OFR Reports on Bilateral Repo Market

The Office of Financial Research (“OFR”) published quantitative information on bilateral repurchase agreement (“repo”) activities in the U.S. securities financing market. In addition, the OFR identified the three principal challenges involved in collecting this type of market data: (i) the limited scope of pilot data collection, (ii) the lack of data standards and (iii) separate data systems.

The OFR highlighted the following “next steps” to be taken in the U.S. securities financing market:

  • the development of permanent granular data collection of bilateral securities financing trades, which will “build on the lessons learned from this pilot data collection” and utilize consistent reporting definitions, concepts and requirements with collections that cover the triparty repo segment;
  • the implementation of mandatory data standards in order to reduce reporting burdens and improve data quality; and
  • the harmonization of reporting definitions, concepts and requirements by U.S. regulators (such as the Financial Stability Board) and international regulatory bodies.

Lofchie Comment: It would be helpful if the OFR explained how it picks the categories of financial risk that it elects to investigate. While it might be true that the selected¬†securities activities pose a material risk to the economy, they certainly are not the activities that pose the greatest risk. Here are a few examples that might pose greater risk to the economy: the near insolvency of Puerto Rico, as well as the insolvency of a number of cities like Detroit, indicates that municipal bankruptcy is a greater long-term (or even short-term) threat to the economy than those risks that comprise the OFR’s current focus. The current low-interest-rate environment presents significant risk for pension plans that must achieve higher returns in order to meet fixed pension obligations. And threats of widespread bankruptcies in the energy sector remain. Yet despite all that, OFR appears to be focused resolutely on fully collateralized securities lending, seemingly without much regard for the genuine real-world risks that threaten economic stability in the United States.