Following intensive discussions last week by the conference committee designated with the job of hammering out compromises on the US financial reform bill, the proposals for the establishment of the Office of Financial Research have finally been approved. The committee has published the final titles from the conference, which includes details of the data utility and indicates the new data requirements facing all participants in the market.
Although the idea behind the Office of Financial Research is now to monitor only systemically important firms in the US market, in order to judge whether a firm can be categorised as such requires the submission of a basic level of data from all players. Following concerns raised by a number of senators during the conference, the group decided to focus the efforts of the new data collection agency on data from systemically important firms. However, in some cases it may be difficult to determine how much of an impact a firm has on the financial system overall and therefore the body will ask firms to provide information on their activities.
Accordingly, the post-conference report states: “The Council, acting through the Office of Financial Research, may require the submission of periodic and other reports from any nonbank financial company or bank holding company for the purpose of assessing the extent to which a financial activity or financial market in which the nonbank financial company or bank holding company participates, or the nonbank financial company or bank holding company itself, poses a threat to the financial stability of the United States.”
The reporting burden on firms is therefore set to increase further in terms of overall data requirements and attributes that must be provided to the regulatory community. Foreign firms may also be subject to these requirements but the amended bill indicates that the data utility will try its best to get the relevant data from foreign regulators rather than the firms themselves.
The focus will largely be on those firms with total consolidated assets of US$50 billion or more, who will be required to report: the financial condition of the firm; the systems in place for monitoring risks; transactions with any subsidiary that is a depository institutions; and the potential systemic risk of its activities (see page 69 of the paper). There are also a whole host of requirements about how quickly some of this data must be produced (within 30 days usually) and the operation of hearings to do with non-compliance.
The full details of the operations of the Office of Financial Research (on page 86 onwards) indicate that the director of the new body will be appointed by the president and will serve a term of six years, during which time the person cannot hold any other regulatory positions. The focus of the body is on collecting, validating and standardising all the required information for the monitoring of systemic risk, which cannot be shared with any other body without the permission of the systemic risk council. It will report and testify before the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives annually on its activities.
As previously proposed in the original documentation, all of the required transaction and position data will be obtained from a combination of regulators, commercial data providers, publically available sources and firms themselves. The Office of Financial Research will also, as previously promised, publish publically: a financial company reference database; an instrument reference database; and formats and standards for reporting of transaction and position data to the utility.
However, given that the focus of the body is now on monitoring only systemically important institutions, this is not likely to be a comprehensive database. It may represent the starting point for a reference data utility, if it is appropriate to be used as such, but it is not intended to present the financial services community at large with standards for data, merely to help in the reporting of this data. Last week’s debate on the subject proved as much; politicians don’t want to be seen to be providing Wall Street with another bail out.