Granularity Instead of Entity-Centricity in the Financial Regulatory Data Architecture

Abstract

The concepts of comprehensive regulation, financial networks, linkages, contagion risk and complexity have become the everyday reference in discussions about financial regulation. Most of these concepts of complex adaptive systems have been developed and originally deployed in quantitative fields such as biology and information theory. But while financial economists have adopted many high level principles and concepts of network theory, less attention has been devoted to defining the data requirements to support effective analysis of complex systems and networks. This conceptual framework of the financial system as a complex, adaptive system leads to the conclusion that one of the key, if not primary, inputs for the assessment of systemic risks and the successful analysis of the propagation of shocks through the tightly interlinked financial system is proper data, or to be specific-granular data. The regulatory community needs to make a conscious decision to walk away from the categorization of financial companies and products into out-moded and ill-defined ‘buckets’ and rather to view modern financial markets through the prism of four fundamental, foundational, elements: entity identification, relationship information, product elements, and transaction tracking from which all required regulatory financial data can be readily constructed. The paper discusses policy considerations with respect to the modern financial data framework and offers a transition plan to convert the current regulatory data approaches to that new framework.