U.S. GOVERNMENT PUBLISHING OFFICE

31–295 PDF WASHINGTON : 2018

EXAMINING THE OFFICE OF 

FINANCIAL RESEARCH 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 7, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–64 

( 

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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

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(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

ANN WAGNER, Missouri, Chairwoman 

SCOTT TIPTON, Colorado, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

DENNIS A. ROSS, Florida 

LUKE MESSER, Indiana 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

AL GREEN, Texas, Ranking Member 

KEITH ELLISON, Minnesota 

EMANUEL CLEAVER, Missouri 

JOYCE BEATTY, Ohio 

MICHAEL E. CAPUANO, Massachusetts 

GWEN MOORE, Wisconsin 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

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(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 7, 2017 ............................................................................................. 1 

Appendix: 

December 7, 2017 ............................................................................................. 25 

WITNESSES 

THURSDAY, DECEMBER 7, 2017 

Berner, Hon. Richard, Director, Office of Financial Research, U.S. Department of the Treasury ........................................................................................... 4 

APPENDIX 

Prepared statements: 

Berner, Richard ................................................................................................ 26 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Wagner, Hon. Ann: 

Statement for the record by Lawrance L. Evans, Jr., Managing Director, 

Financial Markets and Community Investment, U.S. Government Accountability Office ......................................................................................... 104 

Statement of Eric M. Thorson, Inspector General, Department of the 

Treasury, Office of the Inspector General ................................................... 115 

Beatty, Hon. Joyce: 

American Banker article entitled, ‘‘Mnuchin shows no interest in continuing FSOC’s hedge fund inquiry’’ ........................................................... 122 

Berner, Richard: 

OFR Annual Report to Congress ..................................................................... 43 

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EXAMINING THE OFFICE OF 

FINANCIAL RESEARCH 

Thursday, December 7, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Ann Wagner [chairwoman of the subcommittee] presiding. 

Present: Representatives Wagner, Tipton, Ross, Zeldin, Trott, 

Kustoff, Tenney, Hollingsworth, Hensarling, Green, Ellison, Cleaver, Beatty, Gottheimer, and Crist. 

Also present: Representative Loudermilk. 

Chairwoman WAGNER. The Subcommittee on Oversight and Investigations will come to order. 

Today’s hearing is entitled ‘‘Examining the Office of Financial 

Research.’’ Without objection, the Chair is authorized to declare a 

recess of the subcommittee at any time. And without objection, all 

members will have 5 legislative days within which to submit extraneous materials to the Chair for inclusion in the record. 

Without objection, the exhibit binder, which is pretty heavy here, 

including the written testimony of the GAO (Government Accountability Office), which I note was provided to minority staff in electronic format yesterday is entered into the record. The Chair now 

recognizes herself for 4 minutes for an opening statement. 

The Dodd-Frank Act requires the Office of Financial Research, 

OFR, to report annually to Congress on threats to the stability of 

the U.S. financial system, the OFR’s activities, and the key findings from the OFR’s research and analysis. 

Today the subcommittee on Oversight and Investigations will receive the annual testimony from the Director of the Office of Financial Research, Director Richard Berner. In addition, this hearing 

will examine the OFR’s work to support the activities of the Financial Stability Oversight Council (FSOC), its management and structure, and finally its cooperation with Congress and oversight bodies 

such as the Government Accountability Office and the Treasury 

Department Office of the Inspector General. Congressional oversight of the OFR is limited by its inability to exercise the power 

of the purse. The OFR has the authority to set up its own budget 

and to fund itself outside the congressional appropriations process, 

making them quite unique. In fact, in June of this year, the U.S. 

Department of Treasury issued a report which recommended and 

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I quote, ‘‘Congress reform structure and mission of the OFR to improve its effectiveness and to ensure greater accountability.’’ 

Furthermore, the Financial Choice Act, which this committee 

passed earlier this year, abolishes the Office of Financial Research. 

And while I am sure our witness this morning will argue differently, eliminating the OFR would actually improve risk management by creating one less redundant Federal bureaucracy. Recent 

work by this committee has uncovered as many as 20 other Federal 

entities that currently exist and will remain in place should the 

OFR be eliminated. 

Collecting and analyzing data should be streamlined, allowing 

Congress to make informed decisions when crafting policy. For example, the Treasury Department where the OFR is housed already 

has an Office of Economic Policy which is responsible for analyzing 

and reporting current and perspective economic developments in 

the U.S. and world economy. Likewise the division of financial stability, which is maintained by the Federal Reserve performs market surveillance for the purpose of identifying threats to financial 

stability. Congress must insist better coordination and eliminate 

unnecessary layers of Federal bureaucracy when they exist. 

And finally, and maybe most troubling is the questionable analysis of reports produced by the OFR over the last several years. A 

2013 OFR report on the asset management industry concluded that 

investment managers and institutions they worked for could pose 

systemic risk to our financial system. That report, which was widely criticized by the SEC, Members of both the House and the Senate, and even former chairman Barney Frank puts into question 

the OFR’s effectiveness and capabilities. 

Unfortunately, while the creation of the office might have been 

well intentioned, reports of the mismanagement, questionable reports and analysis, redundancy, and the inability to fulfill its statutory mandate raise the question, why does the OFR exist? 

Director Berner, I look forward to hearing your testimony this 

morning and I yield back the balance of my time. 

I now recognize the gentleman from Texas, Mr. Green, the Ranking Member for 5 minutes. 

Mr. GREEN. Thank you so much, Madam Chair, it is an honor to 

be with you this morning. I thank the witness for appearing as 

well. 

Madam Chair, OFR is a necessary part of the Dodd-Frank defense against systemic failure. Some things bear repeating. OFR is 

a necessary part of the Dodd-Frank defense against systemic failure. It is the systemic threat sentinel, it looks out for the next AIG, 

the next Bear Stearns, the next Lehman. It has an absolutely necessary function in this Dodd-Frank legislation, as implemented. 

And as it looks across the economic order, it is looking for the 

3-7s that we were confronted with in 2008—3 years of a fixed rate, 

27 years of rates that would bounce around—given a teaser rate 

that would coincide with a prepayment penalty such that you could 

not extricate yourself from a dastardly loan. It is looking for the 

next line of no-doc loans that would allow people to just get loans 

for unusual amounts of money without proper documentation. 

It looks out for the interconnectedness between these huge mega 

institutions, institutions that when connected improperly can drag 

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down not only this economy, but the economy of the world. It is a 

necessary part of the Dodd-Frank defense against systemic failure. 

FSOC on the other hand is a command center, it is the command 

center, but the sentinel is OFR. OFR is necessary. 

Now like many police departments and areas of the Defense Department, it has some problems. But when we have problems in police departments, not all, some, some areas of the Defense Department we don’t decide to eliminate the police department, we don’t 

decide to eliminate the Defense Department or that area that 

might have a problem, we repair the problem. We don’t decide that 

we are going to cut the budget of Defense by 25 percent because 

there are problems with some area of the Defense Department. We 

don’t decide we are going to cut the workforce by 45.5 percent because there are problems in some areas of a police department, we 

fix the problem. 

It makes no sense to cut OFR by 25 percent, the budget. It 

makes no sense to cut the workforce by 45.5 percent. I will stand 

with anyone who wants to correct problems that may exist in OFR, 

but I will stand against everyone who wants to eliminate OFR. We 

worked too hard. It took us many months. And the unfortunate 

thing about producing good legislation is people don’t remember 

the crisis sometimes that will become the genesis for the legislation. 

It is like when you go to the physician and you have a toothache. 

You are willing to do whatever is necessary to get it resolved. Let’s 

get this pain away. We worked hard to eliminate the pain in 2008. 

And now that we have eliminated the pain and we have a means 

by which we can avoid the pain in the future, we have forgotten 

what the pain was like. It is difficult to remember the pain from 

your last toothache, but you do remember this, you don’t want to 

get another one. So it is important for us to protect OFR and not 

allow those who really want to eliminate Dodd-Frank—and by the 

way, I have colleagues on the other side who have said as much— 

those who want to eliminate Dodd-Frank start by using this salami 

process, one slice at a time, OFR, Consumer Financial Protection 

Bureau, one slice at a time and then you won’t have Dodd-Frank, 

just as we are taking one slice at a time from the Affordable Care 

Act. I yield back my time. 

Chairwoman WAGNER. The Chair now recognizes the Vice Chair 

of the Oversight and Investigation subcommittee, the gentleman 

from Colorado, Mr. Tipton, for 1 minute for an opening statement. 

Mr. TIPTON. Thank you, Chair Wagner, I appreciate you holding 

the hearing today to be able to look at the nature and practices of 

the Office of Financial Research. In September 2014, Chairman 

Hensarling was quoted as saying, ‘‘4 years after Dodd-Frank’s passage it is not readily apparent, what, if anything, OFR has contributed to the process of identifying, mitigating systemic risk.’’ 3 years 

after that statement, it is still not clear to this committee that 

OFR’s fulfilling its statutory purpose, a purpose that Director 

Berner himself recently called an extraordinarily broad mission. 

Since its inception, OFR has been a fixture of Government bureaucracy, riddled with employee dissatisfaction, a lack of transparency and accountability, and, at its worst, obstruction of the 

work of another Government agency. 

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I am pleased that this committee is taking another hard look at 

OFR and its function here today. I would like to be able to thank 

Director Berner for appearing today and look forward to getting a 

better understanding of his viewpoints. 

Chairwoman WAGNER. The gentleman yields back. We now welcome our witness, Director Berner. Today’s witness is the honorable Richard Berner, Director of the Office of Financial Research 

was confirmed by the U.S. Senate in 2013. Prior to his role as director, Dr. Berner served as counselor to the Secretary of the 

Treasury with the responsibility of standing up the OFR. 

Before joining Treasury in 2011, Director Berner was co-head of 

global economics at Morgan Stanley and chief economist at Mellon 

bank. Director Berner received his doctorate from the University of 

Pennsylvania and his bachelor’s degree from Harvard University. 

Without objection, the witness’ written statement will be made part 

of the record following his oral remarks. 

Once the witness has finished presenting his testimony, each 

Member of the subcommittee will have 5 minutes within which to 

ask questions. 

Director Berner, on the table there are three lights, green means 

go, yellow means you have 1 minute left, and red means your time 

is up. 

With that, Director Berner is recognized for 5 minutes to give an 

oral presentation of his testimony. Director Berner. 

STATEMENT OF THE HONORABLE RICHARD BERNER 

Mr. BERNER. Thank you, Chairwoman Wagner, Ranking Member 

Green, and Members of the subcommittee. Thank you for the opportunity to testify this morning on behalf of the Office of Financial 

Research. My written testimony covers the subjects mentioned in 

your invitation letter. As background I also attached our just released 2017 Annual Report to Congress and a new report on OFR 

workforce culture. We will provide the results of the 2017 Federal 

employee viewpoint survey as soon as they are available. 

As you may know, I am leaving the OFR at year’s end, so I think 

it is a good time to take stock of where the OFR is now, compared 

with April 2011 when I was counsel to the Secretary with responsibility to stand up the OFR. Back then we had four staff members 

and no separate office or infrastructure, just a broad mandate to 

help support U.S. financial stability after the worst financial crisis 

since the Great Depression. 

Today, we have resources to meet our mandate, an expert and 

diverse staff of men and women with the tools needed to do their 

jobs, an office in Washington, a small office in New York, and an 

analytic environment where OFR members securely maintain large 

datasets and conduct computing intensive analysis. 

More than 2 years ago we begin to take stock of the OFR, resulting in initiatives to strengthen our workplace culture and to 

streamline our functions. I believe those initiatives will help us effectively and efficiently meet our mandate and maintain the objectivity, integrity, and quality that are the hallmarks of our work. 

The OFR mandate is to support its stakeholders, primarily the 

Financial Stability Oversight Council, by improving the scope, 

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toring threats to financial stability; and evaluating financial stability policies. I have had the privilege of serving as the OFR’s first 

director since January 2013, and I am proud of the accomplishments that the dedicated OFR workforce has made possible. 

For example, the OFR led the international initiative to establish 

the global legal entity identifier (LEI), which is like a bar code for 

precisely identifying parties to financial transactions. If the LEI 

system had been in place during the financial crisis, exposures to 

the failing Lehman Brothers would have been easier to identify, assess, and manage. 

The OFR’s also collaborating with the Federal Reserve to collect 

data describing repurchase agreements or repose, which are critical 

sources of secured short-term funding across the financial system. 

This data will be used in publishing an alternative to LIBOR (London Inter-bank Offered Rate). U.S. dollar LIBOR is a benchmark 

for setting interest rates, and trillions of dollars in mortgages, and 

other financial products. Our mandate includes developing new 

tools to better assess and monitor financial system vulnerabilities. 

We have done that with our new financial system vulnerabilities 

monitor and financial stress index. We are also doing that by combining network analysis with maps of the financial system to help 

identify potential systemic vulnerabilities from cybersecurity incidents. 

Our mandating also includes making data more accessible. We 

have done that with our U.S. money market fund monitor which 

shows developments in these funds by tracking in detail their investment portfolios. And it includes evaluating policies, and we 

have done that by researching factors, other than size, to assess 

the systemic importance of banks. 

Our staff delivered these consequential contributions to stakeholders despite headwinds from working for a startup amid 

persistant uncertainties from existential threats to the OFR. When 

I first testified before this subcommittee in 2011, I said that OFR 

has mandated to shed light into the dark corners of the financial 

system. Today, we and our stakeholders can see into those corners 

more clearly than ever before. Because this work requires ongoing 

vigilance, that light must continue to shine. 

Thank you again for inviting me here today. This oversight helps 

ensure that the OFR is fully transparent and accountable in carrying out its mission. We look forward to working with you to promote the stability of the Nation’s financial system. And I am happy 

to respond to your questions. 

[The prepared statement of Mr. Berner can be found on page 26 

of the appendix.] 

Chairwoman WAGNER. The Chair thanks the witness for his 

opening statements. And the Chair now recognizes herself for 5 

minutes. 

Director Berner, in previous testimony before this committee you 

have indicated that you and the OFR had every interest in being 

transparent and accountable, said yet again today. Yet as we have 

already heard today, including written testimony from the GAO, 

you have not. As we have already discussed, OFR sets its own 

budget outside the congressional appropriations process, determines the size of its staff and their salaries, with no direction from 

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Congress, and has a single director, you. I would argue that the 

OFR is not accountable at all. 

Director Berner, isn’t the lesson of the CFPB that Congress indeed made a mistake in creating agencies with single directors who 

can control every aspect of their agency and are unaccountable to 

Congress, the President, and the public? 

Mr. BERNER. Thank you, Congresswoman, for that question. I believe that we are accountable in many ways to the Congress and 

to others who oversee us. Hearings such as this one really give us 

an opportunity to explain to you what we are doing and the ways 

that we are doing it. 

In addition, we file quarterly reports to the Congress on all of 

our activities and our budget. And as you know from the statute, 

I am required to consult with the Secretary of the Treasury on 

budget and other matters and there is oversight from that. 

Chairwoman WAGNER. Let me quickly go back to the GAO audit, 

Director Berner. Quick yes or no, do you feel like your office fully 

cooperated with the GAO in its investigation? 

Mr. BERNER. Yes, we have. 

Chairwoman WAGNER. What would you say about GAO’s testimony, that was submitted today, which talked about lengthy delays 

and lack of access? To quote here Director Berner, directly from 

GAO’s testimony today. During—and I quote, ‘‘during the course of 

our review of OFR we have experienced repeated problems with 

gaining access to both people and documents. Many meetings with 

OFR officials took months to schedule, some were canceled with 

short notice and requests for documentation and other information 

were delayed.’’ And it goes on, and on, and on sir. 

What would you say about the GAO’s testimony today about all 

of the delays and lack of access? 

Mr. BERNER. I would say, Congresswoman, that we have provided all requested witnesses and documents to the GAO. The 

delays that did occur were the result of scheduling delays on both 

sides of the equation, that those were unfortunate. We did have 

some staff turnover during the period which that audit was being 

conducted. And we understood from our communications with the 

GAO that those had been remedied following a conversation between our chief counsel and GAO counsel— 

Chairwoman WAGNER. Reclaiming my time, Director, because I 

did want to cover a couple more topics. Let’s discuss for a minute 

the workplace culture study, by Charles River Associates (CRA), 

which you, Director Berner actually asked for. Among other things, 

the study identifies concerns from employees that ranged from a 

lack of communication, problems with decision making, a lack of direction, a lack of progress and structure, and inexperienced and unskilled management. 

A lot of these criticisms from OFR employees, many of whom 

were hired under your watch. What is OFR doing to address the 

concerns identified in this report, sir? 

Mr. BERNER. Thank you for that. We did ask for that report and 

we have sought advice from various offices at the Treasury who are 

experts in these matters in order to make that engagement. 

We recognized actually when our Federal Employee Viewpoint 

Survey scores began to decline a few years ago that indeed there 

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were issues of workplace culture that we needed to address. And 

we did start to address those in several ways. The CRA report that 

you refer to is the latest of those, but it is only the latest in a series 

of efforts that we have been making in order to improve workplace 

culture, decision making, and other matters. 

Chairwoman WAGNER. I appreciate that, Director Berner, but if 

we are being honest here, when I read the Charles River Associates 

study on the workplace culture of the OFR, which states strategic 

planning continues to be a problem, I had concerns. 

When I heard your testimony today that the morale in the written testimony, the morale of the OFR was low, it makes one wonder about the leadership structure not to mention Director, the 

multiple ongoing audits, investigation of the OFR by the Treasury 

IG, the GAO’s testimony today with its harsh criticism of your 

agency, for any agency that is very young, OFR has created a 

workplace that appears to outsiders and insiders to be completely 

dysfunctional. And most concerning, Director Berner, is how this 

atmosphere effects the work product, the work product that you are 

obligated to produce. 

I look forward—my time has expired—to you putting your answer out in written form or in some way to explain the volume of 

criticism and reports and information from governmental agencies 

and studies and others that are most concerning regarding your 

agency. 

Mr. BERNER. Happy to work with you, Congresswoman, to get 

you what you need. 

Chairwoman WAGNER. Thank you. The Chair now recognizes the 

distinguished lady and friend of mine from Ohio, Mrs. Joyce Beatty 

for 5 minutes. 

Mrs. BEATTY. Thank you so much, Madam Chairwoman, and it 

is certainly my honor to be here seated next to you. 

And also, Mr. Berner, let me say thank you for your testimony. 

Thank you for your years of service leading the Office of Financial 

Research. And certainly I wish you the best of luck in your future 

endeavors. 

Mr. BERNER. Thank you. 

Mrs. BEATTY. Now, I am going to try to get a couple of questions 

in within my time. I am going to start, for obvious reasons as you 

certainly know, we are looking at this tax bill to say during the 

2016 election, President Trump promised the American people on 

several occasions that he was going to close the carry interest loophole that hedge funds take advantage of to pay lower taxes than 

every day American people. 

Now I am not aware of any, so my question is going to be about 

the Hedge Fund Working Group. In April 2016, the Financial Stability Oversight Council, of which the director of OFR is a nonvoting member, released a pubic statement entitled, Financial Stability Oversight Council Update on Review of Asset Management, 

Products and Activities. In this report the council stated that 

quote, ‘‘there appears to be a concentration of leverage on the economic and corresponding risk exposure of hedge funds.’’ It went on 

to state that there is currently no single regulator with all the information necessary to evaluate the complete risk profiles of hedge 

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funds and suggests that there were further analyses that needed 

to take place. 

We heard from this working group in November 2016 at the tail 

end of the Obama Administration when Deputy Assistant Secretary 

Crane provided an update on the group’s progress on the council. 

And after reviewing the FSOC minutes of 2017 under the leadership of Treasury Secretary Mnuchin, there doesn’t appear to be any 

reference at all or updates by the Hedge Fund Working Group. In 

fact, a couple months ago, the American Bankers Association had 

an article, and Madam Chair, I ask it be entered into the record— 

Chairwoman WAGNER. So ordered. 

Mrs. BEATTY. Mnuchin shows no interest in continuing FSOC’s 

hedge find inquiry. It was published and it raises the question if 

Secretary Mnuchin led FSOC, he would disband the working group, 

can you respond to that? 

Mr. BERNER. Thanks for your question Congresswoman, I can’t 

respond to say what Secretary Mnuchin is doing. But I do know 

that he strongly supports the work of the council to look at risk in 

the financial system and vulnerabilities where they may occur. I 

also know that he strongly supports the work of the OFR whose 

primary purpose is to support the council in a variety of ways. 

In particular, in regard to hedge funds— 

Mrs. BEATTY. Let me resume my time and ask you, does he support the Hedge Fund Working Group? 

Mr. BERNER. I don’t know whether he supports the Hedge Fund 

Working— 

Mrs. BEATTY. Have you received any updates or anything about 

it? 

Mr. BERNER. I have not. 

Mrs. BEATTY. Would you say morale in an organization can be 

down if people are afraid that they are going to lose their jobs? 

Mr. BERNER. Yes, I would, Congresswoman. 

Mrs. BEATTY. Have you heard anything that you should share 

with us about what people might be thinking—why they would be 

thinking they might lose their jobs? 

Mr. BERNER. I think the President’s budget, which came out in 

May of this year, indicated that there would be significant cuts to 

the workforce and to the budget of the OFR, and that might be one 

reason, I think that there are efforts to eliminate the OFR. So 

there is a great deal of uncertainty that employees are facing. 

Mrs. BEATTY. OK. Let me ask you another question. Are you 

aware of video that was uploaded on YouTube from an alleged employee at the Office of Financial Research? They had raised concerns about disparate treatment of African Americans in the workplace? 

Mr. BERNER. Yes, I am aware of those. 

Mrs. BEATTY. Do you know what is being done about that? 

Mr. BERNER. Yes. When we saw those videos, we referred them 

immediately to the Treasury Office of the Inspector General for 

them to look into those videos. 

But I want to say, that in addition, if these expressed concerns 

by employees, and we don’t know who produced these, but if they 

express concerns by employees, I want to strongly say that we really respect concerns. We want to make sure that employees have 

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every opportunity to express their concerns. Expressing them in 

ways other than that would be really good, but we want to make 

sure that employees have every opportunity to express their concerns about the workplace and about anything else. 

Mrs. BEATTY. Thank you. My time has expired. 

Chairwoman WAGNER. The gentlelady yields back. The Chair 

now recognizes the gentleman from Colorado, the Vice Chair of the 

Oversight and Investigations Subcommittee, Mr. Tipton for 5 minutes. 

Mr. TIPTON. Thank you, Chairwoman. And, Director, again, 

thank you for being here. 

In its report, at the request of the Chairwoman of this committee, the Government Accountability Office identified strategic 

planning as a serious issue facing OFR. Would you say that the 

findings of the GAO in this report had merit? 

Mr. BERNER. Congressman, I would say the findings of the GAO 

really overlook a lot of the things that we have been doing in the 

Office of Financial Research. 

Mr. TIPTON. So you see no merit on the findings? 

Mr. BERNER. I think that the efforts we have been making can 

be improved and we are taking steps to improve them. But I would 

not say that there are no efforts and that those efforts have gone 

without producing any results. 

Mr. TIPTON. How is the OFR supposed to achieve its statutory 

mandates under your supervision? 

Mr. BERNER. First and foremost, as I mentioned earlier, we are— 

our purpose is to serve the needs of the Financial Stability Oversight Council and so we want to, and do work with the Council in 

order to understand what they need from us, whether it is data or 

analysis, or something else. 

Second, once we understand that program—and that is an ongoing conversation, once we understand that—we organize ourselves 

in the way that the statute recommends and in a way that produces the most effective and efficient way of doing that. We are 

working hard on changing that right now, because having taken 

stock of where we are, we are moving forward with some changes 

that will help us make—get more effective and efficient, including 

the strategic planning initiatives that you allude to. 

Mr. TIPTON. When you are adding—basically with OFR was actually a redundancy added on how many other agencies are doing 

analysis and research and followed up with the OFR? 

Mr. BERNER. I won’t argue that OFR is redundant, I would argue 

that OFR has some unique things that other agencies don’t that 

complement their work. 

First, no other agency had the ability to collect data across the 

financial system. And those data are really needed to understand 

systemwide where the risks might be. No other agency has access 

to the data that we have in order to do the work that we do. And 

that really complements the work of other agencies. 

Mr. TIPTON. In light of your previous testimony regarding the 

critical role that the GAO plays in overseeing OFR I would be interested to know your thoughts on the GAO’s forced suspension of 

its audits. There were serious concerns that the information OFR 

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provided to the GAO, from datasets to staff management practices, 

was unreliable. 

The Government Accountability Office was forced to suspend an 

audit because it couldn’t verify if a Government agency could be 

held accountable. Do you see this at all problematic? 

Mr. BERNER. Congressman, I have just seen the testimony for 

the first time this morning and it does say there were some concerns about whistleblower activity that forced them to suspend the 

audit. But as I mentioned earlier, we have, and will, and always 

do collaborate and cooperate with GAO to give them everything 

that they need to understand what we are doing and how we are 

doing it. 

And as I understand it, that matter was turned over to the inspector general at Treasury from what they said here, and that 

they are conducting an investigation. But, I don’t comment on investigations, that is what is going on there, it depends on the 

Treasury OIG. 

Mr. TIPTON. I would be interested, Director, to be able to know 

how you can testify before this committee that when we are talking 

about the transparency being able to get that information and accountability that you strongly support the GAO’s oversight function 

I assume? 

Mr. BERNER. I do. 

Mr. TIPTON. And appreciate the constructive work that they do 

in conducting the reviews. If the information provided to the GAO, 

if it is not able to be proven reliable, tell me how that works with 

you? 

Mr. BERNER. Congressman, as I said, I cooperate with, and my 

staff cooperates with, the GAO when they engage with them. My 

staff and I meet frequently to understand what the GAO is asking 

for. And my direction to them is to make sure that they cooperate 

fully, that they give them everything that they need. And if there 

are concerns expressed by GAO that they are not getting what they 

need, then we make sure that we get them everything that they 

need. 

As far as this particular audit was concerned, as I mentioned 

there were some delays that were unfortunate. But we have been 

working with the GAO ever since we started the organization, want 

to continue working with the GAO to make sure that the oversight 

that is appropriate and necessary really goes forward in a way that 

it should. 

Mr. TIPTON. My time has expired Madam Chair. I yield back. 

Thank you. 

Chairwoman WAGNER. The gentleman yields back. The Chair 

now recognizes the gentleman from Missouri, my friend and delegation colleague, Congressman Cleaver for 5 minutes. 

Mr. CLEAVER. Thank you Madam Chair. 

Thank you for being here, Mr. Berner. 

Mr. BERNER. Thank you. 

Mr. CLEAVER. One of my big concerns is if you don’t have sufficient resources and staff to fulfill your mandated responsibility as 

an agency, then you get blamed for not having—not being able to 

do all the things that we gave for you to do. And when I discovered 

that in the 2018 budget release, in May, it required a 25 percent 

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cut, so you were at 220 something employees, I think you lost 100. 

Is that about right? 

Mr. BERNER. Congressman, I think our current workforce is at 

207. 

Mr. CLEAVER. Two hundred seven. So how many staffers have 

you had to eliminate or positions since the budget release for 2018? 

Mr. BERNER. No steps have been taken in that regard yet. 

Mr. CLEAVER. Let me ask you another way, are you doing a review now to figure out who—what jobs you can eliminate? 

Mr. BERNER. We are doing a thorough ongoing review of the OFR 

as I mentioned in my testimony. We are taking stock of what we 

do, how we do it, but with an emphasis on two things. One, is to 

meet our mission, as you said. And second, that, as I mentioned 

earlier, derives from the council’s needs, to make that as effective 

and efficient as we possibly can. 

And we think that by doing that review, then we will be able to 

decide in consultation with the Secretary and others at Treasury 

how we should go about doing that and that review is ongoing as 

we speak. 

Mr. CLEAVER. Suffice it to say the positions wouldn’t have been 

there if you didn’t need them. The people—whatever changes you 

make, whatever reductions you make in staff, I am saying those 

positions would never have been created in the first place if you 

didn’t need them. 

Mr. BERNER. Congressman, when we started the organization, as 

I mention, it was a startup. And I would be the first to say that 

as we looked at the organization as it grew we made changes along 

the way, in organizational structure and skills needed. Furthermore, I would argue that the mission changes in the sense that the 

financial system is always evolving and so we need to be adaptable 

and agile in responding to those changes. 

So this is not something that is cast in stone, we want to be a 

vibrant organization that really does meet its mission and adapts 

to changing needs, and that is the kind of review we are doing 

right now. 

Mr. CLEAVER. All right. Thank you very much. I have been here 

since the creation, I went through the entire Dodd-Frank, sometimes 6-hour committee hearings. And I know that your agency 

was—had been beaten, slammed, and thrown under the bus and 

then backed over for lack of transparency. And I think the Council 

then took some steps to say we want full transparency and openness, so you opened up to a number of public hearings, each year— 

I am not sure how many you are having now—but where the public 

can come in. 

Mr. BERNER. I am happy to appear wherever invited. 

Mr. CLEAVER. No, no, no. I am just saying I am curious about 

how many are being held. How many sessions are open now to the 

public? 

