It’s six years since the Office of Financial Research (OFR), a US Treasury department charged with mining market data, came into existence to address what experts described as a critical gap in policymakers’ knowledge around the events leading up to the financial crisis.
Despite often being overlooked, the independent office has taken on a substantial amount of important and unique work since 2011; particularly when it comes to improving the accessibility, quality and scope of financial information.
Credit ratings, money market funds, liquidity, central counterparties and bank holding companies have all come under the OFR’s microscope in recent years. Securities lending, still considered by many to be an opaque, risky yet critical financial market practice, is the organisation’s latest area of interest.
Last year the Office published a three-day snapshot of securities lending activity, capturing a significant share of total US securities lending activity having received data from seven major lending agents. The pilot study followed a similar exercise by the OFR on bilateral repurchase agreements (repos), another crucial part of the financial system.
“Oversight of the repo market has improved, but the industry remains nontransparent to regulators. At the same time, data about securities lending are scant,” Viktoria Baklanova, a senior financial analyst at the OFR and head the agency’s repo and securities lending pilot projects, told Global Investor/ISF.
“In addition, no one has a definitive, substantial, source of data - everyone gets a piece. Market coverage varies between data providers and it’s hard to understand where double counting exists. Our goal is improve data collection in both markets. We’re striving for a permanent collection of relevant information; comprehensive coverage which ultimately improves data quality and avoids market participants reporting duplicated data to various authorities.”
The analyst, who has previously worked at Fitch Ratings and Moody's, is mindful of the fact that market participants already face a hefty compliance workload. Confidentiality and costs are also front and centre in the OFR’s thinking. “Inefficient reporting can be costly and undermines quality,” Baklanova added. However, she is confident the group carry its success in developing, harmonising, and standardizing data about securities lending and repo markets.
Despite being focused on the US, the world’s largest securities lending market, experts at the OFR have been watching their European peers with interest, particularly the work being done by ESMA to implement the Securities Financing Transactions Regulation (SFTR). From 2018 the rules force European firms and EU branches of non-EU entities to report details of securities lending and repo trades, as well as the complex collateral chains that follow, to an approved EU trade repository.
“Our understanding is that some of the SFTR feedback from the industry has not been favourable,” Baklanova notes. “The reporting requirements are substantial. That being said, the European market is very complex. There are various market participants trading among themselves. The US market is much stronger in terms of dealer/agent intermediation. In that regard, I’m not sure a universal method of securities finance data collection will appear. There are no such trade repository proposals in the US, for example.”
Even so, Baklanova points to the OFR’s involvements multiple data standardisation projects occurring globally. The organisation has the push to develop a global standard to identify legal entities in financial transactions. The Legal Entity Identifier (LEI) now marks almost half a million legal entities in almost 200 countries and will likely end up being a core part of any worldwide securities lending or repo data initiative should one occur.
“Current regulatory reporting often involves multiple technology platforms, creating unneeded costs and risks,” OFR’s director Richard Berner wrote in a note at the start of January. “A bank might use one platform to report to the Federal Reserve, a second to the CFTC, a third to the SEC and a fourth to a state regulator. It makes no sense for firms to maintain multiple platforms just to meet reporting requirements. Multiple platforms can introduce errors into data, and may have little to do with the way a firm runs its business. Through the Financial Stability Oversight Council, regulators are collaborating to improve reporting and reduce costs. The OFR plays a leading role in that effort.”
Baklanova will be presenting the OFR’s vision and survey findings in front of a room full of lenders and borrowers at in Florida at the IMN’s Beneficial Owners' International Securities Finance & Collateral Management Conference on Thursday, 2nd February 2017. Global Investor/ISF covered the findings in August 2016. http://www.globalinvestormagazine.com/Article/3580438/Snapshot-of-securities-lending-activity-published-by-OFR.html. A full copy of the survey can be found here: https://www.financialresearch.gov/working-papers/files/OFRwp-2016-08_Pilot-Survey-of-Securities-Lending.pdf