In a new Staff Report, the Federal Reserve gets serious about evaluating what kind of data are necessary to sufficiently oversee the repo and securities lending markets. While the majority of the paper provides background data on the markets in general, the final section digs into the main issues and provides some worthwhile observations.
The paper’s authors, including prior attendees at the Finadium annual conference, have taken a realistic look at the question of data collection in the repo and securities lending markets. They recognize that these markets are critical for smooth and orderly trading in a host of other financial market products but also bring with them liquidity risks. In order to capture the benefits of repo and securities lending while mitigating the outstanding risks as best as possible, the authors conclude that better oversight is necessary.
To this end, the authors propose six pieces of data that should be captured at the firm level for repo and securities lending transactions:
1. principal amount
2. interest rate
3. collateral type
4. haircut
5. tenor
6. counterparty
The authors demonstrate an understanding of the basic issues in repo and securities lending datasets and recognize that getting their desired data will be difficult. In the meanwhile, they appear to lay their best hopes on Form N-Q data provided by money market mutual funds to try and get some sense of repo purchases. These funds are by far not the only purchasers of repo and typically do not purchase the more illiquid products; this creates an immediate data gap when looking to understand illiquid ABS and equity repo. But, the Fed accurately notes that by collecting the data they would start to get a grip on the market.
Our take is that the Fed is right to want to gather more data on repo and securities lending. However, a government mandate would be necessary in order to take it seriously (see: the SEC’s expected Dodd-Frank rules on securities lending transparency). All market participants could either provide the Fed a report on their activities, or provide data to at least one recognized platform (Equilend/BondLend, SunGard ASTEC, Data Explorers, a tri-party repo clearer, etc.) that in turn can be consolidated by a government agency. Given the widespread use of these platforms in the repo and securities lending markets, achieving this compliance should not be difficult. It will be more challenging however for regulators to make sense of the data once they have them in any form and to ensure that the underlying aggregation process did not leave any stones unturned.
Another idea is for the SEC to mandate that all mutual funds publish their outstanding securities loans on their Form N-Qs. We have used these forms for years to observe the amount of loans outstanding; even better would be detail on the underlying holdings. This would solve a range of other problems as well including offering transparency for retail and institutional investors.
In the end, regulators will need to access multiple sources of information, including reports gathered from the market participants or from several different data sources, in order to get the information they need. This will take some time, but the new white paper shows that they are off to the right start.
The Fed’s paper is here.