2015 Annual Report

to Congress

OFFICE OF FINANCIAL RESEARCH

2014 2015 2014 2015

Funding Conditions

Market Liquidity

Balance-Sheet Liquidity

Intermediation

Corporate Sector

Households

Financial Sector

Joint Distress

Asset Market Interdependence

Interconnectedness

Less Risk More Risk

Volatility

Interest Rate Risk

Positioning

Asset Valuations

Economic Activity

Sovereign Risk

Ination Uncertainty

External Sector

SUBCATEGORIES

(underlying indicators)

RISK CATEGORY

MACRO

CONTAGION

MARKET

FUNDING/

LIQUIDITY

CREDIT

Bank/Dealer nk/Dealer Bank/Dealer nk/Dealer

Central 

CP

Central 

CP

D D

F F

COLLATERAL LAYER

FUNDING LAYER

B

HF HF

HF HF

PB PB

F F

DEALER DEALER

Cash

Provider

Cash

Provider

HF HF

HF HF

PB

ASSET LAYER

DEALER DEALER

HF

HF

HF

HF

HF Exchange

T T

D D

F

Financing Desk

T

Trading Desk

D

Derivatives Desk

PB

Prime Broker

DEALER

CP

Counterparty

HF

Hedge Fund

Research and Data

Threats

Mission

FROM THE DIRECTOR

I am pleased to present the Office of Financial Research 2015 Annual 

Report to Congress. Like the three preceding it, this fourth annual 

report analyzes potential threats to U.S. financial stability, documents 

our progress in meeting the mission of the Office of Financial Research 

(OFR), and reports on key research findings.

Over the past year, the resilience of the United States financial system has continued to 

improve and threats to overall U.S. financial stability remain moderate. Both are trends 

we’ve discussed for the past four years. But as we’ve also previously warned, there’s no 

cause for complacency.

In fact, several financial stability risks have continued to edge higher over the past year. 

Three major themes stand out: (1) the persistent effects of low interest rates, (2) elevated 

and rising credit risks, and (3) the uneven resilience of the financial system. 

This year we are reporting to Congress and the public in two installments. We presented 

to the public in-depth analyses in our 2015 Financial Stability Report in December. In 

addition to summarizing those analyses, this Annual Report to Congress documents our 

progress and presents plans for further advancement this year and in coming years. I 

hope that, taken together, the two reports will help us communicate with a wide range 

of stakeholders while ensuring that we are transparent and accountable in our work and 

the ways we pursue it. 

These reports, like the three we published previously, reflect the views of the OFR 

and our staff. As before, however, we also benefitted from consultation with Financial 

Stability Oversight Council member organizations and their staffs. Consultation and collaboration — with our domestic and global counterparts — is essential for our work and 

a critical ingredient in fostering what we call a virtual research-and-data community. 

The OFR has continued its progress in FY 2015 in meeting its unique, multipart mission. 

Although the core of our mission includes both financial data and research, it is the data 

part of our mission that makes the OFR unique. Our mandates to improve the scope, 

the quality, and the accessibility of financial data are designed to expand our capacity 

and that of our stakeholders to spot and track vulnerabilities in the financial system. 

Here, we report our progress in pursuing our data initiatives, as well as our plans for 

enhancing them.

No less important, our independent research mandate is critical for three reasons. First, 

it is essential for fulfilling our data mandates and is complementary to them. Framing 
IV

Letter from the Director continued

how we assess and monitor threats to financial stability is essential to fill data gaps with 

high-quality financial information fit for its intended purpose. In addition, our research 

agenda is central to filling gaps in our understanding, develop new tools for analysis, and 

assess the resilience of the financial system. Finally, as an independent office that does 

not make policy, the OFR is guided by an objective research agenda in fulfilling the mandate to study and advise on the impact of policies related to financial stability, including 

evaluating and reporting on stress tests. We report here the significant progress we’ve 

made in meeting this analytical mandate.

The OFR has developed a strategic plan and built a strong research-and-data organization to meet our mission. We have assembled a world-class staff and built a robust 

technical infrastructure with powerful computing tools and multiple levels of security to 

safeguard sensitive data. 

To advance our mission in coming years, create a sustainable organization, and be 

transparent and accountable to the public, the OFR is building on our strategic plan with 

a programmatic approach to our work. OFR programs will align our priorities with our 

mission and strategic plan, clearly communicate those priorities to our stakeholders, and 

set clear direction and milestones for achieving them. For example, we will organize our 

work on central counterparties, or CCPs, in a single program covering risk assessment, 

our analytical framework, data collection, and evaluation of risk-mitigating policy tools. 

This report describes in some detail our programmatic approach and our eight initial 

programs.

