OFR_2016_Financial-Stability-Report

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Broader Adoption of Data Standards Needed The legal entity identifier provides a case study in how even an important standard with strong industry support is adopted only slowly when regulatory requirements are uneven or when regulators rely on voluntary implementation. Regulators invest heavily in promoting data standards, whether through influence or through direct development. When data standards are widely used, regulators, market participants, and others can communicate precisely about data. They can also collect, compare, aggregate, share, link, and integrate data. The measure of success for data standards comes not just from their development, though. To be a success, standards must be adopted or used in the financial system where they prove their value. Financial transaction standards are more rapidly developed, adopted, and maintained if they directly support business revenues. Standards targeting other needs, such as risk analysis and management, tend to be adopted more slowly if reporting requirements introduce ambiguity in interpretation, regulators are not thoughtful in determining which standards are mandatory, and regulators do not speak with one voice in standards advocacy. Regulatory mandates can spur wide use of a data standard. The legal entity identifier provides a case study in how even an important standard with strong industry support is adopted only slowly when regulatory requirements are uneven or when regulators rely on voluntary implementation. The LEI is a unique, 20-digit, international code assigned to a legal entity that takes part in financial market transactions. In its current format, a publicly accessible global LEI database provides “business card” information such as legal name, address, country, legal form, and business registry information (see ISO, 2012). Soon after the 2007-09 crisis, regulators and the financial industry worked to set up a global framework for the LEI. The OFR helped lead this effort. The CFTC, SEC, and regulators in other countries mandated its use in derivatives markets. The SEC has also proposed mandating its use in connection with regulatory reporting by registered investment companies. Recently, the U.S. Treasury adopted a rule requiring use of the LEI in qualified financial contracts record-keeping. However, use of the LEI in markets where it’s not mandated is spotty, despite early industry support and potential cost savings for firms. Few major financial services companies have registered all of their subsidiaries, which contrasts with other industry standards such as the Financial Information eXchange (FIX) or Financial Products Markup Language (FpML). For those standards, large companies worked together to standardize electronic trading and OTC product descriptions. The problem the LEI addresses — the precise identification of counterparties — remains unresolved. 80 2016 | OFR Financial Stability Report
The LEI is required in only a few U.S. market segments, such as derivatives data recordkeeping and reporting. Industry adoption has been largely limited to where regulators require its use (see Figure 69). The OFR backs universal adoption of the LEI in all financial markets and plans to mandate its use in its data collections. European regulators have more broadly mandated the LEI for financial transactions in markets beyond derivatives. Under new rules known as Markets in Financial Instruments Regulation (MiFIR), trades in equities, bonds, and other instruments will require LEIs for all parties by January 2018 (see King, 2016). The LEI will be increasingly valuable as use grows. The LEI system will add information about the parent and subsidiaries of each entity, to be phased in beginning in late 2016 (see LEIROC, 2016). This information will help fulfill the promise of the LEI. The system will serve as an additional tool to analyze the complex structures of large financial services companies and their holdings. Figure 69. U.S. Agencies Requiring or Planning to Require Use of the Legal Entity Identifier Agency Rule Companies affected Commodity Futures Trading Commission Consumer Financial Protection Bureau Department of the Treasury Federal Energy Regulatory Commission Securities and Exchange Commission Swap Data Recordkeeping and Reporting Requirements Trade Options Home Mortgage Disclosure (Regulation C) (Effective January 2018) Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority (Effective Dec. 30, 2016) Data Collection for Analytics and Surveillance and Market-Based Rate Purposes (Effective date to be determined) Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information (Effective date to be determined) Swap counterparties Swap dealers that are trade option counterparties Banks and financial entities Financial companies defined in the rule as “records entity” Market-based rate sellers and entities trading virtual products or holding financial transmission rights in the organized wholesale electric markets Counterparties in securitybased swaps reported to a registered swap repository Note: Under other rules, a variety of agencies request that reporting entities use the legal entity identifier as an identifier if they already have one, or allow optional use of the identifier. Source: OFR analysis Key Threats to Financial Stability 81
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OFFICE OF FINANCIAL RESEARCH 2016 F
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Contents Executive Summary ........
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Chapter 2 provides deeper analysis
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of sharp decreases in U.S. equity a
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1 Financial Stability Assessment Ov
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Figure 3. Real GDP Growth (year-ove
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Figure 8. Ten-Year U.S. Treasury Yi
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Monitoring Shadow Banking Risks The
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An earlier OFR paper proposed an ac
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Figure 17. Size, Liquidity, and Con
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Figure 19. Top Systemic Risk Scores
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The analysis pointed to seven key t
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could. In early 2016, investor conc
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earnings or share issuance. But red
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Fund Monitor, the OFR assessed expo
Page 36 and 37: 2.2 Risks in U.S. Nonfinancial Corp
Page 38 and 39: Figure 31. U.S. Nonfinancial Corpor
Page 40 and 41: Figure 36. U.S. Corporate Bond Defa
Page 42 and 43: Commercial Real Estate Prices Have
Page 44 and 45: 2.3 Cybersecurity Incidents Affecti
Page 46 and 47: Hackers Breach Bangladesh’s Centr
Page 48 and 49: Figure 42. Banks that Include an Op
Page 50 and 51: The industry is working with the pu
Page 52 and 53: Figure 46. U.S. Financial Regulator
Page 54 and 55: 48 2016 | OFR Financial Stability R
Page 56 and 57: eleased the results of an unprecede
Page 58 and 59: Figure 49. CCP Default Waterfall ($
Page 60 and 61: Figure 50: CCP Ratios and Amounts f
Page 62 and 63: cause more-prudent CCPs to appear m
Page 64 and 65: 2.5 Pressure on U.S. Life Insurance
Page 66 and 67: The experience of Japan’s life in
Page 68 and 69: 2015). These benefits are effective
Page 70 and 71: Figure 55. Life Insurance Securitie
Page 72 and 73: Drivers of Insurers’ Systemic Ris
Page 74 and 75: 2.6 Systemic Footprints of Largest
Page 76 and 77: Interest Rates and Derivatives Expo
Page 78 and 79: Figure 63. Components of U.S. G-SIB
Page 80 and 81: Figure 66. Five-Year Changes to G-S
Page 82 and 83: 2.7 Deficiencies in Data and Data M
Page 84 and 85: Figure 68. Examples of Key Post-Cri
Page 88 and 89: Better Regulatory Sharing Needed Th
Page 90 and 91: The U.S. Census Bureau surveys publ
Page 92 and 93: The group will also consider how th
Page 94 and 95: and contracts would be crucial. The
Page 96 and 97: Figure 72. Scaling of Data Validati
Page 99 and 100: Glossary 10-Year, 10-Year Forward R
Page 101 and 102: Conditional Value-at-Risk (CoVaR) C
Page 103 and 104: Fire Sale Form N-MFP Form PF Fundin
Page 105 and 106: Liquidity Risk Liquidity Transforma
Page 107 and 108: Pension Funded Ratio Pension Risk T
Page 109 and 110: Stress Test Supplemental Leverage R
Page 111 and 112: Bibliography Adrian, Tobias, and Ma
Page 113 and 114: Board of Governors of the Federal R
Page 115 and 116: www.richmondfed.org/~/media/richmon
Page 117 and 118: Her Majesty’s Government and Mars
Page 119 and 120: Paul, Ruma. “Bangladesh hopes to
Page 121: Zetter, Kim. “That Insane, 18M Ba
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