The South-Eastern European Monetary History Network is a group of financial and monetary historians, economists, and statisticians established in April 2006 on the initiative of the Bulgarian National Bank and the Bank of Greece. It has just issued a big study, South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II. The study supplies data for Austria-Hungary, the Ottoman Empire/Turkey, and the Balkans. Data include (1) monetary variables, (2) interest rates, (3) exchange rates, (4) government finances, (5) prices, production and labor, and (6) national accounts and population. There is also some narrative economic history of each country. Most of the countries in the region previously had little historical data readily available. What had been nearly inaccessible in old books, newspapers, and archives, mostly in local languages, is now a click away on the Internet in English and in machine-readable form. Bravo!
Category Archives: Data and Transparency
OFR Director Berner Discusses Filling Gaps in Data
Office of Financial Research (“OFR”) Director Richard Berner delivered remarks to the 2014 Financial Stability Conference, discussing the importance of filling gaps in data in order to inform policy for financial stability.
According to Director Berner, policy tools, analysis, and data are interconnected: “success in our work must begin with good data” to inform analysis to create good policy.
In order to obtain adequate data, Director Berner said the industry needs data standards and to close data gaps. He explained that it is imperative in the financial stabililty policy community to share data appropriately without compromising confidentiality, and highlighted the importance of making financial data “usable and transparent.”
Additionally, Director Berner mentioned the OFR’s recently released 2014 Annual Report, which identified a number of areas in which progress has been made to fill data gaps, including, among other things:
- a project with the Board of Governors of the Federal Reserve System to fill gaps in data regarding repurchase agreements, which will begin to gather data in early 2015;
- the OFR’s evaluation of leverage across different hedge fund strategies, with a specific interest in sources of leverage; and
- the assessment of data in the activities of the asset management industry, particularly in separately managed accounts.
Furthermore, Director Berner mentioned areas where more work needs to be done regarding gaps in data, including:
- working with the CFTC to promote the use of data standards in swap data reporting to ensure data quality and utility; and
- universally mandating the use of the Legal Entity Identifier (“LEI”) in order to, among other benefits, improve data quality for measuring and modeling counterparty networks.
Lofchie Comment: Across the entire financial industry, regulators seem to be engaged in a hasty, uncoordinated, and poorly conceived grab for “useful” information. It is time to slow down, formulate what information would actually be useful, stop collecting useless data, and develop long-range plans, with realistic timetables, as to how to collect the data that can actually be used.
See: Director Berner’s Speech.
Related news: OFR Issues 2014 Annual Report (December 3, 2014).
IOSCO Issues Report on Post-Trade Transparency in CDS Market
The International Organization of Securities Commissions (“IOSCO”) published a consultation report, titled “Post-Trade Transparency in the Credit Default Swaps Market,” which analyzes the potential impact of mandatory post-trade transparency in the credit default swaps (“CDS”) market.
The report is based on a review of relevant works of academic literature and by international standards-setting bodies, as well as an examination of publicly available transaction-level post-trade data about CDS transactions before and after the introduction of mandatory post-trade transparency in certain CDS markets in the United States.
According to IOSCO, the data does not suggest that this introduction of mandatory post-trade transparency had a substantial effect on market risk exposure or market activity for those CDS products. Additionally, IOSCO stated that it believes that greater post-trade transparency in the CDS market would be valuable to market participants and other market observers. IOSCO encouraged each of its members to take steps to enhance post-trade transparency in the CDS market in its jurisdiction.
See: Consultation Report on Post-Trade Transparency in the Credit Default Swaps Market; IOSCO Press Release.
Academic Paper Investigates Advantage for High-Frequency Traders in SEC Dissemination Process
Academic researchers from the University of Colorado and University of Chicago published a paper titled “Run EDGAR Run: SEC Dissemination in a High-Frequency World,” which finds that the delay between an SEC filing’s acceptance by the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) and its initial public availability on the SEC website, may provide an advantage to certain traders that pay a subscription fee for direct access.