I am deeply grateful for the opportunity to lead this unique and extraordinary organization and our team of diverse, talented, and dedicated professionals. They have made 

and continue to make remarkable strides toward meeting our mission. Financial innovation and the migration of financial activity across markets and jurisdictions will always 

challenge our ability to measure and analyze vulnerabilities in the financial system and 

evaluate the financial stability toolkit. But I am confident that our dedication, strategic 

direction, and culture of collaboration will continue to help us meet those challenges and 

contribute to making our financial system more resilient.

Richard Berner

Director, Office of Financial Research
CONTENTS

From the Director

Preface

Summary

Analysis of Threats to the Financial Stability of 

the United States 5

Threats to Financial Stability 6

Monitoring Tools 9

Further Discussion of Selected Risks 18

Key Findings from OFR’s Research and Analysis of the 

Financial System 25

Evaluating Financial Stability Policies 26

Research and Data Publications 39

Status of the Efforts of the OFR in Meeting its Mission 47

Strategic and Workforce Planning 50

Further Discussion of Data Quality and Scope 57

Collaboration and Outreach 61

Budget and Workforce 67

Information Security 69
OFR Responsibilities

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the OFR. Section 153(a) of the law directed the OFR to support the Financial 

Stability Oversight Council (FSOC) and member agencies by:

•	 Collecting data on behalf of FSOC, and providing such data to FSOC and 

member agencies

•	 Standardizing the types and formats of data reported and collected 

•	 Performing applied research and essential long-term research 

•	 Developing tools for risk measurement and monitoring

•	 Performing other related services

•	 Making the results of OFR activities available to financial regulatory agencies

•	 Assisting FSOC member agencies in determining the types and formats of data 

they should collect

The Act directs the OFR Data Center, on behalf of the FSOC, to collect, validate, 

and maintain all data necessary to carry out its duties. The Data Center acquires the 

data from FSOC member agencies, commercial data providers, publicly available 

sources, and financial entities under certain statutory authority. The law specifically 

directs the OFR to collect data on financial transactions and positions and to prepare 

and publish a financial company reference database, financial instrument reference 

database, and formats and standards for OFR data and data reported to the OFR.

The Dodd-Frank Act directs the OFR Research and Analysis Center, on behalf of the 

FSOC, to:

•	 Develop and maintain independent analytical capabilities and computing 

resources for reporting systems to identify and study risks to U.S. financial 

stability 

•	 Monitor, investigate, and report to the FSOC and Congress on changes in 

systemwide risk levels and patterns

•	 Conduct, coordinate, and sponsor research to support and improve regulation 

of financial entities and markets

•	 Evaluate and report on stress tests or other stability-related evaluations of 

financial entities overseen by FSOC member agencies

•	 Maintain the expertise to support requests for advice or assistance from 

regulators

•	 Investigate disruptions and failures in the financial markets, report findings, 

and make recommendations to the FSOC based on those findings

•	 Conduct studies and provide advice on the impact of policies related to systemic risk and promote best practices for financial risk management
PREFACE

The Dodd-Frank Act established the 

OFR as an independent office within the 

Department of the Treasury. 

We work to fulfill our mission by:

•	 Improving the scope, quality, and accessibility of financial data

•	 Assessing and monitoring threats to financial stability

•	 Developing tools for risk measurement and monitoring that reach across 

the financial system

•	 Conducting applied and fundamental research on the stability of the 

financial system

•	 Conducting studies and providing advice on the impact of policies 

designed to improve resilience in the financial system.

Section 154(d)(2) of the Dodd-Frank Act requires the Office to submit a report 

to Congress annually that assesses the state of the United States financial 

system, including:

•	 An analysis of any threats to the financial stability of the United States

•	 The status of the efforts of the Office in meeting its mission

•	 Key findings from the research and analysis of the financial system by the 

Office

The OFR has produced three annual reports since 2012 to fulfill that mandate. 

In December, the OFR published the 2015 Financial Stability Report, which 

provides the same type of in-depth analysis contained in the OFR’s first three 

annual reports.

The OFR 2015 Annual Report to Congress summarizes our financial stability 

assessment, reports on the key findings of our research and analysis, and provides an update on the efforts of the Office in meeting its mission. 

The annual report fulfills the OFR’s responsibility to report to Congress and the 

public.

We hope that by creating these two reports, we are best serving the needs of 

our wide array of stakeholders, while fulfilling our commitment to be transparent and accountable.