Mr. BERNER. All of our work is open to the public. So for example, we just had two conferences recently, which were open to the 

public, that focused on the issue of fintech and where the opportunities in it and risks might be. Those are completely open to the 

public. We webcast them on our website. We want to make sure 

that everything that we do is transparent and open to the public. 

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Mr. CLEAVER. So are there people from the Administration attending any of those meetings? 

Mr. BERNER. Yes, there are. In fact some people from the Administration spoke at those conferences. 

Mr. CLEAVER. So where is all of this lack of transparency? How 

do you come up with that? It’s a rhetorical question. 

Mr. BERNER. I understand. 

Mr. CLEAVER. Thank you very much. I yield back. 

Chairwoman WAGNER. The gentleman yields back. The Chair 

now recognizes the gentleman from Michigan, Mr. Trott, for 5 minutes. 

Mr. TROTT. Thank you Chair Wagner. I want to thank the director for being with us this morning. 

So you started out in 2013 with four employees in an office—no 

office of your own and now you have 207 employees, an office in 

New York, and an office in Washington. Is that correct? 

Mr. BERNER. Yes, sir. 

Mr. TROTT. That is pretty extraordinary growth in 4 years. 

Wouldn’t you say? 

Mr. BERNER. Yes. Actually, Congressman, we began a little bit 

before that, but yes, it is. 

Mr. TROTT. How many people—what is the most number of people you have managed in your prior life perhaps when you were 

chief economist at Morgan Stanley? How many people did you manage there? 

Mr. BERNER. At Morgan Stanley I had a team of about 60 people 

managed on a global basis in every corner of the world. 

Mr. TROTT. I am greatly bothered by—and I haven’t been in Congress that long, but I am greatly bother by the GAO’s inability to 

complete its audit. When you first took over the position and started to build the office in May 2013, you were the keynote speaker 

at the conference, the Fed conference in Cleveland, and you were 

interviewed. The interview described your position as a linebacker, 

a roving linebacker that doesn’t have any specific job, but you just 

fill in the gaps where necessary. 

And in that interview you said it is your job to develop trust from 

the other agencies, and to be successful it is going to require that 

you develop a culture of collaboration, engagements, and accountability. So certainly it is rhetorical for me to ask you this, but you 

feel like you have accomplished that, even though the GAO couldn’t 

complete its audit so that the taxpayers could know their money 

is being spent wisely? 

Mr. BERNER. Congressman, I feel that we have really worked 

hard to try to accomplish that and I have acknowledged that we 

need to do more work to get to our aspirations. 

Mr. TROTT. So let’s talk about some of your good work. So your 

analysis of the asset management industry was roundly disparaged 

by a number of different commentators, specifically the bipartisan 

group Better Markets, which usually calls for more heavy Government intervention, said that the OFR report adopts an arbitrary 

analytical framework; it provides literal empirical support; it ignores or minimizes the significance of relevant factors; and it conveys its finding in such vague and amorphous terms that it provides to be of little value and is in fact misleading. So that was 

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Better Markets, the Dean of Columbia, the Chair of Brookings, the 

head of Harvard Law School, a bipartisan group of Senators all 

said the report with respect to the asset management industry was 

of no value. 

What happened there, did the OFR drop the ball or do you dispute all of the commentators and expert analysis of your work? 

Mr. BERNER. Congressman, I would say that in that report one 

of the cornerstones of the analysis, the analytical framework was 

an approach which looked at the activities of asset managers, rather than at the entities themselves. I think you need to look at both, 

but the activities framework is something that is really important 

for us to all focus on when we look at risk in those—in that industry and for that matter in others. In fact, in the Treasury Report 

on Capital Markets and the Treasury Report on Asset Managers 

and Insurers, that is the framework that they recommended. 

Mr. TROTT. So all these smart people didn’t understand the purpose of the report. Is that what you are saying? 

Mr. BERNER. No. I am simply saying that that was the purpose 

of the report to shed some light on what the industry looked like 

and how to go about looking at risk in it. 

Mr. TROTT. So let’s go back to Mr. Green’s opening statement. 

Did you believe that without the OFR, FSOC could not possibly 

identify an institution that posed a systemic risk or that you are 

critical to that work? 

Mr. BERNER. I think the OFR is critical to that work because, as 

I mentioned, we have some authorities, we have some capabilities 

that others don’t. 

Mr. TROTT. Right. But part of the—earlier my friend from Missouri made a comment that you would never of course create a position that wasn’t necessary. And part of my concern sitting here 

representing the people of the 11th District of Michigan and hardworking taxpayers is you have these Government bureaucracies 

that get created with no specific mission that oftentimes develop a 

very problematic culture. I am not sure which culture is worse, the 

culture at OFR or the culture at CFPB, but they are both bad from 

what I have read. And they grow, and they grow, and they grow. 

And that is why people coming into D.C. come across the bridge 

and all they see are cranes, there was never a recession in Washington. The Government just keeps growing. 

And if it were just the salaries that were the problem, then we 

probably could live with that because we have a $4 trillion budget 

so we can have a few extra salaries baked in there, but it is stifling 

the banking industry. And it is really death by acronym is what 

I call it, a bank today has to comply with every possible acronym 

from OFR, to CFPB, to EEOC, to every possible acronym that is 

known to man. And it is killing banking, that is why small businesses in my district can’t get loans. 

But I appreciate your time this morning and I wish you the best 

as you return. I don’t know what your plans are when you leave 

in December but maybe it’s back to the private sector. 

Mr. BERNER. Thank you, Congressman. 

Chairwoman WAGNER. The gentleman yields back. 

The Chair now recognize the gentleman from New Jersey, Mr. 

Gottheimer, for 5 minutes. 

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Mr. GOTTHEIMER. Thank you, Madam Chairwoman. 

Mr. Berner, I was reading in the report and quoting from page 

6 of the OFR Annual Report to Congress, that quote, ‘‘the financial 

system is an attractive target for cyber thieves and other hackers 

because financial companies manage the Nation’s wealth and handle trillions of dollars in transactions every day and that underlie 

the U.S. economy.’’ 

So my question, does OFR downsizing risk our ability in your 

opinion to protect our country and our financial institutions from 

cybersecurity attacks? Does it risk our overall financial stability? 

And so if you don’t mind addressing that I would appreciate it, 

please. 

Mr. BERNER. Thank you, Congressman. I don’t think that any of 

us alone has the ability to protect our financial system, our economy from cyber attacks. The attacks are going to happen. But the 

work that we do in collaboration with Members of the Financial 

Stability Oversight Council and others and, indeed, in partnership 

with the industry, I think gives us a better opportunity to add resilience to the system so that when the attacks occur we can understand what their implications might be and so that we can minimize the damage. 

Mr. GOTTHEIMER. Thank you. I am good. Thanks. I yield back. 

Thank you. 

Chairwoman WAGNER. The gentleman yields back. 

The Chair now recognizes the gentleman from Tennessee, Mr. 

Kustoff, for 5 minutes. 

Mr. KUSTOFF. Thank you, Madam Chairwoman. And Director 

Berner, thank you for joining us here this morning. In your testimony you mentioned that the OFR supports the FSOC by, quote 

‘‘Purchasing and securely maintaining more than 65 other datasets 

used by the FSOC staff.’’ closed quote. That does seem like a large 

number, 65. Can you tell us how much the OFR spends each year 

on purchasing commercial datasets? 

Mr. BERNER. Yes, sir. I would have to go back and look at the 

exact number, but we have a budget for purchasing datasets that 

is roughly $4 million. 

Mr. KUSTOFF. It seems like somewhere I read that the number 

was between $5.5 and $6 million. Would that be incorrect? 

Mr. BERNER. I will go back and check, Congressman, and get you 

the exact number. 

But let me just say that as far as the number is concerned, one 

of the things that we are doing in our review is to make sure that 

we don’t purchase or collect any data that aren’t absolutely necessary. So we are taking a review and really looking thoroughly, 

and working with the council to make sure that we make efficient 

use of our resources. 

Mr. KUSTOFF. Thank you. The GAO’s testimony states that the 

OFR’s acting deputy director of research, chief data officer, and 

chief operating officer were unable to respond to GAO’s questions 

about the OFR’s strategic plan and performance measures related 

to its data collection and data sharing functions. Can you tell me 

how those commercial datasets were chosen for purchase? 

Mr. BERNER. Yes, Congressman. They were chosen in consultation with FSOC. When they had needs for data, we went and made 

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sure that those needs were satisfied. In addition, when we worked 

with other agencies, we looked to their needs as well and also to 

the work that the OFR was doing on behalf of the FSOC. Some of 

those data were required for that purpose as well. 

Mr. KUSTOFF. Director, have there been any issues related to 

OFR’s ability to handle sensitive data appropriately? And if so, if 

you could tell me what steps OFR has taken to ensure that the 

controls are in place to manage the risk to the confidentiality, the 

integrity, and the availability of sensitive data? 

Mr. BERNER. Thank you, Congressman, for that question. It is a 

very good one, because there is no priority for us that is higher 

than maintaining the security of data that are entrusted to us. We 

make sure that all of our employees go through security training, 

which is extensive every year and 100 percent compliant with that. 

We make sure that all of our systems and the way we share data 

with others is as secure as it can possibly be. No data can be taken 

outside of the OFR without an agreement. 

Data that comes in are done under a strict memorandum of understanding with the supplying agency. Even those which we acquire or get from industry, those are subject to a strict memorandum of understanding as well. And those specify the purpose for 

which the data will be used, who will have access to the data, how 

the data will be made secure. When we get data from those entities, they come in and actually look at our systems to make sure 

that they are in compliance with the security standards that they 

maintain and we do the same for them. So we go to great lengths 

to make sure that our data are kept secure. 

We also go to great lengths, you mentioned integrity of the data, 

we go to great lengths to make sure that the data that we have 

are as high quality as they possibly can be, because you can’t make 

good decisions unless you have high quality data. 

So I can talk to you at greater length about that, but we work 

hard on all those things. 

Mr. KUSTOFF. Thank you, Director. And thank you, Madam 

Chair, I yield back the balance of my time. 

Chairwoman WAGNER. The gentleman yields back. 

Pursuant to clause D(4), committee rule 3, the Chair recognizes 

the gentleman from Georgia, Representative Loudermilk for an additional 5 minutes upon the conclusion of the time allocated under 

the 5 minute rule. 

Mr. LOUDERMILK. Thank you, Madam Chair, and thank you for 

the additional time, because this is extremely important. I have 

really some information I would like to understand seeing I wasn’t 

here during this time period. I would like to really drill down a little deeper on your statement to Chairwoman Wagner that you believe OFR fully cooperated with GAO’s 2014 audit. 

In 2014 before this subcommittee you testified and I will quote 

that, ‘‘You wanted to reaffirm that the OFR is fully committed to 

transparency and accountability.’’ Director Berner, do you still 

stand by that statement? 

Mr. BERNER. Yes, I do. 

Mr. LOUDERMILK. You do. Regarding transparency and oversight 

when you were before this subcommittee in March 2013 you testified that, and again I quote, ‘‘As we pursue the OFR’s agenda we 

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16 

are committed to the highest level of transparency and accountability to the Congress and the public. We strongly support GAO’s 

important oversight function and appreciate constructive work in 

conducting this review.’’ Do you stand by that testimony? 

Mr. BERNER. I do, Congressman. 

Mr. LOUDERMILK. Thank you. Maybe this will go a little quicker 

than I thought it would. I appreciate that. 

So I assume that the sentiments you expressed toward OFR’s cooperation with GAO in support of GAO’s functions have continued 

unabated since that time, since March 2013 to the present? 

Mr. BERNER. That is correct. 

Mr. LOUDERMILK. Thank you. In February 2014 you testified that 

one of the reasons OFR didn’t need additional accountability to 

Congress was that and again I will quote, ‘‘we are subject to oversight by the various inspector general, inspectors general and by 

the Government Accountability Office, which is an arm of Congress. And in fact, when I was here 10 months ago, I testified on 

a report about transparency and accountability.’’ Do you still stand 

by that testimony? 

Mr. BERNER. I do. 

Mr. LOUDERMILK. Thank you. Director Berner, given these prior 

testimonies which you agree you still stand by today and I appreciate that. I wanted to know if OFR engaged and repeated, and as 

it appears, systemic obstruction of the GAO’s audit of the OFR. 

Mr. BERNER. Congressman, I am not aware of any obstruction of 

GAO’s audit of the OFR. If I may, we provided all the requested 

witnesses and documents that GAO requested. 

When the audit was closed, we were not made aware of that, of 

the allegations, the reliability of the information provided or of any 

ongoing concerns that GAO might have had. 

Mr. LOUDERMILK. So your statement here today under oath is 

that you fully cooperated with GAO, you were fully transparent 

with GAO, there was no obstruction, you fully met their timelines. 

Is that what I am hearing you say here today? 

Mr. BERNER. With regard to the timelines, as I indicated earlier, 

there were some unfortunate delays in scheduling, but we made 

every effort to make sure that GAO had the information that it 

needed. 

Mr. LOUDERMILK. Unfortunate would mean unforeseen. 

Mr. BERNER. Unforeseen. There were scheduling conflicts. They 

wanted to talk to all the senior staff. 

Mr. LOUDERMILK. There was no effort to avoid responding to 

GAO’s request for meetings? 

Mr. BERNER. Absolutely not. 

Mr. LOUDERMILK. OK. 

Mr. BERNER. No, we make every effort to comply with their request. 

Mr. LOUDERMILK. If you will turn to Exhibit 2 in your binder, the 

testimony of Lawrence Evans, Managing Director of Financial Markets and Community Investment at GAO. I will give you a moment 

to turn there if you would like. Not too much time, I am on a time 

limit here. 

Mr. BERNER. I am ready. 

mcarroll on FSR431 with DISTILLER

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Mr. LOUDERMILK. Lawrence Evans the Managing Director of Financial Markets and Community Investment at GAO, states, ‘‘during the course of our review of OFR we experienced repeated problems with gaining access to both people and documents. Many 

meetings with OFR officials took months to schedule, some were 

canceled with short notice and requests for documentation and 

other information were delayed. We had to make repeated attempts 

to obtain required documentation and schedule interviews with 

agency officials. 

These attempts included frequent follow-up emails and phone 

calls, the imposition of deadlines for document delivery that were 

either not complied with or resulted in production of some, but not 

all required documents and a discussion between GAO counsel and 

the chief counsel of OFR recording the agency’s continuing delays. 

Despite these extensive efforts, we experienced significant delays 

that prevented us from completing our audit work within originally 

planned timeframes.’’ 

Do you not deny those facts? 

Mr. BERNER. Congressman, as mentioned earlier, we made every 

effort to comply with GAO’s request and as I also mentioned my 

chief counsel in consulting with the chief counsel at GAO, I thought 

we resolved all the difficulties that are described. And I just had 

a look at this this morning. So as far as I know, we have really 

worked hard to make sure we overcame those issues. 

Mr. LOUDERMILK. So really this boils down to, it is not an opinion 

question, it is really yes or no. So do you deny the accusations, or 

the statement that was made by GAO in their report that you 

weren’t cooperative? 

Mr. BERNER. We made every effort to cooperate with the GAO. 

Mr. LOUDERMILK. So it is not a yes or no. By what you are saying, you are saying no, that the GAO is fabricating their report? 

Mr. BERNER. I am not saying they are fabricating their report. 

I am saying that there were some delays that we acknowledged, 

but that we made every effort to work with them and get them everything they needed. 

Mr. LOUDERMILK. So you believe that transparency is still a vital 

goal and as you stated strongly support the GAO’s important oversight function? 

Mr. BERNER. Yes, I do. 

Mr. LOUDERMILK. You believe that this removes the need for additional legislative oversight of the OFR, but at the same time cooperating with GAO doesn’t seem to be—you are stating it is a top 

priority, but GAO is saying it was not a top priority. 

Mr. BERNER. I am saying we made every effort to comply with 

GAO’s request so that we could be transparent and accountable. 

Mr. LOUDERMILK. It is a little troubling about every effort, because how do you define every effort? Is that an effort by the standard that you set up or the standards that GAO sets up? 

Mr. BERNER. Congressman, I can appreciate the fact that there 

were some delays. We want to resolve those problems, want to 

make sure that GAO does have everything that they need to do 

their work, which I think is very important. 

Mr. LOUDERMILK. Let’s take it one step further. Let’s look at a 

specific instance from Mr. Evans’ testimony, this is in Exhibit 2 of 

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page 4, he stated ‘‘OFR delayed and canceled meetings. We first 

emailed the OFR liaison to request an entrance conference, a meeting between GAO and the Agency under review that marks the beginning of an engagement on February 6th, 2015. OFR’s officials 

agreed to meet with us in person on March 10 in part to accommodate our plans to bring field staff to Washington, DC. 

We sent numerous emails to the OFR liaison and attempted to 

confirm the meeting logistics and attendees, but did not receive a 

response. On March 4th we provided OFR with a set of questions 

to guide the entrance discussions. However, on March 9th, 1 day 

before we were scheduled to meet, the OFR liaison emailed to cancel the meeting. 

Although we provided several options for meeting with the agency officials, we were unable to hold the entrance conference with 

OFR until April 8th, more than 2 months after our first meeting.’’ 

Do you dispute those facts? 

Mr. BERNER. I don’t dispute those facts. 

Mr. LOUDERMILK. Is this conduct of continuing to delay meetings 

something that is acceptable? 

Mr. BERNER. Delaying meetings was certainly not the intent, 

Congressman. Our intent was to try to work with GAO to make 

sure that we got to them, that they got the things that they needed, and that we made witnesses available to them on the basis that 

they asked. 

Now, I would say, Congressman, that we did have some turnover 

in the people whom they asked to talk to. People had left. We had 

a hiatus of leadership in certain areas. 

Mr. LOUDERMILK. But if there was a reason to postpone the 

meeting, you would have let GAO know in advance so they could 

reschedule; is that what you are telling me? 

Mr. BERNER. I am telling you that sometimes we let them know 

in advance when we knew the information. 

Mr. LOUDERMILK. OK. 

Mr. BERNER. And so we would— 

Mr. LOUDERMILK. Let’s pursue that for a moment. Are you aware 

of the fact that your senior staff knew about the conflicts that led 

to the cancellation of the entrance conference weeks before the conference date and then misled the GAO about that fact? 

Mr. BERNER. I am not aware of that, no. 

Mr. LOUDERMILK. We have staff emails. Exhibit 6 is a February 

18 email in which Alicia Marshall, senior attorney, and your counsel office confirms the March 10 entrance conference date with 

GAO. 

Exhibit 7 is an email in which an OFR senior staff member declines an invitation to the meeting with GAO because of a, quote, 

‘‘3-day OFR senior management offsite from March 10 through 12.’’ 

Now, that was in March—that was February 20, well in advance 

of the March 10 date. And then Exhibit 8 is a February 26 email 

where Alicia Marshall is informed that another two of the senior 

staff members invited to the GAO entrance conference interview 

will be at the leadership offsite, and that is February 26, well in 

advance of the March 10. 

But Exhibit 9 is the March 9 email canceling the March 10 meeting on less than 1 day’s notice and strongly suggesting that the 

mcarroll on FSR431 with DISTILLER

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cancellation occurred because of a last minute change in senior 

staff’s schedules; however, she knew that a month in advance, 

which the prior emails isn’t an accurate representation, or at least 

a few weeks in advance, I should say. 

Do you deny that? 

Mr. BERNER. I certainly—I see the emails in front of me. I don’t 

deny their veracity, no. 

Mr. LOUDERMILK. I appreciate the Chairwoman giving me additional time. 

Chairwoman WAGNER. A few more seconds to close, Mr. 

Loudermilk. 

Mr. LOUDERMILK. Thank you, Madam Chairwoman, and I apologize for the time I exceeded, but this is very critical. 

And as I look at this, I understand what you are saying, and I 

appreciate you standing by your testimony, but it doesn’t appear, 

to me, including whistleblowers telling us that there may have 

been manipulation of data, that you haven’t been fully transparent, 

and that there is some evidence of obstruction, which seems to be 

status quo with a lot of our agencies today. And I appreciate you 

being here. I appreciate your answers. 

And Madam Chair, I appreciate the time. 

Chairwoman WAGNER. The gentleman’s time has expired. The 

Chair now recognizes the Ranking Member, Mr. Green, for 5 minutes to close. 

Mr. GREEN. Thank you, Madam Chair. 

Mr. Director, is it your opinion that the financial threats to U.S. 

stability have abated? 

Mr. BERNER. Congressman, I think that we have, over the past 

many years since the financial crisis, done things to make the financial system more resilient. The financial system is always 

evolving, and new threats can emerge, and it is our job, in collaboration with the council, to try to identify where those 

vulnerabilities are, and we need to always be vigilant. 

Mr. GREEN. There is a recommendation that requires, or would 

require a cut in the amount of funding you receive, perhaps as 

much as 25 percent. 

Would you be able to function efficaciously with a 25 percent cut? 

Mr. BERNER. Congressman, I think that, as I mentioned earlier 

in my testimony, it really is time to take stock of where we are in 

the OFR and to see whether or not we can get more effective and 

efficient. We have discussed options to do that with the Secretary 

and with staff with whom he works, and we are looking at those 

options now to make sure that we use our resources in the most 

effective and efficient way. 

I do believe that the OFR can function effectively and efficiency 

with fewer resources. Just exactly what that looks like is really 

going to depend on what the counsel asks of us and what others 

ask of us. 

Mr. GREEN. Should I conclude from your testimony, your recent 

statements, that you are here today to testify that OFR should be 

eliminated; that there should be no OFR? 

Mr. BERNER. I am here to testify that the work that the OFR 

does is essential, is critical to help policymakers make good decisions so that we can make our financial system more resilient. 

mcarroll on FSR431 with DISTILLER

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Mr. GREEN. And would you agree that there is some amount of 

cut in the budget that would cause OFR to lose its potency, its ability to be effective? 

Mr. BERNER. I would agree with that, Congressman. 

Mr. GREEN. Would you agree also that the budget cuts that relate to employees, some 40.5 percent by one estimate—I have seen 

another one a little bit higher—would you agree that these employees, the elimination of these employees, at some point that this 

would have an impact on your efficiency as well as your effectiveness? 

Mr. BERNER. I would argue that if the cuts were too deep, that 

that would have a big impact on our efficiency and our effectiveness. I would also argue that I have enormous concern for the 

wellbeing and the morale of my employees, and I want to make 

sure that they are treated fairly and in a way that is respectful. 

Mr. GREEN. How do budget cuts and the cuts in staff impact morale? 

Mr. BERNER. I think, as I mentioned earlier, Congressman, that 

the uncertainty over where a budget is going, over whether or not 

people are going to keep their jobs, I think that uncertainty has 

weighed on morale. There are other factors, but I think that that 

certainly is one of them. 

Mr. GREEN. And if OFR had been in place in 2008, would it have 

had an impact on the crisis such that it would have possibly mitigated it in some way? 

Mr. BERNER. I think so. I mentioned earlier that the legal entity 

identifier system, which enabled us to understand who owned risk, 

who owned whom, those things would have really helped inform 

policymakers where the risks were. The work that we have done 

since that time, also would have helped us understand better, risk 

in various parts of the financial system, in short-term wholesale 

funding and derivatives markets, and I can give you a complete list 

of those things. In fact, we have written about that subject. 

Mr. GREEN. Had you, or OFR, the opportunity to look into AIG, 

would you have been able to spot the connectedness that AIG 

seems to have had to so many institutions that were flying under 

the radar, as it were? 

Mr. BERNER. I think that we would have done a better job of 

that, for sure. 

Mr. GREEN. And finally this: You would say to me, without question, reservation, hesitation, or equivocation that AFR is absolutely, totally, and completely needed? 

Mr. BERNER. Absolutely. 

Mr. GREEN. I yield back. 

Chairwoman WAGNER. The gentleman yields back. The Chair 

now recognizes the gentleman from Minnesota, Mr. Ellison, for 5 

minutes. 

Mr. ELLISON. I thank the Chair and the Ranking Member. 

Director Berner, first of all, I just want to say thanks for your 

work and your hard work— 

Mr. BERNER. Thank you. 

Mr. ELLISON. —In your research analysis. It is helpful to have 

thoughtful analysis about what makes our financial markets work 

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21 

better, because ultimately, we are trying to serve people and make 

sure people’s lives are better. 

Mr. BERNER. I agree with that, Congressman. 

Mr. ELLISON. And so if you would, sir, please congratulate your 

staff for the good work they are doing. I know you don’t get a lot 

of appreciation. When you go back to your office, just let them 

know that we do—that your work is appreciated. 

Mr. BERNER. Thank you, Congressman. I will be sure to do that. 

Mr. ELLISON. Thank you. Specifically, the slide on the ‘‘Financial 

System Vulnerabilities’’ is really interesting to me. OFR finds some 

improvements since the financial crisis a decade ago. Contagion 

risk is lower. That is a good thing. And it is much less likely that 

financial stress in one financial institution or market is going to 

spill over into others. I think that is a good thing for mom and pop 

grocery stores, homeowners, whoever, it is a good thing. Financial 

institutions are less risky, and they are more solvent and are less 

highly leveraged. 

Do you agree with all that, as my reading of material you supplied? 

Mr. BERNER. I do, Congressman. And, you indicated, that is what 

we said in our report. 

Mr. ELLISON. Yes. Yes. But market risk and credit risk remain 

high, and I would like to just ask you about risks facing the nonfinancial institutions. 

I am very concerned about the growing monopolization of businesses in our economy. Has OFR looked at market concentration 

and the threat it poses to workers, small business, and competition? And let me just add for the record, you can hardly look at any 

industry in our country without about three or four big entities 

controlling 50, 60, 70 percent of the market. That is my analysis, 

not yours. 

But would you please answer whether or not OFR has looked at 

market concentration and the threat it—and what risk it might 

represent to workers, small businesses, and competition? 

Mr. BERNER. Congressman, we haven’t looked directly at concentration in nonfinancial businesses. Others have. I would simply 

say we look at concentration risk in the financial services industry 

and how it might affect financial stability. That is certainly one of 

the things that we do look at. 

For example, if there is an institution that first has a virtual monopoly or a large concentration of risk, that is something that we 

want to take into account. But as far as nonfinancial businesses 

are concerned in our economy, there is more concentration, and 

that is something that we need to pay attention to as we think 

about what that means for the economy as a whole. 

Mr. ELLISON. Thank you. Because as I talked to my colleagues, 

we are all concerned about the falloff in the number of startups. 

What role does the concentration of markets have in starting a 

business? As you monopolize and concentrate, maybe it is the barriers that are just tougher than they used to be. 

I am not saying that is certainly the case. I am saying it is worth 

some study. And we all say we believe in small business, let’s think 

about this. 

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22 

So let me jump to another question. We have seen deep cuts for 

regulatory agencies, like the Office of Financial Research, are being 

proposed. Do you have concerns that rewriting the rules to benefit 

banks, Wall Street, hedge funds, could result in lower wages, fewer 

businesses, more monopolies, more concentrated markets? 

Mr. BERNER. Congressman, I have not written about concerns 

like that, and I would say that before I answer in the affirmative, 

we have to really take a look at those things, but I think that it 

is a reasonable question to ask. 

I think that it is time to take stock of the things that we have 

done, to make the financial system more resilient, and it is pretty 

clear that some tailoring, some adjustments can be done. 

One that is very important and that I support, in particular, is 

not having a one-size-fits-all approach to financial regulation, so 

that our community banks are not burdened by excessive regulation. That is very important. That is something that we talk about 

with our colleagues at Treasury and other financial regulatory 

agencies. 

Mr. ELLISON. All right. I only have 24 seconds left. Could you 

give us an update on LEIs? I was a little late to the hearing. If you 

have a few seconds just to say what you can share as to how that 

is going? 

Mr. BERNER. Sure. We have made great progress on that on a 

global basis, but it is not sufficient, and I think it would benefit 

by having U.S. regulators mandate the use of the LEI in regulatory 

reporting. That would actually help reduce the cost of regulatory 

reporting and make the reports more useable by regulators and by 

the public. 

Mr. ELLISON. Thank you. I yield back. 

Chairwoman WAGNER. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from Indiana, Mr. Hollingsworth, for 5 minutes. 

Mr. HOLLINGSWORTH. Mr. Berner, I genuinely appreciate you 

being here today. I know that one of the things both sides of the 

aisle are very concerned about is the prevention of a future crisis 

like we saw back in 2008. But I know something I am gravely concerned about is employing the same strategy that failed to see the 

2008 crisis and only doubling down on that strategy and expanding 

that strategy instead of refocusing on strategies that have a higher 

likelihood of reducing the amount of systemic risk. 

And to that point, I know one of the primary purposes of OFR, 

at least as put forth in the Dodd-Frank Act, was to perform some 

of the economic research for FSOC. Now, there are a variety of 

other players that do the same thing. Notably, the Fed has over 

300 PhD economists in its employ, especially in the division of financial stability, where the primary mission is to, I quote, ‘‘develop 

and coordinate staff efforts to identify and analyze potential risk to 

the financial system and the broader economy, including through 

the monitoring of the asset prices, leverage, financial flows, and 

other market risk indicators.’’ 

Within this division, the financial macroeconomic stability studies section also, specifically researchers, and I quote, ‘‘linkages between financial stability and macroeconomic performances, including the effects of distress of financial institutions,’’ end quote. 

