As Victor Hugo pointed out, "there is nothing more powerful than an idea whose time has come". And from a regulatory and legislative perspective, particularly as it relates to data management, that time is clearly now.

The first sign of progress came when the National Academy of Sciences released their report on the technical capabilities necessary for regulation of systemic financial risk. The report was a synopsis of the findings of a workshop held in November of last year on the request of Senator Jack Reed to examine the relationship between data and systemic risk.

It concludes (of course) that since the financial industry is so complex and interdependent, the monitoring of systemic risk is essential. It goes on to conclude that most of the risk analysis currently underway is at the firm level and is not the same thing as systemic risk analysis. More important, the report notes that in order to understand systemic risk, more and better data will be required. And not only is more data needed, but the data must be comparable – and therefore there is an urgent need for the financial industry to adopt a common language for all securities and financial contracts. That’s music to our ears and completely consistent with the work that has been underway on our Semantics Repository for the past two years.

Right on the heels of the NAS report, Senator Reed introduced the National Institute of Finance Act of 2010. The bill (S.3005) sets up the mechanism to oversee the collection and standardization of data on financial entities and instruments and promotes data sharing among regulatory agencies. If you'll allow me to quote from the bill … "the US lacks the technical tools and data to monitor and manage systemic risk" … "financial reform will be incomplete without the data, research and analytical capabilities" … and "any new regulatory structure will be ineffective unless we also have the data and analytical capabilities". Well what do you know about that.

Immediately following the release of the S.3005 legislation, the Senate held hearings featuring testimony from Nobel Prize winner Robert Engle, Federal Reserve Board Governor Daniel K. Tarullo (a terrific testimony) and Allan Mendelowitz the former Chairman of the Federal Housing Finance Board. All endorsed the importance of getting the data right as the minimum pre-requisite for providing system-wide oversight over the financial markets. And to receptive ears, I might add.

But that's not all. Right in the midst of all this a number of Nobel Laureates including Harry Markowitz (modern portfolio theory), Rob Engle (volatility research), Bob Merton (options pricing), Myron Scholes (options pricing), Vern Smith (behavioral economics) and Bill Sharpe (asset pricing models) got together and sent a joint letter to the Senate on the importance of comparable and predictable data.

But please don't conclude that this activity is limited only to the U.S. There is a comparable set of legislative activity underway in the Europe. In January of this year, the new European framework was announced setting up the structure for regulatory reform in the form of the European System of Financial Supervisors and both macro- (European Systemic Risk Board) and micro-prudential (European Securities and Market Authority) supervision. All of this activity is necessary to enable the creation and implementation of technical standards and harmonization of data across the Euro Zone and throughout all the Directives currently being debated.

We all now understand that the global financial regulatory reform process is fully underway. Both macro and micro prudential issues are in play – and oversight and monitoring of systemic risk has emerged as a top priority. As a result, we've been receiving calls from a plethora of regulatory agencies asking for detail about entity identifiers, about semantics (if you can believe it) and about industry views on data issues.

It is wonderful to be able to report that data management and content standards are now being recognized as essential pillars of operations.Perhaps the rustles you are feeling in the back of the room are finally the winds of change for the financial data management industry.

Michael Atkin
Managing Director, EDM Council
March 3, 2010