SUMMARY

2015 Annual Report to Congress

The main chapters of this 2015 Annual 

Report to Congress follow the statutory 

requirement to prepare and submit a 

report to Congress annually assessing the 

state of the United States financial system, 

including:

•	 Analysis of threats to the 

financial stability of the 

United States

•	 Key findings from OFR’s 

research and analysis of 

the financial system

•	 Status of the efforts of 

the OFR in meeting its 

mission
2015 OFR Annual Report 2

1 Analysis of Threats to the Financial Stability of 

the United States

Threats to financial stability arise when shocks expose vulnerabilities in the financial system. 

This chapter highlights our assessments of risk and resilience in the financial system, our 

framework for monitoring them, and the tools we are developing and refining to achieve this 

mandate.

Threats to U.S. financial stability have crept higher since our 2014 Annual Report, but are still 

moderate in our judgment. Events since we published our 2015 Financial Stability Report

last month, including the Federal Reserve’s subsequent incremental increase in short-term 

interest rates, have not altered that conclusion.

Three key vulnerabilities stand out: (1) the long-term impact on risk-taking of persistently low 

interest rates, (2) mounting debt and declining credit quality in U.S. corporations and emerging-market countries, and (3) weaknesses that remain in the system despite financial reforms 

and better risk management by financial companies.

We base our assessments on analysis of key data and specific vulnerabilities across the financial system. Our Financial Stability Monitor helps organize that analysis, using a heat map 

that depicts five risk categories and includes breakout displays of two of those categories.

The chapter also discusses other risks from diverging global economic conditions and policies, 

searching for yield amid still-low interest rates and volatility, and cybersecurity breaches.

2 Key Findings from OFR’s Research and Analysis of 

the Financial System

Although the OFR does not make policy, we have a mandate to conduct studies and provide advice on financial stability policies. We present our key findings on the effectiveness 

and potential unintended consequences of some of those policies, and findings from our 

analysis of financial activities. 

Policymakers have taken important steps to eliminate the implied taxpayer support for 

large, complex financial institutions whose serious distress — or whose size, complexity, or 

interconnectedness — could threaten financial stability.

OFR research found that U.S. banking activity remains highly concentrated in eight global 

systemically important banks and that changes in regulation appear to have reduced the 

perception of competitive advantages for them.

Our research also found that clearing derivatives trades through central counterparties (CCPs) 

has significant benefits in reducing the risks to counterparties of default — as long as the CCP 

has the resources to meet payment obligations in the event of member default. But a CCP 

can also be a single point of vulnerability for failure and creates the potential for propagation 

of risks. 

Stress testing is an effective tool for testing the safety and soundness of individual financial 

institutions, and we offer approaches to “macroprudential” stress testing that spans the 

financial system.
3 Summary

Our initial evaluations of policies related to asset management, the leverage ratio, nonbank lending, and housing-market finance point the way to further investigation.

Our 2015 Financial Stability Report on our website and recent OFR papers about research 

and data, listed and grouped here by theme, discuss these findings at greater length. 

3 Status of the Efforts of the OFR in 

Meeting its Mission

The OFR has made significant progress in meeting its unique, multipart mission, and we 

have consequential plans for further progress. This final chapter enumerates OFR accomplishments since its creation in 2010, including our five-year strategic plan. 

The next step is to implement our programmatic approach to achieve the plan’s goals and 

objectives. OFR programs are based on core areas of concentration to help align our priorities with our mission and provide clear direction for us to achieve them.

Initially, OFR programs will focus on eight core areas:

1. Monitors – We are developing a suite of tools to assess, measure, and monitor 

risks across the financial system to complement our Financial Stability Monitor and 

Financial Markets Monitor.

2. Central Counterparties – We are evaluating and measuring vulnerabilities in CCPs, 

which have benefits but also potential risks.

3. Data Quality – We are continuing and expanding the already substantial work we 

have done to standardize financial data and assist FSOC member agencies with data 

standardization.

4. Data Scope – We are continuing to assess and fill gaps in financial data, and to 

assure that data for financial stability monitoring are comprehensive and detailed.

5. Data Accessibility – We are increasing transparency and facilitating research by fostering secure and appropriate data sharing with other officials, industry, and the public.

6. Stress Tests – We are following our mandate to evaluate and report on the stress 

testing of banks, nonbanks, and the broader financial system.

7. Risks in Changing Market Structure – We are investigating disruptions and failures 

in financial markets as we conduct, coordinate, and sponsor research to support and 

improve market regulation.

8. Risks in Financial Institutions – We are conducting and promoting research to 

improve regulation of banks, insurance companies, and other financial institutions.

We have made significant progress in data-related initiatives, such as promoting the legal 

entity identifier system, improving data quality in swap data repositories, and conducting 

the bilateral repo and securities lending pilot projects. In the coming year, we will prepare 

for permanent collections of repo and securities lending data. We will also develop and 

launch a financial instrument reference database.