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23 

In addition to that, the Treasury Department has a number of 

other economists in its employ. I guess what I am asking or trying 

to get to is, why does the Federal Government need another redundant agency with more redundant employees to do the same type 

of research? 

Mr. BERNER. Congressman, as I mentioned earlier, we have at 

least two unique features that make us good partners for the Federal Reserve, for the Treasury Department, and indeed for the 

FSOC. 

Our purpose, as I mentioned earlier, is to serve the FSOC’s 

needs. Those are, first, that we have access to data that others 

don’t. If we can share them with others in the course of their work, 

we do that. But certainly we share the work and results that we 

do. 

And second, we look uniquely across the financial system where 

others cannot. Even the Fed, even others in the financial regulatory community don’t have that same broad authority that we do, 

and so we work to fill the gaps that they might have both in collecting data and in doing the analysis. 

Mr. HOLLINGSWORTH. Yes. So taking both of those points, which 

I know you had made before, and I appreciate you reiterating. The 

second one first is this really a nebulous concept of looking at systemic risk, and I have heard witness after witness after witness 

come in here and talk about how difficult it is to both measure and 

understand systemic risk. 

And, look, I am just an old business guy, and I feel like we have, 

in this institution, redundancy, and now asking them to try to look 

at and measure something that is really hard to understand, nebulous, and maybe, in the end, isn’t delivering any further protection 

with regard to all of this research. 

So I guess how do you measure the systemic risk, as you look 

broadly across the economy, and what is it exactly that you would 

measure the effectiveness by which you are looking for that? 

Are we just waiting for another crisis? 

Mr. BERNER. I am really glad you asked that question, Congressman because I am an old business guy myself. Having been in business for 30 years. But I actually don’t like the term ‘‘systemic risk.’’ 

I prefer to look at ‘‘threats to financial stability’’ because that enables us to look at them individually and collectively—both. 

And that is our approach in the Office of Financial Research. We 

look at vulnerabilities in the financial system. We have identified 

them in our reports, including the latest one, and we put them together to come up with an assessment of overall risks. That is the 

purpose of the monitoring that we do. That is the purpose of collecting the data that we do. 

Mr. HOLLINGSWORTH. Yes. So one of the old adages, ‘‘fight the 

last war,’’ sometimes we fight the last war instead of the next one. 

We had these 300 economists at the Federal Reserve, all of 

whom, presumably, were concerned about macroeconomic stability 

and threats to financial stability, and now, I guess with an extra 

10 PhDs and an extra 12 PhDs, we should rest at night knowing 

that 312 will do the job where 300 didn’t do the job. 

What is unique about your organization that enables them to see 

something that no one has seen before, no economist quite undermcarroll on FSR431 with DISTILLER

24 

stands fully, and that we haven’t at least seen the results thereof 

to assure that what we think we are getting we are getting, with 

those taxpayer dollars? 

Mr. BERNER. I wouldn’t say that we have greater peripheral vision than others, but I think we have the ability and the authority 

to look in places that other people aren’t looking. 

When you look outside the banking system, you look in nonbank 

financial institutions and how the financial system is evolving. 

Think about innovation, which has enormous benefits for the financial system and for the economy. But innovation may also carry 

risks. So we need to understand what those risks might be and 

consider them. 

One of the things that we do in order to do that is to work with 

not just our stakeholders in the Federal Government and in the 

regulatory community, but we also engage with industry to understand how they manage their risks and to see what they see going 

on in the financial system. 

Mr. HOLLINGSWORTH. I guess taxpayers back home are gravely 

concerned about the level of redundancy that we have in the Government, and even more concerned with the significant risk and 

detriment of another financial crisis, that we are doubling down on 

a strategy of we just need a few more people looking in a few more 

places and certainly we will find the problem before it becomes an 

enormous burden on taxpayers, and I worry about reiterating that 

strategy. 

And with that, I will yield back, Ms. Chairman. 

Chairwoman WAGNER. The gentleman’s time has expired. 

I would like to thank Mr. Berner for his testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

[Whereupon, at 11:23 a.m., the subcommittee was adjourned.] 

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(25) 

A P P E N D I X 

December 7, 2017 

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Testimony of Richard Berner, Director of the Office of Financial Research, 

U.S. Department of the Treasury 

House Financial Services Subcommittee on Oversight and Investigations 

Hearing on "Examining the Office of Financial Research" 

December 7, 2017 

The views expressed in this testimony are those of Richard Berner, Director of the Office of 

Financial Research, and do not necessarily represent the views of the President. 

Introduction 

Chairman Wagner, Ranking Member Green, and members of the subcommittee, thank you for 

the opportunity to testifY this morning on behalf of the Office of Financial Research. 

This hearing will be my final opportunity to testif'y before Congress as OFR Director because, as 

you probably know, I am preparing to leave the OFR at year's end. I have had the privilege of 

serving as the OFR's first Director since January 2013 and before that, beginning April2011, as 

Counselor to the Treasury Secretary with the assignment of standing up the OFR. 

Back then, we had only four staff members and no separate office or infrastructure-just a 

broad mandate to support U.S. financial stability after the worst financial crisis since the Great 

Depression. 

Today, the OFR has the resources to meet that mandate: an expert staff of men and women with 

the tools needed to do their jobs, an office in Washington, a small office in New York, and an 

analytic environment where OFR staff members in data and research securely maintain large 

datasets and conduct computing-intensive analysis. 

I am proud of the accomplishments that the dedication of the OFR workforce has made possible 

toward fulfilling our mandate and delivering value to our stakeholders, primarily the Financial 

Stability Oversight Council (FSOC, Council). Our staff attained these consequential 

achievements despite headwinds from working for a start-up amid persistent uncertainties about 

existential threats to the OFR. 

In the remainder of my testimony, I will discuss each of the topics requested in the 

subcommittee's invitation letter. 

OFR Progress in Fulfilling Its Statutory Mandate 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gave the 

OFR a dual data-and-research mandate. In support of the Council and member agencies in 
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fulfilling their purposes and duties, the Office is tasked with improving the scope, quality, and 

accessibility of financial data; assessing and monitoring threats to financial stability; and 

evaluating financial stability policies. 

All of the Office's activities are undertaken to fulfill that mandate. Usefulness in helping to 

fulfill the mandate is our yardstick for measuring the importance and priority of every proposed 

OFR project and activity. 

FSOC Support 

In support of the Council, its committees, and its members, I and members of the OFR staff work 

routinely with them on a wide variety of FSOC activities and initiatives. 

As Director, I am a nonvoting member of the Council. I and other members of the OFR staff 

maintain many points of contact with members of the FSOC staff and the staffs of FSOC 

members to determine their needs from the OFR for support, and collaborate on how to provide 

that support. 

The OFR supports the FSOC and its members by: 

• collecting, maintaining, and securely sharing supervisory and commercial datasets; 

• purchasing and securely maintaining more than 65 other datasets used by the FSOC staff and 

used for the FSOC Annual Report and other analytical needs, including: 

o credit default swap data, 

o data on trends in the primary syndicated loan market and on principal market 

participants, 

o granular information on credit trends in lender portfolios and in newly originated 

loans, 

o a global insurance database, 

o information about residential mortgage and mortgage-backed securities activity, 

o a fixed-income securities database, 

o anonymized, loan-level mortgage information, 

o data on measures of credit risk in publicly and privately held firms, banks, and 

insurance companies, and in broad classes of equity and debt-related assets, and 

o data and accompanying tools to combine comprehensive banking financial statements 

with a wide range of other bank information. 

• leading the FSOC Data Committee - a Council forum for sharing information and 

coordinating action on data-related topics that affect member agencies; 

• producing the Interagency Data Inventory- a catalog of data collected by member agencies 

and co-leading the Data Committee's working group that updates it. Maintenance of the 

inventory, now on the OFR website, is increasingly important as we strive to identify 

opportunities to reduce the financial regulatory reporting burden; 
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• engaging with the FSOC staff in weekly calls and in other ways to coordinate on current 

projects and issues; 

• supplying data and analysis related to financial system vulnerabilities; 

• helping the Council identity and prioritize threats to financial stability, in part by regularly 

producing and presenting threat assessments to the FSOC Systemic Risk Committee. These 

assessments include results of our analysis of confidential data available to the OFR on credit 

default swaps, repo and securities lending markets, and private funds; 

• conducting, coordinating, and sponsoring objective research to evaluate and improve 

regulatory and financial stability policies; 

• developing new monitoring and risk-assessment tools and presenting them to the FSOC 

Systemic Risk Committee; 

• presenting the results of our work to the Council members and to FSOC deputies committee 

to inform their discussions of financial-system vulnerabilities and potential policy steps; 

• presenting at, and contributing to discussions in, other FSOC working committees and 

groups, including the Regulation and Resolution Committee and Financial Market Utilities 

Committee; 

• assisting the FSOC in developing its armual report by providing data, analysis, and writing; 

• providing data and analysis to support the FSOC' s nonbank designation process; and 

• developing procedures and protocols for securely sharing data among the FSOC, its 

members, and the OFR. 

The OFR has also partnered with FSOC member agencies on a number of research and data 

projects, some at the specific direction of the FSOC or its member agencies, and others in a less 

formal response to concerns discussed. Examples related to data scope and data quality are 

provided in the next section. 

Progress on Improving Financial Data 

More broadly, good data are essential for good policymaking. Data needed to inform financial 

stability analysis and policymaking must often be granular. Such data must also be standardized 

to assure their quality; to make them easier to compare, aggregate, and analyze; and to make 

them shed light on who owns what risks. 
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Our data-and-research agenda requires advanced and secure information technology tools. We 

bring large quantities of data into our analytical environment, which we designed and built 

specifically to securely support computing-intensive work with large datasets. The need to keep 

these data secure and safeguard against breaches drives much of our security work. 

The OFR has made strides in building and strengthening all three legs of what I call the threelegged stool of improving the scope, quality and accessibility of financial data. 

Data Scope 

Regulators and the industry both need financial data that are comprehensive in scope. Those data 

must also be detailed enough for assessing and monitoring risks and vulnerabilities in the 

financial system, and for policymakers to make informed decisions. Fulfillment of the OFR 

mandate to fill gaps in the data needed involves collecting key data from the financial industry, 

often collaborating with fellow regulators. 

How we collect data determines how heavy or light the regulatory reporting burden will be. The 

OFR and many fellow regulators are committed to identifying, using, and promoting best 

practices in collecting data to reduce or eliminate duplication and minimize any collection 

burdens. The OFR has been able to accomplish much of its work relying on data already 

collected by other regulators, or voluntarily provided by industry, rather than undertaking 

compulsory measures. 

For example, we have collaborated with two FSOC member agencies- the Federal Reserve and 

the Securities and Exchange Commission (SEC)- on an initiative to collect data describing 

activity in bilateral repurchase agreements, or repos, which are a critical source of secured shortterm funding across the financial system. 

A repo is essentially a collateralized loan, when one party sells a security to another party with 

an agreement to repurchase it later at an agreed price. Securities lending is the same thing but 

involves a loan rather than a sale, and is a much smaller market. The U.S. repo market provides 

more than $3 trillion in funding every day. However, the repo market can also contribute to risks 

to financial stability, so obtaining more information about these transactions will fill an 

important data gap. Bilateral repo transactions involve specific securities as collateral and may 

be transacted bilaterally between two parties. 

To ensure we employed best practices in data collection, we launched a voluntary pilot project in 

2015 in partnership with the Federal Reserve and the SEC to collect data on bilateral repo 

transactions from a representative handful of firms engaged in repo markets. The pilot provided 

valuable insights into the overall repo market and the data that market participants used to 

describe repo transactions. 

Having learned from the pilot, and shared the results of that initiative with the Council and the 

public, we recently reported to the Council and the public our plan with the Federal Reserve to 

undertake a rulemaking later in the current fiscal year for an ongoing data collection covering 

cleared bilateral repo transactions. 
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These data are critical for and will be used immediately in publishing the Secured Overnight 

Financing Rate, which has been selected as an alternative to the LIBOR interest rate benchmark. 

U.S. dollar LIB OR has been used to set interest rates on trillions of dollars of retail mortgages, 

corporate loans, derivatives, and other financial products, but LIBOR's past reliance on survey 

submissions rather than transactions undermined the integrity of the benchmark and permitted 

manipulation. 

Data Quality 

Providing more and better data is important. Standardizing them and sharing them now, in 

financial calm times, across borders is equally so. There is no point for regulators to ask firms for 

data that are not useful or in formats that cannot be used. In addition, firms bear costs for 

providing data in a different format if the data is already being provided to regulators in a format 

that we could use. 

Data quality is the second leg of the three-legged stool of better financial data. High-quality data 

that conform to common standards facilitate aggregation, sharing, risk management, and good 

decision making. High-quality data prevent overlap and duplication among data collections, and 

facilitate the collection of data once for a variety of purposes by many regulators. 

The global Legal Entity Identifier, or LEI, is a foundational data standard that the OFR played a 

lead role in developing and promoting. 

Like a bar code for precisely identifying parties to financial transactions, the LEI helps make the 

flood of data flowing in the financial system easier to compare and share. The LEI can also 

generate efficiencies for financial companies in internal reporting and in collecting, cleaning, and 

aggregating data. 

If the LEI system had been in place during the financial crisis, the breadth and depth of 

exposures to the failing Lehman Brothers would have been easier to identifY, assess, and 

manage. 

By reducing overlap and duplication, the LEI can also ease regulatory reporting burdens. 

Estimates of industry savings in managing their data by using common standards run into the 

billions of dollars. Because of these savings, industry groups have called on regulators to broadly 

adopt the LEI. 

Globally, more than 800,000 companies now have LEis. Ironically, however, given that the LEI 

was an American brainchild, U.S. regulators have been slow to abandon their individual data 

identification systems or to map the LEI to those systems. U.S. regulators are unfortunately 

lagging behind their counterparts overseas, most notably in the European Union. 

For years, I have been calling for regulators at home and abroad to step up and require the LEI in 

regulatory reporting. The time has come to move from suggesting change to requiring it. U.S. 

federal financial regulators should mandate the LEI in regulatory reporting. I am also calling for 

industry to amplifY its support. 
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The OFR has the authority to require the use of data standards when we collect data, so we will 

propose requiring the LEI in our upcoming data collection on repo transactions. 

To promote data quality, we have also collaborated with U.S. regulators and FSOC members, 

including the Commodity Futures Trading Commission (CFTC) and the SEC, and with those 

abroad, specifically the Bank of England and the European Central Bank, to create frameworks 

for setting global standards for granular data, such as in swaps and other over-the-counter 

derivatives. 

To help implement those standards, the OFR and the CFTC conducted a joint project to promote 

the use of data standards in swap data reporting to assure swap data quality and usefulness. An 

initial memorandUm of understanding initiated the project to enhance the quality, types, and 

formats of data collected from registered swap data repositories. Under a second agreement, 

members of the OFR staff worked at the CFTC on the project. 

In addition, we advised the SEC on swap data, and on ways to improve Form PF for measuring 

the risk exposures of hedge funds and other private funds. We have also advised the Consumer 

Financial Protection Bureau and the Federal Housing Finance Agency on mortgage data 

standards. 

Data Accessibility 

Data accessibility is the third leg of the three-legged stool of better financial data. Lack of data 

sharing among regulators is a major cause of duplicative and overlapping reporting requirements, 

so the OFR is fostering data sharing through efforts to overcome obstacles to it. 

A key- perhaps the key- challenge lies in balancing the need to share data more broadly with 

the imperative to protect data security. Tools for keeping data secure include security protocols, 

encryption, and authentication. Using these tools and aligning data security requirements among 

regulators helps to persuade data owners that their shared data will be secure. 

The Federal Financial Institutions Examination Council the interagency group of banking 

regulators- has identified some best practices for secure data sharing, including technology 

solutions and the use of standards to assure that shared data are consistent and accurate. 

A related challenge is to reach agreement on the details and protocols of data sharing. Specific 

memorandums of understanding, or MOUs, are needed to spell out those details. The OFR has 

signed more than 50 such MOUs with federal, state, and overseas regulators and others to 

facilitate data sharing. 

Negotiating MOU details can take months. To streamline and accelerate the process, we are 

working with other FSOC members to develop a set of common MOU provisions. 

So-called "metadata repositories" can also facilitate sharing and avoid duplicative data 

collections. The repositories, which contain metadata- data about data- rather than the 

datasets themselves, give regulators insight into the data collections of other regulators. A 
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regulator contemplating a new data collection can consult the repository to see if another 

regulator is already collecting the needed data. 

We plan to build on the Interagency Data Inventory, a metadata repository described above. We 

will also help other organizations to link their existing metadata catalogs or create new ones. We 

envision the OFR maintaining a central library of financial metadata for multiple stakeholders, 

giving authorized users a single, secure place to find sources of data. 

Reducing Regulatory Reporting Burden 

As the previous discussion implies, our data-related work facilitates reducing the regulatory 

reporting burden, and the OFR has launched a pilot project to explore how we can collaborate 

with the Council to do that. 

Regulation and oversight of financial institutions and markets is divided among federal and state 

agencies. Banks, brokers, and other U.S. financial institutions and markets are overseen on the 

federal level by nine independent regulators and three self-regulatory organizations. (Insurance 

companies and some banks are also regulated at the state level). Firms engaged in multiple 

financial activities are governed by more than one regulator. Sometimes a single activity is 

overseen by multiple regulators. 

This fragmented approach enables tailored regulation and enforcement, but can also result in 

inconsistent and inefficient oversight and reporting. The current regulatory structure has led to 

inconsistencies in agencies' data collection activities. U.S. financial institutions report that they 

are often required to submit the same data to more than one U.S. regulator using different 

calculations, classifications, and formats. 

Duplicative, conflicting, or inconsistent reporting requirements have the potential to increase 

costs, undermine the efficiency and quality of data collections, and impede data comparison and 

integration. Duplicative, conflicting, or inconsistent reporting requirements can also misalign 

regulatory reports from the data that firms use for their risk management. Likewise, these 

requirements could impair the ability of government officials to assess and monitor threats to 

financial stability and assure the functionality and integrity of financial markets. Finally, 

duplicative and inconsistent requirements can erode public confidence in government. 

To better understand this issue, we asked a handful of financial institutions and industry groups 

for examples of such burdens. During initial discussions, firms focused on reports to FSOC 

member agencies. Information came from asset managers, banks, and financial services trade 

associations. 

We analyzed a selection of the examples identified by industry to determine the general validity 

of industry concerns and identifY ways the OFR might help address the issues. For each example, 

we compared multiple data fields to identifY duplicative, conflicting, or inconsistent data 

requirements and found that the industry's concerns warrant further analysis. That follow-up 

work is underway at the OFR. 
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Progress on Financial Stability Research 

A large part of the OFR's dual mandate involves fmancial data, while another major part 

involves conducting research and developing new tools to better assess and monitor financialsystem vulnerabilities. 

Much of this work is done in support of or in collaboration with Council member agencies. 

Based on OFR research, for example, we advised and collaborate with the Federal Reserve on 

ways to improve the stress testing of banks, including analysis of the data used in stress tests. We 

also conducted and maintain analysis to determine the best methods for identifYing the systemic 

footprint of banking firms. In this effort, we built on our earlier research to show how a 

multifactor approach for assessing systemic importance and risk is superior to making 

determinations based solely on bank size. 

Topics related to financial stability are explored in the more than I 00 OFR research papers and 

reports posted on our website. These publications cover areas central to the OFR mission, such 

as potential improvements in stress testing banks and nonbanks, assessing the systemic 

importance ofbanks, and the risks and benefits of central counterparties. 

We have submitted the required Annual Report to Congress every year since 2012 and have 

published a separate Financial Stability Report every year since 2015. All of this work is posted 

on the OFR website the benefit of the Council and the public. 

Monitoring Tools 

The website contains several OFR interactive monitoring tools; developing such tools was noted 

above as a statutory mandate. Two new tools are: 

• Financial System Vulnerabilities Monitor- This monitor is a heat map of 58 indicators of 

potential vulnerabilities in the U.S. financial system, designed to provide early warning 

signals of potential U.S. financial system vulnerabilities that merit investigation. The monitor 

is organized in six categories: (1) macroeconomic, (2) market, (3) credit, (4) solvency and 

leverage, (5) funding and liquidity, and (6) contagion. 

We base our overall assessment of U.S. financial stability on an evaluation of the categories 

of risk in this monitor and on our research, analysis, and surveillance of the financial system: 

. When the monitor shows high or rising vulnerabilities, it indicates a high or rising risk of 

disruptions in the future. Vulnerabilities typically lead to additional stress when shocks hit, 

such as when widespread losses or loan defaults strike the financial system. The additional 

stress can feed a downward cycle. 

The monitor currently shows that market risks from a potential sharp change in the prices of 

assets in financial markets are high and rising. Rising prices and falling risk premiums may 

leave some markets vulnerable to such changes. (Risk premiums are returns in excess of 

returns on risk-free investments.) Such market corrections can trigger financial instability 
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when the assets are held by entities that have excessive leverage and rely on short-term debt 

and other liabilities. 

• Financial Stress Index- The index is a daily market-based snapshot of stress in global 

financial markets, constructed from 33 financial market variables. The index is positive when 

stress levels are above average, and negative when stress levels are below average. 

Financial stress refers to a breakdown in the normal functioning of financial markets, 

sometimes with adverse consequences for the economy. Just as body temperature is used to 

monitor physical health, stress is one of several metrics that we use to monitor frnancial 

health. Episodes of stress can be severe, as in the financial crisis. 

The index currently shows that overall stress is near its lowest level since the financial crisis, 

primarily because oflow volatility. However, this low volatility may be leading investors to 

take big risks, making the financial system more fragile and vulnerable to shocks. 

Policymakers need accurate, clear, and timely signals of market stress to effectively monitor 

potential effects on the financial system and the economy. 

The index incorporates five categories of indicators: (1) credit, (2) equity valuation, (3) 

funding, (4) safe assets, and (5) volatility. The index shows stress contributions by the United 

States, other advanced economies, and emerging markets. 

• U.S. Money Market Fund Monitor- This monitor, displayed on the most visited page on the 

OFR website, is designed to track the investment portfolios of money market funds by funds' 

asset types, investments in different countries, counterparties, and other characteristics. Users 

can view trends and developments across the money market fund industry. 

Money market funds have been popular for decades among investors who want better returns 

than bank accounts offer, but still with little risk. Since the 1990s, institutional investors have 

used money market funds as a professional cash management option. 

The funds strive to maintain the value of the money invested in them. At the height of the 

financial crisis in 2008, investors in an established fund lost money when the price of esch 

share fell slightly below $1 -called "breaking the buck." In the ensuing weeks, investors 

pulled hundreds of billions of dollars out of prime money market funds in favor of safer 

investments, such as government money market funds. The government stepped in to insure 

funds temporarily. That support ended in 2009. Reforms recommended by the Council and 

adopted by the SEC required prime funds as of October 2016 for institutional investors to use 

floating share values rather than a fixed share price. 

A lack of detailed data about fund holdings blocked regulators from seeing risks quickly in 

2008. Since then, regulators have begun to require funds to report detailed data about their 

holdings more frequently. Funds are also required to hold more liquid assets. 
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To develop this monitor, the OFR analyzed more than 4 million records of monthly data on 

the holdings of about 500 funds over five years. Before the OFR released the monitor, the 

data were on the SEC website as separate individual filings and industry-level monthly 

reports. The OFR monitor displays the data in a graphical format that is easy to adjust to the 

needs of any user. Users can also download the data into spreadsheets. 

• G-SIB Scores Interactive Chart- This online chart shows the set of 12 financial indicators 

that the Basel Committee on Banking Supervision, a group of bank supervisors from 28 

jurisdictions, created in 2011 to identify global systemically important banks, or G-SIBs. A 

G-SIB is a bank whose failure is believed to pose a threat to the international financial 

system. The interactive chart displays the data for G-SIBs based in the United States, the 

eurozone, China, and several other countries. The chart graphically displays the data 

employed in our work to identify the systemic footprint of banking firms. 

Annual Report 

Our just-released 2017 Annual Report to Congress, which I attached to this testimony, assesses 

the state of the U.S. financial system, including an analysis of threats to financial stability, key 

findings from our research and analysis, and status of the OFR's efforts in meeting its mission. 

The report says overall risks to financial stability remain moderate. We reached this assessment 

by weighing the financial system's resilience against its vulnerabilities. 

Although the system is far more resilient than it was when the financial crisis loomed a decade 

ago, new vulnerabilities have emerged, including in the last fiscal year. For example, 

vulnerabilities from excessive leverage (when resources are low relative to investment 

exposures) could be exposed by high and rising risks from a potential sudden drop in prices of 

assets in financial markets, particularly stock markets and bond markets. 

The report highlights three specific, key threats to the U.S. financial system: 

1. Vulnerabilities to Cybersecurity Incidents - The financial system is vulnerable to 

cybersecurity incidents because of its interconnectedness and heavy reliance on information 

technology. 

A large-scale cyberattack or other cybersecurity incident could disrupt the operations of one 

or more financial companies and markets, and spread through financial networks and 

operational connections to the entire system, threatening financial stability and the broader 

economy. 

The financial system is an attractive target for cyber thieves and other hackers because 

financial companies manage the nation's wealth and handle trillions of dollars in transactions 

every day that underlie the U.S. economy. 
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To assist in mitigating this threat, we are combining network analysis with maps of the 

financial system populated by real-world data to help identifY potential systemic 

vulnerabilities to cybersecurity threats. 

2. Obstacles to Resolving Failing Systemically Important Financial Institutions Resolution is 

the process of restructuring or liquidating a failing financial company through bankruptcy or 

regulatory mechanism. 

The failure of a large, complex financial company could transmit distress to other firms and 

possibly trigger another financial crisis. 

After the last crisis, regulators developed important tools for resolving failing U.S. bank 

holding companies that are systemically important, but orderly resolution may be difficult in 

some scenarios. In addition, tools to enable an orderly resolution process for nonbanks are 

still works in progress. 

3. Structural Changes in Markets and Industry- Three aspects of market structure pose threats: 

( 1) lack of substitutability, which is the ability to replace essential services if a provider fails 

or drops that line of business; (2) fragmentation of trading activities across multiple channels 

and products; and (3) the chance of a difficult transition to a new reference rate to replace the 

London Interbank Offered Rate, or LIBOR. 

We selected the key threats based on their potential impact, probability of occurring, probability 

of happening soon, and the preparedness of industry and government to manage them. 

The annual report also discusses how we are serving our key stakeholders: the FSOC, FSOC 

members, the Treasury Department, Congress, the financial services industry, and the public. It 

describes our efforts to continue adjusting our focus to meet the needs of those stakeholders. 

In addition, the report discusses our national and international collaboration over the past fiscal 

year, current staffing levels, our budget, and information technology projects. OFR employees 

participate in a wide variety of events related to financial stability research, data, and analysis. 

Collaboration with outside researchers, regulators, and industry experts domestically and abroad 

is crucial to our success. 

OFR Financial Research Advisory Committee 

We receive valuable suggestions and recommendations from our Financial Research Advisory 

Committee, a group of 29 professionals with experience in business, economics, finance, data 

science, risk management, and information technology. Committee members are drawn from 

industry, academia, and the policy community. 

The committee, established in 2012, gives the OFR the benefit of industry experts who bring 

diverse perspectives to inform our work and help the OFR to fulfill its mission. Under the 

governance of the Federal Advisory Committee Act, the full committee meets semiannually. The 

OFR makes the minutes and webcasts of the meetings available to the public. 
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The three subcommittees- Research, Data and Technology, and Financial Services and Risk 

Management meet at different times during the year to develop committee work. 

The full committee met twice in FY 2017: 

• February 23 This meeting included discussions of financial stability risks identified by 

the OFR, the OFR initiative to develop a financial instrument reference database, 

adoption of the Legal Entity Identifier, and the research agendas of OFR programs on 

central counterparties and risks in financial institutions. The OFR also received updates 

from the committee's Financial Instrument Reference Database Viewpoint Working 

Group, Data Standards Working Group, and Financial Innovation Working Group. 

• July 20- This meeting included a presentation on improvements to the Financial 

Stability Monitor (redeveloped as the Financial System Vulnerabilities Monitor); a 

demonstration of the OFR's new monitoring tool, the Financial Stress Index; an update 

on the OFR's efforts to identify obstacles to broader adoption of the Legal Entity 

Identifier; and a discussion of the OFR's work to monitor and analyze operational risks 

and cybersecurity risks. The OFR also received updates from the committee's Financial 

Innovation Working Group. 

Information Security 

The OFR has no priority higher than information security. The OFR recognizes its responsibility 

to safeguard data collected and used in support of its mission. Appropriate management of all 

data ensures that the OFR remains an essential source of data and analysis for monitoring threats 

to financial stability. 

We have built a strong security and privacy awareness program over the past several years 

dedicated to ensuring that our systems and our data are secure and will remain secure. 

The OFR continues to cultivate a strong culture of security awareness and the Office follows 

applicable federal regulations, directives, and best practices for information security. For 

example, the OFR follows the National Institute of Standards and Technology guidance for the 

implementation and operation of a government information security program. 

All OFR employees take annual security and privacy training, and employees who have access to 

nonpublic data are subject to heightened post-employment restrictions. 

