The Office of Financial Research (“OFR”) examined securities-lending activity based on pilot data collected by staff from the OFR, the Federal Reserve System and the SEC. In a recent working paper, the OFR specified that the three annual reports by the Financial Stability Oversight Council (“FSOC”) identified a dearth of data on securities-lending activity. In light of this, FSOC and the other regulators collected pilot data from seven large lending agents in order to address this “critical data need.”
The regulators collected data concerning 75 characteristics of securities loans, including the type of collateral received, the duration of the loan, the fee paid, the type of parties involved, and the type of securities loaned.
The research pilot did not capture data from all securities-lending agents, or from bilateral activity conducted without agent participation. The OFR noted that additional data would complement the pilot data:
A more broad-based permanent data collection would provide consistent and comprehensive coverage of this activity. A securities lending data collection could complement the bilateral repo data collection currently under consideration because both are considered necessary for effective monitoring of financial stability.
The OFR concluded that appropriate standards should be used to ensure the quality of additional data, including the Legal Entity Identifier and the categorization of financial instruments. OFR stated further: “[s]taff from U.S. regulators are working with international regulatory bodies to examine potential steps to harmonize reporting requirements, definitions and concepts.”
Lofchie Comment: Though the information in the working paper is useful, the banking regulators seem overly focused on risks posed by securities-lending transactions relative to other substantial risks to the economy. For that reason, the OFR should broaden its scope. Here are two closely related areas for the OFR to examine: (i) state and municipal insolvency (Puerto Rico is not the end of the story), and (ii) public and private pension obligations (e.g., what are the combined risks of underfunding, increased longevity, and a zero-interest-rate environment?). The OFR also might consider the risk of a further drop in oil prices, or the consequences of a major cyber event. If they really want to be big-picture thinkers and consider major threats to our economy, then they may want to start going to the movies. Securities-lending risks pale before the economic risks of attacks by zombies, space invaders and other shady beings.