ANALYSIS

Analysis of Threats to the Financial 

Stability of the United States

This chapter presents the OFR’s assessment 

of threats to the financial stability of the 

United States, discusses our framework for 

monitoring risk and resilience in the financial 

system, and highlights the tools the Office 

is developing and refining to achieve this 

core part of our mission.

The three chief threats are the: (1) impact 

of persistently low interest rates, (2) 

increasing debt and declining credit quality 

in U.S. corporations and emerging markets 

overseas, and (3) areas of weakness in the 

system that remain despite financial reforms 

and better risk management by financial 

companies.
2015 OFR Annual Report 6

Threats to Financial Stability

Threats to U.S. financial 

stability have edged 

higher since our annual 

report last year, but remain 

in the medium, or moderate, range. That assessment has not changed since 

we published our 2015 

Financial Stability Report 

last month and the Federal 

Reserve’s subsequent incremental increase in shortterm interest rates does not 

alter that assessment.

We continue to base our assessment on our Financial Stability Monitor, 

observation of the financial system, and analysis of key data and specific 

vulnerabilities.

Before and after the Federal Reserve raised short-term policy rates from 

the near-zero levels prevailing since 2008, the Fed clearly communicated 

its expectations: Economic conditions would evolve in a way warranting 

only gradual increases in the federal funds rate and short-term interest 

rates would probably remain below historical averages for some time. 

Consequently, the initial market reaction to the rate increase was orderly.

We expect that such a gradual pace of future increases, as well as other 

factors holding down long-term rates, will keep long-term interest rates at 

historically low levels for some time. 

Those circumstances will probably sustain incentives for investors to take 

more risks for higher yields on their investments. We believe that this 

continued “reaching for yield” behavior — combined with vulnerabilities 

from heavy debt loads and eroding credit quality in emerging markets 

and among nonfinancial U.S. businesses, as well as pockets of uneven 

resilience in the financial system — will increase the vulnerability of the 

U.S. financial system to shocks.

The interplay among these three themes merits further 

discussion:

1Long-term impact of low interest rates – Although some interest 

rates have recently moved higher, given the context just described, 

we expect the incentives for risk-taking from historically low interest rates 

to endure for some time.

Persistently low rates will continue to prompt investors to take higher risks 

to increase their returns on investment and may encourage excessive 

borrowing.

The section on “Other Selected Risks” later in this chapter explores this 

theme in more detail. 

2 Rising debt and ebbing credit quality in nonfinancial U.S. 

businesses and emerging markets – We have been warning for 

some time, including in our 2014 Annual Report, of growing threats to 

financial stability from rising debt and deteriorating credit quality in U.S. 

corporations and emerging markets overseas. The ratio of the debt of 

nonfinancial businesses in the United States to gross domestic product is 

historically high and companies’ leverage (the ratio of debt to earnings) 
7 Analyzing Threats to Financial Stability

What Is Financial Stability?

Financial stability occurs when the financial system can provide its six basic 

functions, even under stress: (1) credit allocation and leverage, (2) maturity 

transformation, (3) risk transfer, (4) price discovery, (5) liquidity provision, 

and (6) facilitation of payments. 

Financial stability is not about curbing market volatility, predicting financial 

shocks, or preventing them. Financial stability is about resilience. When 

shocks hit, a resilient financial system will continue to provide those basic 

functions to facilitate economic activity.

Threats to financial stability arise from vulnerabilities in the financial system 

— failures in these functions exposed by shocks. Resilience depends on the 

system having enough shock-absorbing capacity to continue to function 

under stress, as well as incentives being aligned to limit excessive risk-taking.

Shock absorbers buffer hits, while “guard rails” — or incentives that affect 

behavior — constrain risk-taking by increasing its cost.

Resilience of the financial system and its converse, threats to financial stability, are systemwide concepts. To measure, assess, and monitor them, we 

must look across the financial system. We must examine financial institutions and markets to improve our understanding of how threats spread from 

one institution or market to others. Only then will we be able to find ways 

to counter those risks and make the financial system more resilient.

continues to rise. The hunt for yield and current historically low default 

rates are promoting easy credit and heavy borrowing.

Today’s low default rates seem unlikely to persist. Stress in energy and 

commodity industries from declining prices could spread as investors 

reassess their risks.

Global economic risks are a broader concern. Global growth has slowed 

and the strong dollar is dampening U.S. exports by making U.S. goods 

more expensive for foreign buyers. The dollar’s rise has also pushed down 

the prices of dollar-denominated commodities. In many emerging markets, such as markets in China, Russia, Latin American nations, and parts 

of Asia and Eastern Europe, debt levels in the private sector have reached 

historic highs after years of heavy borrowing. These concerns are most 

pronounced for economies that produce energy and other commodities 

and economies most exposed to the slowdown in global growth. 

