May 4, 2011, Boca Raton, Fla. – Can there be too much data collected on risks to the financial system underpinning the United States economy?
“Could be. I think it's a great idea, conceptually,'' that the newly established Office of Financial Research will collect data from banks, brokerages, trading firms and other sources on the securities they are exchanging and who they are exchanging it with, said Stephen C. Daffron, global head of operations and technology, Morgan Stanley & Co., at the 38th Operations Conference of the Securities Industry and Financial Markets Association.
But Daffron doesn't think the way the collection of price data, reference data, counterparty data and trade data is being pursued is likely to produce the result sought: the ability to home in on those firms and those patterns of trades that are causing immediate harm to capital markets or are beginning to loom as threats.
The goal of the OFR, spawned by the Dodd-Frank Wall Street Reform Act in 2010, is to collect whatever data is needed from financial institutions so that the industry as a whole can be analyzed and evaluated for the specter of systemic risk. In effect, illness in one firm or group of firms will be spotted before it spreads to the market as a whole.
Eventually, the OFR would maintain two different and very important public databases. One would be a database of financial instrument types and another a database of financial entities and organizations.
The OFR would be linked to a Financial Research and Analysis Center whose job will be to develop intelligence – or actionable data – out of the raw data so it can identify emerging systemic risks. Congress would get an annual report.
"What concerns me is three things,'' said Daffron. "First, it's a huge amount of data and we're all dealing with it in a relatively unstructured way right now. Two, they need to deal with it in a way that is consistent. Third, my worry that they would try to use it in ways that are not practical."
He said he had recently been in Washington, D.C. to meet with the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Federal Reserve Board, the Federal Deposit Insurance Corporation and "a partridge in a pear tree.''
His resulting impression? That huge amounts of data will be collected, in ways that are likely to be inconsistent and not easily analyzed. And that the rush to collect data this year and next will impede the analysis of it.
"That much data, in that kind of form, delivered in that kind of time frame, is not the way to do surgery,'' he said. "You can point directions, you can paint large pictures with that paint brush but right now you can't say you should not trade with that counterparty.''
At least not in the way he says he's seen the data being structured so far.
"I don't see the OFR being anything like the surgical instrument that the legislation envisioned,'' he said. "Simply because there's too much [data being collected]. It's too complicated. Maybe at some point we can structure it in a way that is more precise. But right now I don't see it."
The usefulness will depend on the integrity of the data submitted by securities firms, said Angela Biever, chief administrative officer of Raymond James Financial.
It might take a while for the OFR to get used to using it, but securities trading is an information-based business, she said, and it's a "good thing" that regulators will be able to analyze information in the system.
Regulators are "in a learning stage,'' said Jeffrey C. Bernstein, managing director at JPMorgan Securities.
The trick will be what they do with it, after they've figured out what it is. "They have to use it to good effect,'' he said.
This story originally appeared on Securities Technology Monitor.
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