According to the paper, while the delay is “relatively short,” with a median posting time of 36 seconds, prices, volumes, and spreads respond to the filing news beginning around 30 seconds before public posting. Therefore, the paper finds, some computer-driven market participants may be taking advantage of this posting delay.
The paper states that the findings “show that the SEC’s process for the dissemination of insider filings (and likely other types of filings as well) is not a level playing field.” The paper’s research is related to the recent literature on high-frequency trading, providing evidence that there are opportunities for certain traders to profit by trading on delays in the public dissemination of information.
In response to the findings, an SEC spokeswoman stated that the SEC is “conducting a thorough assessment of the dissemination process, including timing increments, and will make any system modifications that may be necessary to optimize the dissemination of information to investors and the markets.”
Lofchie Comment: Although the paper demonstrates a supposed “flaw” in the means by which the SEC disseminates information, this ought not be embarrassing to the SEC. Rather, the paper should be taken as evidence of just how difficult it is to perfectly control and transmit public information to all investors, given the increasing complexity of technology and the continuing rapidity of technological progress. Query: how would the SEC have dealt with a similar “flaw” had it occurred with a private market participant: by bringing an enforcement action or, as we have advocated, by using it as an industry-teaching experience?
If the SEC, or other U.S. regulators, treat each technological problem that occurs with a market participant as cause for an enforcement action, the result is that market participants have no incentive to share information as to problems that they discover. On the other hand, a regulatory culture that incentivizes the sharing of information as a response to technological problems may result in shared incentives to solve those problems.
See: “Run Edgar Run: SEC Dissemination in a High-Frequency World” by Jonathan Rogers, Douglas Skinner, and Sarah Zechman.
See also: Wall Street Journal Article; New York Times Dealbook Article.
FIA and FIA Europe Issue Special Report on Transparency
The Futures Industry Association (“FIA”) and FIA Europe submitted the ninth and final Special Report in a series covering specific areas of the ESMA consultation process for the implementation and recast MiFID II and MiFIR. The final Special Report provides an overview of the proposals relating to transparency, set out in the recently published ESMA Discussion Paper and Consultation Paper.
According to the Special Report, transparency is a theme that permeates the primary legislation and the ESMA Discussion Paper. The Discussion Paper covers topics including (i) pre-trade and post-trade transparency requirements for equities; (ii) pre-trade and post-trade transparency requirements for non-equity instruments; and (iii) the systematic internalizer regime; and (iv) the definition of a “liquid market”, which is a key component of the transparency provisions.
Additionally, the ESMA Consultation Paper has eight sub-sections on transparency, spanning over 30 pages and analyzing, among others: (i) liquid markets for equities; (ii) the systematic internalizer regime; and (iii) pre-trade transparency requirements for systematic internalizer in non-equity instruments.
The Special Report on transparency briefly outlines these issues.
See: FIA Special Report: “Transparency”.
Related news: FIA Issues Special Report: “Defining High Frequency Trading” (June 25, 2014).
CFS and FBI Announce Public / Private Cyber Security Partnership
In the last few days, news about cyber-attacks against a major unnamed hedge fund has highlighted the seriousness of this risk to our overall financial system.
To better assess emerging risks and facilitate coordination surrounding cyber security and threats, the Center for Financial Stability (CFS) and the Federal Bureau of Investigation (FBI) are pleased to announce the formation of a public / private partnership for the financial services community.
Meetings will be hosted by the Vulnerabilities Working Group (VWG) at the CFS. The VWG – more broadly – is at the forefront of gauging financial, macroeconomic, geopolitical, technological, and regulatory risks likely to present over the next 3 to 24 months. Specifically, the technology component will focus on topics such as national security threats, threats to financial institutions, future emerging threats, and crisis management techniques.
The group will be led by Leo Taddeo (FBI) and David X Martin (CFS).
Leo Taddeo serves as the Special Agent in Charge of the Special Operations/Cyber Division of the FBI’s New York Field Office. In this role, Mr. Taddeo leads over 400 special agents and professional support personnel in cyber investigations, surveillance operations, information technology support, and crisis management.
