Grand Vision for New Data Agency Meets Bureaucratic Reality

Deprived of a permanent director for more than two years, the Office of Financial Research has yet to become the muscular, autonomous U.S. hub for financial regulatory data collection, standardization and storage that its backers hoped for.

More controversial is whether it was ever designed to play such a role.

The agency's advocates blame bureaucratic turf fights for preventing the office from rightfully pushing improvements in postcrisis data quality, analysis and availability. Its detractors ascribe even greater authority to the OFR, with some Republicans branding it as Orwellian in its unchecked powers.

But regulators — including one speaking for the Treasury, where the OFR is housed — don't embrace either of these positions, instead seeing the data agency in far more pacific terms. They regard the office as a quieter and more collaborative body that won't get in the way of prudential supervisors or international standard setting bodies.

The direct regulators of financial institutions "are really the ones who have the authority to make those rules and collect the data," said a Treasury representative speaking on condition of anonymity. "We're trying to provide the connective tissue. ... Our job is to make sure that the way the data are being collected reflects the needs of the [entire] regulatory community."

The breadth of data the OFR can gather still exceeds that of existing regulators, however, and its capacity to assess fees on industry could fund an unprecedented data gathering and analysis operation.

But the agency's consensus-building aspirations, the global nature of any prospective real-time financial tracking regime, and other US regulators' continued investments in data collection suggest that it is likely to prove to be more of a background player than the directly transformational agent many expected.

"In a perfect world," design and maintenance of data collection "would all be centralized in the OFR," says Allan Mendelowitz, a former regulator and a backer of the office's prototype, the National Institute of Finance. He hopes the office can build up a comprehensive risk monitoring system over time.

"Nobody else is going to step up and do it," he says.

THE BIG IDEA

The appeal of an agency devoted to independent and unified data collection remains the same as when OFR was initially proposed.

Industry would pay for it. It would relieve duplication, span regulatory jurisdictions, and ease data compliance burdens. Its singular focus would also allow it to pursue big-picture data gathering that was beyond the scope of any single prudential regulator, spearheading first a unified system for financial company tracking and then a way to track positions in real time.

All of these selling points paled in comparison to the greatest attraction of all: it was a different approach than the one that left regulators blindsided by AIG's credit-default swap book and unable to pinpoint Lehman Brothers' financial position in the days before its bankruptcy.

"They got the shock of their life when they walked into these institutions and tried to reconcile the risk management to the books and records of the firm," says Allan Grody, founder of Financial Intergroup. "They were told 'don't even go there.'"

The OFR's foundation reflected these fears about regulatory shortfalls and the trustworthiness of financial institutions' reported data. The Treasury Department's initial descriptions of the body stressed the OFR's ability to demand or purchase "all data necessary" from regulators, vendors, and financial institutions. Foundational supporters like Sen. Jack Reed, D-R.I., envisioned a combative body that could "go toe to toe" with "top Wall Street banks."

Despite that expansive mission, the legislation creating the OFR didn't strip authority from U.S. prudential regulators or prevent them from broadening their own data efforts. In contrast to the Consumer Financial Protection Bureau, which inherited other regulators' authority over retail financial product safety issues, the OFR's authority was an overlay.

"We tried to structure the OFR so it wouldn't be a threat to anyone," says Mendelowitz.

NOT A PEER

Regulators, initially worried that the OFR would be a threat to their turf, no longer see the new agency that way.

Part of this is based on the OFR's slow start: 17 months elapsed before the Obama administration nominated a director, Richard Berner. He's been denied formal confirmation since December due to Republican suspicions of the OFR's mandate. The office missed early self-imposed deadlines for hiring and a timeline for developing legal entity identifiers, unique codes that would help track financial subsidiaries in the same way that social security numbers help track people.

Some of the office's backers blamed the initial delays on the OFR's role within Treasury. Being embedded in a larger body "doesn't give [the OFR] stature," says Clifford Rossi, a former bank risk manager who now teaches at the University of Maryland and writes a column for American Banker. While Republican opposition to the office slowed its recruitment of a director, Rossi said, the Obama administration didn't fight for it.

