Committee to Establish the
 
National Institute of Finance
Providing the data and analytic tools needed to safeguard the U.S. financial system
Home FAQs: Role of the NIF Office of Financial Research
Office of Financial Research
Why is the OFR Critical to the Success of Financial Reform Legislation?  E-mail
In September of 2008, with the U.S. economy poised on the edge of a second Great Depression, Secretary of the Treasury Paulson made a number of fateful and costly decisions without any clear understanding of what was happening in the financial markets. He lacked the data and analysis needed to make good decisions; he was in effect flying blind. The OFR will enable regulators and the Treasury to better understand complex financial products, more effectively uncover fraud, better monitor risks from large financial institutions, and for the first time be able to see the critical linkages between important institutions in the market. Going forward we should never again have a government where actions from the regulators run the risk of making a crisis worse, because the regulators do not understand what is going on in the financial markets.
 
Does the OFR represent any kind of threat to personal privacy?  E-mail

Absolutely not. The OFR has limited authority; it can only collect data that is needed to assess risks to the stability of the U.S. financial system. This would require the collection of systemically important data regarding the transactions and positions of financial institutions, which is the type of data that is needed in order to understand the critical connections between financial institutions. For some structured products, such as asset backed securities, the OFR will need data on the characteristics of the underlying assets (for example information on the underlying mortgages or credit cards). This type of information is essential in order to understanding when these securities might become toxic assets and as a result contribute to a future freezing of the credit markets. Although there is a need to know something about these types of loans, this will not require knowing any personally identifiable information; there is no need to collect and no intent to collect information that could threaten personal privacy. The OFR should not be confused with the Bush Administration’s U.S.A. Patriot Act, which gave the federal government unlimited authority to pry into individual citizens finances.

The purpose for creating the OFR is to ensure that the regulators can provide for the safety and security of our financial system and that does not require an invasion of personal privacy. There are clear limits to the type of data that the OFR can and will be collecting.

 
Who will benefit from the OFR?  E-mail

First, the American people will benefit because it will equip the government with the data and monitoring capabilities needed to help assure that we do not have a repeat of the 2008 financial crisis and costly Wall Street bailouts.

Second, the American people will benefit because the OFR’s data improvements will make the U.S. capital markets more transparent and efficient, reducing the ability of Wall Street to transfer excessive risks to the broader financial system or unsuspecting investors.

Third, the government will for the first time have the data needed to detect massive financial fraud, like the $70 billion Ponzi scheme run by Bernie Madoff. With OFR data the SEC could have detected and ended this fraud more than a decade ago.

Lastly, not only will the American people benefit, the financial sector will also benefit. Right now the state of data in financial industry is chaotic and disorganized at best. The data and reporting standards required by the OFR will result in two benefits for financial firms. First, the operating costs of the financial firms will be reduced by a substantial amount per year. Second, the financial firms will be able to better understand and manage their own risks because they will have much better data regarding what is going on in their own firms.

 
Who will bear the burden of the OFR’s budget costs?  E-mail

The budgetary costs of the OFR will be paid for by the large firms that will be reporting data to the OFR. This is appropriate for two reasons.

First, it is well established that financial firms pay for government oversight and regulation. After all, regulation is about protecting the American public from the types of excesses that created this recent crisis and for which the U.S. taxpayers were forced to bear an exceedingly high cost.

Second, the improvement in data and reporting standards throughout the financial sector will reduce the operating costs of financial firms by billions of dollars a year. It is only right that some of these savings are used to fund the costs of operating the OFR.

The OFR is one of those rare win-win outcomes for both the public and industry. The government will be able to regulate financial markets and firms more effectively. Financial firms will pay for its operations, but they will benefit from reduced operating expenses that will be many times larger than the amount that they will have to contribute in order to fund the OFR.

 
Where do these operating cost savings come from?  E-mail

Data management in most financial firms is a mess. Providing standard reference data, including common standardized designations for firms and their subsidiaries and for financial instruments, will greatly improve the way transactions are handled and recorded. For example, currently large amounts of resources are wasted in the process of manually correcting and reconciling millions upon millions of trades per year per firm that are "breaks." Almost all of these "breaks" are errors that occur in reporting trades because firms do not refer to counterparties and financial instruments in a standardized way.

 
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