David X Martin is an acknowledged expert on risk management. He has served as the founding chairman of the Investment Company Institute’s Risk Committee (ICIRC), and co-chair of the Buy Side Risk Committee, composed of the chief risk officers of the twenty largest asset management firms. He has also published on cyber security. Prior to CFS, David was the chief risk officer at AllianceBernstein.
Aside from excessive central bank liquidity, cyber threats are a meaningful risk to the financial system and could ultimately be part of the next financial crisis.
For more information about this new partnership, please contact LeAnn Yee (manager of communications and development) at lyee@the-cfs.org.
News reports include:
Hedge-Fund Hack Part of Bigger Siege, Cyber-Experts Warn – http://www.bloomberg.com/news/2014-06-23/hedge-fund-hack-part-of-bigger-siege-cyber-experts.html
CNBC News Story – http://video.cnbc.com/gallery/?video=3000285963
SEC Commissioner Gallagher Discusses Disclosure Requirements, Criticizes Use of Regulatory Requirements to Advance Political Goals
SEC Commissioner Daniel Gallagher discussed the SEC’s corporate disclosure requirements, focusing on the extent to which those requirements have been misdirected to purposes other than providing benefits to investors.
Commissioner Gallagher stated that the SEC is imposing too many frivolous reporting requirements, and that these requirements impede economic recovery. He asserted that the “increasing encroachment” of congressionally mandated governance-related disclosure requirements distracts the SEC from its core purpose of requiring material information that is considered significant by the “reasonable investor.”
Commissioner Gallagher claimed that certain stakeholders and “corporate gadflies” have “hijacked” the shareholder proposal system to advance unnecessary and often politically motivated disclosures that are irrelevant and unhelpful to the average investor. These arbitrary disclosures, he explained, are mandated in order to “name and shame” corporations. He noted that many times, certain interests have sought to compel the SEC to regulate indirectly through disclosure where direct restrictions would have been unconstitutional.
Since the last overhaul of the disclosure rules took place in the 1980s, Commissioner Gallagher stated, it is time for the SEC to evaluate critically the SEC’s disclosure-based approach to regulation. He recommended that the SEC implement rules that focus on meaningful disclosures of material information.
Lofchie Comment: Commissioner Gallagher’s important remarks dovetail thematically with Chair White’s speech on the National Market System. His commentary goes to the heart of the mission of the SEC. At its core, the SEC’s mission should be to benefit the economy, whether that is by preventing fraud, improving disclosure to investors or regulating market structure. When the SEC is diverted from that mission by the imposition of goals that are not merely extraneous, but antithetical to helping investors, the economy is injured. Issuers subject to these extraneous SEC requirements are put to greater expense, hurting their investors and the economy. Further, the SEC’s limited resources are diverted from matters that should be their focus, including the important issues raised in the speech on the same day by SEC Chair White.
See: Commissioner Gallagher’s Remarks.
Eduardo Aninat on Capital Tax Increases and Chilean Growth
CFS Advisory Board member and former Chilean Finance Minister Eduardo Aninat comments on proposed policies in Chile to increase the corporate tax rate from 20% to 35% and to eliminate the FUT. He expresses concern regarding the affects the plan will have on investment and growth and challenges the government to show how it came to the conclusion that investment would be unchanged.
See The Wall Street Journal article by Mary Anastasia O’Grady article titled “Assault on the Chilean Miracle.”
The Data the NYSE Didn’t Want People to See, 1914
Professor William Silber of New York University has allowed Historical Financial Statistics to publish his stock market data (Excel file; you may have to click on your Excel icon to see it) on the often neglected U.S. financial crisis of 1914.
This year will be the 100th anniversary of the start of World War I. What is less well known is that the start of the war occasioned a financial crisis in Europe and the United States. In the United States the crisis came at a critical juncture because the Federal Reserve System had been established by law in December 1913 but would not become operational until November.