A shock that erodes perceptions about credit quality in U.S. corporations 

or emerging markets could pose a threat to financial stability.
2015 OFR Annual Report 8

3 Pockets of vulnerability – Reforms and companies’ improvements 

in managing their risks after the financial crisis have strengthened 

key parts of the financial system. For example, these changes resulted 

in higher capital for banks and enhanced transparency for derivatives 

markets.

Despite the improvement in overall resilience, pockets of vulnerability 

remain:

•	 New regulations and other factors have spurred the migration of 

some financial activities and their related risks to areas that may be 

less transparent and less resilient.

•	 Rapid, sharp declines in market liquidity — exhibited during events 

from the “flash crash” of May 2010 to episodes in 2015 — have 

amplified market shocks. If larger shocks hit, a decline in liquidity 

could disrupt market functioning and could pose a threat to financial 

stability. (Ample market liquidity allows large volumes of assets to be 

traded or exchanged for cash quickly without substantially affecting 

price.)

•	 Risks that short-term, wholesale funding could be vulnerable to the 

kind of runs and fire sales that marked the financial crisis continue 

to exist despite regulatory reforms that forced banks to reduce their 

reliance on this type of funding used to finance their operations and 

investments.

•	 Interconnections among financial companies are evolving and the 

ramifications are not yet known. These connections can serve as 

channels for the propagation of shocks through the financial system.

These three themes and other risks are discussed later in this chapter.
9 Analyzing Threats to Financial Stability

Monitoring Tools

Monitors are tools for 

tracking risks in key parts 

of the financial system. The 

OFR currently produces two 

monitors and has several more 

in development. 

In fiscal year (FY) 2016, the OFR will launch a monitors program to 

organize and plan the further development and implementation of 

this suite of monitors (see Chapter 3).

The two monitors in production are the Financial Stability Monitor, a 

graphic heat map and related material that give a snapshot of vulnerabilities in the financial system, and the Financial Markets Monitor, a 

periodic publication that gives the interpretation of the OFR research 

staff of developments in financial markets.

Other OFR monitors in development are the Money Market Fund 

Monitor, the Credit Default Swaps Monitor, the Hedge Fund Monitor, 

and the Correlation Monitor, as shown in more detail in Figure 1.

Figure 1. OFR Financial Stability Monitoring Tools

Tool Frequency Description Audience Data Used

Financial 

Stability 

Monitor

SemiannualProvides a snapshot of weaknesses in the 

financial system based on five functional areas 

of risk: macroeconomic, market, credit, funding 

and liquidity, and contagion. The monitor is not 

designed to predict the timing or severity of 

a financial crisis but to identify, at a high level, 

underlying vulnerabilities that may predispose the 

system to a crisis.

Internal, 

Financial 

Stability 

Oversight 

Council 

(FSOC), 

public

Public data, 

commercially 

acquired data, and 

industry analyses

Financial 

Markets 

Monitor

Monthly Provides an overview on major developments and 

emerging trends in global capital markets.

Internal, 

FSOC, 

public

Public data, 

commercially 

acquired data, and 

industry analyses

Money Market 

Fund Monitor

Monthly Will examine individual funds and the industry as 

a whole on the basis of credit, interest rate, and 

liquidity risk. Each risk category will be analyzed 

based on portfolio statistics and holdings.

Internal, 

FSOC, 

public

Securities and 

Exchange 

Commission (SEC) 

data (Form N-MFP)

Credit Default 

Swaps (CDS) 

Monitor

TBD Will provide analytics on various financial stability 

metrics in the CDS market, such as excessive 

market concentration and interconnectivity, 

through risk metrics and visual assessment 

techniques.

Internal, 

restricted 

FSOC

Depository 

Trust & Clearing 

Corporation data 

and commercially 

acquired data

Hedge Fund 

Monitor

TBD Will provide analytics on potential risks that could 

arise out of the hedge fund industry.

Internal, 

restricted 

FSOC

Commercially 

acquired data and 

SEC supervisory 

information

Correlation 

Monitor

Daily Will explore cross-asset correlations through 

interactive visualizations.

Internal, 

FSOC, 

public

Public data, 

commercially 

acquired data
2015 OFR Annual Report 10

The OFR’s monitoring program entails not only developing new monitors 

but also refining existing ones. For example, the Financial Stability Monitor 

is a tool that is continually evolving to become more forward looking and 

better represent the weaknesses in the financial system.