The OFR brings large quantities of data into its analytical environment, which was designed and 

built specifically for the OFR to securely support computing-intensive work with large datasets. 

The OFR' s information security program works to ensure that the analytic environment has 

effective security controls and procedures that match the level of risk posed by the information 

systems, tools, and data the OFR holds. 

In FY 2017, we renewed our commitment to maintaining the confidentiality, integrity, and 

availability of our systems and the information they hold. We conducted our annual internal and 
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external "penetration tests," which were completed by an independent third party, with no major 

findings identified. We also deployed several additional controls and tools that strengthened our 

security posture. 

Workforce and Culture 

To achieve its mission, the OFR has made a priority of building and maintaining a diverse and 

highly skilled workforce. The Office began in 2011 with only four employees, increased to 30 by 

the end of that year, and currently stands at 207. 

Our workforce has great expertise and experience in fields central to our mission and related 

support functions. As noted, I am proud of the accomplishments that the dedicated OFR 

workforce has made possible. 

However, morale among OFR employees is low. Federal Employee Viewpoint Survey results for 

the OFR began to decline in 2014. In response, we took steps that included launching an 

employee engagement project that produced recommendations resulting in changes, such as an 

employee suggestion box, an employee Lunch and Learn program, a newsletter and electronic 

message boards to keep employees informed, a redesigned and upgraded employee intranet site, 

an online employee directory, and an employee recognition program. 

These changes did not produce the desired results to improve morale, echoed in survey scores. 

After the 2015 and 2016 results confirmed that we had more work to do to achieve the goal of 

the OFR becoming a world-class workplace, we brought in outside experts from main Treasury 

to collaborate with us on additional steps to improve workplace quality. They recommended that 

OFR managers and employees engage in training to improve management, communication, and 

workplace engagement, for example: 

• The OFR leadership team (Director, senior managers, and associate directors) enrolled in a 

"Leadership Deep Dive Program," a multiple-session course conducted by the Weatherhead 

School of Management at Case Western Reserve University. 

• This program was complemented by a series of new and existing training courses in which 

managers enrolled, and offered by Treasury's Office of Human Resources and the Office of 

Civil Rights and Diversity, on a range of topics, including diversity and inclusion, 

combatting unconscious bias, performance management, merit system principles, and 

employee development. 

• The OFR leadership team took additional diversity and conflict resolution training. 

• The team took hands-on training on "The Speed of Trust," and later made the training 

available to the entire staff. The Speed of Trust program is aimed at changing the culture and 

performance of individuals teams by practicing behavior that build trust and communication 
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and avoiding counterfeit behavior that undermines it. 

In addition, Treasury's Office of Human Resources, Treasury's Office of Civil Rights and 

Diversity, Treasury's Office of Minority and Women Inclusion, and Treasury's Office of the 

General Counsel recommended that we hire an independent consultant to conduct a cultural 

assessment of the OFR workforce and provide recommendations to a panel of officials including 

me, and the heads the offices named above. 

The contractor, Charles River Associates, issued its report just a couple of weeks ago (Nov. 21) 

and we shared the full report with Congress, the Secretary of the Treasury and his staff, 

Treasury's Inspector General, and the OFR staff. We posted the report on the OFR website and 

issued a statement on it to the public. The full report is attached to this testimony. 

One of the reasons we launched the cultural assessment initiative was the appearance of several 

anonymous videos on the Internet making allegations including employee discrimination at the 

OFR. We took these allegations seriously and responded. 

Charles River independently assessed whether statistical evidence indicates patterns of 

discriminatory practices at the OFR. The employment outcomes studied included applicant 

selections for hire, starting base salary, performance ratings, merit pay increases, current base 

salary, award selections, promotions, and separations. 

The report concluded, "There is no evidence of a pattern and practice of adverse decisions with 

respect to gender or race/ethnicity in any employment practices analyzed. Instead, the analyses 

of the different employment outcomes are overwhelmingly neutral with respect to gender and 

race/ethnicity and are among the most neutral or favorable that CRA [Charles River Associates] 

has observed for an employer." 

Charles River also elicited employee feedback about workplace culture, with a focus on 

diversity, inclusion, fairness, employee engagement, empowerment, and trust. 

The report included recommendations for improving OFR culture, while noting that, "the study 

focused only on identified concerns raised by employees and did not ask what is working well at 

OFR, so the results do not represent a balanced view ofboth positives and negatives." 

The full report is attached to this testimony. 

Morale among OFR employees has also been affected in recent years and employee stress levels 

rose as proposals repeatedly surfaced in Congress to eliminate the Office, and as the President's 

Budget proposed steep cuts in the OFR budget and workforce. Late last month, employees were 

told that that the staff would be cut consistent with the budget. 

Employees during OFR "all hands" staff meetings express concern about what the future holds; 

when decisions will be made about job cuts and budget cuts; and how OFR functions, work 

groups, and individuals will be targeted for elimination. 
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We are committed to making the OFR a world-class workplace, and believe that our efforts, 

especially recently, are having an impact. We have received only preliminary results from the 

2017 Federal Employee Viewpoint Survey, but those suggest that we may see progress when the 

full results are available. We will provide them to the subcommittee when they are available. 

OFR Cooperation with Oversight Bodies 

The OFR always cooperates fully with oversight bodies, including Congress, the Government 

Accountability Office (GAO), and the Treasury Department's Office ofinspector General. We 

have provided documents as requested and made OFR employees available for interviews as 

requested. 

Congressional Oversight 

As noted, we have submitted an Annual Report to Congress as required by the Dodd-Frank Act 

every year since 2012 and made those reports broadly available on the OFR website. We 

submitted reports on Human Capital Planning as required from 2012 through 2015. 

As required by the law (the Consolidated Appropriations Act of2016, PL 114-113), we file 

quarterly reports to Congress on the OFR's use of funds, staffing levels, and actions to achieve 

Office goals and objectives. 

We interact routinely with key members of Congress, their staffs, and committee staffs to 

respond to questions, address concerns, and share insights on issues related to financial stability. 

In addition, we are working with other agencies to respond to Congressional inquiries about 

assessing the benefits of cross-market surveillance for market oversight and financial stability 

monitoring, and the potential impact for financial firms of a new Chapter 14 of the Bankruptcy 

Code. 

I testifY before Congress whenever invited. This is my fourth time testifying as OFR Director. 

Auditors' Oversight 

Since its establishment, the OFR has been the subject offour GAO audits (and interviewed for 

another five); six audits by the Treasury Inspector General; and participated in one audit by the 

Council of Inspectors General on Financial Oversight. 

After a GAO report in 2012 called for the OFR to strengthen its transparency and accountability, 

we made significant strides to improve our communication with our stakeholders, including the 

public: 

• We made major upgrades to our website, which began as only a few pages on the website 

of the Treasury Department, became a stand-alone OFR website in early 2015, and was 

recently redesigned to showcase our interactive online monitors and data standards work. 
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• More than 31,000 subscribers have signed up to receive alerts about our website updates. 

• We created a senior management position of Chief of External Affairs to foster enhanced 

communication and outreach by leading the team responsible for communications, 

Congressional affairs, and outreach with FSOC, its members, and industry. 

• We further developed our strategic planning and performance management. We 

published the OFR Strategic Framework in early 2012 for fiscal years 2012-14, which 

described the OFR's long-term strategic goals, objectives, and implementation priorities. 

• In early 2015, we released our Strategic Plan for fiscal years 2015-19. The plan provides 

OFR leaders with a roadmap for achieving the Office's mission, vision, goals, and 

objectives. It also demonstrates the OFR's commitment to being transparent and 

accountable, and to linking activities to strategic goals and performance metrics. 

The 2012 GAO report acknowledged that no material overlap is apparent in the work of the OFR 

and the FSOC, which have complementary mandates, or among the work ofFSOC member 

organizations. However, the report recommended that, to ensure comprehensive identification 

and analysis of threats to the financial system and to minimize duplication, the FSOC and the 

OFR clarifY their respective responsibilities for monitoring threats to financial stability, as well 

as the roles of FSOC member organizations. In response, the OFR and the FSOC have 

strengthened steps to assure a coordinated approach to achieving their shared mission and 

minimize duplication. 

During a GAO audit that began in February 2015, eight OFR senior managers and several other 

OFR employees were interviewed and the Office provided more than 700 pages of requested 

documentation. The OFR complied fully with all GAO requests related to the audit. The GAO 

reportedly terminated the audit in 2016 but never informed the OFR of the termination. The 

GAO has declined to inform the OFR about the reasons for termination and has not requested 

additional information from the OFR that might be needed to resume the audit. 

In a separate audit by the Treasury Inspector General related to procurement, we have provided 

all requested documents and made available witnesses for 34 interviews. That audit was started 

in August 2014 before stopping, starting, and stopping again until October 2016, when the IG 

returned to the audit. In all the OFR has responded to at least 1,400 inquiries related to this audit; 

as I understand it, as of today, only one document request (containing 10 discreet inquiries) is 

outstanding. 

Conclusion 

When I first testified before this subcommittee in 2011, I said the OFR is mandated to shed light 

into the dark comers of the financial system. 

The OFR has made enormous progress since its inception on fulfilling its mission. Today, we 

and the Council can see into those corners more clearly than ever before. 
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But our work is far from complete. The evolving nature of the financial system and the 

vulnerabilities that could threaten it make financial stability a moving target and the dark comers 

move with it. Because this work requires ongoing vigilance, that light must continue to shine. 

Thank you again for inviting me here. I am happy to respond to your questions. 
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OFFICE OF FINANCIAL RESEARCH 

12017 
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FROM THE DIRECTOR 

I am pleased to present this 2017 Annual Report to Congress. It fulfills our statutory requirement to assess the state of the United States financial system, 

including analyzing potential threats to financial stability, documenting our 

progress in meeting our mission, and describing our key findings. 

We assess threats to financial stability by weighing vulnerabilities in the financial system against 

its resilience. Our overall risk assessment is unchanged from last year: Threats to financial stability 

are moderate. But underneath that assessment are changes in the balance between financial-system vulnerabilities and resilience. 

We judge that three vulnerabilities are newly important: (1) those arising from cybersecurity incidents; (2) obstacles to resolving large, complex financial institutions; and (3) those arising from 

changes in financial market structure. 

However, we also judge that the system's resilience has improved over the past year, as government officials and market participants continue to implement efforts to enhance resilience 

globally. 

Our 2017 Financial Stability Report complements this annual report with a more deeply analytical 

assessment of threats to financial stability. 

These reports and the ones we published previously reflect the views of the OFR, but we 

continue to benefit from input from and collaboration with the member organizations of the 

Financial Stability Oversight Council and their staffs. 

Collaboration is a critical ingredient in fostering what we call a virtual research-and-data community- one that extends the reach and impact of what our staff can accomplish alone. Our collaboration includes interaction with our Financial Research Advisory Committee and our domestic 

and global counterparts. 

Such input and collaboration have facilitated the progress we've made during the year toward 

meeting our mission. For example: 

In collaboration with the Federal Reserve, we advanced plans to begin collecting data on 

bilateral repurchase agreements and to publish new reference rates that are alternatives to 

UBOR. 

!ii We developed new tools to assess and monitor vulnerabilities and resilience in the financial 

system. Our Financial System Vulnerabilities Monitor and Financial Stress Index expand the 

risk-assessment toolkit for the benefit of officials and the public. 
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l!li We evaluated alternative methodologies to set regulatory thresholds for U.S. banks based 

on risk rather than size alone. 

l!li We assessed resilience in central clearing counterparties. 

Over the past six years, policymakers globally have increased financial-system resilience by 

improving capital and liquidity, and performing regular stress tests at banking firms; instituting 

new resolution regimes to restore market discipline; and strengthening derivatives markets. 

Now is an appropriate time to take stock of whether such reforms effectively balance the vibrancy 

of the financial system with its resilience. The first three reports from the Treasury Department 

on the Executive Order on Core Principles for Regulating the United States Financial System are 

important steps in that stocktaking, and the OFR stands ready to deploy our data and analytical 

tools to evaluate that balance in support of the effort. 

Likewise, over the past six years, the OFR has filled gaps in our understanding of the functioning 

of the financial system both in normal and stressful times. And we have filled gaps in financial 

data and taken steps to improve their quality and accessibility. 

Now is an appropriate time to take stock of the OFR as an organization- one that started with 

a handful of people when I arrived in 2011, and must effectively balance achieving an extraordinarily broad mission with efficiency and agility. Over the past two years, we have embarked on 

that path through initiatives to reconfigure and streamline our functions. I am convinced we can 

do that while maintaining the objectivity, integrity, and quality that are hallmarks of our work. 

During nearly five years as Director of the OFR, I have had the honor of leading an extraordinary 

group of public servants, united in their passion for our mission and their shared commitment 

to succeed. I am extraordinarily proud of the OFR team and grateful for the privilege of working 

with this diverse group of dedicated and talented professionals. 

Although I will be leaving the OFR at year end, I am confident that the OFR staff will keep that 

passion burning and strive as "One OFR" to build on the progress we have achieved together 

toward a strong and vibrant organization. This year's accomplishments demonstrate that teamwork brings success, and OFR team members will continue to work together and collaborate with 

our stakeholders to produce outstanding results. 

Richard Berner 

Director, Office of Financial Research 
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FROM THE DIRECTOR 

SUMMARY 

ANALYSIS 

Financial Stability Threats 

Financial Stability Assessment 

Financial System Vulnerabilities Monitor 

Financial Stress Index 

RESEARCH 

CONTENTS 

6 

11 

12 

18 

Network Analysis to Identify Cybersecurity and Operational Risk 21 

Reducing Regulatory Reporting Burdens 24 

LIBOR Alternative 27 

Legal Entity Identifier 

Assessing Systemic Importance of Banks 

Financial Data Services Initiatives 

Key Findings from 2017 Research Papers 

MISSION 

Status of the Efforts of the OFR in Meeting 

Its Mission 

Support of Key Stakeholders 

Collaboration 

Organization, Staffing, and Offices 

Information Technology 

LOOKING AHEAD 

29 

32 

34 

35 

39 

40 

44 

52 

55 

59 
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SUMMARY 

2017 Annual Report to Congress 

We prepared this 2017 Annual Report to Congress 

to meet the statutory requirement for the Office of 

Financial Research (OFR) to prepare and submit a report to 

Congress within 120 days after the end of each fiscal year. 

As in previous years, the report's three main chapters assess the 

state of the United States financial system as required by the 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

of 2010, including: 

3 Status of the Efforts of the OFR in 

Meeting Its Mission 

Summary 
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Overall risks to financial stability remain in the medium range. We reached this 

assessment by weighing the financial system's resilience against its vulnerabilities. 

The system is far more resilient than it was when the financial crisis loomed a decade 

ago, but new vulnerabilities have emerged, including in the last fiscal year. 

For example, vulnerabilities from excessive leverage (when resources are low relative 

to investment exposures) could be exploited by risks that are high and rising from the 

potential for a sudden drop in prices of assets in financial markets, particularly stock 

markets and bond markets. 

The chapter highlights three key threats to the U.S. financial system: 

1. Vulnerabilities to Cybersecurity Incidents 

2. Obstacles to Resolving Failing Systemically Important Financial Institutions 

3. Structural Changes in Markets and Industry 

We chose these key threats based on their potential impact, probability of occurring, 

proximity (could they happen soon?), and the preparedness of industry and government to manage them. 

We also introduce new risk-assessment tools developed by the OFR- our Financial 

System Vulnerabilities Monitor and our Financial Stress Index and discuss the 

insights from them that contribute to our assessment of financial stability. 

We base our overall assessment of U.S. financial stability on many inputs, including an 

evaluation of the six categories of risk in the vulnerabilities monitor and our research, 

analysis, and surveillance of the financial system. 

This chapter discusses key findings in six areas, plus findings contained in selected 

research papers during the fiscal year: 

1. Network Analysis to Identify Cybersecurity Vulnerabilities and Operational 

Risk Network analysis combined with maps of the financial system populated 

by real-world data may help identify potential systemic vulnerabilities to 

cybersecurity threats. 

2. Reducing Regulatory Reporting Burdens Preliminary OFR analysis indicates 

that examples cited by industry about duplicative, conflicting, and inconsistent 

regulatory reporting requirements merit further exploration. 

2 2017 I OFR Annual Report to Congress 
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3. LIBOR Alternative- Alternatives to LIBOR are needed. One milestone for 

achieving a smooth transition to any alternative is that officials and market 

participants must help develop active derivatives markets that use the new rate. 

LIBOR, formerly known as the London Interbank Offered Rate, but now called ICE 

LIBOR (Intercontinental Exchange LIBOR), is an interest rate benchmark. 

4. Legal Entity Identifier- To realize the full potential of the Legal Entity Identifier 

(LEI), a financial data standard, strategic regulatory mandating of the LEI is 

required, according to industry advocates. The LEI is like a bar code for precisely 

identifying parties to financial transactions. 

5. Assessing the Systemic Importance of Banks- A multifactor approach that 

captures risk is superior to using asset size alone to determine the systemic 

footprint of U.S. banks. The asset-size threshold could subject some large U.S. 

banks with traditional business models to costs for complying with regulations that 

are not aligned with their risks. 

6. Financial Data Services Initiatives- The Financial Stability Oversight Council 

(FSOC) and its member agencies could increase efficiency by adopting initiatives 

to facilitate appropriate data sharing and reduce the indirect and potentially 

direct costs of financial data acquisition. 

Status of the Efforts of the OFR in Meeting Its Mission 

This chapter discusses how we are serving our stakeholders: the FSOC, FSOC 

members, the Treasury Department, Congress, the financial services industry, and 

the public. It also describes our efforts to continue adjusting our focus on meeting 

the needs of those key stakeholders. 

In addition, the chapter discusses our national and international collaboration over 

the past fiscal year, current staffing levels, our budget, and information technology 

projects. 

OFR staff experts and leaders participate in a wide variety of events related to financial stability research, data, and analysis. Collaboration with researchers, regulators, 

and industry experts domestically and abroad is crucial to our success. We also receive 

valuable suggestions and recommendations from our Financial Research Advisory 

Committee, a group of 29 experienced professionals with experience in business, 

economics, finance, data science, risk management, and information technology. 

Committee members are drawn from industry, academia, and the policy community. 

Our research and data agenda requires advanced and secure information technology tools. We bring large quantities of data into our analytical environment, which 

was designed and built specifically for the OFR to securely support computingintensive work with large datasets. The need to keep these data secure and safeguard against breaches drives much of our security work. 

Summary 3 
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na 

ANALYSIS 

e nan bil 

e n 

,':0- vera II risks to financial stability remain in the medium 

, , range, We reached this assessment by weighing the 

system's resilience against its vulnerabilities, Thanks 

to actions taken after the financial crisis, the system is far 

more resilient than it was when the crisis loomed a decade 

ago, but vulnerabilities have emerged, including in the last 

fiscal year, 

Although our overall assessment is moderate, market risks are high and 

rising from the potential for a sudden drop in the prices of assets in financial 

markets, particularly the stock markets and bond markets, Such a decline 

could exploit vulnerabilities from excessive leverage, when resources are 

too low in relation to investment exposures. 

The chapter highlights three key threats to the US financial system: 

1. Vulnerabilities to Cybersecurity Incidents 

2. Obstacles to Resolving Failing Systemically Important Financial 

Institutions 

3. Structural Changes in Markets and Industry 

We also introduce new risk-assessment tools developed by the OFR- our 

Financial System Vulnerabilities Monitor and our Financial Stress Indexand discuss the insights we glean from them about financial stability. 

--~-----------~-----

Analysis of Threats to Financial Stability 
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The new monitor 

and index can be 

found on the 

OFR we-bsite 

The new monitor and index, which are both on the OFR website, 

financialresearch.gov, are part of the OFR's quantitative monitoring toolkit. They 

signal where potential vulnerabilities might require further investigation. We conduct 

those investigations using a wider set of data, qualitative information, and expert 

analysis. The OFR's 2017 Financial Stability Report contains a more in-depth analysis 

of the threats and our overall assessment of financial stability. 

Financial Stability Threats 

Shocks that cause widespread losses or loan defaults can expose underlying vulnerabilities and turn them into threats that can potentially disrupt the financial system with 

adverse consequences for the economy. 

We selected the key threats to U.S. financial stability based on their potential impact, 

probability of occurring, probability of happening soon, and the preparedness of 

industry and government to manage them. The key threats are: 

The financial system is vulnerable to cybersecurity incidents because of its interconnectedness and heavy reliance on information technology. 

A large-scale cyberattack, accident, or other cybersecurity incident could disrupt 

the operations of one or more financial companies and markets and spread 

through financial networks and operational connections to the entire system, 

threatening financial stability and the broader economy. 

The financial system is an attractive target for cyber thieves and other hackers 

because financial companies manage the nation's wealth and handle trillions of 

dollars in transactions every day that underlie the U.S. economy. 

The hack of consumer information at the consumer credit reporting firm Equifax, 

disclosed in September 2017, highlighted the vulnerability of some financial 

companies and the absence of regulatory guidance on how consumer credit 

reporting companies should manage cybersecurity risks. The attackers reportedly accessed personal information for 145 million Americans, including Social 

Security numbers and driver's license information. 

A cybersecurity incident could pose a financial stability risk if it caused a loss of 

confidence in financial institutions, if it damaged the integrity of consumer financial data, or if the victimized company provided unique services that could not 

easily be replaced. 

In such a scenario, customers and other financial companies might sever their 

connections to a victimized company to avoid exposure and protect themselves 

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from losses. They might also sever ties to similar companies for fear they are also 

vulnerable. Finally, they might limit their risks by pulling back from certain types 

of financial activities. 

Three factors increase vulnerabilities to cybersecurity incidents for any type of 

company and industry: 

1. The open structure of the Internet allows malicious actors to target companies across the globe. 

Figure 1. Example of Financial System Network Mapping 

OFR analys1s 

Analysis of Threats to Financial Stability 
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Tabletop 

exercises 

are simulated 

cybersecurity 

incidents industry 

and regulators 

hold 

2. The availability of encrypted digital currencies or "cryptocurrencies" makes 

evading detection easier for criminals because they can move and hold 

funds under assumed names. 

3. Product liability laws do not generally apply to computer software, creating 

potential incentives to rush products to market and fix or "patch" problems 

later, including cybersecurity vulnerabilities. 

Financial companies can help protect themselves and the overall system by 

investing in strong defenses and increasing their ability to recover from cybersecurity incidents. Regulators must work with the industry to ensure the resilience of 

the financial system, even if individual companies do not recognize that the benefits of protecting the overall system are worth their cost of increased resilience. 

In the insurance industry, the National Association of Insurance Commissioners 

adopted a model law in October for protecting insurance data from hackers. But 

for the model law to take effect, U.S. states would need to adopt it. 

In October 2016, federal banking regulators proposed rules to enhance risk 

management standards to combat cybersecurity threats. 

As the OFR researches cybersecurity risks, we analyze past breaches, evaluate 

the effectiveness of regulations and policies, and draw lessons from "tabletop 

exercises" simulated cybersecurity incidents industry and regulators hold. 

We are also applying network analysis and using detailed datasets to develop 

maps to learn how cybersecurity incidents can spread through the financial 

system (see Network Analysis to Identify Cybersecurity Vulnerabilities and 

Operational Risk). For example, such network analysis could focus on interconnections within markets and how shocks are transmitted- analysis that can be 

applied to shocks from cybersecurity incidents (see Figure 1 for a representative multilayer view of work that could be done on three markets: credit default 

swaps, triparty repurchase agreements, and corporate bonds). 

Resolution is the process of restructuring or liquidating a failing financial company 

through bankruptcy or regulatory mechanism. The failure of a large, complex 

financial company could transmit distress to other firms and possibly trigger 

another financial crisis. 

After the financial crisis of 2007-09, regulators developed important tools for 

resolving failing U.S. bank holding companies that are systemically important, 

but orderly resolution still may be difficult in some scenarios. Tools to enable an 

orderly resolution process for non banks are still works in progress. 

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There are two paths for the resolution of a failing systemically important financial institution (SIFI) that is not an insured depository institution. The first path is 

bankruptcy. 

The second path, created by the Dodd-Frank Act, is the "orderly liquidation 

authority" when bankruptcy may not be the best alternative. On the recommendation of regulators and in consultation with the President, the Secretary of the 

Treasury could place the failing SIFI into receivership for the Federal Deposit 

Insurance Corporation (FDIC) to liquidate. The Act created this second path as 

a backstop to the bankruptcy process for the FDIC to address financial stability 

concerns and for better cross-border coordination among regulators. 

In some scenarios, the first and second paths have shortcomings for handling the 

failure of the largest and most complex bank holding companies, known as global 

systemically important banks (G-51Bs). For example, if more than one G-SIB was 

failing, the FDIC might not be able to use the orderly liquidation authority to 

restructure the banks and release them from oversight quickly enough to stabilize 

the U.S. financial system. 

Some proposals would strengthen bankruptcy provisions for financial companies but also would eliminate orderly liquidation authority. However, obstacles to 

handling a G-SIB failure through the bankruptcy process may remain. For example, the bankruptcy trustee might not have near-immediate access to short-term 

liquidity needed to stabilize the failing company or the cooperation of international regulators. 

Finally, tools for successfully resolving systemically important nonbank financial firms are still being developed, despite problems among such firms during 

the crisis, such as the collapse of Lehman Brothers and near-failure of insurer 

American International Group, and the increasing importance of nonbanks such 

as central counterparties (CCPs). 

Unlike G-SIBs, CCPs are not required to submit "living wills" to their primary 

federal regulators with plans for their rapid and orderly resolution in the event of 

their material financial distress or failure. CCPs are required to develop recovery 

and orderly wind-down plans for extreme events that could threaten their viability 

and financial strength before insolvency is reached. But CCPs are not subject to 

sanctions if regulators deem their plans unsatisfactory. 

In 2016, the Commodity Futures Trading Commission (CFTC) issued guidance 

requiring more detailed wind-down planning. The Securities and Exchange 

Commission (SEC) is requiring CCPs under its supervision to submit initial plans 

by the end of 2017. 

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Three aspects of market structure pose threats: (1) lack of substitutability, which is 

the ability to replace essential services if a provider fails or drops that line of business; (2) fragmentation of trading activities through multiple channels and products; and (3) the danger of a difficult transition to a new reference rate to replace 

the London Interbank Offered Rate (LIBOR). 

A lack of substitutability is an aspect of market structure that can pose a threat. 

Some markets depend on one or a few financial institutions whose services may 

be difficult to replace under stress. For example, the increasing reliance on a 

single institution for settlement of Treasury securities and related repurchase 

agreements (repos) is a key vulnerability. An interruption in Treasury settlement 

services would disrupt the Treasury market and potentially a range of other 

markets. 

Figure 2. Market Share by Exchanges 

and Their Affiliates, 1996 and 2016 

(percent) 

Fragmentation in markets can also pose threats. As electronic 

trading has escalated, the number of trading channels has 

grown (see Figure 2). This growth can increase flexibility for risk 

managers who want to hedge by diversifying their risks and 1996 

2016 

Source: Muzan Trade and Quote 

for corporate treasurers and portfolio managers to reallocate 

assets quickly under stress. But fragmentation also introduces 

risks by reducing liquidity because resources of market makers 

are stretched thinner across more exchanges and products. 

Some markets are also becoming more fragmented among 

products, raising concerns about the availability of liquidity 

also becoming more fragmented. 

Another potential threat comes from the transition from LIBOR 

to an alternative. The risks and costs of using LIBOR make the 

move essential, but failure to make a timely and smooth transition could impair the functioning of markets that now rely on 

LIBOR. LIBOR reflects transactions in a shrinking market. Most 

of the responses by traders to the LIBOR survey are based on 

judgment rather than actual trades. LIBOR tracks unsecured 

transactions, which represent a small share of banks' wholesale 

funding. 

The new U.S. benchmark rate, the Secured Overnight Financing 

Rate, will be produced by the Federal Reserve Bank of New 

York in cooperation with the OFR. It will be based on trading activity in repos backed by Treasury securities, not bank 

surveys (see LIBOR Alternative in next chapter). 

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A vulnerability is 

a factor that can 

originate, amplify, 

or transmit 

disruptions in the 

financial system 

The Alternative Reference Rates Committee, made up of banks active in the 

derivatives market, informed the process and selected the Secured Overnight 

Financing Rate as its preferred LIBOR alternative. The new rate promises to be 

more reliable. 

Despite these improvements, the transition from LIBOR carries additional risks. 

Obtaining widespread market acceptance and reliance could take years. Officials 

and market participants must develop active derivatives markets that use the 

new rate. 

Financial Stability Assessment 

We base our overall assessment of U.S. financial stability in part on an evaluation of 

the six categories of risk in our new Financial System Vulnerabilities Monitor and on 

our research, analysis, and surveillance of the financial system. 

This new monitor improves on and replaces the OFR's Financial Stability Monitor. 

When we introduced the prototype of the Financial Stability Monitor in 2013, we 

noted that we planned to update and fine tune it. We made improvements in 2014 

and 2015, then began a project in fiscal year (FY) 2017 to make fundamental changes. 

The previous version of the monitor combined signals of vulnerability and stress, 

which prevented an accurate assessment of risk. 

