The Securities Industry and Financial Markets Association Monday said the creation of a system of monitoring overall risks to the nation's financial industry could take one of eight forms, each of which would be costly.

The eight approaches and the assessment of their costliness, which was not specified, were part of a Systemic Risk Information Study released by SIFMA Monday. The survey of 22 regulators, commercial and investment banks, insurers, hedge funds, exchanges, and industry utilities was produced in conjunction with Deloitte & Touche.

“SIFMA strongly supports the creation of a tough, competent systemic risk regulator to oversee systemically important firms so that the activities of one or a few firms will not threaten the stability of the entire financial system,” said Tim Ryan, SIFMA president and CEO. The study, he said, was designed to " be useful to the regulatory community.''

The eight approaches to overseeing systemic risk are:

Enterprise-wide stress testing, applied consistently across all financial firms

Reverse stress testing, requiring firms to identify scenarios that may have a significant impact on their operations and to describe the precautions they would take to help mitigate the risks

Aggregated risk reporting, with summary data being supplied in templates

Risk sensitivity analysis, wherein financial institutions calculate and provide to regulators relevant information on the key risk exposures in their businesses

Trade repository-based analysis, where financial institutions, market participants, service providers and other parties supply trade information and position-level data into an industry information hub, where regulators then examine it.

Industry utility approach, using trade repositiories and existing firms that act as information and process utilities

Concentration exposure reporting, where regulators develop thresholds on key risks, across markets, and firms report in

Data warehousing, where the regulators to have a central data warehouse capable of receiving and storing transaction- and position-level data from all relevant financial institutions

Among the concerns expressed by respondents were:

• All eight potential approaches are costly

• 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

• More OTC and counterparty transparency is needed

Data standards, consistency, and accuracy are needed to make the risk management work

Maturity transformation mismatches, defined as long-term assets funded by short-term liabilities, are a key systemic risk issue

• The industry itself needs to improve its monitoring of leverage and concentrations of risk

Exercise participants warned of the significant cost and complexity of this approach. One respondent believed that “a regulator would become the risk manager for the entire industry and that is a challenging exercise. The amount of work needed to build a risk management group for the entire financial system is huge.”

Here is the study.


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