Network Data Standards, and SDRsfinancialresearch.gov/conferences/files/andrewlo_network... ·...

Network Transparency,Network Transparency,Data Standards, and SDRsData Standards, and SDRs

AndrewAndrew WW Lo MIT and AlphaSimplexLo MIT and AlphaSimplexAndrew Andrew W. W. Lo, MIT and AlphaSimplexLo, MIT and AlphaSimplexOFR/FSOC Annual ConferenceOFR/FSOC Annual Conference

Swap and Trade Repository: Data Standards Swap and Trade Repository: Data Standards and Data Gapsand Data Gapspp

January 23, 2014January 23, 2014

© 2014 by Andrew W. LoAll Rights Reserved

OFR/FSOCWhat Is A SIFI?What Is A SIFI?

© 2014 by Andrew W. Lo All Rights Reserved

23 Jan 2014 Slide 2

OFR/FSOCWhat Is A SIFI?What Is A SIFI?

Importance Varies, Depending On: Individual characteristics Relation to others Relation to others State of the system Rules of the game

Importance Can Change Quickly Dynamic across time and circumstancesDynamic across time and circumstances Can regulators and regulation keep up?


23 Jan 2014 Slide 3

OFR/FSOCThe Financial System Is ComplexThe Financial System Is Complex

Source: IMF GFSR (2010)


23 Jan 2014 Slide 4

Source: IMF GFSR (2010)

OFR/FSOCAn Example: Sovereign Debt and Credit RiskAn Example: Sovereign Debt and Credit RiskGranger‐Causality Network of CDS‐Based ELR

Billio, Getmansky, Gray, Lo, Merton, Pelizzon (2013)

S iMarch 2012

= Sovereign = Insurer = Bank Bank


23 Jan 2014 Slide 5

OFR/FSOCAn Example: Sovereign Debt and Credit RiskAn Example: Sovereign Debt and Credit Risk

March 2012


23 Jan 2014 Slide 6

OFR/FSOCAn Example: Sovereign Debt and Credit RiskAn Example: Sovereign Debt and Credit Risk

December 2011

SpainSpain


23 Jan 2014 Slide 7

OFR/FSOCBut These Are All Indirect MeasuresBut These Are All Indirect Measures Dodd Frank Act, Title VII:

– Minimize systemic risk of derivatives tradingMinimize systemic risk of derivatives trading– Create transparency in derivatives markets– Provide credit protection for derivatives traders

Data exist to map actual swaps network But accessing it is not trivial But accessing it is not trivial Contract terms can be complex and critical, e.g., credit support annexes (recall AIG) Data standards are the starting point Data standards are the starting point You can’t manage what you don’t measure


23 Jan 2014 Slide 8

OFR/FSOCHow Are We Doing?How Are We Doing?


23 Jan 2014 Slide 9

OFR/FSOCLessons From The Financial Crisis?Lessons From The Financial Crisis?Industry Assessment of Systemic Risk, July 2005:

“In approaching its task, thePolicy Group shared a broadPolicy Group shared a broadconsensus that the already lowstatistical probabilities of thestatistical probabilities of theoccurrence of truly systemicfinancial shocks had furtherfinancial shocks had furtherdeclined over time.”CRMPG II J l 27 2005 1– CRMPG II, July 27, 2005, p. 1


23 Jan 2014 Slide 10

OFR/FSOCLessons From The Financial Crisis?Lessons From The Financial Crisis?

But CRMPG II Also Contained:…Recommendations 12, 21 and 22, which call forurgent industry‐wide efforts (1) to cope with seriousg y ( ) p“back‐office” and potential settlement problems inthe credit default swap market and (2) to stop thethe credit default swap market and (2) to stop thepractice whereby some market participants “assign”their side of a trade to another institution without thetheir side of a trade to another institution without theconsent of the original counterparty to the trade.(CRMPG II J l 27 2005 i )(CRMPG II, July 27, 2005, p. iv)


23 Jan 2014

OFR/FSOCLessons From The Financial Crisis?Lessons From The Financial Crisis?

Firms Represented in CRMPG II: Bear Stearns Citigroup

JPMorgan Chase Merrill Lynchg p

Cleary Gottlieb Deutsche Bank

y Morgan Stanley Lehman Brothers Deutsche Bank

GMAM Lehman Brothers TIAA CREF

Goldman Sachs HSBC

Tudor Investments


23 Jan 2014

Thank You!Thank You!

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