The importance of data quality for effective financial stability policies – Legal entity identifier: a first step towards necessary financial data reforms

The success of any type of risk management activity, including financial stability monitoring and policy implementation, depends on the quality, completeness and timeliness of the data underpinning the analysis. The recent breakdown in some over-the-counter (OTC) derivatives markets is often attributed to the opaqueness of the markets and a lack of consistent, accurate data to support both internal (risk management) and external (regulatory supervision) analysis. The quality of data in the markets from which OTC derivatives “derive” is not generally perceived to be much better. In practice, the sharp increase in the global interconnectedness of financial markets has necessitated a shift in the analytical approach for financial stability monitoring and policy development from a historic institution by institution and sector based framework to a new framework that focuses on risks to the system as a whole and that analyses the financial system as a complex adaptive system. The new framework requires investment in new approaches to financial data based on the uniform representation and definition (standardisation) of the key elements, whether referencing an entity, a product, an instrument, a contract, etc. Such elements may be regarded as building blocks which together allow flexible data aggregation to support multiple policy objectives. While there has been substantial progress in the global initiative to standardise the identification of entities in a universally acceptable manner, through the legal entity identifier system, the broader and more complex question of the standardisation of the depiction of financial products/instruments/contracts across markets and geographies remains an important challenge for policy makers to address.