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EDM Council Meeting Dominated by Concern Over Achievability of US NIF…

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Discussions during the quarterly EDM Council meeting in London last week were dominated by questions regarding the feasibility of the proposals surrounding the establishment of National Institute of Finance (NIF) in the US. The EDM Council itself is currently working on a proof of concept around mortgage backed securities (MBS) data with the NIF, which is aiming to establish and maintain a national repository of financial transaction and entity position data.

As noted by Reference Data Review in August the campaign to set up the NIF did not get off to the most auspicious start and it seems that scepticism around the achievability of its goals remains in the market. The petition to launch the NIF is now closed and only managed to elicit 101 signatures from interested parties in the reference data space, for example.

Attendees to the EDM Council meeting were informed by Mike Atkin, managing director of the industry group, about the progress of the various data initiatives going on across the industry, including that of the NIF. He elaborated on the proof of concept work that he and his team are engaged in to test the feasibility of coding MBS from the source.

“The NIF in the US and the European Central Bank (ECB) are both talking about the same idea with regards to standardising data by tagging it from the source,” explains Atkin. “There is strong interest from the regulatory community about the idea in both the US and Europe and this is validating the importance of this endeavour.”

Atkin notes that there are differences between the ECB’s reference data utility proposals and the NIF: “The NIF is looking to collect data and how to help the regulatory community and the industry use that data, whereas the ECB is simply looking at the data collection side of things.”

This capability for analysis is a significantly different proposition and Atkin reckons this may be where there is some confusion in the market. The NIF is seeking to provide the analytical capabilities to the market to be able to deal with the data it is collecting. According to Allan Mendelowitz, a director at the Federal Housing Finance Board and a founding member of the Committee to Establish the NIF (and thus a key proponent in the market behind the idea), the NIF would have the authority to gather appropriate data and provide the analytical capabilities necessary to monitor systemic risk. It would also be able to perform independent risk assessments of individual financial entities, and to provide advice on the financial system to the Federal regulatory agencies and the United States Congress, says Mendelowitz.

However, rather than getting bogged down in the analytical discussions to begin with, the EDM Council is merely looking at the data collection idea at the moment, says Atkin. “We are attempting to demonstrate that the idea is viable to the regulatory community in order to assist the NIF in getting legislation in place to tag data at the source using consistent semantics,” he explains.

The proof of concept is therefore designed to demonstrate that it is possible to mark up issuance source documents using the EDM Council’s semantics repository data tags. “We are engaged in a gap analysis to highlight where there is a lack of clarity around MBS data and the links between the different data components themselves. We are then attempting to demonstrate that this data can be tagged when it is created, at source,” Atkin continues.

The project also involves dealing with what Atkin calls the “internal IT guts”, where the EDM Council led team are examining the translation of the data into the database of a financial institution and the various input and output layers. The output of the data to downstream systems is important in that it must be fit for purpose: data attributes must be able to be aligned with risk management requirements and metrics, for example, says Atkin.

However, this very focus on the technical details behind the project is what many attendees to the EDM Council meeting took issue with. As Ken Price, CEO of entity data specialist vendor Avox and attendee to the meeting, explains, the main issue with the NIF is not the technical challenge, it is rather the political considerations for the project.

“There is some level of naivety on the part of the NIF about how a US based reference data utility could force other countries to comply with its data tagging requirements. There would need to be consistent global regulation to be able to establish such an entity and we all know how difficult that is to achieve: just look at the G20 talks for proof,” explains Price.

Someone needs to be out there asking the “tough questions” regarding these political considerations rather than focusing on technical details at this stage, argues Price. “Full global regulatory harmonisation needs to be achieved before anything like this could happen and I don’t see it happening in the near term,” he adds.

Attendees to the meeting were in agreement that the ability to measure systemic risk on a global scale was an attractive proposition but most were sceptical about the feasibility of the NIF project. “When asked whether they thought monitoring global systemic risk via consistent data was a good idea most hands at the meeting went up, but when they were asked whether it was an achievable goal, it was a different story: not a single hand went up,” Price elaborates.

The proof of concept for MBS will prove that the industry can manage risk on these instruments, says Price, but he contends that banks do this every day anyway. “I’m not convinced about the value of the project,” he adds.

Although Price is sceptical about the full agenda of the NIF, he is rather more positive about the ECB’s proposals. “The ECB’s approach is more pragmatic and the ECB as a regulatory body would have more legislative control over the European region, whereas the NIF would not be a legislative body. The ECB also has a better understanding of what is achievable in the market because of the nature of its position in the market,” he explains.

Obviously, as noted by Reference Data Review over the last few months, there are a number of issues surrounding the ECB’s proposals also. Many in the market are unconvinced of the need for a reference data utility full stop, let alone one mandated by the regulatory community. The ECB itself has also been rather quiet about its proposals over the last few weeks; likely distracted by the deluge of work it must carry out as part of the ongoing regulatory overhaul.

However, regardless of these concerns at this early stage, it will be interesting to see the regulatory reaction to the EDM Council’s proof of concept work. The project is expected to be completed by the first quarter of next year, but expect an update at the next EDM Council meeting in December.

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