Congress is offering up another bite at the data standards apple, introducing H.R.1530 - 115th Congress (2017-2018): Financial Transparency Act.
Its purpose is “to amend securities, commodities, and banking laws to make the information reported to financial regulatory agencies electronically searchable, to enable RegTech applications, and for other purposes.”
RegTech is the application of technology to support regulatory objectives. Required for this are data standards so that technology can be consistently applied to related data sets across multiple U.S. regulators.
The Financial transparency Act empowers the secretary of the Treasury to “promulgate data standards for the information reported to member agencies by financial entities under the jurisdiction of the member agency and the data collected from member agencies on behalf of the Council (Financial Stability Oversight Council or FSOC)”.
Those member agencies are:
- the Securities and Exchange Commission (SEC),
- the Commodity Futures Trading Commission (CFTC),
- the Federal Deposit Insurance Corporation (FDIC),
- the Federal Reserve,
- the Office of the Comptroller of the Currency (OCC),
- the Consumer Financial Protection Bureau (CFPB),
- the National Credit Union Association (NCUA) and
- the Federal Housing Finance Agency (FHFA).
The data standards include common identifiers for information reported to member agencies or collected on behalf of the FSOC. This includes a common legal entity identifier for all entities required to report to member agencies; and common data formats for information reported to member agencies or collected on behalf of the FSOC.
The data standards must:
- render information fully searchable and machine-readable;
- be nonproprietary;
- incorporate standards developed and maintained by voluntary consensus standards bodies; and
- be consistent with accounting and reporting principles.
The Treasury secretary shall seek to promote interoperability of financial regulatory data across members of the FSOC and that all public information shall be published as open data, freely available, accessible via application programming interface where appropriate and offered without any registration requirement or reuse restriction.
Legislators tried once to set data standards for regulatory reporting, including it in the Financial Stability Act of 2010 and came up short. Why did the first attempt fail, and why is it so important to get this right now?
Well, if you haven’t noticed, the financial services business has been completely digitized. Today, almost all regulation is implemented through computer code in the digital factory that underpins all financial transactions.
Digitized financial transactions are aggregated and wind up on customer-facing computers; on internal management, risk and accounting reports; and as input in manual or electronic format to multiple regulators’ for each of the FSOC regulators to allow them to fulfill their oversight responsibilities.
The data components of financial transactions are the financial material that are used in different configurations to represent different products and aligned to represent different market participants acting in different capacities across the financial supply chain.
Financial transactions can thus be thought of as an assemblage of these identifiers and data elements to uniquely identify the transaction as a specific product bought by a specific business entity. It is analogous to assembling specific components of a commercial product and designating its manufacturer and purchaser.
The difference is that the commercial product is tangible and visible; the financial transaction is completely digital. Getting its digital footprint right is crucial.
In the first legislative attempt, the Office of Financial Research (OFR) under the Treasury secretary was established to collect information from financial companies, specifically financial transaction data and position data (the aggregated transactions of each legal entity for each financial product).
However, before requiring the submission of information from any financial company, the OFR was required to coordinate with each agency and rely on information available from such agencies.
This proved unmanageable even though the OFR had been mandated to set formats and standards for reporting financial transaction and position data. Each agency was required to legislate changes to financial companies reporting obligations, report by report.
They were also reluctant to invest in changing their internal systems to conform to such new formats and identifiers as their budgets were already constrained.
Each agency, like financial companies, have their own legacy systems that define themselves and their clients, and their financial products, through different identifiers using different data formats.
The Financial Transparency Act is attempting to address this issue by providing legislative certainty for all agencies to make common data standards mandatory.
The pillars of the legislation is set to have financial entities report the same standardized identity data in common data formats to their reporting agencies (one of the eight member agencies of the FSOC).
The OFR’s Data Center established under the Financial Stability Act of 2010 would still need to prepare and publish a financial company reference database and a financial instrument reference database. Without them, no collection nor aggregation of multiple agency data can occur.
This is critical, as the OFR’s earlier responsibility to establish reporting formats and standards for reporting aggregate financial transaction and position data will presumably be substituted with aggregating agency submitted standardized data.
Finally, the legislation leaves open the question of what data standards and what data formats are to be used. The legislation calls for the standards to be nonproprietary and incorporate standards developed and maintained by voluntary consensus standards bodies.
The language calls for “a common legal entity identifier” but is silent on investment product or financial contract identifiers. Many of the later that are in common use are proprietary.
One of the most significant standards initiatives that satisfies these criteria, the Global Legal Entity Identifier (LEI) initiative, is not specifically referenced in the legislation. There are other identifiers that vie to be anointed as the common legal identifier.
Also, standard data formats, albeit not proprietary, are numerous. How this gets sorted and implemented within the three-year time frame mandated by the legislation is not clear at all. Perhaps more specificity is needed before the legislation becomes law.
Allan D. Grody is president of Financial InterGroup Advisors, a strategy, research and acquisition consultancy.