In my last two articles (Rags To Riches and Connectivity, Contagion and Risk), I summarized what the recently-released annual report from the U.S. Department of the Treasury's Office of Financial Research (OFR) had to say on the stability of our financial system and on the measurement of contagion risk. In this final article based on the report, I conclude with the OFR's progress and outlook on promoting data standards.
The OFR has a congressionally-mandated responsibility for providing advice, support and leadership in the development, use and integration of financial data standards. According to the OFR, during the recent financial crisis "[t]he lack of consistent standards for precisely identifying financial entities and defining financial instruments prevented institutions from assessing and measuring building risks within and across business lines."
The OFR defines four categories of financial data standards:
- Entity identifiers
- Instrument identifiers
- Standards for financial and business reporting
- Transaction standards
In the report, the OFR provides a summary of the history, status and prospects for Legal Entity Identifiers (LEIs), their top data standards priority. In addition, and in my view of more value, they provide pragmatic guidance on how to assess potential data standards projects. The three critical questions posed by the OFR are whether or not the potential standards development effort is within their scope and mission, whether or not it is a good candidate, and finally what their role in the effort should be. These guidelines can be applied by any organization to gate their data standards program and optimize resource allocations.
The OFR's Data Standardization Considerations
The discussion in the report on what makes a good candidate for standardization is particularly valuable, as it covers not just the criteria for selection but the criteria for success, e.g. the participants "must have the technologies, formats, and processes required to submit and accept the data."
Additional useful guidance is provided in the form of a short list of eight "principles for data collection" which include such insights as "Use validation controls at the point of data collection in the form of submittal failures or messaging" and "Give participants time to test their data formation process and submittal system."
In the final section of the report, "Improving the Integrity of Reported Data," the OFR discusses the goals and shortcoming of the CFTC-issued rules on OTC derivatives data. While the conclusion is not news -- the lack of a required data format defined in detail has "hampered regulators efforts to aggregate and analyze the data" -- it is refreshing that the OFR both recognizes the problem and is committed to addressing it.