and reduce costs. The OFR plays a leading role in that effort.
Richard Berner is the Director of the Office of Financial Research