Remarks by OFR Director Richard Berner at the Financial Regulation Summit: Data Transparency Transformation
Published: March 24, 2015
Good afternoon, it’s a pleasure to be here. I want to thank Hudson Hollister and the Data Transparency Coalition for sponsoring this important Summit, and for inviting me to discuss how standards can improve financial data and thus transparency.
As you know, developing and promoting standards for financial data are central to the mission of the Office of Financial Research. Likewise, I know that financial data standards are important to everyone in this room, and I appreciate your interest in, and support for, their use — now and in the future.
Today I will focus on the OFR’s data standards agenda, past, present, and future. Related, I will discuss how we at the OFR are meeting the critical needs to share data and to fill data gaps.
As you know, the OFR was created by the Dodd-Frank Act in 2010 to help promote financial stability by delivering high-quality financial data and analysis for the benefit of the Financial Stability Oversight Council — FSOC — and the public.
Financial stability monitoring, analysis, and research certainly are not new. But the financial crisis that began in 2007 changed the conversation. The crisis exposed critical gaps in our analysis and understanding of the financial system, in the data and metrics used to measure and monitor financial activities, and in the policy tools available to mitigate potential threats to financial stability. These gaps — in analysis, data, and policy tools — contributed to the crisis and hampered efforts to contain it.
These three gaps are interconnected, like links in a chain. Weakness in any of the three links could impair our overall ability to spot and address weaknesses in the financial system. We need good analysis to make good policy. And we need good data — solid, reliable, granular, timely, and comprehensive data — to conduct good analysis and monitoring. In other words, good data are the foundation for success in our work and for effective risk management in financial companies.
It may seem obvious to all of you in this room, but I cannot overemphasize the importance of quality in making financial data usable and transparent. When Lehman Brothers failed six years ago, its counterparties could not assess their total exposures to Lehman. Financial regulators were also in the dark because there were no industry-wide standards for identifying and linking financial data representing entities or instruments.
Standards are needed to produce high-quality data. Transparency follows from quality; for data, transparency means that all users understand what the data represent.
Fortunately, we have made progress in improving both the scope and the quality of financial data. However, gaps persist and it’s our job to fill them.
The global legal entity identifier, or LEI, is the cornerstone for financial data standards. As you know, the LEI is like a bar code for precisely identifying parties to financial transactions.
The OFR has led the global LEI initiative from the start, and it has gone from conception to nearly full-fledged operational system in just a few years. Currently, the OFR’s Chief Counsel serves as chairman of the Regulatory Oversight Committee, which oversees the LEI system.
I don’t have to tell this audience that the case for ubiquitous adoption of this data standard is strong.
Had the LEI system been in place in 2008, the industry, regulators, and policymakers would have been better able to trace Lehman’s exposures and connections across the financial system. The LEI system also generates efficiencies for financial companies in internal reporting and in collecting, cleaning, and aggregating data. In addition, I expect it will ease companies’ regulatory reporting burdens by reducing — and eventually eliminating — overlap and duplication.
The financial services industry has strongly supported the LEI initiative. In fact, major trade groups have called for government regulators to mandate its use — a rare example of industry asking for more regulation.
The global LEI system is up, running, and growing. Like any network, the LEI system has benefits that will grow as the system grows.
To accelerate adoption, the OFR has been calling for regulators to require broader use of the LEI in regulatory reporting. We are also calling for broad adoption of standards for instruments and products as they become available.
Regulators have begun to respond. The Securities and Exchange Commission required the use of the LEI in rules announced a month ago for reporting data related to securities-based swaps. Last week the Federal Reserve Board announced a proposal to require banking organizations to include their existing LEIs on certain regulatory reporting forms.
I don’t have to dwell on how these data standards can help you, your companies, and your agencies. But I would like to outline what you could do to help us all realize their full benefits.
In particular, we’d like to call on you in the Data Transparency Coalition as a collaborator in pursuing data standards. That would be appropriate given your past work in helping regulatory agencies understand, use, and benefit from more effective use of data standards, in particular XBRL.