As its name indicates, the new Financial System Vulnerabilities Monitor gives early 

warning signals of potential vulnerabilities. A vulnerability is a factor that can originate, amplify, or transmit disruptions in the financial system. 

When the Financial System Vulnerabilities Monitor shows high or rising vulnerabilities, 

it indicates a high or rising risk of disruptions in the future. Vulnerabilities typically 

lead to additional stress when shocks hit, such as when widespread losses or loan 

defaults strike the financial system. The additional stress can feed a downward cycle. 

A second new tool, the OFR Financial Stress Index, is a daily snapshot of current 

stress in global financial markets. Stress can be minor; for example, it can surface in 

a brief period of uncertainty and price volatility in the equity market. Or it can be 

major, like the stress precipitated by the runs on Lehman Brothers and other brokerdealers in 2008. 

The distinction between stress and vulnerabilities means that the two should be 

measured separately. Both of these complementary tools factor into our overall 

assessment that risks to U.S. financial stability remain in the medium range. 

Analysis of Threats to Financial Stability 1 '] 
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The Financial System Vulnerabilities 

Monitor is a heat map of 58 indicators of 

potential vulnerabilities organized into 

six risk categories: (1) macroeconomic, 

(2) market, (3) credit, (4) solvency and 

leverage, (5) funding and liquidity, and (6) 

contagion. These categories reflect key 

types of risks that have contributed to 

financial instability in the past. 

The stress index and vulnerabilities monitor each have a category for credit, but 

the two tools are measuring different 

aspects of the financial system, so the 

same or similar categories or indicators 

are not contradictory. For example, high 

stock valuations generally indicate low 

stress now, but such high valuations can 

be a potential vulnerability for the future. 

The new monitor, which we will update 

quarterly, includes a category for 

solvency and leverage that was not in the 

earlier monitor. New underlying indicators provide additional information (see 

Figure 3). 

The colors of the heat map mark the 

position of each indicator in its long-term 

range. For example, red signals that a 

potential vulnerability is high relative to 

its past. Orange signals that it is elevated. 

Movement toward red indicates that a 

potential vulnerability is building. 

Figure 3. Financial System Vulnerabilities Annual Comparison, Second Quarters of 2016 and 2017 

Macroeconomic Risk 

Funding/Liquidity Risk 

Contagion Risk 

Potential Vulnerability 

Low 111111111111• 111111111111111111 High 

):;. Inflation risk 

Fiscal risk 

fl> External balance risk 

Valuationslrisk premiums 

Financial risk-taking/risk appetite 

Household credit risk 

Nonfinancial business credit risk 

Real economy borrowing levels and terms 

Financial institution solvency 

Financial institution leverage 

Funding risk 

~Trading liquidity risk 

~ Cross-institution risk 

Financial sector concentration risk 

Cross-border contagion risk 

here and in past editions are subject to change because of newly 

range due to new observations. 

Federal Financial institutions Examination Council call Federal Reserve Forrn 

FinanciallC, the Volatility laboratory of the NYU 

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Macroeconomic risk 

02 

1016 

Inflation risk 

U.S. consumer inflation expectations 

External balance risk 

U.S. current account balance/GOP 

U.S. cross-border financialliabilitiesfGDP 

Macroeconomic risks to U.S. financial 

stability are moderate. The U.S. economy 

continues to expand at a modest pace. 

The current U.S. economic expansion is 

the third longest since 1850. Inflation is 

low, and investors are not expecting 

major changes. 

U.S. government debt as a percent of 

gross domestic product (GDP) is at its 

highest level in decades. Very low interest rates are currently mitigating this 

vulnerability because they make debt 

more affordable. 

China's elevated level of debt hampers 

additional borrowing and is high by 

world standards, although credit growth 

has slowed over the past year. Direct 

U.S. financial claims on China are small 

relative to the size of the U.S. financial 

system, but the Chinese government is 

a major holder of U.S. government debt. 

Indirect exposures through other Asian 

markets and through the global economy 

are more significant. 

Potential negative spillovers still exist 

from Brexit, the United Kingdom's 

planned exit from the European Union. 

If the exit does not go smoothly, the 

disruptions would most affect U.S. financial institutions with large direct financial 

exposures to the United Kingdom and 

potentially spread to other U.S. financial 

firms and markets. 

Market risk 

• Q2 Q1 

2016 2017 

Valuations/risk premiums 

U.S. equity valuations 

U.S.Treasurytermpremium 

U.S. corporate bond spread 

U.S. mortgage-backed security spread 

U.S.houseprice/rentratio 

US house price/income ratio 

U.S.CREcapitalizationspread 

appetite 

U.S. bond investor duration 

U.S. equity market volatility 

Market risks from a sharp change in the 

prices of assets in financial markets are 

high and rising. 

Rising prices and falling risk premiums may leave some markets vulnerable to big changes. Risk premiums are 

returns in excess of returns on risk-free 

investments. 

Such market corrections can trigger 

financial instability when the assets are 

held by entities that have excessive 

leverage and rely on short-term debt and 

other liabilities. 

Each of our annual reports has highlighted the risk that low volatility in 

Analysis of Threats to Financial Stability 
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market prices and persistently low 

interest rates may promote excessive 

risk-taking by investors and create future 

vulnerabilities. In 2017, strong earnings 

growth, steady economic growth, and 

increased expectations for a U.S. fiscal 

policy that stimulates economic growth 

have fueled the rise in asset prices. 

Stock market valuations are at historic 

highs, according to several metrics. 

Prices are also elevated in bond markets, 

suppressing yields. Risk premiums for 

corporate bonds have nearly fallen to 

the lowest point since the financial crisis. 

At the same time, long-term interest 

rates in the United States remain low, 

despite a long span of steady economic 

growth, low unemployment, and gradual 

increases in benchmark interest rates by 

the Federal Reserve. 

The low rates have increased the risk of 

loss by bond investors if interest rates 

rise, but two factors mitigate the potential systemic risk from rising rates. First, 

investors such as pension funds and 

insurance companies have long-term 

liabilities, including pension obligations 

and life insurance coverage that allow 

them to tolerate any short-term market 

losses on bonds. Second, the Federal 

Reserve has clearly stated its intention to 

raise interest rates gradually. 

2017 I OFR Annual Report to Congress 

Credit risk 

02 Q2 

2016 2017 

Household credit risk 

U.S. consumer debt/income 

U.S. consumer debt/GOP growth 

US consumer debt service ratio 

US mortgage debt/income 

US mortgage debt/GOP growth 

U.S.mortgagedebtserviceratio 

Nonfinancial business credit risk 

US nonfinancial business debt/GOP 

U.S. nonfinancial business debt/GOP growth 

U.S. nonfinancial business debt/assets 

US nonfinancial business debt/earnings 

U.S. nonfinancial business earnings/interest 

Real economy borrowing levels and terms 

Lendingstandardsfornonfinancial business 

Lending standards for residential mortgages 

Some measures of credit risk have 

moderated since last year, reflecting 

crosscurrents of positive and negative 

developments. Credit risk from debt 

by nonfinancial corporations remains 

elevated. Nonfinancial corporate debt 

continues to grow, although at a slower 

pace than in 2016. Measures of firms' 

debt-to-assets and debt-to-earnings 

ratios are red on the monitor heat map. 

In addition, the quality of covenants 

may be weakening. Covenants are terms 

in financial contracts meant to protect 

investors. For example, covenants may 

limit a borrower's total debt or restrict 

business activities. Weaker covenants 

historically accompany buildups of debt 

and may signal lower credit quality. 

However, the growing economy and 

rising profits are reducing the risk of 
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defaults. Many companies have rolled 

over their existing debt at lower interest rates and with longer repayment 

timetables. 

Household credit risks are rising, but 

appear to be concentrated in the 

nonmortgage segment of the market. 

Total household debt, including mortgages, hit a record $12.8 trillion in the 

second quarter of 2017, surpassing 

its 2008 peak. Mortgage risks remain 

moderate after the drop in such debt 

after the financial crisis. 

Auto loans and student loans bear 

watching. They account for much of the 

recent growth in household debt (see 

Figure 4). Delinquencies of student loans 

have been high since 2012. Auto loan 

delinquencies have declined from their 

post-recession peak in 2011 but have 

been rising since 2015. 

Figure 4. U.S. Nonmortgage Household 

Debt ($trillions) 

1.6 

0.0•-----------

2008 2012 2016 

Note: Data as of June 30, 2017. "Other" includes 

consumer finance and retail loans 

Sources: Federal Reserve Bank of New York, OFR 

analysis 

Solvency and leverage risk 

• 02 02 

2016 2017 

Financial institution solvency 

U.S. BHC risk·based capital (median) 

U.S. BHC risk·based capital (aggregate) 

U.S. commercial bank risk·based capital (median) 

U.S. commercial bank risk-based capital {aggregate) 

U.S. commercial bank leverage (median} 

U.S. commercial bank leverage (aggregate} 

U.S.Iifeinsurerleverage{median) 

U.S. non-!ifeinsurerleverage(median) 

The failure or near-failure of large financial institutions has been a common 

source of stress during financial crises in 

the past, including the crisis of 2007-09. 

For this reason, the OFR's new monitor 

includes measures of solvency and 

leverage risk. These measures signa! !ow 

risk in banks. 

Large banks have more capital to serve 

as a cushion against losses than before 

the crisis. The eight U.S. G-S!Bs have 

significant buffers of capital and liquidity above the minimum required, which 

bolsters their solvency. Bank profits are 

gradually starting to improve as interest rates rise but remain relatively low. 

Return on equity for U.S. G-S!Bs has 

been stagnant at about 10 percent, 

compared with 12 percent to 17 percent 

before the crisis. 

Insurance company leverage is moderate. Since the crisis, insurers have used 

less leverage. Leverage is high when 

the company resources needed as a 

buffer against losses are low relative to 

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investment exposure. Some life insurers make substantial use of derivtives; 

this indicator captures only the current 

market value of these exposures and may 

understate future risks. 

Leverage among nonbank broker-dealers, which are not reflected in the 

monitor, deserves monitoring. Most of 

the largest U.S. broker-dealers are affiliated with banks. However, changes in 

bank regulation may fuel an increase in 

broker-dealers not affiliated with banks. 

The largest nonbank broker-dealers 

each with more than $10 billion in assets 

-have substantially more leverage than 

their bank-affiliated peers. 

Funding and liquidity risk 

Q2 Q2 

2016 2017 

TED spread 

US financial commercial paper spread 

Trading liquidity risk 

DealerpositionsinUSTreasuries 

Dealer positions in US agency· backed securities 

USTreasurybondturnover 

US equity turnover 

Financial institution liquidity risk 

US commercial bank loans/deposits(median) 

US commercial bank loans/deposits (aggregate) 

US BHC wholesale funding (median) 

U.S. BHC wholesale funding (aggregate) 

US BHC net stable funding (median) 

U.S. BHC net stable funding (aggregate) 

2017 I OFR Annual Report to Congress 

Market liquidity, the ability of a market 

participant to buy or sell an asset in a 

timely manner at relatively low cost, 

remains a concern. Market liquidity is 

vulnerable to the risk of asset fire salesthe risk that market participants will not 

be able to sell securities without creating 

a downward spiral in prices. 

Funding liquidity (the availability of credit 

to buy assets) is also subject to run risk 

-the risk that investors will lose confidence and pull their funding from a firm. 

In the past several years, U.S. G-SIBs 

have steadily increased their reliance on 

"runnable liabilities," liabilities that are 

vulnerable to runs. 

Indicators of market liquidity are mixed. 

Some indicators suggest that conditions 

are moderate, while others suggest lower 

risk. Two measures of market liquidity 

signaled extraordinary stress during the 

crisis but have since eased: 

1. Bid-ask spreads -the difference 

between the average price at which 

customers buy from dealers and the 

average price at which customers sell 

to dealers; and 

2. Price-impact measures- the 

price change after a large trade is 

completed. 
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Contagion risk 

02 

2017 

Cross-institution contagion risk 

Assetfire-salerisk 

U.S. systemic capital shortfall estimate SRISK/GDP 

sed:orcon centf·atic'n risk 

Contagion risk is the danger that stress 

at a financial institution or market spills 

over to others. OFR research suggests 

that the financial system remains highly 

interconnected. Of the many factors 

contributing to the financial crisis, 

contagion is one of the most difficult to 

measure (see The Contagion Index and 

Agent-based Models). 

U.S. banking industry concentration 

U S.life insurance industry concentration 

The monitor includes measures of 

concentration in the financial system. 

Concentration makes the financial industry more vulnerable to the spread of 

disruptions from distress at individual 

In the search for new ways to measure contagion risk, OFR researchers have developed a 

contagion index to assess the potential spillovers 

to the broader financial system when a bank 

defaults. The contagion index has been declining 

in recent years for most G-SIBs (see Figure 5). 

Figure 5. Percent Change in Contagion Scores 

for FY 2016 

State Street 

Wells Fargo 

JPMorgan Chase 

Citigroup 

Morgan Stanley 

Bank of New York 

Mellon 

Goldman Sachs 

Bank of America 

-40 .Jo -15 

Sources: Federal Reserve Form Y-15, OFR analysis 

15 30 

The contagion index is not included in the monitor because it can only be calculated since 2013. 

The index combines measures of a bank's leverage, size, and connectivity. 

Contagion Index ~ Financial Connectivity x Net 

Worth x (Outside Leverage- 1) 

Connectivity is measured as the portion of 

a bank's liabilities held by other financial 

institutions. 

OFR researchers also continue to use agentbased models to analyze how risks can spread 

among firms during a crisis. Agent-based 

models simulate behaviors of different types of 

financial firms and the complexity of behavior 

among firms as they react to the actions of other 

firms. These models help us understand the way 

risks propagate across the financial system and 

the impacts of shocks and changes in regulatory 

policies. The OFR cosponsored a conference on 

the topic with the Bank of England and Brandeis 

University in September 2017. 

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firms. The monitor shows that these 

signals are mixed. Concentration in 

the U.S. mutual fund industry is high. 

Concentration in the U.S. banking industry is moderately elevated; the heights 

reached after the crisis have subsided. 

Concentration in the life insurance industry is low. 

The monitor also includes the SRISK 

measure. SRISK short for systemic risk 

-reflects the capital a firm is expected 

to need to remain solvent during a 

crisis. SRISK and two other metrics offer 

insights on the contribution that individual firms make to systemic risk (see 

Figure 6). 

In addition, the monitor now contains an 

index of fire-sale risk, the chance that a 

self-reinforcing cycle will develop when 

liquidations of bank assets push down 

prices in a falling market. This risk has 

a I so been low in recent years. 

Figure 6. Systemic Risk Measures of Joint Distress for the Six 

Largest U.S. Bank Holding Companies (z-scores) 

2009 2011 2013 2015 2017 

2017 I OFR Annual Report to Congress 

The Financial Stress Index is a daily 

market-based snapshot of stress in 

global financial markets. It is constructed 

from 33 financial market indicators. The 

indicators are organized into five categories: (1) credit, (2) equity valuation, (3) 

funding, (4) safe assets, and (5) volatility. 

The index is positive when stress levels 

are above average and negative when 

stress levels are below average. 

The index shows that overall stress is 

near its lowest level since the financial 

crisis, primarily because of low volatility. 

However, this low volatility may be leading investors to take big risks, making the 

financial system more fragile and vulnerable to shocks. 

The OFR index can be broken down so 

users can view each of the five categories 

separately or in combination. It also can 

be broken down by the region generating the stress. 

Analysis of the categories can reveal 

the drivers of financial stress, guiding 

the interpretation of market events by 

cutting through the clutter of market 

chatter. For example, if we examine the 

index during the 2013 "Taper Tantrum" 

event, we find that the index shows 

increased levels of stress in the credit 

and volatility categories (see Figure 7). 

The methodology for the index uses a 

dynamic process to account for changing 

relationships among the variables in the 

index. No two stress events are exactly 

the same, and the relative importance of 

drivers of financial stress varies over time. 
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Figure 7. OFR Financial Stress Index· 2013 Taper Tantrum Period 

Financial stress 

refers to a 

breakdown 

in the normal 

functioning of 

financial markets 

15.Apr 

IIIIC~dit II Volatility - FSI 

3.Jun 17.Juo 

10 

0 

-5 

S.)U! n.Ju! 

Sources; Bloomberg Financial L.P., Haver Analytics, OFR analysis 

OFR Financial Stress Index can be found at 

www.financialresearch.gov/finandal-stress-index/ 

The OFR's innovative methodology 

is dynamic but remains accessible to 

policymakers. 

The daily frequency of the OFR's index 

improves upon the weekly or monthly 

frequency of other indexes. 

Financial stress refers to a breakdown 

in the normal functioning offinancial 

markets. High levels of financial stress 

can precede declines in economic activity. These episodes can be severe. For 

example, the OFR index shows stress 

peaking during the financial crisis. 

Policymakers need accurate, clear, and 

timely signals of market stress to effec· 

tively manage the effects. 

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RESEARCH 

e and 

The OFR has continued to work throughout the year on 

data and research projects to fulfill its mission. This chapter 

describes key findings from our research and analysis. The 

chapter focuses on cybersecurity and operational risk, reducing 

regulatory reporting burdens, an alternative reference rate, the 

Legal Entity Identifier (LEI) data standard, a multifactor approach 

to assessing the systemic importance of banks, and financial 

data services initiatives. The chapter also discusses selected 

findings in our research papers during the fiscal year. 

Network Analysis to Identify Cybersecurity 

and Operational Risk 

Cybersecurity incidents and other operational risks are growing threats to 

financial stability. Financial firms are connected through complex, interconnected networks. Disruptions to the operations of a key institution in the 

financial system could be transmitted through these networks and lead to a 

systemic crisis (see Financial Stability Threats). 

To understand this threat, officials can combine network analysis with 

maps of the financial system to identify cybersecurity vulnerabilities and 

other operational risks. Networks can be mapped out in a visualization of 

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financial entities such as firms, markets, 

trading desks, financial market utilities 

(nodes), and the connections between 

these entities (links). Network analysis of these connections increases the 

understanding of potential vulnerabilities to shocks and helps in evaluating 

and developing policies to enhance the 

stability and resilience of the financial 

system (see Figure 8). 

Figure 8. Interconnections in the Credit Default Swaps Market Illustrate How Shocks Can Spread 

8 Initial infection 

• Note: Arrows signify direction of payment and the thickness of the line indicates the size of payment disruption. CCP stands for 

central counterparty. 

Source; OFR analysis 

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The OFR's broad financial stability 

mandate gives us a unique perspective for studying threats to the financial system from cybersecurity risks 

and other operational risks. The OFR 

has the authority to collect data from 

federal financial regulators and market 

participants. This authority allows the 

OFR to analyze a wide range of detailed 

transaction-level datasets. Using these 

data, researchers can develop detailed 

maps that show the financial transactions among market participants and 

identify the participants most important 

to a particular part of the U.S. financial 

system. 

The OFR's current research on cybersecurity and other operational risks is in 

two main areas. The first analyzes past 

operational and cybersecurity incidents 

involving financial entities. We review 

event studies, recent experiences, and 

other information to understand events 

and how they might threaten the financial system. Researchers evaluate the 

efficacy and scope of regulations and 

gaps in policy that could affect the financial system's resilience. We draw lessons 

from tabletop exercises, which bring 

together industry participants and regulators to examine potential scenarios. 

The second major area of OFR research 

focuses on applying network analysis to 

potential cybersecurity risks and other 

operational risks. The OFR is developing maps that highlight connections 

throughout the financial sector. We use 

these maps to identify key vulnerabilities 

and critical institutions across different 

markets. 

Network analysis of these maps identifies 

the most centrally connected companies in a financial market. This analysis 

offers several key lessons for improving 

defenses. One lesson is that a network's 

resilience can vary greatly against different types of threats. Targeted attacks 

by sophisticated adversaries can cause 

much more damage than random failures, and these attacks necessitate 

a much higher level of network resilience. Another lesson is that coordinating defense strategies among network 

participants is vital in preventing weaknesses in defense systems. A lack of 

coordination between market participants and regulators can compromise 

network stability and leave key institutions under-defended. 

As real-world data is added to these 

maps, network analysis yields more 

valuable insights. The maps hold the 

potential to allow policymakers, market 

participants, and the public to see 

specific ways cybersecurity and operational risks could threaten the stability of 

the financial system. Those insights help 

bolster network defenses. 

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Reducing Regulatory 

Reporting Burdens 

Regulation and oversight of financial institutions and markets is divided 

among federal and state agencies. 

Banks, brokers, and other U.S. financial 

institutions and markets are governed 

Figure 9. Current Oversight by Federal Financial Regulators 

FSOC MEMBER AGENCIES 

(.Regufato1y oversight) 

Safety and Soundness 

Consumer Finoncial Protection 

Supervision and Systerr;ic Risk 

Safety and Soundness 

Consumer Financial Protection 

Supervision and Systemic Risk 

Securities and Markets 

Consumer Financial Protection 

Housing Finance 

Financial Protection 

on the federal level by nine independent regulators and three self-regulatory 

organizations. (Insurance companies and 

some banks are also regulated at the 

state level). Firms engaged in multiple 

financial activities are governed by more 

than one regulator. Sometimes a single 

activity is governed by multiple regulators (see Figure 9). 

REGULATED FINANCIAL 

ENTITIES 

Depository 

Institutions 

Insurance 

Companies 

Nondepository 

Financial Entities 

Broker-Dealers and 

Other Market Intermediaries 

Investment Companies 

or Advisors 

Fannie Mae, Freddie Mac, 

and Federal Home Loan Banks 

Financial Market Utilities 

and Other Infrastructures 

Sources: Government Accountability Off1ce (GAO), Financial Regulation, GA0-16-175, February 2016, Figure 2, OFR analysis 

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This fragmented approach enables 

tailored regulation and enforcement, but 

can also result in inefficient oversight 

and reporting. The current regulatory 

structure has led to inconsistencies in 

agencies' data collection activities. U.S. 

financial institutions report that they are 

often required to submit the same data 

to more than one U.S. regulator using 

different calculations, classifications, and 

formats. 

Duplicative, conflicting, or inconsistent reporting requirements have the 

potential to increase costs, undermine 

the efficiency and quality of data collections, and impede data comparison and 

integration. Duplicative, conflicting, or 

inconsistent reporting requirements can 

also misalign regulatory reports from the 

data that firms use for their risk management. Likewise, these requirements 

could impair the ability of government 

officials to assess and monitor threats 

to financial stability and assure the 

functionality and integrity of financial 

markets. Finally, duplicative and inconsistent requirements can erode public 

confidence in government. 

To better understand this issue, we asked 

a handful of financial institutions and 

industry groups for examples. During 

these initial discussions, firms focused 

on reports to member agencies of the 

Financial Stability Oversight Council. 

Information came from asset managers, banks, and financial services trade 

associations. 

We analyzed a selection of these examples identified by industry to determine 

the general validity of industry concerns 

about regulatory burden and identify 

ways the OFR might help address these 

issues. For each example, we compared 

multiple data fields to identify duplicative, conflicting, or inconsistent data 

requirements and found that the industry's concerns warrant further analysis, as 

discussed in the next section. 

Preliminary OFR analysis found validity 

in the assertions from industry about 

duplicative, conflicting, or inconsistent 

reporting requirements. Discrepancies 

generally fell into three categories: 

1. identical information sought 

in different data formats or 

classifications, 

2. similar information sought using 

different methodologies or metrics, 

and 

3. different information sought for similarly situated filers or scenarios. 

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For example, the reporting requirements 

of Forms PF and CPO-PQR demonstrate 

at least some of these characteristics. 

The Dodd-Frank Act directed the SEC 

to establish reporting requirements for 

investment advisers to private funds. The 

law requires that the reports include data 

such as counterparty credit risk exposure, trading and investment exposures, 

and types of assets held. 

To collect the data, the SEC and the 

CFTC jointly implemented a rule requiring certain private fund advisors and 

commodity pool operators (CPOs) to 

submit information through Form PF. 

Separately, the CFTC implemented Form 

CPO-POR. Large CPOs, as members of 

the National Futures Association, must 

also submit the association's Form POR, 

an abbreviated version of the CFTC 

form. These forms require CPOs to file 

confidential reports on holdings, transactions, and certain trading strategies and 

characteristics. Based on size, certain 

pools file more frequently and file more 

information than others. 

2017 I OFR Annual Report to Congress 

These reporting forms contain examples 

of identical information being sought. By 

filing Form PF or CPO-PQR, a respondent might not be required to file all 

or part of the other forms or schedules 

of forms. CPOs whose pools qualify as 

hedge funds might report quarterly on 

Form PF, exempting themselves from 

filing all but one year-end CPOPOR schedule. However, large CPOs 

are still required to report quarterly on 

Schedule A of the association's Form 

POR. The association's Form POR 

contains a subset of the information in 

the CFTC's Form CPO-PQR. As a result, 

the large CPOs might be required to file 

Form PF, an abbreviated but duplicative 

Form CPO-POR, and a duplicative association Form POR at the end of the year. 

Although the agencies and association 

attempt to limit reporting duplication, 

the attempts fall short of preventing all 

overlap. 

In another example, both forms request 

information on assets under management but have different definitions. Form 

CPO-PQR defines assets under management as the amount of all assets under 

the control of the CPO. The SEC defines 

regulatory assets under management to 

include securities portfolios that receive 

supervisory or management services 

from the report filer. The difference in 

the definitions could require CPOs to 

calculate separate types of assets under 

management for reporting on each of 

the forms. 
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The OFR's initial analysis found that 

concerns raised by the industry may be 

justified. Further analysis is necessary to 

better understand the reasons for the 

discrepancies. Future analysis should 

consider whether individual discrepancies cause burden, or burden exists only 

in the aggregate. 

If further analysis confirms that these 

concerns are justified, we will work to 

ease these burdens through the FSOC 

and its member agencies and by pursuing our data-related mandates. 

!II helping agencies agree on 

common standards for definitions, identifiers, and formats; 

!II using statutory authority 

to impose common standards by brokering agreements between industry and 

regulators on essential data 

elements; 

1!1 promoting and adhering to 

best practices in data collection;and 

LIBOR Alternative 

For years, the LIBOR interest rate benchmark has played a central role in global 

financial markets and the economy. U.S. 

dollar LIBOR has been used to set interest rates on trillions of dollars of retail 

mortgages, private student loans, corporate loans, derivatives, and other financial 

products. LIBOR, formerly the London 

Interbank Offered Rate, is now known 

as ICE LIBOR (Intercontinental Exchange 

LIBOR). 

The LIBOR benchmark's past reliance on 

survey submissions rather than transactions led to widespread manipulation. Traders submitted responses to 

the LIBOR survey intending to increase 

returns on derivatives positions, and 

during the 2007-09 financial crisis, 

intending to minimize appearances of 

riskiness of their banks. 

Although reforms to LIBOR have made 

manipulation less likely, a shift in sentiment among banks about the advantages of LIBOR and increasing reluctance 

by banks to participate in LIBOR surveys, 

along with the longer-term trend from 

unsecured to secured funding markets, 

have raised serious questions about the 

viability of LIBOR as a benchmark. 

Doubts about LIBOR's future prompted 

the Federal Reserve to begin an effort 

to identify an alternative benchmark for 

funding costs in U.S. financial markets. 

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General Collateral Rate 

This rate would be calculated based on overnight repurchase agreement (repo) transactions against Treasury 

securities in the triparty repo market. The market is 

called triparty because each transaction between a security seller and buyer also involves a clearing bank. The 

Federal Reserve Bank of New York collects data about 

repo transactions from the two clearing banks in this 

market. 

Broad General Collateral Rate 

This rate would be a broader benchmark based on 

trades in triparty repo and the general collateral financing (GCF) overnight repo market. Trades in the GCF repo 

market are made against a pool of general collateral 

rather than a specific security. The market is run by the 

Fixed Income Clearing Corporation (FICC), which acts as 

a central counterparty. To calculate daily rates, data will 

be obtained about interest rates and the value of funds 

borrowed in GCF repo. 

Secured Overnight Financing Rate 

This rate would be the broadest measure of the repobased rates. It covers the two markets included in the 

broad general collateral rate, plus centrally cleared bilateral repo transactions. Bilateral transactions are arranged 

and settled between borrower and lender. Bilateral repo 

transactions generally fall into two categories: (1) trades 

cleared through FICC's service, and (2) uncleared trades 

completed without a third party. Because not much 

data about uncleared bilateral trades is available, this 

benchmark would be calculated with data about interest 

rates and the value of funds borrowed in trades cleared 

2017 I OFR Annual Report to Congress 

The OFR joined the effort, and we have 

worked closely with the Federal Reserve 

to create a set of benchmarks based on 

data on overnight repurchase agreements, or repos. 

The Federal Reserve Board and the 

Federal Reserve Bank of New York 

convened the Alternative Reference 

Rates Committee, made up of banks 

active in the derivatives market, to inform 

the process. 

The repo market is a key source of 

secured short-term funding for the financial system. In a repo transaction, a security owner sells a security to raise cash. 

The agreement requires the seller of the 

security to repurchase it on a specific 

date for a prearranged price. If the seller 

is unable to repurchase the security, the 

cash provider is entitled to liquidate the 

security for repayment. 