Whatever the reason for OFR's slow start, other regulators haven't waited for it to lead the way. Last month the Commodity Futures Trading Commission launched its Interim Compliant Identifier, a stopgap version of an LEI under which it is "prepared to issue identifiers for other regulators," signifying global ambitions.

Numerous agencies, including the Securities and Exchange Commission, are pushing projects using the XBLR data standard, setting a de facto approach. And the Federal Reserve established the Office of Financial Stability Policy and Research, which designed loan-level data collection protocols for large bank holding companies

"Isn't this a new data standard?" asks Thomas Day, a risk management consultant for Sungard and former Office of Thrift Supervision official. He contends the OFR has been "outflanked"; it is being stifled within the Treasury, Day says, leaving a vacuum in place where it should be coordinating other actors.

"Because the OFR has done very little," the Fed "is moving forward," Day wrote in an email to American Banker.

Other OFR backers are sympathetic to prudential regulators' desire to address data concerns themselves. After struggling with blind spots during the crisis, "You can't expect the Fed would continue with business as usual," says Mendelowitz. "To the extent that they're trying to go out to collect better data, that's not something to criticize."

COOPERATION EXPECTATIONS

Regulators aren't yet putting much effort into pooling their resources, however. Major U.S. financial supervisors still regularly purchase vendor market data under contracts that prohibit sharing with unlicensed fellow regulators — and the OFR.

"Having two bank regulators collecting the same data — that is winding down," said one official. In conversations over the last several weeks, regulators and officials at large banks have hinted that the OFR is on the verge of announcing joint data initiatives with industry groups and fellow regulators.

The OFR could play a role as a neutral aggregator for such data, though outside observers aren't optimistic that regulators will cede much to the OFR — despite the office's ability to relieve their budgets by taking on costly projects paid for by industry assessments.

"Does every agency have to dig deep and build its own capability to gather that information, or does it make sense to do that collectively?" asks Grody. "It's an economic decision logically, and it's a political decision practically."

PERKS OF A LOW PROFILE

Some of the OFR's backers are now hoping that winning the deference of other regulators may not be vital to the data agency's eventual success. The office's broad mandate gives it plenty of room to work, they say, and an aggressive approach may not pay off.

Grody offers the CFTC's recent introduction of its interim corporate entity identifier as an example of the perils of moving unilaterally. Required by Dodd Frank to introduce tracking to the swaps market, the CFTC introduced its tracking system in August.

The G-20's Financial Stability Board didn't appear grateful. In a late-August note, an FSB subgroup wrote that its members were reviewing "decisions by early movers" to make sure that they wouldn't lock "the future global LEI system into early, local technical system design choices."

"To think that the U.S. is going to be able to dictate [the terms of the LEI system] is a holdover from the 20th century," Grody says, arguing that the U.S. simply doesn't have the clout to do so.

The OFR still sees legal identifiers as crucial to a long-term regulatory data overhaul: "If you don't have data standards like the LEI you can't aggregate the data meaningfully," the Treasury official said.

But given that establishing an LEI will require market regulators worldwide to agree on its format, the OFR has invested its efforts in the FSB's process.

"It may seem like things are going slowly, but I can assure you that by the standards of global regulation in the past, LEI is really moving at light speed," the person said.

There are some signs of progress at home, too. The office has more than doubled its staff over the last nine months, to 108 full-time employees. And in July, the OFR issued a "request for information" asking for suggestions on how to design and build its data processing, analysis, and storage system. "Traditional data management technologies and capabilities" will be insufficient for the job, the request states, before calling for a "big data solution."

Such a system would have to be capable of "stitching together many datasets, sometimes from hundreds of different sources, created at varying points in time, and sometimes of very large size, to create a holistic view of a given market or market segment, instrument or financial entity," the request says.

The office hasn't yet put a contract out to bid. But it will need an operational system within 12-18 months, as it "anticipates receiving large quantities of data in the near term."

The OFR has the statutory authority to acquire the data for such a system, Rossi says, regardless of how other regulatory bodies view the process.

"We're talking about something that's common sense, to establish an organization that isn't just looking at banks or nonbanks or exchanges," he says. "It's extremely important, but it's not revolutionary."