Outreach Events

The 23rd Annual Beneficial Owners International Securities Lending & Collateral Management ConferenceFort Lauderdale, FL.


2/1/2017

33rd Annual RMA Conference on Securities Lending, Boca Raton, FL


10/10/2016

FDIC 16th Annual Bank Research Conference, Arlington, VA


9/9/2016

ROSE Program Fordham Scholars Visits to the Federal Reserve, Treasury Department and, FINRA, Washington, DC


4/27/2016

PASLA/RMA Conference on Asian Securities Lending, Singapore


4/1/2016
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Outreach Blog

Friday, November 20, 2015

FSB Finalizes Standards and Processes for Global Securities Financing Data Collection and Aggregation

On November 18, 2015, the Financial Stability Board (FSB) published its final Standards and Processes for Global Securities Financing Data Collection and Aggregation. The final standards are based on the FSB’s previous November 2014 consultation paper and define the data elements for securities lending, repo, and margin lending that national and regional authorities will be asked to report in aggregate to the FSB.

The standards build on the November 2014 consultation paper, including public comments, as well the policy recommendations from the FSB’s August 2013 report Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos, in particular its recommendations to improve transparency of securities financing markets. The Report sets out standards and processes to allow the FSB periodically to collect aggregated data on securities financing transactions from national and regional authorities.  Among other things the final reports defines the data elements for repos, securities lending and margin lending that national and regional authorities will be asked to report on as aggregates to the FSB, the purpose of which is to allow for consistency among national/regional data and to make it possible to derive meaningful global aggregates. Additionally, the Report describes data architecture issues related to the data collection and transmission from the reporting entity to the national/regional authority and then from the national/regional level to the global level.

Among other things, the report sets out six recommendations to ensure the consistency and usefulness of the data collected by authorities:

  1. National/regional data standards should be consistent with the data elements, granularity level and definitions provided in the published final standards;
  2. Jurisdictions should design their local requirements with a minimum monthly reporting period and frequency;
  3. To allow for international comparability and consistent aggregation, the reporting population at the national/regional level should be as comprehensive as possible; 
  4. National/regional authorities should define an appropriate reporting scope that would not hamper the global comparability and aggregation of data;
  5. Before reporting to the FSB, authorities are asked to correct national/regional aggregated data for double-counting;
  6. The use of internationally agreed standard identifiers at the national/regional level reduces the reporting burden and improves the consistency of aggregates at the global level.

FSB Reactions to Certain Comments

 

While the final standards were informed by various industry comments, some suggested changes did not make it into the final document. 

 

For example, ISA, RMA, and PASLA disagreed in their comments with the FSB’s proposed collection of rate/price information stating that they were “unconvinced that rate/price information provides any additional insights that would be useful for macro prudential analysis as the FSB identified in its report of 29 August 2013.”  In the final standards, FSB chose to retain rate/price data collection as part of the framework. In addition, ISA, RMA, and PASLA stressed the proprietary nature of rate/price data and suggested that data collection by regional/local regulatory authorities have appropriate safeguards built into the process. While the FSB did address confidentiality of data at each the two reporting tiers in the final document, they did not address rate/price data confidentiality specifically, choosing to leave the onus of making confidentiality determinations to national/regional authorities.  

 

ICI Global was also concerned in their comments with confidentiality of collected data, and recommended confidentiality measures beyond the flagging system proposed by the FSB.

 

"Some of the data that the FSB expects national or regional authorities to collect may be sensitive and potentially commercially actionable. As a threshold matter, the FSB should recommend that every national or regional authority to have appropriate systems and procedures in place to ensure the confidentiality and security of such information before requesting it from market participants. Appropriate systems and procedures, in this regard, go far beyond assigned confidentiality flags. Even though the FSB will deal solely with aggregated data, it too should have robust systems and procedures in place before collecting data from national or regional regulators. "

 

Nonetheless, the FSB chose to stick with its confidentiality flag-based system in the final standards.  

 

CSFME asserted in its comments that the data collection was too narrow, and that the Consultation Paper's focus on global aggregates limited to position metrics "will have minimal value, and may well prove to be misleading."   While position aggregates in securities lending may help track the level of cash collateralized loans, CSFME argued that these metrics alone cannot track the risk of collateral fire sales, one of the main systemic risks that supervisors have linked to securities finance. Rather, CSFME proposed that the data initiative be expanded beyond position aggregates to include risk mitigation resources as well as termination activity.  According to CSFME, to have a true understanding of the risk associated with collateral fire sales, loan recalls and returns must be tracked along with position aggregates. In addition, because lending agents can mitigate these termination risks with rebate incentives, cash buffers and loan substitutions, these mitigation techniques and practices must be considered as well.  Ultimately, in the final draft, the FSB chose not to add risk mitigation resources and termination activity to the data collection.  