In late August 2017, the Federal Reserve 

sought public comment on three daily 

rates based on repo transactions with 

U.S. Treasury securities that would 

be published by the Federal Reserve 

Bank of New York in cooperation with 

the OFR (see Key Benchmarks for 

Alternative Rates). 

The Alternative Reference Rates 

Committee selected the Secured 

Overnight Financing Rate in June 2017 

as its preferred alternative to U.S. dollar 

LIBOR. 

The new benchmarks would be more 

reliable and viable than LIBOR because 

they are based on actual secured transactions, rather than quotes, and would 

bring necessary transparency to the 

repo market. 
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The OFR plans to establish an ongoing data collection covering some repo 

transactions. Some of these data might 

be useful in calculating these rates. This 

work builds on the OFR's 2015 pilot project conducted with the Federal Reserve 

and the SEC to collect data on bilateral 

repo transactions. 

We expect to begin with cleared trades 

so the data can support calculation of 

the Secured Overnight Financing Rate. 

Currently, data to support that rate are 

provided on a voluntary basis not 

suitable for establishing a rate on which 

potentially trillions of dollars in contracts 

are based. 

Selection ofthe preferred LIBOR alternative is only a first step. The transition 

period brings risks. New benchmarks will 

require broad market acceptance. For 

example, to achieve a smooth transition, 

officials and market participants must 

help develop active derivatives markets 

that use the new rate. Market participants say substantial time might pass 

before all types of financial contracts 

now using LIBOR make the transition to 

a new benchmark rate. Even then, some 

existing contracts do not specifically 

allow an alternative reference rate to be 

selected, so amending their terms could 

be difficult. In some cases, amending a 

financial contract may require the agreement of all bondholders. 

Legal Entity Identifier 

The global LEI system is a cornerstone 

for financial data standards that benefits industry and government. Like a bar 

code for precisely identifying parties to 

financial transactions, the LEI helps make 

the vast amounts of data in the financial 

system more comparable. The LEI can 

generate efficiencies for financial companies in internal reporting and in collecting, cleaning, and aggregating data. 

The LEI can ease companies' regulatory 

reporting burdens by reducing overlap 

and duplication. Many financial firms 

report data to more than one government regulator, and different regulators 

have different reporting requirements 

and data identifiers. This lack of uniformity can lead to inefficient, costly, and 

overlapping requirements for reporting 

and data management that create costs 

for industry. Estimated costs for industry 

of managing data without common standards run into the billions of dollars. 

The OFR's goal is adoption 

of the LEI broad enough to 

serve the needs of the OFR, 

the FSOC, and FS.OC member 

agencies to conduct financial 

stability monitoring and 

analysis. To achieve such a 

network effect, private firms 

must voluntarily adopt the LEI. 

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Because of these problems, industry 

groups have called on regulators to 

broadly adopt the LEI. The same case 

can be made for adopting other uniform 

standards for regulatory reporting, especially about common metrics for instruments and accounting. 

Organizations reap substantial direct 

benefits from adopting the LEI, including reductions in manual processes to 

check identifiers, efficiency gains when 

integrating data sources, and improvements in data quality. These benefits can 

save man-hours and reduce costs. Broad 

adoption of LEis for client on boarding 

and client documentation could produce 

operational efficiencies for individual banks and clients as well as entire 

markets. 

The LEI can also help industry, regulators, and policymakers trace exposures 

and connections across the financial 

system. If the LEI system had been in 

place during the financial crisis, the 

breadth and depth of exposures to the 

failing Lehman Brothers would have been 

easier to assess and potentially manage. 

The OFR led the design and deployment 

of the global LEI system. The system is 

now complete, with a three-tier governance structure, more than 700,000 

LEis assigned, and reliance on the LEI in 

scores of regulations in the United States 

and abroad. 

2017 I OFR Annual Report to Congress 

But full adoption of the LEI -necessary 

for the LEI to produce the most efficiencies for government and the private 

sector and to keep the system selfsustaining -has not yet happened. The 

OFR's goal is adoption of the LEI broad 

enough to serve the needs of the OFR, 

the FSOC, and FSOC member agencies 

to conduct financial stability monitoring 

and analysis. 

To achieve such a network effect, private 

firms must voluntarily adopt the LEI. 

Recent discussions and surveys show that 

mandating the LEI in appropriate cases 

also remains necessary. 

At its February 2017 meeting, the OFR's 

Financial Research Advisory Committee 

recommended that the OFR hold discussions with industry executives and 

government officials about the current 

and future benefits of the LEI, associated 

costs, and barriers to broader adoption. The committee also recommended 

that the OFR share the results of its 

inquiry with selected industry executives 

who could help identify practical ways 

to overcome the barriers. Finally, the 

committee suggested meetings between 

regulators, industry, and the OFR to 

further explore potential solutions. 

The OFR has determined that regulations 

requiring use of the LEI (as opposed 

to making LEI use optional) are effective and necessary to drive adoption. 

For example, the Markets in Financial 
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The OFR has determined that 

reglllations that require use 

of the LEI are effective and 

necessary to drive adoption. 

Instruments Regulation in Europe, set 

to take effect in January 2018, requires 

LEis for all counterparties to all trades 

under a rule known as "no LEI, no trade." 

This rule helped drive LEI adoption in 

Europe, and notable increases in LEI issuance have occurred in the run-up to the 

compliance deadline. 

In Europe, regulators concluded that the 

benefits justified requiring the LEI in this 

way. In the United States, many market 

participants will not obtain an LEI unless 

it is mandated. 

Our fact-gathering found that regulators are reluctant to mandate use of the 

LEI if they already have an identifier that 

serves the needs of their own reporting, 

even if they would benefit from increased 

interoperability of their data with data 

from other regulators. 

Regulators also view the $75 cost of 

obtaining an LEI as a burden on smaller 

businesses without more compelling and 

direct benefits. Smaller organizations are 

often reluctant to obtain LEis, claiming 

that LEI acquisition would be an additive 

regulatory burden without a clear, direct 

benefit. These organizations may not 

have data operations, do not appreciate 

the potential for productivity gains, do 

not appreciate the indirect benefits, or 

do not believe their organizations affect 

financial stability. 

Although the cost of obtaining an LEI 

is low, the administrative costs of maintaining LEis in internal systems can be 

a factor, especially systems with more 

complex data. 

Larger firms have more hurdles to clear 

in changing their processes to obtain, 

maintain, and renew their LEis. Firms with 

internal databases that rely on proprietary identifiers also incur costs to map 

their databases to the LEI. However, 

some firms have already made infrastructure investments and implemented database improvements to use LEis. 

The next step in the evolution of the LEI 

standard, the introduction of corporate 

hierarchy data (also known as level 2 

data), can create challenges because of 

the complexity of many organizational 

structures. These data answer the question of "who owns whom" in the financial 

system and offer insights about the full 

risk exposures of large, complex financial 

entities. 

Consistent with statements several years 

ago by the FSOC and G-20 (the Group 

of 20, a forum of finance ministers and 

heads of central banks from 19 countries 

and the European Union), the OFR has 

found that the LEI offers indirect benefits relating to market stability. Repeated 

confirmation of these benefits by government regulators remains critical to reach 

the number of adopters needed to make 

the system self-sustaining and achieve 

the network effects necessary to conduct 

dynamic and effective financial stability 

monitoring and analysis. So does the 

identification of quantifiable cost savings 

and efficiency gains, as cited by recent 

industry reports. 

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Substitutability 

means providing 

important 

services that 

Assessing Systemic 

Importance of Banks 

What is the best way to determine the 

systemic importance of a U.S. bank? 

Many U.S. regulations categorize banks 

based on asset size. However, size alone 

does not fully capture the risks a bank 

may pose to financial stability. 

OFR research supports an alternative 

approach that relies on multiple factors, 

not just asset size. 

The Dodd-Frank Act created an assetsize threshold of $50 billion to identify 

banks to be subject to enhanced regulation. That threshold could subject some 

large U.S. banks with traditional business models to enhanced regulation that 

creates compliance costs unaligned with 

their risks. It could also exclude some 

U.S. operations of foreign banks. 

As of the end of 2015, a total of 34 U.S. 

banks each had more than $50 billion in 

assets. Eight of those are banks identified as global systemically important 

banks (G-SIBs), banks whose distress or 

disorderly failure would cause significant 

disruption to the global financial system 

(see Figure 1 0). 

A multifactor approach could replace the 

$50 billion asset-size threshold used in 

some U.S. bank regulations. A multifactor 

2017 I OFR Annual Report to Congress 

approach would be similar to the approach 

used internationally to identify G-SIBs. 

G-SIB identification is currently based 

on an evaluation of five factors: (1) size, 

(2) complexity, (3) interconnectedness 

to other financial companies, (4) foreign 

activities, and (5) lack of substitutability (providing important services that 

customers would have difficulty replacing if the bank failed). 

For identifying systemically important 

U.S. banks, the G-SIB methodology 

could be extended and applied to identify large U.S. banks that are not G-SIBs, 

but merit extra regulatory scrutiny. 

The first improvement would be to better 

incorporate risks arising from a lack of 

substitutes, particularly for banks that 

provide payments, settlement, custody, 

and other unique services central to the 

functioning of financial markets. 

The second improvement would better 

account for the complexity of some 

foreign banking organizations operating 

in the United States. The U.S. operations 

of foreign banks tend to be more active 

in U.S. capital markets and rely more on 

wholesale funding than comparably sized 

domestic banks. 
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Figure 10. Systemic Importance Scores Under the Basel Methodology (basis points) 

336 1107 831 536 

359 444 8 730 

'249 50 74 498 

419 143 147 669 

172 47 106 

57 50 65 46 11 84 110 25 62 20 

65 17 14 105 33 86 36 36 58 2 19 

53 24 14 58 11 27 60 140 34 

24 18 35 178 68 25 

13 38 0 268 

47 25 83 4 24 15 

37 16 82 19 15 

24 97 13 

30 50 17 15 28 14 

29 31 25 35 

18 28 16 18 22 10 13 18 

20 11 83 0 23 

17 15 10 15 22 29 

21 28 17 11 19 J1 

18 25 19 19 29 !o 

17 29 

16 20 13 

13 11 54 '7 

10 14 11 35 

18 18 13 

20 14 

13 12 

11 10 

13 

Note: Data as of December 31, 2015. Entries are sorted from highest to lowest systemic importance score. 

Basel Committee on Banking Supervrsion, Feder·al Reserve i=orm Y-15, OFR analysis 

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During the financial crisis in 2007-09, analytic tools and related code, while 

stress on foreign banks spilled into the protecting data security. 

U.S. financial system and the U.S. operations of some of these banks were large 

beneficiaries of Federal Reserve credit 

programs. 

Financial Data Services 

Initiatives 

The OFR has a statutory mandate to 

standardize the types and formats of 

financial data, expand the scope of data 

suitable for financial stability analysis, 

foster appropriate data sharing, and 

make data accessible while protecting 

data security. 

One of the OFR's challenges is to achieve 

this mandate while serving the needs of 

the FSOC, FSOC members, and other 

stakeholders. To meet this challenge, 

the OFR is considering financial data 

services initiatives the FSOC could adopt 

to streamline financial data purchasing, 

collection, integration, and access. 

One potential financial data services 

initiative could offer one-stop shopping 

for detailed information- like an index 

or card catalog- about the data held 

by FSOC member agencies. 

Another initiative would foster data 

sharing among FSOC member agencies 

by helping stakeholders apply standard 

formats to financial data and access 

2017 I OFR Annual Report to Congress 

A repository of meta data, the detailed 

descriptions of the data regulators 

collect, will enable linking offinancial 

datasets. In collaboration with FSOC 

member agencies, the OFR maintains a 

limited version of this repository today, 

the Interagency Data Inventory. 

A third financial data services initiative 

would expand on the current inventory 

by including richer detail on the descriptions of regulatory data collections, 

down to the granular data-element level. 

This detail is analogous to the column 

headings and formats in a spreadsheet. 

The heading displays the column name 

and each cell in the column is in a certain 

format, such as text, number, currency, or 

percentage. 

A metadata repository captures these 

types of descriptive details. By comparing the details in a catalog of metadata, 

we can address questions of duplication, overlap, and inconsistencies among 

FSOC members' datasets- an essential 

step toward reducing regulatory reporting burdens. 
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Key Findings from 2017 Research Papers 

The OFR's published research focuses on financial stability issues central to our 

mission. Here are key findings from selected OFR briefs and working papers during 

fiscal year (FY) 2017. 

Ill Expanding central clearing in the repurchase agreement (repo) 

market could reduce risk exposures for dealers by 81 percent. The 

repo market provides short-term financing for financial companies. 

After the financial crisis, rules made banks more resilient to stress, 

u.s. 

but also increased the cost of repo trading for bank-owned dealers. 

These costs are mostly related to the 2012 introduction of the supplementary leverage ratio, which the OFR has explored in other papers. 

Today, dealer-to-dealer bilateral repo transactions backed by government securities can be centrally cleared, but transactions between 

dealers and clients are not centrally cleared. Expanding repo central 

clearing to transactions between dealers and clients could reduce 

costs related to the supplementary leverage ratio, improve market 

access, and support financial stability. ("Benefits and Risks of Central 

Clearing in the Repo Market," by Viktoria Baklanova, Ocean Dalton, 

and Stathis Tompaidis) 

Reverse repo (assets) 

Treasuries 

TIPS 

STRIPS II m CCP exposure 

Bilateral exposure 

New leverage rules have affected the repo market. Bank-owned 

dealers subject to the rules now borrow less through repo but 

use lower-quality collateral. Higher bank capital requirements help 

protect banks against losses, but may have unintended consequences. 

Regulators use leverage ratios such as the supplementary leverage 

Key Findings from Research and Analysis 
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25% 

20% 

15% 

10% 

5% 

0% 

ratio to backstop risk-based capital standards. Risk-based 

standards require banks to hold more capital against 

more risky assets. Leverage ratios do not draw distinctions 

based on risk. After the supplementary leverage ratio was 

introduced in the United States in 2012, dealers owned 

by U.S. bank holding companies and covered by the new 

regulation borrowed less in the repo market, but used 

riskier collateral. Dealers not owned by banks increased 

their repo borrowing as bank-affiliated dealers pulled 

back. This change suggests risks may be shifting outside 

the banking sector. ("Do Higher Capital Standards Always 

Reduce Bank Risk? The Impact of the Basel Leverage 

Ratio on the U.S. Triparty Repo Market," by Meraj 

Allahrakha, Jill Cetina, and Benjamin Munyan) 

Firms peripheral to a central counterparty (CCP) 

network that are net sellers of credit protection contribute more to systemic risk in the credit derivatives 

market than do central counterparties at the core of 

the market. A severe credit shock can trigger demands 

for large payments between counterparties in the U.S. 

credit default swaps (CDS) market. Researchers used 

anonymized market data to build a model of the CDS 

payment network. Under stress, the central counterparty 

contributes less to contagion than peripheral firms that 

are large net sellers of CDS protection. During a credit 

shock, these firms can suffer large shortfalls that create 

shortfalls for their counterparties, amplifying the initial 

shock. ("Contagion in the CDS Market," by Mark Paddrik, 

Sriram Rajan, and H. Peyton Young) 

Ill If the Federal Reserve requires banks to leave their capi12 16 20 tal buffers untouched during stress tests, banks would 

Regulatory capital minimum 

I Actual capital ratio 2015 04 

G-518 add-on 

Fal! in CCAR (Figure 4) 

OFR 2017 Annual Report to Congress 

be more resilient during a financial crisis but would 

be required to hold more capital during less-stressed 

times. U.S. bank regulators are phasing in new capital buffers, which are cushions of capital banks hold to 

absorb losses under stress. The Federal Reserve has not 

announced how stress tests will treat these new capital 

buffers. Should the tests require banks to leave buffers 

untouched? Or should banks be allowed to draw down 

buffers to pass stress tests? If a bank can't draw down its 
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buffer, the U.S. G-SIBs would have to hold more capital. 

Without the change, however, stress tests could affect 

less-systemic banks more than G-SIBs. ("Capital Buffers 

and the Future of Bank Stress Tests," by Jill Cetina, Bert 

Loudis, and Charles Taylor) 

Ill Regulators could create systemwide stress tests of CCPs 

at minimal cost to companies by building on existing stress test results at individual CCPs. A better U.S. 

systemwide stress test could be built to measure the 

strength of all CCPs based on existing stress tests by U.S. 

and European regulators. Models that combine existing 

data with statistical techniques and computer modeling would broaden and deepen the tests. Regulators 

would get a clearer view of systemwide risks from banks 

that work through multiple CCPs. This approach would 

require regulators to collaborate in sharing and analyzing data. ("Measuring Systemwide Resilience of Central 

Counterparties," by Stathis Tompaidis) 

A new way of measuring complexity can support the 

resolution process after a bank holding company fails. 

An approach for measuring the complexity of bank holding companies is based on the number, diversity, and 

geographic distribution of bank holding company subsidiaries. The approach combines network analysis and 

graph theory to measure complexity by identifying bank 

holding company subsidiaries that share a common property, such as business activity or geographical location, 

and then calculating how many ownership and control 

links must be disentangled to unwind the company if it 

fails. ("The Complexity of Bank Holding Companies: A 

New Measurement Approach" by Mark D. Flood, Dror 

Y. Kenett, Robin L. Lumsdaine, and Jonathan K. Simon, 

Sept. 29, 2017) 

Key Findings from Research and Analysis 
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MISSION 

e e FRin eeting . . 

ISS I On 

.·.·•T··. ?is chapter discusses OFR support for our key stakeholders, 

.•· o.or national and international collaborations over the 

past current staffing levels, our budget, and information 

technology projects. 

The OFR was created when the financial system and the economy were 

beginning to recover from the financial crisis, and regulators were beginning 

to implement regulations and policies to make the financial system more 

resilient 

The environment and stakeholders' needs have evolved since then. In the 

future, we plan to continue adjusting our focus on meeting the needs of our 

key stakeholders the FSOC, FSOC members, the Treasury Department, 

Congress, the financial services industry, and the public- as their priorities 

evolve. 

As a service organization, the OFR stands ready to respond quickly to stakeholders' needs and collaborate with stakeholders to achieve them. 

Meeting Our Mission 39 
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The OFR will be a: 

Trusted resource for meeting stakeholder needs. 

We aim to fill gaps in stakeholder capabilities, give 

objective advice, and act as a sounding board for 

making difficult decisions. 

Key source for financial data. High-quality financial data that are secure, fit for their intended 

purpose, easy to access and compare, and inexpensive are essential for making good policy 

decisions. 

Ill! Key source for research and analysis on financial stability. On behalf of the FSOC, we conduct 

applied and essential long-term research on the 

causes of financial crises, develop tools for measuring and monitoring financial stability risks, and 

analyze the impact of policies related to financial 

stability. 

Source for supplemental expertise. The DoddFrank Act requires the OFR to maintain expertise 

to support the FSOC and its members. The OFR 

has this expertise in the fields of finance, regulation, economics, law, policy, data, and technology. 

40 2017 I OFR Annual Report to Congress 

Support of Key 

Stakeholders 

The OFR meets the Dodd-Frank Act 

mandate of supporting the FSOC and 

FSOC members in a number of ways. The 

Office provides data, research, and analysis to the FSOC, its members, Congress, 

and the public. We are also charged with 

looking throughout the financial system 

to collect and standardize financial data, 

monitor and analyze risks, and perform 

policy research and analysis. 

The FSOC obtains data from nonbank 

financial companies through the OFR. 

Our Director is a nonvoting member of 

the FSOC, and members of the OFR staff 

work on a wide variety of FSOC activities 

and initiatives. 

The OFR supports the FSOC and its 

members by: 

supplying monthly data and analysis 

on market trends; 

presenting updates of our monitors and delivering ongoing threat 

assessments to the FSOC Systemic 

Risk Committee; 

presenting to FSOC principals and 

deputies to inform their discussions 

of market events and potential 

policy steps; 

making presentations and participating in discussions for other FSOC 

working committees and groups, 

including the Regulation and 
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Resolution Committee and Financial 

Market Utilities Committee; 

assisting the FSOC in developing its 

annual report through analysis and 

writing support; 

Ill leading the FSOC Data Committee 

and co-leading the committee's 

working group that updates the 

Interagency Data Inventory; and 

Ill providing data and analysis to 

support the FSOC's nonbank designation process as the FSOC identifies nonbank financial companies 

that meet thresholds in the FSOC's 

initial quantitative metrics. 

The FSOC Data Committee is a forum 

for sharing information and coordinating action on data-related topics that 

affect member agencies. The OFR leads 

the committee, which has overseen the 

development of the FSOC Interagency 

Data Inventory, designed as an initial 

step toward avoiding duplication and 

burden in regulatory reporting. The 

inventory, the catalog of data being 

collected by the FSOC member agencies, helps identify data that can be 

shared by serving as a common reference of regulatory datasets. It can also 

serve as a best-practices framework for 

categorizing information security levels, 

sharing data, and improving reporting 

efficiency. 

We also co-chair the working group of 

the Data Committee that updates the 

inventory. Maintenance of the inventory 

is increasingly important as we strive to 

identify financial regulatory burdens on 

industry that can be reduced. 

In addition, we serve the FSOC and its 

staff by collecting, maintaining, and 

appropriately sharing supervisory and 

commercial datasets. The OFR has 

purchased and maintains more than 65 

datasets used by the FSOC staff. The OFR 

develops procedures and protocols for 

securely sharing data among the FSOC, 

its member agencies, and the OFR. 

We regularly respond to requests by the 

FSOC and its staff for objective research 

and analysis. In addition, we have worked 

to determine the best methods for identifying systemically important banks. 

In this effort, we built on our earlier 

research to show how a multifactor 

approach for assessing systemic importance is superior to making determinations based solely on bank size. 

Our research also helps the FSOC identify and prioritize threats to financial 

stability. 

The OFR offers objective evaluation of 

financial stability risks and the effectiveness of regulatory policies to FSOC 

members. The OFR has partnered with 

FSOC member agencies on a number 

of research and data projects, some at 

the specific direction of the FSOC or its 

member agencies, and others in a less 

formal response to concerns discussed. 

Our work to meet the needs of the 

FSOC member agencies includes a 

project with the Federal Reserve to 

collect and analyze data in support of a 

reference interest rate as an alternative 

to LIBOR, an interest rate benchmark 

formerly known as the London Interbank 

Meeting Our Mission 41 
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Offered Rate, but now called ICE LIBOR 

(Intercontinental Exchange LIBOR). We 

are also collaborating with the Federal 

Reserve on a project to fill critical data 

gaps in repurchase agreement (repo) 

transactions, which could support the 

reference rate project. 

During fiscal year 2017, we improved 

our U.S. Money Market Fund Monitor, 

which tracks the investment portfolios of 

money market funds and shows trends 

and developments across the money 

market fund industry. The monitor uses 

data converted from the SEC Form 

N-M FP and presents the information in 

a graphic, user-friendly format on the 

OFR website. It makes the underlying 

data freely available for download by the 

industry and public for monitoring and 

analysis. The monitor is one of the most 

viewed items on the OFR website, with 

more than 14,000 page views in the year 

after its launch. 

To improve data sharing among the 

FSOC member agencies, we are continuing to work with them to streamline the 

process of developing memorandums of 

understanding by developing best practices and a set of common provisions. 

We anticipate that our ongoing work with 

standards organizations on identifiers 

and other data standards will benefit the 

FSOC member agencies as the quality and interoperability of financial data 

improves. 

The OFR led the U.S. delegation on the 

global Legal Entity Identifier (LEI) initiative so the LEI could be developed to 

meet regulatory needs, including swap 

data repository collection requirements. 

This foundational standard was the result 

42 2017 I OFR Annual Report to Congress 

of a global effort that the OFR spearheaded, as Treasury's representative to 

the international initiative through the 

Financial Stability Board. 

The LEI system now is routinely considered by others as a way to meet additional needs. For example, the LEI code 

has become the preferred identifier for 

parties engaged in swaps activities, and 

the International Standards Organization 

asked the foundation that runs the LEI 

system to maintain the international 

standard for "entity legal form" (such as 

a corporation). 

Because the OFR is an office of the 

Treasury Department and the Secretary 

is the FSOC chair, we regard Treasury 

as a key stakeholder. We share expertise and staff time on projects with the 

Department, consistent with the law, as 

we do with other FSOC members. 

In addition to supporting the FSOC 

annual report project, the OFR has lent 

employees with special expertise to the 

Department on work details of up to six 

months. 

We also provide Treasury offices access 

to purchased data on a reimbursable 

basis, generating significant cost savings 

compared with those offices obtaining 

the data directly (because they avoid 

administrative costs and pay only for the 

services they need). 

To support efforts to make the financial 

system more resilient to cyber threats, 

we are assisting Treasury's Office of 

Critical infrastructure Protection and 

Compliance Policy in maintaining and 
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updating their maps of the financial 

system. The goal of our network analysis 

of the maps is to gauge the resilience of 

U.S. financial markets to shocks. 

In addition, through our regulatory reporting burden initiative, the 

OFR is addressing broad Treasury, 

Congressional, and industry interest in 

identifying areas of duplication, overlap, 

and inefficiency in regulatory reporting. 

We have identified, on a pilot basis, areas 

of potential overlap in regulatory reports 

relating to private funds (see Reducing 

Regulatory Reporting Burdens). This 

work, if expanded, could aid the FSOC in 

identifying and brokering the implementation of common data standards that 

would alleviate reporting burdens on 

firms and improve the quality of financial 

data for regulators. 

The Dodd-Frank Act requires the OFR 

to report to Congress annually on our 

progress in meeting our dual data and 

research mandates. We do so through 

this report. and our Director testifies 

before Congress when invited. The 

OFR also submits quarterly reports 

to Congress as required by the 

Consolidated Appropriations Act. These 

reports describe the OFR's use of funds, 

staffing levels, and actions to achieve its 

goals and objectives. 

In addition, our Government and 

Industry Affairs liaisons routinely interact with key members of Congress, their 

staffs, and committee staffs to respond 

to questions, address concerns, and 

share insights on issues related to financial stability. 

Key members of the House Financial 

Services Committee and Senate Banking 

Committee have referenced OFR 

research during public proceedings, 

including our research on identifying 

systemically important banks. The OFR 

also has made presentations to staff 

members of the House Financial Services 

Committee and the Senate Banking 

Committee on the OFR's U.S. Money 

Market Fund Monitor and on issues 

including financial stability considerations related to bond market liquidity. 

In addition, we are working with other 

agencies to respond to Congressional 

inquiries about assessing the benefits 

of cross-market surveillance for market 

oversight and financial stability monitoring, and the potential impact for financial firms of a new Chapter 14 of the 

Bankruptcy Code. 

The OFR has had an industry outreach 

function since the early days of its existence. Our Government and Industry 

Affairs team meets with leaders of financial service companies on a regular basis, 

learning what issues concern financial 

experts to further inform our agenda. 

Our pilot work to collect and anonymize 

repo data to produce reports about the 

bilateral repo market has been widely 

cited by market participants as a success. 

In addition, the industry Alternative 

Reference Rates Committee has 

expressed support for the repo-based 

reference rate (to replace LIBOR) that the 

OFR and the Federal Reserve Bank of 

New York would produce. 

Meeting Our Mission 43 
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We also are working on a regulatory 

reporting burden project that would 

benefit industry and promote more efficient regulation by exposing expensive, 

duplicative, and inefficient regulatory 

reporting. 

Industry trade groups have noted 

favorably the OFR's ongoing objective 

analysis on regulatory reform, including 

OFR analysis of bank stress tests, the 

approach for identifying systemically 

important banks, and the regulation of 

central counterparties. 

The stability of the U.S. financial 

system is essential to the welfare of all 

Americans and their financial wellbeing. As a result, the American public 

is a beneficiary of OFR efforts to assess 

and report on vulnerabilities in the 

system. Our service stems from our critical function as both a research and data 

institution, our ability to look across the 

entire financial system to spot emerging threats to financial stability, and our 

unique data-related mandate. 

Results of our work are made public on 

the OFR website, financialresearch.gov. 

In publishing our findings and monitoring 

tools, we support market discipline by 

making the vulnerabilities of the financial 

system more transparent. 

Another channel for informing the public 

about the OFR and its work is our Twitter 

site, where we highlight key OFR activities and products, including graphics. 

We also send e-mail alerts to the more 

than 30,000 subscribers who subscribed 

through our website. 

44 2017 I OFR Annual Report to Congress 

Our research is regularly cited in the 

media. We maintain working relationships with members of the news media 

and answer reporters' questions about 

the OFR. 

To further meet the needs of the public, 

we have projects underway to enrich the 

information on the OFR website and to 

make it more usable and accessible by 

applying usability best practices. We are 

also working to expand our offerings of 

downloadable data and interactive monitors for members of the public and news 

media to understand the importance 

of OFR work and topics related to the 

stability of the financial system. 

Collaboration 

OFR staff experts and leaders participate 

in a wide variety of events related to 

financial stability research, data, and 

analysis. Collaboration with other 

researchers and regulators, as well industry experts domestically and abroad, 

is crucial to our success. The OFR has 

created a virtual research-and-data 

community to extend our reach and 

impact by collaborating with colleagues 

in government, industry, and academia in 

the United States and around the globe. 

