The Securities Industry and Financial Markets Association (SIFMA) and Deloitte & Touche have published a report intended to assist regulators and policymakers in understanding systemic risk oversight and help them to respond to potential future systemic risk events. The "Systematic Risk Information Study" was commissioned by SIFMA in anticipation of legislation establishing a systemic risk regulatory regime for large, interconnected financial institutions.
Based on interviews of regulators, securities broker-dealers and banks, insurance companies, hedge funds, exchanges, and industry utilities, the study seeks to promote greater awareness and understanding of potential systemic risk information requirements. It focuses on the types of information a systemic risk regulator, irrespective of its structure, may require to monitor systemic risk, and how financial institutions and regulators currently capture, report, and analyze the information.
Twenty-two organizations, including SIFMA member firms, regulators, CCPs, and exchanges, were interviewed. The interview questions used in the study may be found in appendix A. The key insights revealed by these questions may be summarized as:
- All participants interviewed (and SIFMA) support the concept of a systemic risk regulator although there was some variance in views on structure and other matters
- Regardless of the structure of the systemic risk regulator, its roles and responsibilities for the overall markets may be analogous to that of a firm's chief risk officer (CRO), but covering systemically important financial institutions (SIFIs), markets, and underlying systemic risks
- Systemic risk may develop in a short period of time or may build up over time. In normal market periods, daily and weekly reporting may be perceived to have limited benefit compared to the costs involved, however, in times of market stress more frequent reporting would be of greater value
- Across each of the eight potential systemic risk information approaches that were developed, there are gaps in:
- The infrastructure necessary for financial institutions and regulators
- The potential information needed by the systemic risk regulator
- All eight potential systemic risk information approaches are considered costly
- Emphasis on processing too much information at too granular of a level may ultimately hinder the ability of a systemic risk regulator to focus on the relevant build-up of systemic risks ("hot spots"); and result in missing the forest for the trees
- More transparency is needed for over-the-counter (OTC) transactions and counterparty information
- Data standards, consistency, and accuracy need to be enhanced in order to support aggregation on a firm-wide and industry-wide level
- Maturity transformation mismatches, defined as long-term assets funded by short-term liabilities, are a key systemic risk issue
- The industry as a whole needs to improve its monitoring of leverage and concentrations
As fund directors consider how to address risk matters, and how their fund or fund complex may fit in the broader scheme of systematic risk, this report provides some insights that may be useful in the board room or in a dialog about risk with the fund's adviser.
The full text of the report is available here.