Systemic Risk Mitigation: Ending "Silos" of Information Why a Central Counterparty for Data Management is Needed
September 21, 2009
"...it is clear that risk concentrations may arise from interrelated exposures across the risk categories rendering a silo-based approach insufficient as potential concentrations across categories may not be captured."
Cross-sectoral review of group-wide identification and management of risk concentrations
Basel Committee on Banking Supervision , April, 2008
"Regulatory reform needs to be addressed as a single package, not piecemeal." - Secretary Timothy Geithner
Testimony before the House Financial Services Committee, July 23, 2009
Many initiatives are being proposed to get at a much overlooked but core problem for a systemic risk regulator: the data that each regulator receives to help in detecting systemic risk is neither timely nor consistently defined by the submitting firms.
The financial crisis that began in 2007 has alerted regulators to the reality that more timely recognition of risk exposures is crucial as toxic financial transactions can cascade undetected through internal business units of a single financial institution, through interrelated but separately regulated markets, and through mostly unregulated payment and settlement systems.
A parallel concern is that there are many gaps in the data submitted by financial institutions operating across multiple regulatory regimes. Autonomously-run business units create multiple reporting "silos" of information. Such separate methods of reporting financial performance and risks taken pervade global financial institutions. This separation, while causing data inconsistencies and presenting aggregation issues within the firms themselves, are being perpetuated on a grander scale in reports submitted to sovereign country and regional regulators.
The financial crisis has spawned many proposed public and private sector solutions. However, these solutions fall far short of resolving the data inconsistencies and aggregation issues inherent in regulatory regimes based on such separate "silos" of reporting. One private initiative, an industry sponsored global Central Counterparty for Data Management, is thought best able to solve the data issue, giving regulators systemic risk "seeing" ability across the reporting silos of individual financial institutions as well as across the many silos of information at different regulatory agencies which also still exist.
Identifying Data
One of the most intractable and long-standing impediments to systemic risk mitigation has been the proprietary and non-standard nature of what should be standardized and unambiguously identified data.
Regulators are asked to rely on data knowing full well that counterparties might be mislabeled and/or subsidiary entities aggregated differently; or that specific products traded and/or reported on singularly or in aggregated positions are differently defined or valued under different regulatory regimes and by different firms.
The problem with this data is that product and business entity identifications are inconsistent and ambiguous; identifiers are not standardized (see chart below) and, therefore, data aggregation across silo organizational structures is jeopardized; faulty data aggregation leads to faulty performance and risk management reporting of position and counterparty data; and internal reporting that is suspect or wrong leads to government's inability to aggregate and act on this faulty data, whether within its jurisdiction or across multiple jurisdictions.
Standardizing identifying data has long been desired so that industry participants can converse in a consistent, error-free electronic manner with their counterparties, their supply chain participants and their regulators. This is the long-sought vision of Straight-Through-Processing (STP), with uninterrupted electronic communication from the start of a transaction through to payment and settlement, and to recording in the official books and records of the firm. Left unrealized, its absence will be a great impediment to systemic risk mitigation.
