Financial industry regulators still don’t have a complete picture of counterparty risk, says a new report.
A group of senior financial supervisors from 10 countries, including Canada, issued a report today, which finds that, while firms have made improvements in assessing counterparty risk, current practices fail to meet the regulators’ expectations, or industry best practices.
The report from the Senior Supervisors Group (SSG), which includes the Office of the Superintendent of Financial Institutions (OSFI), finds that some firms have met expectations for timeliness and frequency, data aggregation capability, and data quality.
However, it notes that other firms have failed to make as much progress as anticipated. “One particular area of concern remains firms’ inability to produce and submit to supervisors high-quality data on a consistent basis,” it says.
Indeed, it notes that, “There is much room for improvement.” The report says firms must commit to building the infrastructure necessary to aggregate and update exposures accurately, and in a timely way, including the ability to identify data anomalies.
It also recommends that firms continue to prioritize controls and governance, even in times of relatively well-functioning and stable markets; and, that firms should integrate recurring regulatory requests into their ongoing risk management control process, rather than viewing these reports as “one-off” requests.
The report calls on regulators to stress the significance of reliable, timely and accurate reporting of counterparty exposure to the firms under their oversight. “Supervisors of systemically important financial institutions and other firms that manage significant numbers or volumes of counterparty exposures should prioritize this effort within the scope of their own work and commit to impressing upon their firms the importance of this expectation,” the report says.
It also suggests that supervisors should provide firms with feedback on their data aggregation, reporting, and counterparty risk monitoring abilities. And, the report says that regulators will have to commit more time and resources to the effort, including ongoing assessments of firms’ processes to confirm the validity of the reporting process and the accuracy of the data.
“Neither supervisors nor firms should lose sight of this critical piece of risk management, particularly as memories of the financial crisis begin to fade,” it cautions.