Collaboration with others helps us to 

maximize our resources, support financial 

stability research, and promote standards 

that lead to high-quality data on the 

global financial system. 

We regularly reach out to academic 

and financial industry groups for their 

input on current and emerging financial 

stability issues. We also collaborate with 

colleagues around the world on research 
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and data projects by speaking at conferences and events and maintaining our 

involvement with global organizations. 

In addition, we hold and cosponsor 

conferences and other events to promote 

awareness and discussion about issues 

related to financial stability. 

Our outreach includes remarks, presentations, and appearances in panel discussions by OFR Director Richard Berner 

and other members of the OFR staff. 

They speak at conferences and meetings 

sponsored by industry groups, government regulators, academic institutions, 

and others. 

In addition, the OFR sponsors a Research 

Seminar Series for OFR employees to 

engage in discussion and debate with 

outside experts from government agencies, academic institutions, and international organizations. More than two 

dozen outside experts appeared at 

these seminars during the fiscal year. 

Presentations included: 

"Liquidity Requirements, Liquidity 

Choice, and Financial Stability" 

111 "Competition and Stability in 

Banking: The Role of Regulation and 

Competition Policy" 

"Do Bank Bailouts Reduce or 

Increase Systemic Risk? The Effects 

of TARP on Financial System 

Stability" 

"Liquidity Regulation and 

Unintended Financial Transformation 

in China" 

The OFR Financial Research Advisory 

Committee, a group of 29 experienced 

professionals with experience in business, economics, finance, data science, 

risk management, and information 

2017 Financial Research '"''·m""' 1 Committee Meetings 

February 23 The ninth meeting of the committee included discussions of financial stability 

Department of risks identified by the OFR, the OFR initiative to develop a financial instrument 

Treasury reference database, adoption of the Legal Entity Identifier, and the research 

agendas of OFR programs on central counterparties and risks in financial institutions. The OFR also received updates from the committee's Financial Instrument 

Reference Database Viewpoint Working Group, Data Standards Working Group, 

and Financial Innovation Working Group. 

July 20 

Federal Reserve 

Bank of New 

York 

This meeting included a presentation on improvements to the Financial Stability 

Monitor; a demonstration of the OFR's newest monitoring tool, the Financial 

Stress Index; an update on the OFR's efforts to identify obstacles to broader 

adoption of the Legal Entity Identifier; and a discussion of the OFR's work to 

monitor and analyze operational risks and cybersecurity risks. At the meeting, the OFR also received updates from the committee's Financial Innovation 

Working Group. 

Meeting Our Mission 45 
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technology, enhances our annual 

research-and-data agendas with recommendations that help ensure the OFR 

is focusing on the most important and 

timely issues. Committee members are 

drawn from industry, academia, and the 

policy community. 

The committee, established in 2012, 

gives the OFR the benefit of industry 

experts who bring diverse perspectives 

to inform our work and help the OFR to 

fulfill its mission. Under the governance of 

the Federal Advisory Committee Act, the 

full committee meets semiannually. The 

OFR makes the minutes and webcasts of 

the meetings available to the public. 

The three subcommittees- Research, 

Data and Technology, and Financial 

Services and Risk Management- meet 

at different times during the year to 

develop committee work. 

The OFR's commitment to setting global 

standards- ranging from identifiers 

such as the LEI to mortgage standards 

-is integral to our mandates under the 

Dodd-Frank Act. To that end, the OFR 

provides analytical assistance on data 

standards, and promotes their development and use among the FSOC member 

organizations, in global regulatory 

forums, and through standards-setting 

bodies. 

Our collaboration with public and 

private stakeholders during the past 

year reaffirmed that the time is right to 

establish clear, internationally mandated 

and coordinated standards for reporting 

46 2017 I OFR Annual Report to Congress 

financial data and metadata (the data 

describing data). 

Implementation requires the use of standards for the design of data collections, 

either through coordinated global action 

or implementation of technical guidance. 

At its meeting in February, the OFR's 

Financial Research Advisory Committee 

recommended that the OFR engage 

key stakeholders of the LEI to identify 

obstacles to more complete adoption 

of the standard. The OFR is following 

that recommendation as it continues 

to lead the process of building implementation strategies and coordinating 

adoption plans with industry and regulatory colleagues in the United States and 

abroad. 

Memorandums of understanding (MOUs) 

are key to the OFR's strategy to promote 

data sharing, particularly among regulators. In May, the OFR and the European 

Central Bank signed an MOU that formalizes the processes for the staffs of the 

OFR and the bank to share analyses and 

information about emerging financial 

market risks in the United States and the 

eurozone. 

This MOU is the OFR's second on 

cross-border cooperation. In April 2015, 

the OFR signed a similar informationsharing arrangement with the Bank of 

England, the United Kingdom Prudential 

Regulation Authority and the United 

Kingdom Financial Conduct Authority. 

These types of cross-border agreements 

on information sharing are important 
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tools for the OFR to meet its statutory 

mandate by monitoring global financial 

market risk, while potentially lowering 

regulatory reporting costs for firms that 

operate in the United States and abroad. 

The OFR also has scores of MOUs with 

other agencies in the United States. 

The OFR contributes to the global 

Working Group for Harmonization of 

Over-the-Counter Derivatives Data 

Elements. The group, sponsored by 

the Committee on Payments and 

Market Infrastructures International 

Organization of Securities Commissions 

(CPMI-IOSCO), is focused on three 

distinct efforts: (1) a unique product 

identifier, (2) unique transaction identifier, and (3) standardizing critical data 

elements. 

We collaborated with industry participants about the product identifier during 

meetings in January, April, and July of 

2017. The identifier will enable unique 

identification of financial products for 

easier aggregation of data and analysis 

of potential asset-specific risks. 

The transaction identifier will enable 

identification of unique individual overthe-counter derivative transactions to 

facilitate aggregation of transactions and 

enhance analysis. We contributed to the 

publication, Technical Guidance for the 

Harmonization of the UTI (unique transaction identifier). We also reviewed the 

industry's consultative responses and 

drafted the final recommendations of the 

guidance, published in February 2017. 

The technical guidance outlines the definition, format, and use of the transaction 

identifier. 

We participate in the Financial Stability 

Board's working group on governance 

for both identifiers. Strong global governance is necessary for effective implementation and continued relevance of 

global standards. 

In April 2017, the OFR took leadership of 

the governance assessment work stream 

for the unique transaction identifier. The 

final proposed governance arrangements for the transaction identifier were 

published for public comment in March 

2017. 

The work on critical data elements is 

aimed at producing clear guidance to 

authorities on definitions, format, and 

use of critical data elements (other than 

the transaction and product identifiers) 

for consistent and effective global aggregation of over-the-counter derivative 

contracts. Under OFR leadership, this 

work continued to focus on the potential for the International Organization 

for Standardization to manage data 

elements. 

As co-chair of the work stream on critical 

data elements, the OFR continues to 

lead the revision of the Batch 1 CDE (critical data elements) Consultative Report, 

consisting of 14 data elements, as well 

as the analysis, finalization, and revision 

of the 27 data elements for the Batch 2 

CDE Consultative Report. The Batch 3 

CDE Consultative Report was published 

in June 2017. 

Meeting Our Mission 47 
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The OFR staff worked with the industry and global standards bodies during the year 

to develop standards that would affect a broad array of processes in the mortgage 

industry. 

For example, we held a two-day workshop to align data fields and definitions 

between messaging standards by the International Organization for Standardization 

and the Mortgage Industry Standards Maintenance Organization. 

The mortgage industry relies on electronic payments to transfer money between 

participants in mortgage financing, guarantee, and securitization processes. We 

worked with the mortgage industry to help its stakeholders (such as mortgage 

issuers and servicers) understand the potential impact of adopting the International 

Organization for Standardization's standard in the U.S. electronic payments system. 

The OFR also continued to collaborate with industry and regulators to advance the 

adoption of a universal loan identifier. Such an identifier would help regulators and 

the industry assess risk by linking first and second liens, such as first mortgages and 

related home-equity loans- without revealing the personally identifiable information of borrowers. But without an industry-wide requirement to adopt a universal loan 

identifier, adoption has been slow. 

As an example of voluntary adoption, government-sponsored enterprises Fannie Mae 

and Freddie Mac have committed to begin collecting the universal loan identifier for 

all applicable loans delivered to them. This new data collection becomes mandatory 

for loan delivery to these government-sponsored enterprises by May 2019. 

FY 2017 OFR Acting Associate Director for Current Analysis participated 

in the Financial Stability Board's Data Experts Group, which is 

responsible for developing standards for a global data collection on securities financing transactions and implementing 

the collection. The group met to develop the implementation 

guidelines for the collection. 

48 2017 I OFR Annual Report to Congress 
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FY 2017 OFR staff members represented the Treasury Department in an 

initiative to establish a governance structure for sharing aggregated and anonymized data on securities financing transactions 

with financial authorities overseas through a secure data center 

hosted by the Financial Stability Board and Bank for International Settlements. 

FY 2017 OFR staff members represented the Treasury Department in 

the Financial Stability Board's Financial Innovation Network. 

The events included a case study on artificial intelligence and 

rna chine learning in financial services. The OFR contributed to 

drafting a report analyzing potential benefits and risks for financial stability stemming from applications of artificial intelligence 

and machine learning. 

April 2017 OFR Associate Director for Data Strategy and Standards, a 

Senior Standards Specialist, and a Policy Advisor attended 

the quarterly meeting of CPMI-IOSCO sponsored by the Data 

Harmonization Working Group. 

Meeting Our Mission 49 
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Speeches 

OFR Director Richard Berner made remarks at the following events: 

.Oct. 2016 NeW Pedago9y of Firlandal Regullltion conferebi:e attn<¥ 

Columbia L?wSthocil o11 "1he lnterclisc:ibliilarv 

Financial Stability Aralysis," 

Jan. 2017 Power of Transparency Speaker Series hosted by the Atlantic 

Council and Thomson Reuters. 

M11rch Financial [)ata S~n:nnifhosted by, the 

ti<;m ,on "Re<:J.udng the Reg~latory Reporting 

OFR staff members made public remarks and presentations at many events, 

including: 

Oct: 2016' American Soc:h:>ty of International law im<l tne lhstitute of 

Oct. 2016 Securities Lending conference and Securities Finance 

Jan.- Feb. 2017 Collateral Management conference 

An OFR Senior Financial Analyst gave presentations about the 

OFR's securities lending data pilot during events sponsored 

by the Risk Management Association and the Information 

Management Network. 

April 2017 Eurofi High Level Seminar 

The OFR Deputy Director for Research and Analysis participated in a panel on "Emerging Risks in Global & EU Financial 

Markets." 

50 2017 I OFR Annual Report to Congress 
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July 2017 Society for Economic Measurement 4th Annual Symposium 

An OFR Senior Advisor participated in a panel highlighting 

the benefits Fin Tech and Reg Tech can provide to the financial industry. He discussed evolving analytical approaches in 

response to explosive growth in data volumes. 

FY 2017 Conferences and Events 

.Oct. 2016 BigDati!:,lrnpro\ti~g.theSc;ope; Quality, an<Mcc~ssibi.lity of 

Fin~tii:ial Market t>ata 

Dec. 2016 Conference on Innovation, Market Structure, and Financial 

Stability 

The OFR and the Federal Reserve Bank of Cleveland cosponsored this event. It brought together academics, policymakers, 

and market participants to discuss financial and technological 

innovations and their impact on financial stability. 

~ettlng Global Standards .for Gnmular Data: Sharing the 

Challenge workshop. 

Sept. 2017 Conference on Heterogeneous Agents and Agent-based 

Modeling 

The OFR, Brandeis University, and Bank of England cosponsored this event. It highlighted research on the impact of 

individual heterogeneity for financial system stability and 

economic outcomes. 

Meeting Our Mission 51 
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Organization, Staffing, 

and Offices 

To achieve the goals set by the DoddFrank Act, the OFR has three centers (see 

Figure 11): 

1. The Data Center acquires and 

manages data and leads global 

initiatives to develop standards for 

efficiencies in data reporting and 

analysis. 

2. The Research and Analysis Center 

conducts research, performs analysis, 

and evaluates policies related to the 

stability of the U.S. financial system. 

3. The Technology Center is responsible for OFR information technology 

systems and system security, including an information technology platform to support analysis with large 

data sets. 

Three divisions support the centers: 

1. The Operations Division provides 

expertise, program management, 

implementation, policy, and oversight for budgeting, travel, human 

resources, procurement, and 

facilities. 

2. The External Affairs Division 

produces OFR publications and 

graphics and maintains relationships 

and communicates with a broad array 

of stakeholders, including Congress, 

industry, the news media, and the 

OFR workforce. 

52 2017 I OFR Annual Report to Congress 

3. The Office of the Chief Counsel, part 

of the Treasury Department's Office 

of General Counsel, offers legal guidance on policy initiatives, analysis and 

research, data acquisition and usage, 

procurements, and agreements with 

other organizations. It also oversees 

risk management work and audits. 

The OFR's work was supported during 

the fiscal year by 210 employees: 203 

permanent, six term, and one temporary. 

(This count does not include employees 

on detail from other agencies or serving 

under the Intergovernmental Personnel 

Act of 1970.) Only the Director is a political appointee. 

Two leadership groups govern the OFR. 

The Director and seven deputy directors 

and chiefs make up the senior management team. The leadership group 

includes those eight senior managers 

plus 20 associate directors who lead the 

teams under the senior managers. 

In consultation with the FSOC, FSOC 

members, and other stakeholders, the 

OFR developed an FY 2017 plan that 

reflects our mission, five-year strategic 

plan, key stakeholder needs, critical infrastructure needs, and budget parameters. 

The FY 2017 plan was a roadmap for the 

OFR to meet the needs of key stakeholders within the President's Budget parameters. All OFR employees were assigned 

work that contributed to meeting stakeholder needs, statutory requirements, 

and the building and operating of critical 

infrastructure. 
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Figure 11. OFR Organizational Chart 

Business 

Architecture 

Data 

Products 

Data 

Operations 

Current 

Analysis 

Financial 

Markets 

Financial 

Research 

Product 

Strategy 

and Support 

Enterprise 

Systems 

Information 

Security 

Technology 

Strategy 

Services 

Government 

and Industry 

Affairs 

Meeting Our Mission 53 
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OFR funds obligated in FY 2017 were 

$92.9 million 54 percent for labor 

and 46 percent for other expenses (see 

Figure 12). This ratio differs significantly 

from the two-thirds labor, one-third 

nonlabor split in the budgets of most 

agencies, largely due to significant OFR 

expenses for data acquisitions ($8.8 

million) and technology software and 

hardware ($13 million) to support the 

OFR's unique mandates. 

The OFR is an office within the U.S. 

Department of the Treasury, overseen 

by Congress and government auditors. 

Since its establishment, the OFR has 

answered four audit requests from the 

Government Accountability Office, and 

interviewed for another five; six audits 

by the Treasury Inspector General; and 

one audit by the Council of Inspectors 

General on Financial Oversight OFR 

leaders have testified before Congress 

on four occasions: Director Richard 

Berner has testified three times as 

Director, and a former Chief Operating 

Officer testified once before the 

Director's confirmation. 

Though part of the Treasury Department, 

the OFR is not funded by annual 

Congressional appropriations, but by 

semiannual assessments from bank holding companies with total consolidated 

assets of $50 billion or more each and 

nonbank financial companies supervised 

by the Board of Governors of the Federal 

Reserve System. 

The OFR pays the Treasury Department 

nearly $10 million per year for support 

Figure 12. OFR Funds Obligated in Fiscal Years, 2013- 2017 ($thousands) 

2013 2014 2015 2016 2017 

Compensation 15,339 24,168 29,036 32,485 37,379 

Benefits 4,885 7,968 9,507 11,322 13,054 

Labor Total 20,224 32,136 38,543 43,807 50,434 

Travel 246 296 453 556 447 

Communication and Utilities 4,717 5,332 3,811 62 179 

Printing and Reproduction 24 27 31 26 22 

Other Services 22.683 23,558 25,033 35,794 31,823 

Supplies and Materials 3,916 4,947 8,060 8,312 6,508 

Equipment 13,495 16,970 8,785 5,997 3,459 

Grants 320 

Non labor Total 45,081 51,130 46,173 51,067 42,439 

TOTAL 

Note: Other services include rent and administrative support for human resources, conferences and 

events, facilities, and procurement. 

Source: OFR analysis 

54 2017 I OFR Annual Report to Congress 
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for OFR human resources, budget, 

travel, and acquisitions activities. ln 

addition, the Office pays Treasury more 

than $6 million annually for information 

technology circuits; payroll services; 

and agency-wide systems for training, performance management, and 

human resources management. The OFR 

Director must consult with the Treasury 

Secretary in establishing the OFR budget 

and workforce. 

Information 

Technology 

Information security is one of the OFR's 

highest priorities, and we have built a 

strong security and privacy awareness 

program over the past several years 

dedicated to ensuring that our systems 

and our data are secure and will remain 

secure. All OFR employees take annual 

security and privacy training, and 

employees who have access to nonpublic 

data are subject to heightened post-employment restrictions. 

The OFR brings large quantities of data 

into its analytical environment, which was 

designed and built specifically for the 

OFR to securely support computing-intensive work with large datasets. In FY 

2017, we renewed our commitment to 

maintaining the confidentiality, integrity, 

and availability of our systems and the 

information they hold. We conducted our 

annual internal and external "penetration tests," which were completed by an 

independent third party, with no major 

findings identified. We also deployed 

several additional controls and tools that 

strengthened our security posture. 

The OFR operates two storage systems. 

One system is used exclusively for 

analytics; the other system is for general 

purposes. One of our projects during FY 

2017 involved enabling the encryption of 

data not being used (referred to as "data 

at rest") on both systems to boost our 

security. 

The OFR follows the National Institute 

of Standards and Technology guidance 

for the implementation and operation 

of a government information security 

program. 

Disaster Recovery and Web 

Infrastructure Security 

We a I so reassessed our business needs 

for disaster recovery in FY 2017. The 

OFR has an alternate processing center 

and disaster recovery center outside 

of Washington, D.C. We conducted a 

number of tests using several scenarios to determine that the center would 

be ready in the event of an emergency, 

and we put additional technology and 

controls in place to ensure its readiness. 

The OFR uses this disaster recovery data 

center as an alternate processing center 

and not just as a standby. When not in 

disaster-recovery mode, we maximize 

our investment in this resource by using 

it for additional computing power for the 

OFR's day-to-day operations. 

During the year, we also assessed our 

public website, financialresearch.gov, 

and determined that we needed to 

increase the security level of the site's 

Meeting Our Mission 55 
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infrastructure to handle new requirements. In anticipation of creating a 

restricted, password-protected area 

on the website in the future, we built a 

platform that would allow researchers 

or other approved stakeholders from 

outside the OFR (such as the FSOC 

and FSOC members) to have access to 

certain protected resources. This project 

also required creating an authentication 

mechanism and process to ensure only 

selected users approved for access and 

having user accounts and passwords will 

be allowed. 

Finally, we upgraded the OFR's 

mobile-device-management platform, 

increasing the security of our mobile 

phones, while enabling capabilities that 

allow OFR employees to securely use 

on-site services, such as our time-andattendance system. 

When we launched the OFR analytic 

systems at the end of 2013, we decided 

not to use external "cloud" services. 

Cloud services allow organizations to 

pay only for the computing and storage 

capacity they use, instead of procuring, 

creating, and maintaining entire in-house 

systems. Over the past four years, rapid 

technology development and improvements, coupled with improvements in 

security, have advanced external cloud 

options significantly. 

Now, our analytic systems are nearing 

the point of requiring significant investment in new machinery and hardware. 

After extensive research and work to 

determine the most cost-effective way 

56 2017 I OFR Annual Report to Congress 

forward, we launched a project in FY 

2017 to begin to migrate a number of 

our systems to the cloud. Consequently, 

the eventual cloud migration of key 

services guided many decisions we made 

during the year about architecture, new 

investments, ongoing maintenance and 

support arrangements, and our existing 

product portfolio. 

To support a cloud migration, we also 

developed a new system architecture 

that effectively and efficiently ties internal systems with cloud and Web-based 

systems, and we made prudent investments in new technology for internal 

systems. 

As a result, we decommissioned several 

systems and discontinued certain products in favor of better and more costeffective alternatives. We also found 

opportunities to reduce or eliminate 

some unused or less-needed services 

and capabilities, develop a streamlined review process for new system 

and software requests, and reduce our 

dependency on less-effective traditional 

database management systems. 

We are taking the steps necessary to 

ensure that our cloud infrastructure will 

provide the same level of protections 

as our internal infrastructure, and will 

comply with all federal security guidance. 
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The OFR Technology Center supported a number of other projects during FY 2017, 

including: 

redesigning www.financialresearch.gov, our public website; 

developing publicly available monitoring tools; 

enhancing our internal knowledge catalog and metadata repository; 

helping OFR researchers and analysts make the best use of the power of our 

analytic systems, reducing the processing time of models that require high-performance or high-volume computing; 

upgrading our internal collaboration and workflow automation platform; and 

expanding use of our chart and data automation systems. 

2017 redesign of the OFR website, FINANCIALRESEARCH.s1ov 

Meeting Our Mission 57 
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lOOKING AHEAD 

We are basing our agenda for FY 2018 on the needs of our key 

stakeholders. To implement this agenda, we have identified 

our key stakeholders and their needs and mapped out strategies for 

determining and serving those needs during the year. 

Our priorities include: 

Support alternative reference rates and collect bilateral repo data- We have 

been collaborating with the Federal Reserve and Federal Reserve Bank of New 

York to develop an alternative to LIBOR, an interest rate benchmark that was 

formerly known as the London Interbank Offered Rate but is now called ICE 

LIBOR (Intercontinental Exchange LIBOR). We also collaborated with the Federal 

Reserve and the SEC on two voluntary pilot projects in 2015 to explore how to 

collect data about bilateral repurchase (repo) agreements and securities lending transactions. In FY 2018, we plan to undertake a rulemaking to establish an 

ongoing data collection covering some repo transactions. These data might 

be useful in calculating the selected LIBOR alternative, called the Secured 

Overnight Financing Rate. 

Evaluate potential bankruptcy changes- The OFR and the Government 

Accountability Office are evaluating whether potential changes to bankruptcy 

laws could improve the resolution -successful restructuring or liquidation -of 

a failing systemically important financial institution. As we said in Chapter 1, the 

failure of large and complex financial companies could transmit distress to other 

firms, with potentially adverse consequences for the economy. 

Evaluate the value of cross-market surveillance- To understand the vulnerabilities in the financial system that could be exposed by shocks, we are studying 

the interconnectedness of financial markets in cooperation with the SEC and the 

CFTC. This project to assess the cross-market connections arising from the positions of key market participants will help us understand how these connections 

could spread risk through the financial system. 

Meeting Our Mission 
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Map systemic effects of cybersecurity threats and operational shocks- We 

plan to continue analyzing the threat to nnancial stability that cybersecurity 

incidents and other operational failures can pose. We described this threat in 

Chapter 1. We also discussed in Chapter 2 our project to combine network analysis with maps (loaded with real-world data) of the financial system to identify 

cybersecurity threats and other operational vulnerabilities. 

Bring about broader adoption of the Legal Entity Identifier (LEI)- We support 

a recent recommendation from our Financial Research Advisory Committee to 

spur wider adoption of the LEI- and achieve the full benefits of this essential 

data standard. We are following the recommendation by brokering a series of 

discussions with financial industry executives and government officials to explore 

costs and benefits and identify hurdles that impede widespread adoption. The 

next step will be to find ways to overcome these hurdles. 

In the next fiscal year, we also plan to explore financial data services initiatives that 

the FSOC could adopt to increase efficiency by reducing the time and resources 

expended for financial data acquisitions. We are already working with the Treasury 

Department's Bureau of the Fiscal Service on pilot data acquisition contracts with 

selected FSOC member agencies. These contracts are for procuring financial data 

more efficiently and, potentially, at lower cost. 

To increase efficiency, maximize performance, and reduce costs, our Technology 

Center will begin moving our analytic services to the cloud in FY 2018, following the 

plan developed during and after FY 2017. Using cloud services, organizations pay 

only for the capacity they use, rather than developing and maintaining complete 

in-house systems. 

We will also relocate our OFR Web infrastructure to a new provider in fiscal 2018. The 

architecture we developed will allow Web and internal and external cloud systems to 

be seamlessly and securely integrated. This new architecture will be the foundation of 

the data-centric capabilities the OFR plans to develop to support FSOC members. 

OFR 2017 Annual Report to Congress 
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OFFICE OF 

FINANCIAL 

RESEARCH 

FINANCIALRESEARCH .c;ov 
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For Release on Delivery 

Expected at 10:00 a.m. ET 

Thursday, December 7, 2017 

GA0-18-255T 

United States Government Accountability Office 

Statement for the Record to the 

Subcommittee on Oversight and 

Investigations, Committee on Financial 

Services, House of Representatives 

OFFICE OF FINANCIAL 

RESEARCH 

Observations on GAO 

Access to Information on 

Programs and Activities 

Statement for the record by 

Lawrance L. Evans, Jr., Managing Director, 

Financial Markets and Community Investment 
105 


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•WhyGAO·P(~p~re~.•111. i}····· !< • '<·····,······· is.·.:· • .statement ·· · · .··· · · · 

•(ns~;,~lnb~r:itiM;tn~1to~~.••.• •. ··.• •. 

Gomfllillee "~ Finan. cia I ;:ervlce~. : ..• • , t~q~esle'dtftaljS;AO review. OFR,.an. 

office ;v;Hb(n tl!e Qepafll)lent ~fthe • 

·· :f(~~lJ,f)l . .l\mOOQP!heflh1ngs,.1$ACJ.•.• 

OFFICE OF FINANCIAL RESEARCH 

Observations on GAO Access to Information on 

Programs and Activities 

GAO Views 

GAO has broad statutory authority to audit and evaluate agency transactions, 

programs, and activities, as well as a broad statutory right of access to agency 

records. Auditing standards require that analysts and financial auditors promptly 

obtain sufficient, relevant evidence to provide a reasonable basis for any related 

findings and conclusions. Therefore, prompt access to all records and other 

relevant information is needed for the effective and efficient performance of 

GAO's work. GAO has promulgated protocols describing how it will interact with 

the agencies it audits. Among other things, GAO expects that agencies will 

promptly comply with requests for all categories of needed information. GAO 

also expects to receive full and timely access to agency officials who have 

stewardship over the requested records and to agency employees responsible 

for the programs, issues, and other factors covered by such records. 

During the course of its review of the Office of Financial Research (OFR), GAO 

experienced repeated problems with gaining access to both people and 

documents. Many meetings took months to schedule, some were canceled with 

short notice, and responses to requests for documentation and other information 

were delayed. GAO made repeated attempts to obtain required documentation 

and to schedule interviews with agency officials. These attempts included 

frequent follow-up emails and phone calls, the imposition of deadlines for 

document delivery that were either not complied with or resulted in production of 

some but not all required documents, and a discussion between GAO Counsel 

and the Chief Counsel of OFR regarding the agency's continuing delays. Despite 

these extensive efforts, GAO experienced significant delays in getting access to 

officials and agency documents. 

Whistleblower allegations raised additional concerns about the quality of 

information that OFR provided GAO. As GAO discussed with House Committee 

on Financial Services staff, in June 2016 GAO was contacted by an anonymous 

whistle blower who alleged that OFR had manipulated the information it provided. 

GAO subsequently learned that the Department of the Treasury's Office of 

Inspector General (Treasury OIG) was conducting an investigation of similar 

allegations from whistleblowers. Because of concerns about the quality of OFR's 

information and the fact that the Treasury OIG was conducting an investigation, 

GAO decided to terminate the engagement consistent with GAO protocols and 

practices. However, GAO agreed with Committee staff that, following the 

completion of the Treasury OIG's investigation, GAO would be in a better 

position to initiate a new review of OFR. 

-------------United States Government Accountability Office 
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Chairman Wagner, Ranking Member Green, and Members of the 

Subcommittee: 

I am pleased to submit this statement on our access to information at the 

Office of Financial Research (OFR), within the Department of the 

Treasury, and the reasons for our termination of a recent review of OFR. 

My statement will provide information on our audit standards and 

protocols regarding our access to agency information, the information 

access issues we encountered at OFR, and our concerns about the 

quality of OFR's information and the factors that led to our decision to 

terminate our review. 

As you know, the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) established OFR to serve the Financial 

Stability Oversight Council (FSOC) and its member agencies by 

improving the quality, transparency, and accessibility of financial data and 

information, conducting and sponsoring research related to financial 

stability, and promoting best practices in risk management. Since OFR 

was created, we have analyzed various aspects of the agency's 

operations as part of our body of work related to financial markets, such 

as the agency's early efforts to establish management structures to carry 

out its mission and its role in monitoring systemic risk to financial 

stability.' 

In September 2014, the House Committee on Financial Services 

requested that we review OFR to assess, among other things, the 

agency's usefulness to regulators and Congress in assessing financial 

risk and setting regulatory policy and any delays or set-backs in its major 

undertakings and the reasons for them. This request was the first time we 

had been asked to focus solely on OFR. In response to that request, we 

initiated a review of OFR in January 2015. 

