Behind the US Regulatory Scene

Data management has not traditionally been regarded as part of the regulatory agenda, but the last four months have seen this radically change, especially in the US. On February 4, senator Jack Reed introduced S.3005: The National Institute of Finance Act of 2010, "to create an independent research institute, to be known as the National Institute of Finance (NIF) to "oversee the collection and standardization of data on financial entities and activities, conduct monitoring, research and analytical activities to support the work of the Federal financial regulatory agencies and the Congress."

Developments seemed to progress swiftly when only a month later US senator Christopher Dodd's financial reform bill was passed in the Senate Banking Committee and introduced as a bill in the Senate. The bill proposed setting up the Office of Financial Research (OFR), a data and analysis centre, which will sit within the US Treasury and would aim to enable regulators to better understand complex financial products while giving key insight into systemic risk threats by collecting data needed to assess risks to the stability of the US financial system.

However, less than one month after it was introduced as a bill in the Senate, US senator Richard Shelby, ranking Republican on the Committee on Banking, Housing, and Urban Affairs, criticized the OFR in a speech he delivered regarding financial regulatory reform legislation before the senate on April 29. Shelby referred to the proposal as being a "massive new potentially half-billion dollar per year federal bureaucracy designed to collect ‘granular' financial data and to construct complex financial models."

"This new bureaucracy is given unprecedented authority, including abilities to obtain virtually any type of data it wants from financial companies, to the level of detail of what you buy on your credit card...This new bureaucracy is also designed to gather data, process it, and then is required to make it available to Wall Street firms so they can cut their costs. Who's for Wall Street now?" questioned Shelby during the speech before the Senate.

Expected Reactions
Far from being a shock for the industry, Shelby's words of concern have reflected the worries and unanswered questions many have regarding to what extent the OFR proposition could work in practice.

London-based PJ Di Giammarino, CEO of regulatory think-tank JWG, says early in the year, the wind was very much blowing against this proposition. "Initially, many were surprised to see it appear as it has. We doubt the framers of this proposal can believe it has come this close to life this quickly," says Di Giammarino, adding that he thinks that if it goes through, they may well regret having pushed it so fast.

In fact, the speed of the development has also been questioned by industry and data experts, who expected the bill would face major barriers sooner or later. "The bill has made very fast progress and it is understandable that it would hit a few bumps in the road. I think the question is whether it now sits out for a bit to be thought through, or whether the industry will need to digest this requirement as it struggles to implement it," says Di Giammarino.

Concerns around the high costs the proposition would entail, long timeframes and even privacy have all been highlighted as barriers for the set-up of OFR. "When you introduce the need for new data, it raises concerns not only around privacy, but more importantly around the appropriateness of the data and the value of its collection, as well as the cost of the infrastructure required to maintain it," he says.

But, while market participants agree the goals the OFR is trying to achieve would represent a major step forward for the financial industry, especially around the understanding of systemic risk, many think the sheer immensity of the project as well as the lack of standardization in the industry would not lead the proposal to a successful outcome.

However, while some of the questions remain unanswered, some suggest it may not be viable to have the full details of the proposal set in stone prior to it becoming law. Frankfurt-based Francis Gross, head of the external statistics division at the European Central Bank (ECB), says the first steps must involve establishing the concepts around the OFR. Once the concepts around the mandated data collection and standards are established there will be a need to carry out a technical development process as well as an organizational development process,” he says.

“It would be wrong to wait with making law until all the details of such a concept are developed, because it will not be possible to develop the details of the concept itself further before the law is made,” he says, adding that as a starting point it is necessary to have the principles, the goals as well as the boundaries in place prior to carrying out further detailed development.

London-based Stuart Plane, sales and marketing director at Cadis, says the process of accepting an initiative of this sort resembles what organizations ask when embarking on an EDM project. "Firms will question whether it is worth the cost and effort, and whether it is going to deliver the desired results," he says, adding that in both cases the questions are valid.

Yet, now is the time to raise these questions. Allan Grody, president of Financial Intergroup Advisers, a retired founding partner of PricewaterhouseCoopers' financial services consulting practice and emeritus adjunct professor, risk management systems, Leonard N Stern Graduate School of Business NYU, says: "We are delighted to see the government finally understands that the plumbing has to be fixed and that we have to get the standards in place first to be able to see across the financial institutions and across the silos of those institutions."

But the discussions are ongoing relating to the language in the proposed bill. Grody says as it has evolved and found its way to the final piece of legislation, there are weaknesses in the legislative language that render the fulfillment of the mission of the office of financial research impossible. "We are suggesting those databases of tagged data exist, but be maintained at each financial institution and are overseen by their external auditors. Financial institutions will collect this data in a data warehouse around these new standards that we hope the government works with the industry to set as opposed to the government setting them," he says.

Concerns and Challenges
Financial Intergroup is not the only organization to have been vocal in questioning the introduction of a new government-run utility. One of the ongoing concerns the industry has raised when discussing the concept of data utilities both in Europe and in the US has revolved around the introduction of further infrastructures into the industry. Linked with high costs, some question to what an extent yet another repository is necessary and what value it would bring to the industry.

The concept of  data collection, at the centre of the OFR proposal, could mean each financial institution would have to send the data to a data centre on a daily basis. This move would be regarded as a major challenge even if there had been agreed standards in the financial industry—but without standards, it promises to be difficult to do.

Grody says: "The OFR will be faced with an enormous reconciliation process to correct errors in the data, reconciling back to the originating sources periodically or the data will get out of sync with the real books and records of the submitting firms." This will be the case even if it is to be sent in a yet to be agreed upon standardized format, within prescribed standardized identifiers for instruments and counterparties and other data attributes needed for valuations and risk assessments, he says.

Yet, one of the main concerns is around the depth of the proposal and the lack of global reach an initiative led by one regulator may have. Even if the systemic risk oversight has been one of the areas the industry has agreed must be enhanced, the siloed nature in which the OFR proposes to monitor systemic risk may not be the ultimate solution. In fact, without a global view, systemic threats cannot be detected. "A single regulator, no matter how much of the market it oversees, cannot compel other sovereign jurisdictions to comply," says Grody.

Only time will tell whether the OFR progresses on the same terms as stated in the final bill or not, whether changes are yet to come or whether it will succeed. Now it's all a matter of how this is carried out. Experts only hope the legislation gives the industry the much-needed impetus to get the data right—but on the industry's own terms.