Given the discussions I had with a number of people at Sibos a couple of weeks ago, the data management industry practitioners engaged in working on establishing a new legal entity identification (LEI) standard have high hopes that the Financial Stability Board (FSB) will be able to bridge the gap between national regulators in setting global standards. The community should therefore welcome the news that the G20 is proposing to upgrade the FSB’s status so that it would have a much more active role in monitoring systemic risk and providing recommendations (with some teeth) across the markets. PS Valuations teams should also take note of the recommendations.
The specialist committee that was established by the G20 back in May to examine systemic risk oversight, dubbed (rather bizarrely) the Private Sector Taskforce of Regulated Professions and Industries, has released a report this week that champions the idea of the FSB having an active role in identifying systemic risks across the global markets. The idea would be that the FSB, or a new subsidiary body under the group, could act as an early warning system to highlight any potential systemic threats and provide a suitable globally coordinated response to tackle them.
The report itself also points to data formatting and standards inconsistencies across jurisdictions as a particular problem for systemic risk monitoring by financial institutions and regulators: “where financial institutions are confronted with multiple and inconsistent data definitions and requirements, it makes it more difficult for them to build coherent and consistent group-wide risk information technology arrangements—a significant supervisory goal. Also, it makes it more difficult to generate pertinent and consistent data during crisis situations and impedes timely and effective cross border action by regulatory organisations.”
The paper then makes a footnote reference (see the section on ‘Standards and Consistency,’ page 17 of the doc below) to the LEI work that has been done already as “a good model for further work toward data standardisation.” Furthermore, it says: “the G-20 should encourage the FSB to undertake parallel efforts to catalyse joint private and public sector efforts on the many technical issues faced in other parts of the G-20 project, for example, on resolution, OTC derivatives infrastructure and standards, and macroprudential oversight.”
So, not only is it pointing out the standards inconsistencies across the globe within the regulatory compliance arena and recommending that these should be examined, it is also suggesting that further LEI style projects should be kicked off under the auspices of the FSB’s systemic risk work (albeit in a footnote).
At the end of the report (in Appendix 2), the group also indicates that the LEI work and XBRL developments are merely the “beginning” and that “more impetus” is needed to drive forward change. “The FSB peer review is good first step, but much more needs to be done on consistency of different types of reporting; evaluating needs for and usefulness of different strands of reporting; managing volume of reporting to avoid information overload; deleting superannuated requirements, etc,” it suggests.
It also suggests that the FSB should be able to make recommendations for the standardisation of data (page 28) and recommend suitable responses from the industry and regulators. Not specific in reference, but a start.
Most of the recommendations are, unfortunately, buried within appendices and footnotes rather than being front and centre. However, the report does call directly for changes in one particular area of interest to data managers: valuations and pricing.
Accordingly, the direct recommendations for improvements in standards consistency across borders relate to: financial reporting; auditing, including auditor registration, reporting and inspection/oversight arrangements; valuation; and actuarial services (see page 25 of the report). The group states that valuation services are often overlooked in terms of their importance by the rest of the industry. “There is a lack of recognition of the importance of valuation, which has resulted in a fragmented professional and regulatory landscape when viewed from a global perspective,” it states.
In order to rectify this, it proposes that: “Regulation is necessary to ensure that appropriate quality is provided in the market for valuation services and to provide comfort to users that: an expert valuation provider has the necessary qualifications; will meet appropriate professional standards in his or her work; and that the valuation has been prepared in an environment that maximises objectivity and minimises bias.” That old chestnut of “independence” of valuation sources is therefore present within the minds of the taskforce, which is no surprise, given that the International Accounting Standards Board’s chairman Hans Hoogervorst sits is involved…