Prior to the financial crisis, regulators only had limited data available to them about securities lending and repo markets. The crisis exposed a number of vulnerabilities previously not recognized as a result of this lack of data. Right away, regulators realized that the only way to understand and effectively address these weaknesses -- leverage and liquidity risks, weak market infrastructure, and fire sale risks — was to obtain more and better regulatory data about securities lending and repo volume, the types and quality of collateral being employed, and how securities lending and repo fit into firms’ risk management processes. But a recent release
by the Office of Financial Research says these data collection efforts are not enough. According to the OFR, despite the efforts of regulators, significant gaps remain, and "the risk of set fire sales before or after a counterpart default remains largely unaddressed.”
For the most part, regulators currently gather data about repo and securities lending from the regulatory filings of market participants and collections of data by market segment from settlement agents. OFR suggests that these two methods are not being used to their full potential. Firstly, the data reported by these two methods are highly aggregated and focused on quantities traded, not providing any information about rates, haircuts, or counterparty exposures. Secondly, there is no centralized data repository or common reporting standards across regulators, making it very difficult to compare or analyze data derived from disparate sources. Multiple collection requirements also means there is some overlap in data collection, resulting in a great deal of double-counting and imprecision. OFR asks why collect data that cannot be used to understand securities lending and repo outside of or across markets? Third, data collections on market segments from settlement agents are lacking because they are incomplete. While the data collected by regulators from the two tri-party repo agents is granular and useful, there is no similar data on bilateral trades that settle outside the tri-party repo platforms. Private firms do collect granular market segment data from repo and securities lending market participants, but this data is also incomplete because its collection is entirely voluntary.
The lack of comparability and imprecision severely limit usefulness of the data regulators currently collect, making it difficult if not impossible to weigh policy options, monitor market conditions, and understand the risks to the greater financial system posed by securities lending and repo activities. In an effort to remedy this situation, OFR and the Federal Reserve have launched a joint pilot program to collect better and more complete data. According to OFR’s April 23, 2015 brief
"The pilot task force identified data elements essential for analyzing the risks related to repo and securities lending. Data are needed to capture the dependence on short-term funding of individual repo market participants, counterparty exposures, and interconnections between participants. In addition, data re needed about the collateral used to help in understanding collateral quality, diversification, and haircuts. With respect to securities lending, the pilot task force is reaching out to agent lenders to collect data on loans, terms, and collateral uses. A number of large firms have agreed to participate in these two pilot data collections, which are expected to be completed before the end of 2015."
"These data collections will go a long way toward improving transparency in securities financing markets, but there is more to do. Success in the ongoing reform efforts will require adoption of international standards, extensive collaboration, and improvements in data sharing."