Thursday, February 12, 2015

CSMFE Submits Comments on FSB Data Collection Proposals

Aircraft pilots cannot monitor risks based solely on altitude; neither can market supervisors.

Author: David Schwartz J.D. CPA

On February 12, 2015, the Center for the Study of Financial Market Evolution ("CSFME" or the "Center") filed its response to the Financial Stability Board’s (FSB) consultation, Standards and Processes for Global Securities Financing Data Collection and Aggregation ("Consultation Paper”). The Consultation Paper proposes a system of data collection intended to help market supervisors infer changes in systemic risk that are said to be created by securities lenders, repo traders and margin lenders.  Previously, as part of their larger workstream on shadow banking, the FSB recommended that national/regional authorities collect appropriate data on securities financing markets to help the FSB better assess ongoing financial stability. The Consultation Paper is a proposal regarding what kinds of data on repo, securities lending, and margin lending should be collected, how they should be collected, and in what format.  

In its letter, CSFME asserts 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, 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, the Center proposes that FSB and national and regional authorities expand the data initiative 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.