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October 21, 2014

Another Missed FSOC Opportunity

By Irina Leonova, Banking Specialist at Better Markets

Watching the “public part” of the October 6th FSOC meeting was … painful. Regrettably, as we have said before, FSOC meetings make the Kremlin look open by comparison.

That’s unfortunate because it’s a disservice to the American people and a wasted opportunity for policy makers.  FSOC members should demand lengthy public meetings so that the American people, the press and the chattering class get to see that the Committee is genuinely grappling with difficult issues; that its members are serious, competent and hardworking policy makers; and, that they are taking their duties to protect the country against systemic risks seriously and working hard to prevent more crashes and bailouts.

Regardless of who runs FSOC, everyone isn’t going to agree with them, but everyone should at least be able to see most of what they are doing and understand why they are doing it.  If that happens, then when the inevitable disagreements occur, there are can be informed discussions based on the facts, which should help reduce the political and ideological attacks.

Let’s review what was shared with the public during the open part of the FSOC meeting: it is reviewing an unidentified entity against some largely unidentified criteria to determine if it should be designated as systemically important. That is, more or less, how it was presented at the open session. This is not helpful and, in fact, counterproductive.  Not only does it leave the public uninformed, but it results in a guessing game of what the criteria is and which entity it might be.

In addition to that, based on other discussions at the meeting, the Council appears to be focusing on three topics: SDR swap data, LEI and bilateral repo data.  Let’s review them.

First, SDR swap data: In its 2014 report FSOC said  “… some U.S. authorities’ access to these [SDR] data remains a challenge due to legal and other obstacles,” i.e., without a removal of the indemnification requirement for regulators to access the SDR data, authorities cannot access information about swaps.  This issue, indemnification, is one of the biggest problems of the SDR regime. As a result, the Federal Reserve Board, FDIC and other financial regulators do not have access to swap data in SDRs. That is an unacceptable SDR structure, which was supposed to be designed to provide transparency. It is hard to believe that U.S. regulators are not allowed to see the complete SDR swap data. FSOC should be publicly campaigning against this and figuring out a way to change it….fast.

Regarding swap data standards, the gist of the problem is that CFTC under the Dodd Frank financial reform law was mandated to develop the reporting framework for SDRs. In developing the reporting framework, the CFTC did not specify the exact data standards to be followed by reporting entities.  As a result, each SDR developed its own individual standard and, when data was reported to the CFTC, it naturally was not the same. As stated in the 2014 FSOC annual report “… under current rules the repositories have significant discretion in how they report the data. Without strong and common standards, the data collected by repositories are unlikely to bring the desired benefit to counterparty analysis and financial stability monitoring.”  Ok, but we already know that non-standardized, free form financial data will not work. FSOC’s discussion should have been directed to why this has happened, how to prevent it from happening again in other data collection initiatives and when the current situation will be resolved.

Second, global LEI Initiative: credit should be given to where the credit is due – Financial Stability Board[1] and G20 Leaders did an exemplary job launching the global LEI initiative in 2012.[2]  See the LEI ‘bible’ on the FSB website. But any risk manager will tell you that having IDs is only a small step to help achieve financial stability objectives. What is needed is relationship data. In June 2012 the FSB LEI group members (that includes Treasury, Fed, SEC among others) agreed on “the rapid development of the standards for LEI reference data on ownership and corporate hierarchies, as these data are essential to achieve one of the key objectives of risk aggregation for the global LEI system.” The discussion on the U.S. implementation of the global LEI initiative needs to focus on risk aggregation and LEI with relationship data. FSOC members should outline how they will implement reporting of the relationship data as part of the open access public LEI system that they committed to in 2012.

Third, bilateral repo data: this is an important subject, but not a lot details were shared on the pilot bilateral repo work at the meeting. The well-known work was done by the FSB on shadow banking monitoring and data collection on a global level with the New York Fed focusing on reforms in the tri-party repos in the U.S. There is hardly any information on bilateral repo data collection efforts in the U.S. We can only guess how the data pilot project is structured and why its framework and development was only shared with banks, but not with the general public. Public advocates and academics raised concerns about the repo market before the problems began in 2008 and the crisis ensued.  FSOC should engage them in the development of the framework now.

While those data issues are important, we also wish we heard discussion and acknowledgement of other pressing challenges of the U.S. financial stability: resilience of CCPS, cross-border resolution and recovery, domestic bankruptcy regime, possibility of runs on asset managers, new securitization products like rent-to-REIT, to name a few. This absence of the public discussions on those topics is disappointing as well.

The meeting ended, however, on a high note:  Chairman Lew asked both the industry and advocacy community for suggestions on how to improve the work and transparency of FSOC. We are grateful he asked and we have started work on a detailed list of suggestion to share with the Chairman.

[1] US Department of the Treasury, Federal Reserve Board and SEC are members of the Financial Stability Board.

[2] In the interests of full disclosure, I worked at the FSB at the time and was coordinating  the FSB work on this report to the G-20.



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