Financial Stability Monitor

The Financial Stability Monitor displays current weaknesses in the financial 

system based on five functional areas of risk: macroeconomic, market, 

credit, funding and liquidity, and contagion. The monitor is designed 

Figure 2. OFR Financial Stability Monitor

2014 2015 2014 2015

Funding Conditions

Market Liquidity

Balance-Sheet Liquidity

Intermediation

Corporate Sector

Households

Financial Sector

Joint Distress

Asset Market Interdependence

Interconnectedness

Less Risk More Risk

Volatility

Interest Rate Risk

Positioning

Asset Valuations

Economic Activity

Sovereign Risk

Ination Uncertainty

External Sector

SUBCATEGORIES

(underlying indicators)

RISK CATEGORY

MACRO

CONTAGION

MARKET

FUNDING/

LIQUIDITY

CREDIT

Note: For more detail on how the monitor is structured, see the note accompanying Figure 2.1 in 

the Financial Stability Report on our website.
11 Analyzing Threats to Financial Stability

to identify underlying vulnerabilities that may predispose the financial 

system to a crisis, not to predict the timing or severity of a crisis. By 

looking across the financial system, the monitor can help identify potential threats wherever they arise.

The monitor displays these risks in a clear and easy-to-understand, 

high-level format. It represents about 60 indicators that are aggregated 

from a vast pool of underlying data. The indicators are collected from 

models, market prices, and surveys, cutting across different jurisdictions, 

Indicator weighted average 

(z-score 0-20)

SUBCATEGORIES INDICATORS

Subcategory 

average

Normalize data across 

individual indicators

Color conversion scale

0 10 20

7.84

8.97

8.67

RISK CATEGORY

Corporate Sector

Households

Financial Sector

CREDIT

2014 2015

Corporate Bond Spreads

Corporate Leverage

Nonnancial Debt-to-GDP (Level)

Nonnancial Debt-to-GDP (Change)

Mortgage Delinquencies

Household Debt Service Ratio

Household Debt-to-GDP (Level)

Household Debt-to-GDP (Change)

Savings-to-Income

Lending Standards

Bank Provisions

Bank Credit Risk

Bank Health Index

Financial Debt-to-GDP (Level)

Financial Debt-to-GDP (Change)

Volatility

Interest Rate Risk

Positioning

Asset Valuations

Market Volatility

Volatility Surface

Duration Index

Investor Condence 

Net Speculative Positioning 

Emerging Market Fun Flows

Equity Markets

Commercial Real Estate 

House Prices 

High-Yield Credit 

Treasury Term Premium 

Municipal Credit

MARKET

2014 2015

19.69

8.10

9.52

10.60

RISK CATEGORY SUBCATEGORIES INDICATORS

Figure 3. Financial Stability Monitor Expanded: Market and Credit Risks
2015 OFR Annual Report 12

industries, and institutions. We derive each risk measurement 

from an indicator’s position within its historical range.

The monitor first appeared in the OFR’s 2013 Annual Report and 

since then, our researchers and data experts have been working 

to refine the indicators, make the monitor more forward looking, 

and make other improvements.

In June 2015, the OFR posted an expanded, interactive, online 

version of the monitor on the OFR website at financialresearch.

gov. In the online version, users can explore the monitor’s risk 

categories and subcategories, drill down to its indicators, and 

view its historical performance. The display of the underlying 

indicators can be instructive by signaling risks that might not 

be apparent in the higher-level risk categories. For example, a 

yellow color signifying medium risk in one of the five major categories might have red, elevated risks underpinning it, as well as 

green, more benign risks that “cancel out” the red ones. 

Figure 3 includes some of that drill-down detail.

The release of the online monitor was the first time the OFR 

made public an interactive online tool for visualizing metrics 

related to financial stability. We plan to update the online 

version and the underlying analysis every six months to complement the versions in each of our annual financial stability 

reports and annual reports to Congress (see The OFR’s Financial 

Stability Risk Assessments).

The OFR’s Financial Stability Risk Assessments

•	 December 2015: 2015 Financial Stability Report – This 

new report analyzed threats to financial stability, evaluated 

policies to reduce those threats, described actions to improve 

U.S. financial data, and reported key findings from OFR 

research. The report preceded this 2015 Annual Report to 

Congress and is on our website.

•	 June 2015: Financial Stability Monitor – In this inaugural 

online version of the monitor, we judged that “overall risks 

to financial stability remain at a medium level. Many of the 

risks that were present at the time of our last assessment 

remain relevant, while some have diminished.”
13 Analyzing Threats to Financial Stability

Assessment of the Monitor’s Five Risk Categories

1 Macroeconomic – Macroeconomic risks have risen since our last 

annual report, largely due to economic deterioration in China and 

other emerging market economies. Economic growth there has slowed, 

investors are wary, investment capital is retreating, and authorities have 

moved to protect the value of their currencies (see Figure 4). 

