Transaction data monitoring essential to industry's future, says Ce-Nif

Transaction data monitoring essential to industry's future, says Ce-Nif

In an interview with FOi ahead of the Senate Act’s final reconciliation with an earlier House of Representatives reform Act, Mendelowitz stressed that data monitoring was “more important than anything else in the bill.” He said that: “The other provisions are worthless if your regulators are flying blind.”

Ce-Nif (the Committee to Establish the National Institute of Finance) has called for a new independent body to collect and manage all transaction and position data for US financial entities and their affiliates. It has also requested that a database be created to store the data, which would be accessible by regulators so they could monitor the build up of systemic risk.

“Anyone who looked at what happened in the crisis came to the unavoidable conclusion that the government lacked the data to know what was going on,” Mendelowitz said. “This is the key to understanding what happened.”

While the new entity will not be known as the National Institute of Finance, Mendelowitz said that 95% of what Ce-Nif had been campaigning for would be provided by the Office of Financial Research, the new oversight body which would be created were the Senate Act to become law.

Such a body would spell huge changes for the over-the-counter derivatives market, which is under no uniform obligation for transaction reporting.

Mendelowitz, a former chairman of the Federal Housing Finance Board (the agency responsible for regulating the Federal Home Loan Bank System), started the voluntary Ce-Nif with three fellow academics and a quantitative analyst in February 2009.

Mendelowitz says the five were “drawn together by a common view as to major failings with respect to data and analysis available to government regulators and policy makers , and by a shared objective of fixing those failings with legislation included in the regulatory reform bill that we knew would be passed in the wake of the 2008 financial market meltdown.”

In a February 2010 letter to senator Chris Dodd, head of the senate banking committee and chief author of the Senate's Wall Street Reform Act, which was signed by six Nobel prize-winning economists (including Myron Scholes and Robert Engle), Mendelowitz wrote:

“Going forward, a significant regulatory weakness is the absence of a sustained effort to gain a deep understanding of risks to the financial system, including the lack of essential data and the analytical capacity to turn that data into useful information to enable regulators to better safeguard our financial system.

“The current legislative response to the crisis has focused primarily on expanding regulatory authorities and determining who should exercise those authorities. There has been far too little attention devoted to strengthening the research efforts and fixing the inadequate data and analytical capability on which sound regulatory decisions must be based.

“To be successful, legislation intended to equip the government to understand and monitor systemic risk and be able to reduce the risks of major financial crises in the future must include provisions to strengthen research efforts and provide the government with previously unavailable data and analytical capabilities.”

Unavoidable risk

Buoyed by the passing of the Senate Act on May 20, Mendelowitz echoed those sentiments today. He said that: “We wanted the government to ensure going forward that they had the capability to find out what's going on. We looked at what new entities would be created, and there was no discussion of data bodies. “

He claimed that there was no understanding of what systemic risk meant.

“You have to have a build of inter-connectedness in a financial system,” he argued. “Two people on both sides of a trade is an unavoidable situation. What we did is put together a proposal that government collect granular transactional position data on a daily basis – that’s the only way you can do it.”

He was optimistic that the Office of Financial Research would be part of the final reform law. The group had strong support from even conservative think tanks such as the American Enterprise Institute for Public Policy Research.

“More important than big names,” he argued, was “broad support across academia, parties, politics, even data firms – SunGard, IBM Research, for instance. We even got a letter from the American Bar Association.”

“Flying blind”

Mendelowitz said the greatest barriers to the legislation passing was the Republican Party, led by Dick Shelby, the former Alabama Democratic senator who turned Republican in 1994, along with “anyone that thinks data is irrelevant to systemic risk issues”.

Asked whether he was worried the provision might be unilaterally discounted by reconciliation committee head Barney Frank, as Blanche Lincoln’s proposal for banks to spin-off their swap-trading desks was this week, Mendelowitz admitted: “It’s a possibility. Stranger stuff has happened…. There’s always a risk with negations. The risk is in the process – it’s a sudden death playoff”, he argued.

“The issue, when it comes to it,” he argued, “is the enormous amount of vested interest . There are more than 3,000 bank lobbyists in Washington right now,” he claimed.
“In addition, certain departments won’t like this. We’ve stressed very emphatically that this body has to be independent, and that second, it can't be regulatory. The wording is structured to ensure that.”

As the bill stands, the Office of Financial Research would have the capability to offer Congressional testimony without prior regulatory approval, Mendelowitz said. “Even the secretary of the Treasury doesn’t have that. The Treasury will try and weaken , I’m positive of that.”

He said that: “All we could have hoped for is in that bill – probably 95% of what we were pushing for .”

“It’s fingers crossed time,” he concluded.

Tom Osborn +44 207 779 8361

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