 

Next Steps

The report also discusses the potential uses of the aggregated data, as well as the next steps for the completion of the initiative, including a timeline for the implementation of the standards and processes.

The FSB has indicated that it will begin work immediately on the detailed operational arrangements, and plans on initiating the official global data collection and aggregation at the end of 2018.

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The CSFME’s Regulatory Outreach Programs

Regulatory reform has become a collaborative process. Where once market supervisors promulgated rules without regard for input from practitioners, today’s reform process has evolved into a dialogue of mutual respect for the opinions of all stakeholders in the capital markets. The process of regulatory outreach has become embodied in virtually every developed markets in the world.

The CSFME has adopted a role of facilitating this collaborative dialogue at all stages of the professional contribution process. Starting with students’ contributions to published commentary letters, through panel presentation and webinars, right up to trade association initiatives, the CSFME provides assistance through education, data compilation, analysis and commentary for some of the most pressing issues in contemporary markets.

Research and Analysis of the Effects of Financial Regulatory Reforms

Given the sweeping changes in financial market regulation following the financial crisis, CSFME has turned its focus to questions relating to to how these changes are affecting the risks and economics of bank activities. The purpose of the Center’s research in this area is to foster sound policymaking and effective regulation with minimal adverse and unintended consequences. CSFME studies supervision and regulation of global financial institutions, the effects of reregulation on the global financial industry, optimal roles and methods of regulation in securities markets, corporate governance at financial institutions, and the most effective metrics and methods of data collection for understanding and measuring the effects of regulations on the global financial landscape. 

Lately, in response to a call from the FDIC for research on financial sector policy and regulation, the Center submitted a paper modeling the indirect costs to markets of bank regulatory reform.  The paper critiques regulators’ models for assessing these costs, and provides empirically-based suggestions for a more complete dynamic model of the long-term effect of bank capital reform.  Mindful of the Basel Committee's ongoing reviews of modeling tools, i.e., May 2012 and March 2016, the Center's critique is intended as a constructive addition to the holistic conceptual base of the regulatory reforms.

The Center also continues to provide input on regulatory proposals.

In March of 2016, CSFME submitted a comment letter to the Bank for International Settlement's (BIS) December 2015 consultative document regarding step in risk.  While supporting generally the goals of the Basel Committee to minimize the potential systemic implications resulting from situations where banks may choose to provide financial support during periods of financial stress to entities beyond or in the absence of any contractual obligations, the Center expressed some concerns and offered some suggestions regarding the approach taken by the Consultation. Drawing on practical experience, the Center offered an example from the trade finance sector supporting its belief that the nature of step-in risk may be one example of an acceptable, non-diversifiable exposure, given the potential positives for the economy at large.

In February 2015, CSFME submitted a comment letter in response to the Financial Stability Board’s November 2014 consultative document, Standards and Processes for Global Securities Financing Data Collection and Aggregation. In its letter, the Center identified additional metrics that may be necessary to assess properly the risk of collateral fire sales associated with securities lending transactions.  In particular, CSFME asserted that FSB and sovereign regulators must expand the data initiative beyond position aggregates, to include risk mitigation resources as well as termination activity.

Students Learn to Evaluate and Contribute to the Reform Process

As the level of intensity surrounding the reform process continued to build in 2013, the CSFME began to bring a fresh perspective to the reform process. By working with finance students and the US regulatory agencies, CSFME hoped to challenge the settled views of stakeholder by introducing the views of those whose careers would be shaped by the outcome of the reforms.

In the spring of 2013, a select group of Fordham University economics students met in Washington with officials at the U.S. Treasury, Office of Management and Budget, Federal Reserve Board, and the Securities and Exchange Commission. The CSFME helped arrange the meetings and funded the logistics. By all accounts, the experience was very positive for students and regulators alike.

Buidling upon the success of the 2013 pilot program, in 2014, both Fordham and the CSFME decided to expand the outreach program and formalized the Regulatory Outreach for Student Education program as the ROSE program. Honor students in finance and economics were selected by the deans of four schools within the university: the Graduate School of Business Administration, Fordham College at Lincoln Center, the Gabelli School of Business, and Fordham College at Rose Hill. The students were organized into four teams representing their schools. The CSFME selected a contemporary issue of career significance, the Financial Stability Board’s Consultative Document on G-SIFI designation of non-bank, non-insurer financial institutions. Each team was charged with studying the issues in debate, then presenting their opinions in the manner of a formal comment letter to the FSB. Over four months, the students reviewed earlier opinion pieces, met with practitioners and regulators, and then submitted their opinions. Without influencing their opinions, the CSFME arranged access to research materials and opinion leaders, then reviewed their letters and, as appropriate, recommended submission on university letterhead. In April, 2014, the four teams’ letters were published by the FSB on its website. In recent memory, no university had ever had one letter, much less four, published on a regulatory website. To finalize the 2014 ROSE program, the CSFME arranged for all four teams to present their opinions to the key regulators at the Federal Reserve Board and the SEC in Washington, D.C. The day of meetings ended with regulators’ praise at the degree to which the students had understood the issues and presented their opinions clearly.

