Securities lending: illuminating data?

With five turbulent years having passed since the crisis, regulatory data collection tools have been refined, standardised identifiers nearly constructed and more frequent and granular reporting rolled into regulation by the likes of Dodd-Frank and EMIR. Now that regulators have this mass of data, what is the next step in linking it and putting it to use?  

In 2013, global regulators are finally taking a good look at connecting the data dots. The FSB has especially taken the lead here, releasing three consultation papers in November 2012 regarding the oversight and regulation of entities and securities lending and repos. Data concerns are most strongly evident in the consultation Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos.

The paper’s goals are laudable in their drive for securities lending/repo transparency, asking the industry to examine and refine current data collection points for repo/securities lending, such as trade repositories, surveys and periodic market reporting for everything from principal amount to maturity information. The IMF has also thrown its weight behind the effort in its recent working paper detailing the potential synergy between the G20 Data Gaps Initiative and its Special Data Dissemination (SDDS) group for financial stability analysis. 

Of all these initiatives, the one closest to the ground is shadow banking regulation focused on securities lending/repos. At last, information architects have a set of real strategic questions to answer.

There’s no doubt the IMF and FSB are taking a long-awaited step in the right direction and, if done correctly, this could have the potential to result in huge savings in reporting costs for firms and the prevention of another ‘shadow’ crisis.

However, the necessary nuts and bolts to construct a robust infrastructure for data collection that will make the regulation useful are still missing. So, where should regulators begin in order to get this right?

Firstly, the FSB’s programme of data collection assumes the pre-existence of authoritative stores of transaction – and other – data, including repo/securities trade repositories. At present, these do not exist in the necessary numbers, meaning interim data sources will have to be leveraged whilst the transition to more defined collection points, such as repo/securities trade repositories, are made.

To effectively gauge the depth of the shadows, the FSB and IMF will have to conduct an assessment of current sources including:

• Trade repositories:  Present in the US (DTCC) but do not currently deal with repos in the EU. There are plans to build further repositories, but it’s unclear when they will be in place

• ICMA surveys:  European repo data including total value, counterparty, geographical, collateral, cash currency, clearing and settlement and maturity

• Central banks:  e.g., US Fed, which provides FedWire service for tracking principal and interest, daily balance report, list of participants 

• Brokers:  EU/US repo broker data; average EU/US daily volumes 

• CCPs:  Transactional information between clearing members

• Tri-party custodian-agents:  Widening and narrowing of sets (eligible collateral profiles) could provide information on parties’ risk appetite

• IMF Standards for Data Dissemination:  SDDS Plus prescribes a survey of high-level data on claims/liabilities covering many shadow banking activities.

Clearly, there is no shortage of dots to connect. While the FSB characterises repo trade repositories as an ideal fix to the problem of organising this data, these will never be the ‘be-all-and-end-all’ for repo data, which has been described as “spotty” and “difficult to understand” by the Fed. To take the most efficient approach with a smart view of how this regulation should look, the FSB should, in conjunction with market participants, identify the most robust current baseline that could be created.

If this surveying is conducted correctly, it will enable more informed policy decisions and allow for the refinement of inadequate data sources, while helping to avoid feedback issues from creating new data flows that could distort the market. Armed with a more realistic picture of the sector and a more reliable data set, regulators will be able to identify and mitigate potential issues like market idiosyncrasies, categorisation issues and multiple identifiers, and ultimately achieve an enhanced data set.

Naturally, it isn’t just about data sources. Mapping data gaps based on a consolidated reporting regime will be of little use without universal standards. One of the biggest obstacles will be in achieving a universal Legal Entity Identifier for assigning counterparties to transactions and identifying their parentage/ownership structures. No less a challenge is the existence of a unique product identifier (UPI), also required to map individual components of pooled securities, give regulators a complete lifecycle view of the products and, ultimately, aggregate and compare that data.

As with any regulatory initiative of this scale, with risk comes reward. The FSB and IMF should seize the opportunity before them and be able to do their job better, faster, cheaper and ultimately more safely. In the coming months, all eyes will be on them. They have a lot on their plate – will they make data a priority?