As detailed in the remainder of my statement, during the course of this 

review we encountered substantial delays in obtaining access to 

information, and the information we were provided was often of limited 

value. While we had made a commitment to the Chairman to complete 

our work and issue a product by November 17,2015, these delays 

1

GAO, Financial Stability: New Council and Research Office Should Strengthen the 

Accountability and Transparency of Their Decisions, GA0-12-886 (Washington, D.C 

Sept. 11, 2012) and Financial Regulation: Complex and Fragmented Structure Could Be 

Streamlined to Improve Effectiveness, GA0-16-175 (Washington, D.C.: Feb_ 25, 2016). 

Page 1 GA0-18.255T Office of Financial Research 
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GAO Conducts Audits 

and Evaluations in 

Compliance with 

Auditing Standards 

and Has Broad 

Authority to Access 

Information 

prolonged the engagement until June 2016. As we informed your staff, we 

also spoke with a whistleblower who alleged, among other things, that 

OFR had manipulated the information it provided to us. We subsequently 

learned that the Department of the Treasury's Office of Inspector General 

(Treasury OIG) was conducting an investigation into similar allegations 

from whistleblowers. Because the whistleblowers' allegations raised 

concerns about the reliability of the information OFR had provided to us, 

and because the Treasury OIG was conducting an investigation into the 

same or similar allegations, we decided to terminate the engagement 

consistent with GAO protocols and practice. However, we agreed with 

committee staff that, following the completion of the Treasury OIG's 

investigation, we would be in a better position to initiate a new 

engagement. This statement was prepared in accordance with those 

sections of GAO's Quality Assurance Framework that were relevant to 

our objectives. 

GAO has broad statutory authority under title 31 of the United States 

Code to audit and evaluate agency transactions, programs, and activities. 

To carry out these audit and evaluation authorities, we have a broad 

statutory right of access to agency records. Using the authority granted 

under title 31, we perform a range of work to support Congress, including 

the following: 

Evaluations of federal programs, policies, operations, and 

performance. 

Management and financial audits to determine whether public funds 

are being spent efficiently, effectively, and in accordance with 

applicable laws. 

Investigations to assess whether illegal or improper activities may 

have occurred. 

Engagements in which we work proactively with agencies, when 

appropriate, to help guide their efforts toward transformation and 

achieving positive results. 

We carry out our audit and analytical work in accordance with generally 

accepted government auditing standards. 2 Our analysts and financial 

2

GAO, Government Auditing Standards, 2011 Revision, GA0~12-331G (Washington, 

D.C .. December2011) 

Page 2 GA0.18.255T Office of Financial Research 
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auditors are responsible for planning, conducting, and reporting their work 

in a timely manner without internal or external impairments. These 

standards and responsibilities require that analysts and financial auditors 

promptly obtain sufficient and relevant evidence to provide a reasonable 

basis for any related findings and conclusions. Therefore, prompt access 

to all records and other relevant information is needed for the effective 

and efficient performance of our work. 

Our work involves different collection approaches to meet the evidence 

requirements of generally accepted government auditing standards. Such 

evidence falls into four categories: 

physical (the results of direct inspection or observation); 

documentary (information created by and for an agency, such as 

letters, memorandums, contracts, management and accounting 

records, and other documents in various formats, including electronic 

databases); 

testimonial (the results of face-to-face, telephone, or written inquiries, 

interviews, and questionnaires); and 

analytical (developed by or for GAO through computations, data 

comparisons, and other analyses). 

We have promulgated protocols describing how we will interact with the 

agencies we audit. 3 We expect that agencies will promptly comply with 

our requests for all categories of needed information. We also expect that 

we will receive full and timely access to agency officials who have 

stewardship over the requested records; to agency employees 

responsible for the programs, issues, events, operations, and other 

factors covered by such records; and to contractor personnel supporting 

such programs, issues, events, and operations. In addition, we expect 

that we will have timely access to an agency's facilities and other relevant 

locations while trying to minimize interruptions to an agency's operations 

when conducting work related to requests for information. 

3GAO, GAO's Agency Protocols, GA0-05-35G (Washington, D.C. Oct. 21, 2004) 

Page3 GA0~18-255T Office of Financial Research 
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Access Issues with 

OFR Included 

Difficulties with 

Scheduling Meetings 

and Obtaining 

Documents 

During the course of our review of OFR, we experienced repeated 

problems with gaining access to both people and documents. Many 

meetings with OFR officials took months to schedule, some were 

canceled with short notice, and requests for documentation and other 

information were delayed. We had to make repeated attempts to obtain 

required documentation and to schedule interviews with agency officials. 

These attempts included frequent follow-up emails and phone calls, the 

imposition of deadlines for document delivery that were either not 

complied with or resulted in production of some but not all required 

documents, and a discussion between GAO counsel and the Chief 

Counsel of OFR regarding the agency's continuing delays. Despite these 

extensive efforts, we experienced significant delays that prevented us 

from completing our audit work within originally planned time frames. 

Examples include the following: 

OFR delayed and canceled meetings: We first emailed the OFR 

liaison to request an entrance conference-a meeting between GAO 

and the agency under review that marks the beginning of an 

engagement-on February 6, 2015. OFR officials agreed to meet with 

us in person on March 10, in part to accommodate our plans to bring 

field staff to Washington, D.C. We sent numerous emails to the OFR 

liaison attempting to confirm the meeting logistics and attendees but 

did not receive a response. On March 4, we provided OFR with a set 

of questions to guide the entrance discussion. However, on March 9-

one day before we were scheduled to meet-the OFR liaison emailed 

to cancel the meeting. Although we provided several options for 

meeting with agency officials, we were unable to hold the entrance 

conference with OFR until April 8, more than 2 months after our first 

meeting request 

In another example, we requested a follow-up interview with OFR 

officials on June 30, 2015, to discuss OFR's (1) statutory mandate 

and how the agency planned projects to meet it and (2) functional 

issues, such as how the agency manages data collection and data 

sharing efforts among federal financial agencies. However, OFR did 

not acknowledge receipt of our meeting request until July 27-almost 

a month after our initial request. Further, the agency proposed 

delaying our requested meeting for another month-specifically, until 

August 26. We expressed disappointment at the lengthy time frames 

and described the impact they could have on our work, but again, on 

August 25-one day before we were scheduled for an in-person 

meeting-the OFR liaison emailed to cancel the meeting. 

Page4 GA0~18~255T Office of Financial Research 
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OFR repeatedly delayed fulfillment of document requests: On 

May 11, 2015, we requested copies of several documents that OFR 

described during the April 8 entrance conference, On May 20, the 

OFR liaison em ailed to let us know that officials were discussing our 

request and said she would soon let us know when we could expect 

the documents, A week later the liaison notified us that OFR would 

fulfill the document request in two parts: one by June 5 and the 

second by June 12, We followed up with the liaison on numerous 

occasions before receiving all documents in the original request on 

June 19-5 weeks after our May 11 request In another example, after 

meeting with OFR officials who could not respond to questions that 

had been sent in advance, we made a formal request on October 16, 

2015, that OFR respond to the questions in writing, We also 

requested that OFR provide additional documents detailing, for 

example, OFR's performance measures and project management 

policies and practices, We made several follow-up attempts by email 

and phone before receiving the documents 2 months later (December 

14, 2015) and written responses almost 4 months later (February 3, 

2016), 

In addition to these difficulties with scheduling meetings and obtaining 

documents, officials we met with were frequently unable to answer our 

questions, In some cases, OFR officials in the best position to answer our 

questions were unable to provide answers or would direct us to ask 

others in the agency, who also told us they were not able to answer, For 

example, on September 11, 2015we met with OFR's Acting Deputy 

Director of Research and its Chief Data Officer and were able to learn 

about the agency's data collection and data sharing efforts, However, 

although we provided OFR with an agenda nearly 2 months in advance, 

both officials were unable to respond to agenda items covering how 

certain aspects of OFR's strategic plan and performance measures relate 

to its data collection and data sharing functions, which are statutorily 

mandated, 4 Instead, we were told that the questions should be posed to 

OFR's Chief Operating Officer, We met with OFR's Chief Operating 

Officer on September 30 and posed the same questions; however, we 

were told that they were best answered by the Acting Deputy Director of 

Research and the Chief Data Officer, 

4 The Dodd Frank Act requires OFR to set up a data center and a research and ana!ys1s 

center to, among other things, collect and provide data to FSOC and its member 

agencies, pertorm applied and essent1allong-term research, and develop tools for risk 

measurement and monitoring 

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Wh istleblower 

Allegations and a 

Separate 

Investigation Led 

GAO to Terminate Its 

Review of OFR 

Agency officials gave several explanations for their delays, including that 

the required parties were very busy or traveling, that they did not receive 

an email (despite our logs showing that the emails were transmitted), that 

particular months were busy at the agency, and that they did not fully 

understand our requests. We continued to pursue our information 

requests, analyze the information we obtained from OFR, and moved 

forward with our efforts to respond to the Committee's request. However, 

as a result of OFR's repeated delays, we were unable to issue a report by 

November 2015, as committed to the Chairman, and ultimately were still 

conducting audit work in June 2016. 

In June 2016-during the course of our audit work-GAO's then 

Managing Director of Financial Markets and Community Investment was 

contacted by an anonymous whistleblower. The person stated that they 

worked at OFR and alleged, among other things, that OFR had 

manipulated certain information provided to us and misled us during 

interviews. In an effort to corroborate the whistleblower's allegations, we 

reached out to officials at the Treasury OIG, who told us that they too, 

were conducting an investigation into OFR's activities. They advised us 

that they had also been approached by whistleblowers with similar 

allegations. As we have discussed previously with Committee staff, the 

whistleblower allegations we and the Treasury OIG received raised 

serious questions about the reliability of some of the information we had 

obtained from OFR Because of these concerns and because the 

Treasury OIG was conducting an ongoing investigation into the same or 

similar allegations, we decided to terminate the engagement in July 2016 

consistent with our protocols and practice. However, we agreed with 

Committee staff that, following the completion of the Treasury OIG's 

investigation, we would be in a better position to initiate a new 

engagement. 

Chairman Wagner, Ranking Member Green, and members of the 

subcommittee, this concludes my statement for the record. 

PageS GAQ.18.255T Office of Financial Research 
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(102435) 

For further information about this statement, please contact Lawrance L. 

Evans, Jr., Managing Director, Financial Markets and Community 

Investment, at (202) 512-8678 or evansl@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this statement. GAO staff that made key contributions to 

this testimony are Kay Kuhlman (Assistant Director), Tiffani Humble 

(Analyst in Charge), Robert Lowthian, Jessica Sandier, and Jennifer 

Schwartz. 

Page7 GA0-18-255T Office of Financial Research 
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STATEMENT OF ERIC M THORSON 

INSPECTOR GENERAL 

DEPARTMENT OF THE TREASURY 

OFFICE OF INSPECTOR GENERAL 

BEFORE THE HOUSE FINANCIAL SERVICES COMMITTEE 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS 

DECEMBER 7, 2017 

10:00 AM 

Chairman Wagner, Ranking Member Green, and Members of the Subcommittee, 

thank you for the opportunity to provide this statement for the hearing on 

"Examining the Office of Financial Research." I will discuss our office's 

investigative and audit oversight of the Department of the Treasury's {Treasury) 

Office of Financial Research (OFR). 

TREASURY OFFICE OF INSPECTOR GENERAL 

Before I discuss the details of our oversight work, I would like to give you some 

background about our office. Our office provides independent audit and 

investigative oversight of the Department of the Treasury's programs and 

operations as well as its bureaus, excluding the Internal Revenue Service and the 

Troubled Asset Relief Program. We oversee Treasury programs and operations to 

manage Federal collections and payments systems, manage and account for the 

public debt, maintain government-wide financial accounting records, regulate 

national banks and federal savings associations, manufacture the Nation's 

currency and coins, collect excise taxes on alcohol and tobacco products and 

regulate those industries, operate the Federal sanctions and anti-money laundering 

and anti-terrorist financing programs, provide domestic assistance through the 

Office of the Fiscal Assistant Secretary and the Community Development Financial 

Institutions Fund and international assistance through multilateral financial 

institutions, and promote lending to small businesses through the Small Business 

Lending Fund. We also oversee the Gulf Coast Restoration Trust Fund and the Gulf 

Coast Ecosystem Restoration Council, an independent Federal entity. 

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OFFICE OF FINANCIAL RESEARCH 

Title I of Dodd-Frank Wall Street Reform and Consumer Protection Act, 1 enacted 

July 21 , 201 0, created the Office of Financial Research within Treasury. OFR' s 

mission from Fiscal Years 2012 to 2014 was to support the Financial Stability 

Oversight Council (FSOC), 2 its member agencies, 3 and the public by (1) improving 

the quality, transparency, and accessibility of financial data and information; 

(2) conducting and sponsoring research related to financial stability; and 

(3) promoting best practices in risk management. As part of its Strategic Plan for 

Fiscal Years 2015 - 2019, OFR updated its mission. Its current mission is to 

promote financial stability by delivering high-quality financial data, standards, and 

analysis for the Financial Stability Oversight Council and the public. 

TREASURY OFFICE OF INSPECTOR GENERAL OFR OVERSIGHT 

Although OFR has always been a part of our annual audit plan and risk 

assessment, in 2016 our office began receiving information that prompted an 

increased audit and investigative focus on OFR. Specifically, beginning in early 

February 2016, our counsel, who also serves as Treasury's Whistleblower 

Protection Ombudsman, was contacted by OFR employees seeking information 

about whistleblower protection. In addition, in early June 2016, the Government 

Accountability Office (GAO) contacted me about concerns with OFR. 

GAO received information from a whistleblower while they were conducting an 

audit of OFR. GAO's audit was initiated in February 2015 and focused on the 

examination of (1) OFR's function, (2) OFR's activities since it was established, 

and (3) any challenges OFR had faced in carrying out its activities to date and 

potential challenges it might face in its future effort. Based on the whistleblower 

concerns GAO decided to stand down their audit and reach out to us. The process 

of getting the particulars from GAO, as well as access to their evidence, 

1 P.L 111-203, July 21,2010. 2 FSOC, also established by Dodd-Frank, is charged with identifying threats to the financial stability 

of the U.S.A., promoting market discipline, and responding to emerging risks to the financial 

stability of the U.S. financial system. 3 FSOC members are the Secretary of the Treasury, the Chairman of the Board of Governors of the 

Federal Reserve System, the Comptroller of the Currency, the Director of the Bureau of Consumer 

Financial Protection, the Chairman of the Securities and Exchange Commission, the Chairperson of 

the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading 

Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National 

Credit Union Administration, an independent member with insurance expertise, the Director of the 

Office of Financial Research, the Director of the Federal Insurance Office, a state insurance 

commissioner, a state banking supervisor, and a state securities commissioner. 

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progressed throughout the summer. In early September 2016 we asked to meet 

with GAO to clarify what concerns prompted them to stand down their audit and 

reach out to us. The clearances needed for that consumed some time, and we 

were able to pose our questions to their auditors at the end of November 2016. 

The meeting with GAO revealed that while the GAO team had no specific evidence 

to verify Whistleblower complaints received, they believed that the allegations 

warranted further review and that our office was in the best position to perform 

this investigation. 

The following is a summary of the oversight activities related to OFR for the Office 

of Investigations and the Office of Audit. 

OFFICE OF INVESTIGATIONS 

Investigations - Whistleblower Retaliation 

As a result of the information received from OFR employees, our office has been 

investigating multiple issues of whistleblower retaliation at the Office of Financial 

Research. Among the issues raised and being reviewed are claims of wrongful 

intervention in performance ratings, wrongfully pressuring employees to request 

transfers, and wrongful intervention in a promotion decision. 

While conducting this extensive investigation, which included many witness 

interviews and reviews of considerable documentary evidence including thousands 

of emails, I must report that there is still more work to be done. Our investigators 

are still carefully evaluating whether their interviews and review of materials clearly 

support a conclusion of unlawful whistleblower retaliation, or any other prohibited 

personnel practices. The key issue in retaliation cases is, after finding a protected 

disclosure and a subsequent personnel action, to prove that the personnel action 

was taken as retaliation for the disclosure, and lacked another, proper purpose. 

And, as we must remember, interpretations of actions are not always objective, nor 

borne out by rigorous analysis. 

On the ratings issues, I must advise that, based on what our investigators know at 

this time, the rating direction could be convincingly argued to be the act of a senior 

executive assuring that ratings are justified and appropriate. 

Similarly, the transfer action could be convincingly argued, at this time, as a 

managerial decision to assure positions are filled with the most qualified 

people. And on the promotion matter, the evidence indicates that the decision was 

made by a five member panel which was unanimous in its promotion decision, 

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which argues strongly that the decision was not tainted. While the participation of 

a supervisor who was aware of protected disclosures participating in the promotion 

process is from an appearance standpoint problematic, it would only violate 

prohibited personnel practices if that supervisor influenced the selection process. 

This investigation is currently continuing and we expect to begin reporting on the 

results of our work later this month with work continuing into early 2018. 

Investigation- Vandalism Incident 

In addition to the investigation noted above, in December 2016 my office opened 

an investigation regarding a vandalism incident where phallic symbols and the 

words "get fired" were drawn on the windows of several OFR supervisory 

personnel. Our investigation into that matter identified the subject who drew the 

offensive symbols and words. That subject no longer works for OFR or the 

Treasury. During that investigation multiple interviews of OFR employees were 

conducted and widespread issues of mismanagement and low morale were alleged, 

which appeared consistent with problems identified in previous federal employee 

viewpoint surveys, and which are the subject of the current audit and investigative 

work described in this testimony. 

OFFICE OF AUDIT 

Our office has audited OFR since early 2011. Following is a summary of our audit 

work. 

Audit- Treasury Has Made Progress to Stand-up OFR 

In June of 2012, our office reported on the effectiveness and status of Treasury's 

process to establish the Office of Financial Research. We reported that as of April 

2012, 21 months after OFR was created, efforts to establish the office were still 

in progress. The officials responsible for establishing the office initially engaged in 

high-level strategic and organizational planning and sought to hire key personnel. 

They also focused on developing and facilitating the global acceptance of a 

universal Legal Entity Identifier• while leveraging Treasury's Departmental Offices 

to support administrative functions. In the summer of 2011, after key operational 

personnel were brought on board, progress toward establishing a comprehensive 

implementation planning and project management process accelerated. This 

4 Legal Entity Identifier is being developed as the universal standard for identifying all parties to 

financial contracts. It is a key element in OFR's effort to understand and monitor risks to financial 

stability and meet its statutory mandate to develop and promote data standards. 

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culminated in the approval of OFR's Project Management Methodology in January 

2012, OFR's Strategic Framework in March 2012, and OFR's Strategic Roadmap 

in April 2012. While not finalized until well over a year after it was established, 

these documents and methodology, taken together, provide OFR with a 

comprehensive implementation plan. 

Concurrent with the development of its comprehensive implementation plan, OFR 

also began to develop its analytic and data support for FSOC. As of April 2012, its 

Research and Analysis Center had sponsored seminars and published two working 

papers on risk assessment topics. 

We recommended that OFR monitor its progress in carrying out the activities in the 

comprehensive implementation plan and take actions timely to address any 

slippages or otherwise make adjustments so as to achieve the objectives and 

timeframes in the plan. The office's planned corrective action was responsive to 

our recommendation. (OIG-12-057) 

As of August 2012, OFR reported that it has a system in place to ensure that it 

monitors its progress. OFR senior managers hold regular meetings to review OFR's 

activities. As of this date, we have not performed a corrective action verification 

relating to the action taken to address our recommendation. 

Audit - Office of Financial Research Funds and Activities Were Separate from 

Treasury's Departmental Offices 

In March 2015, our office reported on Treasury's controls over the separation of 

funds and activities between OFR, the Office of Domestic Finance (ODF). and the 

Office of Economic Policy (OEP) within Treasury's Departmental Offices. We 

initiated this audit in response to Congressional interest in the separation of funds 

and activities between mandatory-funded offices, such as OFR, and discretionaryfunded offices that carry out potentially related or overlapping work, such as ODF 

and OEP. 

We found that the funds and activities of OFR were separate from ODF and OEP. In 

accordance with Dodd-Frank, Treasury established the Financial Research Fund to 

account for the financial activity of OFR and the Financial Stability Oversight 

Council (FSOC). Activities such as assessments and outlays for labor and non-labor 

expenditures were properly posted to the fund; however, we did note a weakness 

in the coding of certain payroll transactions that increased the risk that certain 

Departmental Offices' labor expenses could have been applied to the Financial 

Research Fund. Furthermore, while the OFR Director is organizationally located 

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within ODF, we found no evidence of commingling of resources among projects 

undertaken by OFR and projects undertaken by ODF and OEP. 

We recommended that Treasury enhance controls over the coding of payroll 

transactions by Departmental Offices' personnel who provide support to OFR and 

FSOC. Treasury's planned corrective actions met the intent of our recommendation. 

(OIG-15-027) 

As of October 2015, OFR reported that training had been developed and 

implemented for all Departmental Office personnel that allocate time to the OFR 

payroll code. Additionally, OFR reported a process was established to review payroll 

charges to the OFR Intra-agency Agreement before such transactions are approved. 

Audit - Financial Stability Oversight Council and Office of Financial Research Data 

Requests Are Not Duplicative 

In August 2015 we issued a report responsive to the directive in House Report 

113-508 on the Financial Services and General Government Appropriations Bill, 

2015, which required us to assess whether data reporting required by FSOC and 

OFR from financial companies, or any related entities, is duplicative of data 

reporting required by other regulators and burdensome. Based on our inquires and 

review, we found no indications that data reporting required or requested of 

financial companies by FSOC and OFR has been duplicative of data required by 

primary financial regulatory agencies or unduly burdensome on those companies or 

any related entities. We did not make any recommendations to FSOC or OFR. (OIG15-0431 

Audit Performance Measures 

One of our ongoing audits is an audit to assess the design of Office of Financial 

Research's performance measures and the implementation of these measures. As a 

result of the whistleblower information received from GAO, this work was put on 

hold. Additionally, as required by Government Auditing Standards, our auditors 

must conduct additional procedures to determine the effect, if any, the information 

provided by the whistleblowers will have on the results of the audit. 

Audit - Procurement Activities 

Another ongoing audit engagement is seeking to determine if ( 1) the Office of 

Financial Research's procurement activities ensure that the Office of Financial 

Research effectively and efficiently acquires the goods and services needed to 

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accomplish its mission and (2) whether these acquisitions are made in compliance 

with applicable procurement regulations. As a result of information received from 

the whistleblowers, we expanded the scope of this audit and decided to conduct 

this audit in two phases. The first report will discuss the OFR's Government 

Purchase Card transactions. The second report will cover OFR's contracting 

practices. We expect to issue our first report in January 2018. 

Audit- Review of the Office of Financial Research's Hiring Practices and OFR's 

Response to Its Federal Employee Viewpoint Survey (FEVS) Results 

Lastly, in August of this year our office initiated an audit of OFR's Hiring Practices 

and response to its Federal Employee Viewpoint Survey Results. The objectives of 

this audit are to determine whether (1) OFR's hiring practices are in accordance 

with Office of Personnel Management, Treasury, OFR, and other Federal 

requirements; and (2) OFR's process for reviewing and responding to FEVS results 

are in accordance with Federal requirements including Treasury policies and 

procedures. This work is currently being conducted and we expect to begin 

reporting on the results of our work in early 2018. 

CONCLUSION 

In the spring of 2017 we provided updates on our work to your staff and advised 

on what we had learned from GAO and our work. At the end of June 2017 

Chairwoman Wagner and I discussed the matter, and in October 2017 I and my 

Counsel briefed your staff as well as minority staff on where we were and what 

we had found. 

Thus, we have to advise that, at this time, we cannot say that there is clear 

evidence of whistleblower retaliation and other instances of prohibited personnel 

practices. And information about further, and more widespread, management 

deficiencies must still await the completion of the on-going audit work, and receipt 

of further allegations that are substantiated upon further investigation. 

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AMERICAN BANKER BankT~ink (1/5) 

BankThink Mnuchin shows no interest in continuing FSOC's 

hedge fund inquiry 

By Gregg Gelzinis 

Published September 22 2017, 4:26pm EDT 

More in Policymaking, Hedge funds, Asset management, SIFis, Steven Mnuchin, FSOC 

@I Print liili Email liliJ Reprints !+Share 

In 2014, under the Obama administration, the Financial Stability Oversight Council kick-started 

an initiative aimed at better understanding the risks posed by the asset management sector. 

The willingness of the Trump administration to continue that work- particularly as it pertains 

to hedge funds - has been a looming question. The early signs, unfortunately, are not 

encouraging. 

Before the Dodd-Frank Act created the FSOC, regulators only focused on their specific slice of 

the financial sector, with no systemic risk mandate. The lack of a systemic risk regulatory body 

to foster sustained communication and collaboration among disparate regulators was a key 

flaw in the financial regulatory structure prior to the financial crisis. Bringing together the 

different financial regulators around one table, the council gives them the authority to 

investigate risks to financial stability and the tools necessary to mitigate those financial 

stability threats across the financial system. 

The FSOC under former Treasury Secretary Jack Lew initiated the work stream an asset 

managers with a public conference. As this work stream progressed, the FSOC identified the 

$3 trillion hedge fund industry as a subsectar worthy of enhanced scrutiny, and formed a 

working group to investigate the issue further. In November 2016, the hedge fund working 

group provided a public update on the progress of this inquiry and outlined a compelling 

framework for how hedge funds could pose a systemic risk to the financial sector. 
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On Friday, Treasury Secretary Steven Mnuchin was scheduled to preside over his fourth meeting of 

the FSOC. Once again, an update on work investigating potential financial stability risks posed by 

hedge funds was missing from the agenda. 

Bloomberg News 

But there is growing concern that the council led by current Treasury Secretary Steven Mnuchin 

will drop the inquiry. 

On Friday, Mnuchin was scheduled to preside over his fourth meeting of the FSOC since he 

assumed the chairmanship of the panel in February. Once again, an update on the council's 

work investigating potential financial stability risks posed by the hedge fund industry was 

missing from the ogenda. The lack of progress by the Trump administration to date in 

following up on the hedge fund inquiry is particularly troubling in light of the ties of Mnuchin 

and other key Trump backers to the hedge fund industry. 

The FSOC's framework discussed under the Obama administration revolves around the 

potential risk posed by highly leveraged hedge funds. When a hedge fund employs leverage -

through repurchase agreements, loans or derivatives contracts - it increases its risk of failure 

because it diminishes its capacity to absorb losses in the face of a financial shock. While the 

hedge fund industry is not highly levered in the aggregate, there are several highly leveraged 

funds, and the strategies that use the most leverage are growing as a percentage of the 

industry's assets. 
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According to the Office of Financial Research, the top 10% of macro and relative-value hedge 

funds, which control over $800 billion in gross ossets, are leveraged at roughly 15-to-1. Higher 

leverage certainly increases the chance a hedge fund will be wiped out in times of severe 

stress, but the key question for financial stability purposes is whether hedge funds then 

transmit that stress throughout the financial system. 

The FSOC pointed to two likely transmission channels: counterparty exposure and asset fire 

sales. If a large and highly leveraged hedge fund were to fail, it would not be able to pay off its 

loans or meet its derivatives obligations, which would transmit stress to its counterparties -

many of which are systemically important banks. Moreover, after a financial shock, a large 

leveraged hedge fund may scramble to unwind its positions to meet its obligations by selling 

off assets at fire-sale prices. The sell-off may push down prices across an asset class, 

potentially causing margin calls from concerned creditors at other financial institutions, 

propagating further fire sales. 

Both of these scenarios are plausible ways that hedge funds could disrupt financial stability. 

The FSOC's hedge fund working group had also outlined a series of data limitations that must 

be addressed to give policymakers a better understanding of potential hedge fund financial 

stability risks. 

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This framework is not only theoretical. In September 1998, the Federal Reserve Bank of New 

York facilitated a private bailout of Long Term Capital Management, a highly leveraged hedge 

fund. LTCM was leveraged at 30-to-1, with $4 billion in net assets, but $125 billion in gross 
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assets. The leverage figure was even more staggering when factoring in synthetic leverage 

from derivatives. Major Wall Street banks were highly exposed to LTCM and if it had failed, the 

ensuing stress at these major banks could have sparked a financial crisis. Moreover, research 

from the Federal Reserve Bank of San Francisco found that during the 2007-2008 financial 

crisis, hedge funds were a key vehicle through which stress was transmitted throughout the 

financial sector and concluded that further research into hedge fund risks was warranted. 

Not only is the hedge working group's conspicuous absence from the FSOC's agenda over the 

past eight months troubling, but the Trump administration also endorsed the House-passed 

Financial Choice Act. The Choice Act slashes the FSOC's budget in half and eliminates its 

authority to subject systemically important nonbank firms, including hedge funds, to enhanced 

regulation and oversight by the Federal Reserve Board. 

At the next FSOC meeting, Secretary Mnuchin should affirm the necessity of the hedge fund 

working group and provide an update on its findings, including the actions the FSOC has 

taken to rectify the data limitations outlined in its previous public update. This inquiry is too 

important to be shut off or hidden from public view. 

Gregg Gelzinis 

Gregg Gelzinis is a special assistant for the economic policy team at the Center for American 

Progress. 

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