Originally appeared in MiFID Monitor
In order to tackle the inconsistency in the measurement of aggregate risk in the market the IBM Data Governance Council is seeking responses from market participants to its recent proposals for risk measurement reporting standards. The group, which was set up three years ago by IBM and comprises 50 financial market firms, claims these standards will facilitate a real-time view of market exposure with regards to aggregate risk.
The IBM led council claims that inconsistent methodology in the disclosure of operational, market, and credit risk has complicated regulatory oversight. It contends that semantic clarity around reporting risk will therefore enable new levels of transparency in the market. To this end, it is proposing to use extensible business reporting language (XBRL) for risk reporting on a global basis.
Steve Adler, chairman of the IBM Data Governance Council, explains: “Creating a risk taxonomy using XBRL will provide a vocabulary and a common language allowing everyone to understand what risk means, and that’s the first step in making it easier to calculate and report. When we have semantic clarity around the way organisations describe risk, incidents, events, losses, claims, exposures, forecasts and reserves, it gets easier to aggregate loss information, analyse it with standard actuarial methods, compare past exposures to present conditions and opportunities, and forecast potential outcomes.”
The council claims that this transparency could provide a new macroeconomic tool and greater fiscal accountability for regulators, investors and central banks worldwide. It would therefore be easier to identify toxic assets on books and the standards could mitigate fraud, help prevent wide scale fiscal crisis and rebuild confidence in financial systems, says the group.
The council is immediately seeking proposals and discussion on this topic to help drive a year long effort to create a proposed specification for XBRL for risk reporting. The next meeting about this specification will take place 26-27 February 2009 in New York City in a combined effort with the SEC, the Enterprise Data Management (EDM) Council, the Financial Services Technology Consortium, XBRL International and XBRL US.
XBRL is already widely used for financial reporting throughout Europe, Australia and Japan, and the Securities and Exchange Commission (SEC) has proposed its use among American firms in 2009. According to the council, an XBRL taxonomy of risk could serve as a fundamental building block to enable interoperability and standard practices in measuring risk worldwide. It claims that standards such as these could potentially enable central banks to manage vast databases of loss history and trend analyses that could better inform policymakers and member banks helping to minimise risk and produce better returns.
“This is an opportunity for both improving the effectiveness of the risk management function and the quality of reports,” said Dan Schutzer, executive director of Financial Services Technology Consortium. “XBRL for risk reporting also holds the potential for cost reduction through the development of consistent, clear and comprehensive reporting standards.”
The IBM Data Governance Council is a group of 50 global companies, including Abbott Labs, American Express, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Bank of Montreal, Bell Canada, Citibank, Deutsche Bank, Discover Financial, Kasikornbank, MasterCard, Nordea Bank, Wachovia, and the World Bank, among others. The group is focused on leading best practices around risk assessment and data governance in an attempt to help the industry take a more disciplined approach to how companies handle data.