The Austrian archduke Franz Ferdinand was assassinated in Sarajevo on June 28, 1914 by a Bosnian Serb. After several weeks of mounting tensions, Austria-Hungary declared war on Serbia on July 28. Stock exchanges across Europe closed. The New York Stock Exchange followed suit, deciding to shut down just minutes before the beginning of the July 31 session at the urging of the Secretary of the Treasury.
The exchange remained closed until December, but within two weeks, traders began unofficial trading in stocks in New Street, in back of the stock exchange. The Wall Street establishment successfully discouraged trades from being reported in the financial press. In an engaging piece of historical detective work, Professor Silber found that trades had however been reported in the little-remembered New York Morning Telegraph. The Morning Telegraph specialized in racetrack and entertainment reporting, so it was not beholden to the Wall Street establishment for scoops, readers, or advertising. However, it too eventually gave in to pressure not to publish trades, ceasing after late October.
Professor Silber found that data were available on many stocks, including those of the Dow Jones Industrial Index and the Dow Jones Transportation Index. He first published his work in academic journals, but believing that the story would be of wider interest, later wrote a book for a general audience, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (hardcover 2007, paperback 2008). The book explains how policy makers and participants in financial markets addressed the challenges raised by the war in Europe in a largely successful way that helped the United States become the world’s great safe haven for foreign investment, a position it has enjoyed ever since.
Later this year we hope to follow up with other data from the New York financial market of a century ago, and perhaps from other financial markets.
SEC Chair White Delivers Speech on Disclosure Requirements
SEC Chair Mary Jo White spoke at the National Association of Corporate Directors Leadership Conference, focusing on the importance of disclosure and the need to update the disclosure system to better fit today’s securities markets.
According to Chair White, the core purpose of disclosure is to provide investors with the information they need to make informed investment and voting decisions. Chair White discussed information that companies are required to disclose, such as how their businesses are operated, how much money they’ve made over the past few years, and specific details about large shareholders. She went on to say, however, that current disclosure requirements may be too lengthy and could lead to an “information overload” that made finding the most relevant information difficult for an investor.
Additionally, Chair White stated that many disclosure requirements become outdated due to technological advances, legislative mandates, and things such as “investor demand or a company’s decision to take a defensive posture and disclose more information rather than less to reduce the risk of litigation claims that there was insufficient disclosure.” Chair White also said that companies have complained about repetitive disclosure mandates which required them to disclose the same information in separate filings.
To move forward with making improvements to the disclosure system, Chair White said that the SEC must first understand what information is demanded from companies and why, referencing JOBS Act Section 108 (“Review of Regulation S-K”) as a mandate which provided an opportunity for the SEC to analyze the rules that form the disclosure system. The Division of Corporation Finance is scheduled to release a report on the disclosure system soon pursuant to this mandate, according to White. In addition, White said the SEC must consider whether investors would benefit from disclosures that were more tailored to the particular industries in which they operated, and whether the current EDGAR electronic disclosure system and current timeframes for disclosure requirements were still appropriate given the increasing use of technology.
Lofchie Comment: In discussing the issue of “information overload,” Chairman White reported that various interest groups had sought disclosure on “over 100 topics – a bewildering array of special causes” (presumably having little to do with whether the company would make a good investment). Later in the speech, she singled out “executive compensation” as an area where companies are required to make excessive disclosures that “can amount to more than 40 detailed pages.”
This is the second recent speech in which Chairman White has questioned the use of SEC disclosure requirements as a tool that serves a goal other than protecting investors. (See the link below as to her speech on the independence of the SEC.) The Chairman’s speech raises the question as to whether or not she intends to support the SEC’s newly proposed rule on the ratio of executive pay to the pay of the average employee (a proposal that we consider ill-conceived).
See: SEC Chair White, Speech, “The Path Forward on Disclosure”.
Related news: SEC Chairperson Mary Jo White Speaks at Fordham Law School on the Importance of Independence (October 7, 2013).