One student team even offered suggestions that regulators had not previously considered and praised for their creativity. “We always know what the trade groups will say, but you brought a fresh perspective.” That team, Fordham College at Lincoln Center, was awarded the 2014 ROSE Award for Analytic Excellence. In retrospect. each student completed the program with a credit that will not only endure on their resumes but also contribute to the evolution of the financial markets through the Twenty First Century.

In 2015 and 2016, Fordham formalized the ROSE Program as a for-credit course in their curriculum. The focus of the 2016 ROSE Program was the Bank for International Settlement's December 2015 consultative document proposing a preliminary framework for identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities.  Five teams of graduate and undergraduate students in economics, finance, accounting, management, and law researched and drafted comment letters on the consultation and submitted their letters to a panel of distinguished industry judges.  After reviewing each excellent submission, the judges then one winning letter to be presented at a visit to the Federal Reserve Bank on April 27, 2016. The winning team's letter was submitted in full to the BIS, along with a summary of the key ideas from the letters from each of the other four teams, and the submission was published on the organization's website with those of the consultation's other commenters.   All five teams of Fordham Scholars visited Washington, DC on April 27, 2016 and met with officials at the Fed, Treasury Department, and FINRA.  

Institutional Securities Lenders respond to Academic Criticisms

In 2006 the Center was created, initially for the purpose of testing academic criticisms of the securities lending markets. With funding and data support from the Risk Management Association, CSFME found “no strong evidence to conclude that securities lending programs have been used to any great extent to manipulate proxy votes or exercise undue influence on Corporate Governance issues.” Our study also found that “broker borrowbacks” had contributed to spikes in lending activity around record date – the same phenomenon that the academics had misinterpreted as evidence of hedge fund manipulation – due to the efforts of brokers to meet recall notices from securities lenders. In effect, the brokers were scrambling to acquire votes for their customers, not building positions to swing corporate elections. The academics had fatally misinterpreted their findings!

Ed Blount of CSFME testified at the SEC’s Roundtable on the results of the research in September, 2009. Then, the CSFME white paper, published in 2010, was submitted to the SEC as an attachment in response to a consultative document on the “Proxy Plumbing” process. As a result of the Center’s contribution to the collaborative process, the misguided call for reform of securities lending began to subside. Once again, securities borrowers were fairly recognized to be honest brokers in the corporate governance arena.

Securities Lenders consider new means to retain their Voting Rights

In a follow-up to the Empty Voting project (“Borrowed Proxy Abuse” as it came to be known), the CSFME responded in 2011 to requests by the participating securities lenders, by turning its attention to ways in which those lenders might be able to retain their corporate governance rights, while still benefiting from the income attributable to their securities loans. After all, as many studies have found, securities lending contributes significantly to the efficiency of market operations. Why should lenders be forced to choose between their loan fees and fiduciary duties to vote their shares, especially if they are contributing to market efficiency?? With independent funding, the CSFME retained attorneys from two prestigious Washington D.C. law firms, Stradley Ronon and Sidley Austin, to investigate the legal underpinnings to market practices which force pensions, mutual funds, insurers and other institutional securities lenders to give up their voting rights when they lend portfolio securities. In practice, margin customers of brokers also lend their securities, yet they usually retain voting rights -- and most of them aren’t even long-term beneficial owners. Both groups of beneficial owners retain dividend rights, so why, institutional investors asked, shouldn’t institutions also keep their voting rights? With the benefit of exhaustive legal research, CSFME filed a petition with the Securities & Exchange Commission to initiate a pilot program to test new market procedures by which recently-introduced efficiencies in market operations might permit lender to retain votes.  Learn more about Paradoxical Erosion of Corporate Governance

In 2013, the SEC approved that pilot program, largely in response to the encouraging recommendations of the International Corporate Governance Association, as well as the California State Teachers Retirement System and the Florida State Board of Administration.

That pilot was initiated in 2014. Simultaneously, the CSFME began to apply the results to new initiatives in Canada and Switzerland, where the pressure to meet fiduciary voting obligations was intensifying.  More about Full Entitlement Voting



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