Remarks by OFR Director Richard Berner at the SIFMA OPS 2015 Operations Conference & Exhibition

Good morning, it’s a pleasure to be here. I want to thank SIFMA for sponsoring this conference and for inviting me.

I also want to express my special thanks for SIFMA’s strong support for the legal entity identifier, or LEI, initiative and for continuing support for future initiatives to promote high-quality financial data through the use of data standards.

Developing and promoting standards for financial data are central to the mission of the Office of Financial Research. I believe that our engagement with you in industry to develop and promote the global LEI system is a model for cooperation between government and industry on a worldwide scale — a model that I hope will serve as a blueprint for progress in the future.

This morning 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. I will conclude by outlining some current threats to financial stability and explain how our work illuminates their assessment and monitoring.

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.

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 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 LEI 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.

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.

Within SIFMA and across the financial services industry, support for the LEI has been strong. In fact, SIFMA and other 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.

As many of you know, the OFR is working to accelerate adoption by calling for regulators to require broader use of the LEI in regulatory reporting. We have also called for broad adoption of standards for instruments and products as they become available. And I repeat those calls today.

Regulators have begun to respond. The Securities and Exchange Commission required the use of the LEI in rules announced a couple of months ago for reporting data related to securities-based swaps. More recently, the Federal Reserve Board announced a proposal to require banking organizations to include their existing LEIs on certain regulatory reporting forms.

At the OFR, we recognize that the LEI system is only the start. There is much more to be done. On that foundation, we are helping to build other standards — that’s where we need your continuing 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.

We are 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, as we are required to do by law. Rather than start from scratch, 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.

As we further develop our plans for this reference database, we expect to consult with interested parties and invite comments on how best to take advantage of existing work, while providing a coherent, systemwide reference. We hope this initiative will result in new opportunities for collaboration, research, and innovation across the financial system.

One example of the systemwide 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. 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.

This need to improve ways to securely share sensitive data, both among authorities within the same jurisdiction and across borders, is important to improve the quality of financial data, to reduce or eliminate duplication, and to carry out our work. Data sharing is essential because none of us — no single regulator, company, or industry segment — 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.

A perfect understanding of how to fill those gaps will always elude us. But by working together, we can fill many of them. Our goals of sharing and standardizing financial data across the globe certainly 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.

With collaboration, we can make critical information available to decision makers, while finding ways to secure the information, protect confidentiality, and honor legal requirements.

So, how do we approach data security? We know that 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. 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.

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.

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.

This repo pilot project is one example of how the OFR looks across the financial system to fill gaps in analysis and financial data. We have also begun a related initiative — a first cousin to the repo project — to fill gaps in securities lending data. Working with the Fed and the SEC, we are reaching out to lenders and borrowers to understand where the gaps are. And we are developing templates for a pilot project similar to the repo pilot, to collect data on loans, terms, and collateral uses.

Let me conclude by discussing our assessment of current threats to financial stability. Compared with the period just before the financial crisis, I think such threats are moderate. But vigilance remains critical because we see some risks to financial stability increasing, such as excessive risk-taking in some markets during the extended period of low interest rates and low volatility, vulnerabilities associated with declining market liquidity in a few markets, and the migration of financial activities toward opaque and less resilient corners of the financial system.

Let’s step back for a moment. I started my remarks this morning by recalling how the financial crisis exposed deficiencies in data, in our understanding of the functioning of the financial system, and in tools to promote financial stability. Thanks to strong intervention, the financial system and the economy have both recovered, but there is more work to do.

To this audience, the point may seem simplistic but is still worth noting: Economic growth depends on a strong and stable financial system. At the OFR, our work supports such growth by helping to promote the resilience in the financial infrastructure that growth requires.

Yet our current environment of slow growth is raising questions about whether tradeoffs exist between resilience and growth. My answer: Only in the short run. Efforts to increase resilience may require adjustments that could be temporary headwinds to growth.

To be sure, there are concerns that more permanent adjustments could impair market functioning. A moment ago, I mentioned my concerns about liquidity in some financial markets. Indeed, several developments since the financial crisis have altered the amount of liquidity available in the financial system and the ways investors redeem holdings to get cash.

By design, regulation is intended to strengthen the capital positions of financial institutions and limit excessive risk-taking. As a consequence of some of these measures, balance-sheet constraints have increased the cost of securities financing activities and reduced incentives to maintain them.

However, regulations are far from the only factors at play. Some causes are cyclical, such as a decline in available collateral and changes in risk preferences. Other causes appear to be structural, such as changes in the investor base, in the development of new financial products, and in the structure of securities markets, such as the spread of high-frequency trading and algorithmic trading to fixed-income markets.

Traditional indicators do not support excessive concern about market liquidity. But, since the crisis, market liquidity has become more fragmented in a few markets, such those for sovereign bonds in emerging markets and U.S. corporate bonds. Signs of bifurcation or fragmentation are evident in the concentration of dealer inventories in high-quality liquid assets, declines in trading volumes, declines in the size of average trades, and settlement failures.

The fragile nature of liquidity was especially evident during the sell-off in fixed-income markets in mid-2013 and during market dislocations in September and October 2014. Neither development was widespread nor severe enough to prompt outsized price declines or to force firms to reduce their debt, but these developments bear watching, measuring, and analyzing.

Someone asked me recently what risks keep me up at night. The truth is, the risks that worry me the most are the risks I understand the least. Where are our blind spots? Are there significant risks in the system we are not seeing? Has the continuous evolution and innovation in the system caused a build-up of risks in a part of the system where we are not looking? The unknown risks are what keep me up at night and because the financial system is constantly changing, new risks are constantly emerging.

In short, I love my job, but I’ve learned to accept that sleepless nights come with it.

Thank you again for having me here this morning. I will be happy to take your questions.