In addition, the levels of debt among corporations in emerging markets 

— already high and rising rapidly — will become increasingly difficult to 

manage during the economic slowdown.

In a sample of large emerging market countries, total corporate debt 

increased from $10 trillion to $24 trillion in 2008. In China, South Korea, 

Thailand, and Chile, ratios of corporate debt to gross domestic product 

are now more than 100 percent (see Figure 4). 

Nonfinancial firms in emerging markets are under particular stress. Profits 

are declining, debt levels are high, and the ability to pay down or pay 

off their debts is declining. Among large countries in emerging markets, 

Brazil, Turkey, and China stand out for the highest debt among nonfinancial companies in relation to their economies. Since 2010, corporations 

in the raw materials and energy sectors have had the largest increases in 

debt-to-earnings ratios, coupled with diminishing profits.

Figure 4. Emerging Market Risk Levels

Note: For more detail, see Figure 2-33 and Figure 2-32 in the Financial Stability Report on our website. 

GDP=gross domestic product. 

Sources: Bloomberg L.P., Haver Analytics, International Monetary Fund, OFR analysis

Indonesia

Mexico

Russia

South Africa

Brazil

India

Turkey

Thailand

Chile

China

Korea

0 40 80 120 160

Corporate

Debt % of GDP

Q4 2014

Change Since 

Q1 2008

Average

Q4 2014 Monetary External

Vulnerability

PrivateFiscal Sector

Resistance to shock

Low High 

Buffers
2015 OFR Annual Report 14

The U.S. economy has 

been resilient to these 

global problems so 

far, but continued or 

magnified problems 

overseas could harm 

future growth and 

financial stability in 

the United States.

The buildup of debt in producers of energy and other commodities helped 

fuel a protracted and significant expansion in the global supply of commodities. Commodity producers kept pace with demand from China and 

the U.S. shale oil boom added to the availability of crude oil. As global 

growth slowed and demand declined, the prices of energy, metals, and 

other commodities declined sharply. The supply has been slow to adjust. 

As a result, the slowdown in China and the rest of the global economy is 

taking a toll on countries that export large amounts of commodities and 

capital goods for sale to Chinese businesses. For example, the deceleration means that China is importing less oil to fuel its industrial production, 

exacerbating the global oil glut. Other emerging market economies are 

facing some of the same problems, as well as spillover effects from China.

A third of U.S. corporate profits originate overseas. The stronger dollar 

and weaker global growth are dragging overall earnings lower. Total 

U.S. exposure from direct financial links between the United States and 

emerging markets, including U.S. investments in emerging markets and 

U.S. bank loans, is estimated to be $2 trillion to $3 trillion, or 1.1 percent 

to 1.6 percent of the financial assets in the U.S. private sector, according 

to OFR estimates based on private and public data sources.

The U.S. economy has been resilient to these global problems so far, but 

continued or magnified problems overseas could harm future growth and 

financial stability in the United States.

2 Market – A number of market risks, the risk of losses from declines 

in asset prices, are also elevated and a cause for concern. Long-term 

Treasury yields barely compensate investors for the risks of holding them, 

as indicated by near-zero “term premiums,” which measure the risk that 

short-term Treasury yields will not evolve as investors expect. The low 

yields on bonds that use Treasuries as the benchmark for their pricing 

pull down yields on riskier ones, such as bonds issued by corporations. 

As investors have acquired longer-term debt to boost returns, they have 

increased their duration risk — duration being the sensitivity of bond 

prices to changes in interest rates — to the high end of its historical 

range. The result is that investors are vulnerable to noticeable losses from 

even relatively moderate changes in interest rates. 

3 Credit – Credit risk, or the risk of borrowers defaulting and failing to 

repay their debts, is high and rising among nonfinancial U.S. businesses. Our analysis indicates that the risk is higher than our Financial 

Stability Monitor indicates. As noted earlier, debt among nonfinancial 

companies has been growing for years and is at a historic high relative to 

U.S. gross domestic product (see Figure 5).

In addition, the ratio of debt to earnings for nonfinancial U.S. corporations will rise further if earnings continue to decline. The buildup of debt 
15 Analyzing Threats to Financial Stability

Figure 5. U.S. Corporate Debt - Nonfinancial Firms

$4.7 trillion

Outstanding 

Non
nancial 

Corporate Bonds

$1.5 trillion

1995 Q2 2015

55%

70%

Non
nancial

Debt to GDP

Sources: Haver Analytics, Federal Reserve Financial Accounts of the United 

States

Figure 6. The United States in the Corporate Credit 

Cycle

Emerging 

Markets

Japan

U.S.

