5. Great, the G20 set up the Financial Stability Board to set things straight. So, what’s the problem?
It was thought by all that “regulatory compulsion” at such a global level, overseen by the world’s most prominent collection of leaders of the largest economies, would finally solve the collective action problem that stymied the industry from doing this on their own. Industry members could not justify stepping aside from each firm’s own self-interest in maintaining the status quo. It would be costly to re-engineer legacy systems built in convoluted increments over the previous six decades. Everyone without exception wanted to get to standardized data but each did not want to change their own systems for the collective good of all.
At this time, I and colleagues prepared more detailed responses focusing on the governance, business operations, systems architecture, and essential professionals and vendors that would be needed to finally solve this problem. We then submitted responses to consultations from trade associations and various governmental and regulatory bodies. We still respond to what seems like an endless stream of such consultation requests, each exploring a nuance or concept that was not addressed in a previous consultation.
This incremental approach is being followed because the government officials overseeing the global standards initiatives were learning at the same time as they were establishing regulations. This had the effect of industry members implementing regulations that had deep flaws which, when discovered, caused a new set of regulations to be promulgated to effect incremental (and at times, major) changes. Each time this occurred, and it occurred quite often, it took this “new system” of data standards and financial transaction work flows down the same, Rube Goldberg or Heath Robinson-type of path of the last six decades.
I and my colleagues, on the other hand, had been doing our homework over a lifetime, and submitted consultation responses on a detailed level early in the process, when no regulations had yet been passed. These responses were so detailed that government personnel had not yet understood that these were issues to be addressed, let alone seen that we had already solved them.
In the end, the industry’s apathy to collective action has now been replaced by the regulators’ collective action problem. The FSB is only a persuasive global “bully pulpit.” Each sovereign country must promulgate in law or regulation the use of these global data standards. Our organization of the Global Data and Standards Alliance recognized that government alone could not solve the problem. Only commitments, with regulatory incentives, by the largest globally active financial institutions could do this.
To bring this about, only 30 financial institutions, the internationally active and systemically important ones, now identified by the FSB as G-SIFIs (Globally Systemically Important Financial Institutions), needed to be brought on board with the new data standards. (Many of these were members of the Global Data and Standards Alliance). Their customers and correspondents, collectively, comprise most of the world’s financial interactors. It would take only twelve home country regulators of the G-SIFIs to provide and redirect an already available operational risk capital reduction incentive. This in contrast to the current approach of cajoling regulators in 200 countries to follow the FSB’s lead.
6. Do emerging markets present a special problem?
Countries with less developed capital and derivatives markets continue to question the benefits of data identity standards. They are concerned about privacy rules in their own countries. The major point of contention is the lack of organizational hierarchies in counterparty identifiers to accommodate risk management needs (the early driver of the global data standards initiative). Identifying parties, uniquely, unambiguously, and universally, is also an anathema to those countries that operate undeclared state-owned enterprises; those businesses that care not to let competitors know that they are the ultimate owners of companies; and those countries whose value to businesses is to be able to register in their territories anonymously.