As you know, the Federal Deposit Insurance Corporation adopted XBRL as the data standard for commercial bank financial statement reports, often referred to as Call Reports. Although this project has streamlined the call report process by reducing errors, cutting processing times, decreasing costs for banks, and improving the comparability of the data, different federal agencies are using different standards for identifying entities in XBRL data. The lack of a common standard limits XBRL reporting efficiency and raises costs. Adopting the LEI for entity identification across agencies would improve efficiency and the quality of the reported data. The time has come to do just that, and we’d like your support for it.
At the OFR, we recognize that the LEI is a critical and foundational data standard. But we also recognize that it is only the start and there is much more to be done. On that foundation, we are helping to build other standards — that’s where we also need your help and support.
The LEI gives us insight into “Who is who?” among legal entities. A second standard can help us identify “Who owns whom?” — a standard for hierarchies, or corporate structures, for easily identifying firms’ subsidiaries. This standard promises to help us make continued progress in tracing the interconnections in the financial system.
The OFR is also working on a spectrum of other identifiers to help us answer the question, “Who owns what?”
Over the past year, we have begun to develop plans for a reference database for financial instruments, something that we are required to do by law. We do not want to start from scratch; rather we want to leverage work already done by others. For example, private firms, nonprofits, and academics offer products for instrument identification and analytics. We don’t want to compete with them; we want to include them in the design so that their systems can talk to each other. The reference database would thus connect these components together.
We expect that as we further develop our plans for this reference database, we will consult with interested parties and invite comments on how best to take advantage of existing work while providing a coherent, system-wide reference. We would thus expect this initiative to result in new opportunities for collaboration, research, and innovation across the financial system.
One example of the system-wide approach to data quality improvement is in derivatives markets. Financial reform sought to improve transparency in derivatives markets by requiring that data related to transactions in swaps be reported to swap data repositories. Swap data are critical to understand exposures and connections across the financial system, and the repositories are designed to be high-quality, low-cost data collection points.
We at the OFR and our colleagues at the Commodity Futures Trading Commission — CFTC —both want to promote the use of data standards in swap data reporting to assure data quality and utility. A year ago, we began a joint project to enhance the quality, types, and formats of data collected from registered swap data repositories. Together, we are aggressively moving forward to address key data quality issues and inconsistencies in how data are reported across repositories. We are also collaborating on developing uniform global unique transaction identifiers and unique product identifiers.
OFR collaboration on data standards includes not only U.S. regulators but also regulators overseas. We view the international cooperation behind the LEI as a blueprint for future progress on other global financial data standards.
For example, the OFR joined with the Bank of England and the European Central Bank in mid-January to convene a forum entitled “Setting Global Standards for Granular Data,” the first of two workshops. Discussions in this workshop built on our work with the CFTC and on work by the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions, and the Financial Stability Board to identify core standards needed to share and use data on over-the-counter swaps on a global basis.
Data standardization is essential but not sufficient to improve the quality of financial data, to reduce or eliminate duplication, and carry out our work. We also need to improve ways to securely share sensitive data, both among authorities within the same jurisdiction and across borders. Data sharing is essential because none of us — no one regulator or company alone — possesses or has access to all of the data needed to paint a complete picture of threats to financial stability. The financial system is complex and ever-changing, so even if we put all of our data together in one place, significant gaps would remain and new ones would emerge. It is a puzzle with many interlocking types and pieces of data.
A perfect understanding of how to fill those gaps will always elude us. But by working together, we can fill many of them. Your companies and agencies hold some of those puzzle pieces. It is essential for us to collaborate appropriately to put them together, to see where the data gaps are, and to fill them. Equally, sharing is critical for the regulatory community to reduce duplication and overlaps in data collection.
You may be thinking that’s easier said than done. We all realize that our goals of sharing and standardizing financial data across the globe face hurdles, including legal barriers, data security concerns, and confidentiality restrictions. These challenges are legitimate and potentially daunting. But we do not want to risk the potential consequences if future financial shocks were to trigger another crisis simply because we lacked the benefit of high-quality data to illuminate financial system vulnerabilities and possible ways to mitigate them.
