15 │ Conclusions 133 Derivatives were identified by the G20 as being of critical importance to the stability of the
financial system and the EU has now enacted the European Market Infrastructure Regulation
(EMIR) to create the framework for observing and managing these risks. But this starts from the
perspective of the micro-regulation of individual financial institutions (and their customers to
some extent). In particular, it seems that risk management of non-centrally cleared over-the-
counter (OTC) derivatives – the most complex – will be based on a requirement to post initial
margin/collateral or hold appropriate capital.
The Financial Stability Board (FSB) noted in its Third Progress Report in June 2012 that data from
trade repositories requires more work on the scope of the data needed by authorities as well as on
technical issues, such as reporting formats and data aggregation. The FSB wants more discussion
on this as access by authorities to trade repositories (TR) data is critical for assessing systemic risk
and financial stability; conducting market surveillance and enforcement; supervising market
participants; conducting resolution activities; as well as for monitoring progress toward meeting
the G20 commitments on OTC derivatives.
For the EU, it is not apparent that the data will be gathered in a format that will enable a macro-
economic analysis to be undertaken to check the magnitude and direction of the bets inherent in
the aggregate of the reported positions. That would remove a major opportunity to observe a
bubble developing.
The report also provides a selected overview of approaches for the measurement of financial
instability and financial distress. The focus is on tools that have been developed for banks that may
be usefully applied to NBFIs in the future. Analogous research directly relating to NBFIs is, to our
knowledge, not yet available. This point is confirmed in a recent working paper by the Basel
Committee on Banking Supervision (BCBS) which states that “the role of non-bank financial
institutions is almost universally ignored” by studies on systemic risk and risk indicators and “this
appears to be one of the most serious gaps in the literature…”
In part, the lack of focus on NBFIs in systemic risk analysis may be due to the fact that a) there is
not yet a clear understanding of the role of NBFIs in the process of financial intermediation in
recent years and b) their role has been evolving. Existing institutions are undertaking activities that
they previously were not involved in, and altogether new institutions have emerged undertaking
new activities in the process of financial intermediation.
Additionally, there is a lack of data available on NBFIs in comparison to banks.
Moreover, the same BCBS working paper notes that “currently, there is no widely accepted model
for comprehensively measuring systemic risk. Instead, researchers have tended to use a wide
range of models and methodologies to examine one or a few specific aspects of systemic risk”.
These various studies can be broadly grouped into 5 categories, namely 1) indicators of financial
distress based on balance sheet variables; 2) early warning indicators; 3) macro stress tests; 4)
methods for calculating the systemic importance of individual institutions; and 5) analyses of
interconnectedness.
The review of available NBFI data undertaken as part of the study and the various discussions with
stakeholders identified a number of major data gaps which, at the present time, preclude
transposing the analysis undertaken so far for the MFIs to the NBFIs.