OFR: Setting Reference Data Standards

The Dodd-Frank Wall Street Reform bill, passed by the US Senate on July 15 and signed by President Obama on July 21, includes the set-up of the much-discussed data collection and analysis center, the Office of Financial Research (OFR). The OFR will collect data from bank holding companies and non-bank financial companies to help monitor systemic risk and support the work of the Financial Stability Oversight Council. To do this, the new organization is expected to mandate the use of standards. The question raised now is if these standards will create a foundation for international reference data standards in the financial information industry.

The industry has suffered from the lack of international standards, and some see this as an opportunity to fix that problem. New York-based John Mulholland, director, global head, reference data, capital markets and securities operations at RBC Capital Markets, says the OFR is set to benefit the industry as it may help establish data standards. “The difference between this and other reporting requirements put to the industry is the expectation that this is going to trigger the establishment of standards,” he says.

The legislation specifies that the OFR will be supporting member agencies by standardizing the types and formats of data reported and collected. Pennsylvania-based Arthur Small, principal at consultancy firm Venti Risk Management, and co-founding member of the National Institute of Finance, which was involved in presenting the OFR concept to the legislators, says it was important to ensure the OFR could request the data in a format that allowed for analysis. This meant the Office had to have the authority to impose data standards, he says.

The data center part of the OFR is also required to publish the standardized data in a financial company reference database, and a financial instrument reference database, making it easily available to the public. According to Small, a US investment bank has said that by having these standards for financial reference data and entities, the firm can save $300 million a year.

Still, reference data experts do not expect the databases to replace the need to take reference data from vendors. The legislation does not go into detail about time of publication of the information, and timeliness is essential for users of this data. “It’s not clear to me what we as an industry will get from the data, because I do not understand the timing,” says New York-based Norman Brower, executive director, reference data solutions, Morgan Stanley.

In fact, Brower does not think the standardized reference data published will be the value proposition. Instead, it is the establishment of standards and published counterparty data, which can benefit the industry. The OFR will have to publish the formats and standards used, meaning there will be focus on creating consistent language and improving standardization. “I do believe it will drive standards, which is going to be one of the big benefits from this,” he says. These standards may apply to a range of data items. Although there is a lot of uncertainty about what firms will be required to send to the OFR, the bill mentions transaction and position data, and market participants also expect this to include reference information and counterparty data.

From a counterparty data perspective, market participants also hope the industry may benefit from the OFR work. It would be beneficial if the OFR could make legal entity and ownership percentage information available. “Right now, there is really no good legal entity data, and legal entity data hierarchies,” says Brower, adding that this is where the OFR may be able to add real value.

Others also mention the role the new legislation could play in creating standards for the OTC derivatives market. “The mandate to trade derivatives through a central clearing facility will impose standards for those instruments,” says Princeton, New Jersey-based Ed Ventura, president, Ventura Management Associates.

With improved standardization in this space, market participants expect the financial overhaul to result in reduced risk. New York-based Gerard Bermingham, vice-president of business strategy at Information Mosaic, a provider of post-trade automation systems, says the creation of OTC derivatives standards will enable systems to support that market. “Standards can help in the ability to manage the process in an automated way,” he says.

Global vs Local

Yet, the financial market is global, and the need for global reference data and standards remains. The US legislation is seen to have been fleshed out quickly, but the principles highlighted by the bill are debated globally. London-based Gert Raeves, senior vice-president of strategic business development and marketing, GoldenSource, says the phrase about the fact that when it rains in the US, it starts to drizzle in Europe, now appears to be true. “It means that even if it is not currently the most co-ordinated regulation, I think other markets will adapt and copy the US example,” he says, adding that it does not seem like lack of international agreement will become a problem.

In terms of the standards, some argue that the OFR standards could potentially end up being used internationally. “Although it is being driven by US law, I think it will have a global reach,” says Mulholland.

But others are more concerned about fixing the standards problem at a US-level, considering the industry’s history of failing to set global standards. New York-based Allan Grody, president of Financial Intergroup Advisers, underlines that the industry is global, while regulators are local. “The problem is global, systemic risk is a global phenomenon,” he says, adding that there is a need for regulatory collaboration and a Basel III-type directive. “I would like the G-20’s Financial Stability Board to also promulgate a data standard, in addition to the evolving global capital standard they already oversee,” says Grody.

Still, the US appears to be leading the way. It seems like it is now up to the industry to come together to ensure the market will benefit from this US effort. “Single governments cannot do this without the industry’s active support and commitment,” says Grody, who suggests the global institutions that are now identified in the legislation as systemically important financial institutions must take the lead.

In fact, this is the recurring theme. The standard-setting exercise may be a good thing, but it depends on how it is done. Bermingham says the industry needs to be involved in the standards process. “Standards setting is very much a collaborative effort,” he says, adding that firms are more likely to be open to adopting the relevant standards if they have been involved in the decision-making process.

There is no need to start from scratch. “I would suggest they should absolutely leverage industry knowledge. The industry understands these complex structures,” says Brower, explaining that there is no reason not to involve the industry in the standards-setting process. The industry is also likely to be keen to participate, according to Brower, as firms will not want to be forced to adopt standards that fail to meet the necessary requirements.

The standards are also seen to have more potential to become global if they are derived through a consultative and inclusive process. Small says there have already been discussions with counterparts in other countries. “I think everyone in this discussion understands that we don’t want to have multiple and competing standards,” he says.

It will also be essential to sharpen the language, ensuring there is a common way of communicating the data. The OFR will need a consistent infrastructure and defined terms to be able to pull data together from various places. “Let’s make sure everyone is using the same language,” he says.

Industry association the EDM Council is one of the organizations that could help the OFR get started with this. For the past couple of years it has focused on ontology as part of its semantics activities. The Council has created a semantics repository, which has been presented at various symposiums. “Everything we do starts with semantics,” says Washington, DC-based Mike Atkin, managing director of the EDM Council.

Until the decisions on the language and standards have been made, there is not much firms can do to prepare for the new reporting requirements. There is still some way to go to determine what the OFR will mean to the industry. Raeves says the question firms need to focus on in the meantime is: “Are we making choices right now that are too narrow?” There is no point investing in systems and processes that do not offer firms the flexibility to adapt to new, or recycled, standards required going forward.

The standards will be critical for what the OFR is trying to do. The challenge now is to ensure the industry experts are involved in the standards-setting process to create the best possible solution for the international market. With the right standards and the right level of support from the industry, this activity may well result in something great.