The Top 50 Counterparties Report – a good idea but more work is needed on data quality

Since 2010 the Senior Supervisors Group (SSG), a cousin to the Basel Committee and the Financial Stability Board comprised of regulators from large financial markets, has been collecting data on the top 20 counterparties of major banks. This seems like a good risk management tool to increase awareness of counterparty exposures across business lines but there is still work to be done to make it effective.

After some analysis, the Group has now released its progress report and is expanding its requirement to capture the top 50 counterparties. In the January 15 2014 analysis, “Progress Report on Counterparty Data,” the SSG says that the project’s goal was to give supervisors more information on counterparty exposure and to test and track over time how well banks can produce the data across legal entities and products. So far the project is coming in as fair.

The report itself is supposed to capture 95% of counterparty exposures and fill in the following metrics: derivatives- related fields (daily), credit valuation adjustments (CVA; weekly), repo (daily), securities lending (daily), traditional lending-related fields (monthly), short-term money placements (daily), and issuer risk (daily). We think that is a good list.

Here are the main takeaways from the progress report:

– Counterparty reporting should be a standardized process. There is too much manual intervention currently.

– Firms have made insufficient progress improving data quality.

– Firms and supervisors that have prioritized this effort have shown an improved understanding of risk.

But: “There is much room for improvement.”

The biggest problem is in poor data management and errors in the report itself. “Recurring data errors indicate that many firms are below SSG benchmark standards for data quality and cannot measure and monitor the accuracy of the data they submit or rectify quality issues in a timely manner.” That’s going to be a tough one to resolve but its important. We’ve seen repeatedly that knowledge and eyes on specific names brings more attention to risk exposure.

At the same time, only 68% of banks could actually deliver the report weekly on a T+3 basis. That’s not great but not to us as bad as poor data in the report itself.

Says the SSG, “On the whole current practices fail to meet supervisory expectations or industry self-identified best practices for timely and accurate reporting of top counterparty exposures.”

We’re expecting more attention to this report going forward. For starters, the project has moved to the Bank for International Settlements, meaning it is getting systematized in the BIS’s International Data Hub. This will likely lead to academic studies on counterparty concentration risk and potential efforts by reporting banks to diversify their bilateral exposures. For banks themselves, the reports should serve as a good general risk management tool.