We believe the efforts underway nationally and internationally demonstrate that, with collaboration, we can make critical information available to decision makers, while finding ways to secure the information, protect confidentiality, and honor legal requirements. For example, the recent report from the Irving Fisher Committee on Central Bank Statistics contains an excellent summary of recommendations and best practices.
As I noted, the critical need to maintain the security of confidential data is an obstacle to data sharing. Bad outcomes can result if highly sensitive data fall into the wrong hands. Government organizations that collect and maintain the data have well-established and time-tested security measures in place. Taking the data outside the sphere of these protective measures could potentially introduce grave risks.
The remedy for this obstacle is that data sharing must occur with controls and safeguards every bit as rigorous as the controls and safeguards that the sources of the data have employed and refined over time.
To share data, regulators must work out legal agreements and determine the technology and standards to use for exchanging the data. Now is the time for agencies to work through the legal and technological issues. During times of crisis, we will have neither the latitude nor the time to ensure that we can share data safely and quickly.
At the OFR, we are committed to protocols and procedures for collecting, storing, and appropriately sharing data that meet or exceed the strict standards of our data-sharing partners. In fact, the OFR has developed world-class data security procedures. And we have defined and adopted a data security classification scheme and matching controls to assure secure data handling and sharing. Using them, supervisors can know that their data are just as secure with us as they are in their own systems.
We have also sponsored exploratory research and discussions on the use of cryptological tools to protect data. And we are routinely communicating with providers of information about how to anonymize information to ensure that confidentiality is protected, whether information is viewed alone or in combination with other information.
Through bilateral data-sharing agreements among FSOC member agencies, all participants can be assured that shared data will be protected, secured, and treated consistently.
We are already sharing data under such agreements. Examples include our access to the Securities and Exchange Commission’s detailed data about hedge funds and other private funds in Form PF, and their detailed money market fund data in Form N-MFP. Using the Form PF data, the OFR is evaluating leverage across different hedge fund strategies, with a particular interest in sources of leverage.
As we all know, sharing alone will not fill all of the data gaps we need to fill to form a complete picture of the financial system. We must also fill gaps by collecting new data from firms and markets.
Our partnership with the Federal Reserve to fill gaps in data describing repurchase agreements, or repo, is a good example of such initiatives. In October, we announced a pilot project to understand how to fill these gaps, and today, we are well underway.
As you know, a repo is essentially a collateralized loan — when one party sells a security to another party with an agreement to repurchase it later at an agreed price. Repos are an important source of short-term funding for the financial system. The U.S. repo market provides an estimated $3.8 trillion in funding daily. However, the repo market can also contribute to risks to financial stability.
The repo market is comprised of two parts: the triparty repo market, in which transactions are centrally settled by two large clearing banks, and the bilateral market, where repo transactions are cleared and settled privately between two firms. (The General Collateral Financing Repo [GCF Repo®] Service, in which the Fixed Income Clearing Corporation acts as a central counterparty, also settles on the triparty platform.)
Information and data on the triparty market are published regularly, but information about bilateral repos is scant.
The project is designed to fill the gaps in bilateral repo data, and it marks the first time the OFR is going directly to industry to collect financial market information. Participation in the pilot project is voluntary, and participating companies have provided input on what data should be gathered and what templates should be used for data collection. This pilot is intended to inform future collection efforts, which we hope to initiate quickly. Aggregated data from the pilot will be published to provide greater transparency into the bilateral repo market for participants and policymakers.
Let me sum up: Promoting data standards and filling data gaps are core elements of the OFR mission. Without good data, we can’t do good research and provide the good analysis needed by policymakers to protect financial stability. Lacking good data, firms will have much more difficulty assessing and managing their risks. Your collaboration is an essential ingredient in making good data available to all of us.
Thank you again for the opportunity to join you here today. I would be happy to respond to your questions.