Europe

REPA RI

ER COVERY

EXPANSION DOWNTUR

N

Funding pressure

Asset prices lower

Defaults increase 

Relever balance sheets 

Volatility and speculation 

rise

Leveraged buyout 

and mergers and 

acquisitions 

capital 

expenditure

rise

Restructure

Free cash ow rises

Margins increase

Cleanse balance 

sheets

Repay debt

Conserve cash

Note: For more detail see Figure 2-3 in the Financial Stability Report on 

our website.

Sources: Bloomberg L.P., Haver Analytics, Morgan Stanley, OFR analysis

is starkest among companies already vulnerable 

because of existing debt levels and weakening 

capacity for repaying their debts.

Elevated debt and sinking earnings are hallmarks 

of the late stage of the credit cycle, which typically precedes a rise in default rates (see Figure 

6). As the figure shows, emerging markets are in 

the downward portion of the cycle with defaults 

increasing, asset prices falling, and funding 

harder to obtain for operations and investments. 

Europe and Japan are still in the recovery phase.

Meanwhile, the drop in the price of oil and other 

commodities, coupled with the slowdown in 

global economic growth, has diminished the 

ability of multinational companies and firms in the 

energy and commodity industries to repay their debts.

In the United States, regional banks with exposures to energy companies 

or to local economies reliant on the energy industry face the prospect of 

increases in troubled loans. Many of them have already increased their 

loan-loss reserves in response, but the ultimate magnitude of losses in 

these industries and regions is uncertain.
2015 OFR Annual Report 16

Some U.S. corporations have tried to maintain their earnings growth by cutting costs. 

Instead of using loan proceeds to pay off 

their debt, other companies are increasing 

debt through acquisitions, leveraged buyouts, 

dividend payments to shareholders, and buying 

back their stock (see Figure 7). Joint action by 

federal financial regulators in 2013 and 2014 

has helped to reduce the number of bad loans 

and to curtail banks from issuing leveraged 

loans, which are loans to companies or individuals that already have significant debt loads. 

Despite that progress, standards for loan 

underwriting remain weak.

4 Funding and liquidity – Wholesale funding markets appear stable. 

Financial firms use this type of funding, frequently on a short-term 

basis, for their operations and to manage risk. Regulatory reforms after 

the 2007-09 financial crisis forced banks to reduce their use of short-term 

wholesale funding and increase their capital cushions. These requirements 

helped reduce the risk of banks failing and triggering runs. Many of the 

largest broker-dealers, which are at the center of these markets, became 

part of bank holding companies and are subject to these requirements. 

These changes, combined with changes in the behavior of market participants and improvement in companies’ risk management, dramatically 

reduced the size of these markets since the crisis.

In contrast, market liquidity risk represents a pocket of vulnerability in the 

financial system, as mentioned earlier. The years after the crisis have had 

long stretches of relatively ample liquidity and low volatility, interrupted 

by episodes of spiking volatility and impaired market liquidity, even in 

markets considered deep and liquid.

Examples of these episodes are listed in Figure 8. Analysis of these 

events shows steep declines in liquidity that amplified the shocks. If 

the shocks were significantly larger, the resulting evaporation of market 

liquidity could threaten financial stability.

Although some participants in the bond market have attributed the 

deterioration in liquidity to changes in government regulations, such as 

requirements for banks to hold more capital, a number of other factors 

have also been at play since the financial crisis. Some of these factors 

involve market structure, including the surge in automated trading, 

Figure 7. Leveraged Loan Use Shift

0

50

100%

2005 2007 2009 2011 2013 2015

Other

Renancing

Dividend

payment and

share buyback

Mergers,

acquisitions, and

leveraged buyouts

Sources: Standard & Poor’s, OFR analysis
17 Analyzing Threats to Financial Stability

changes in the appetite of investors for taking risks, and transformation 

in the types of investors active in the markets. Other factors relate to 

economic cycles, such as lower returns when interest rates are low and 

changes in the availability of collateral. The relative importance of these 

factors is difficult to measure. 

5 Contagion – The risk of financial stress being transmitted across different entities and markets, known as contagion risk, has risen since 

our last annual report. The driver was volatility in financial markets in the 

third quarter of 2015.

Although the Financial Stability Monitor suggests that overall contagion 

risk is low, this risk is difficult to measure in the absence of financial stress. 

In our assessment, contagion risk is actually higher than current measures 

indicate.

Figure 8. Recent Illiquidity Shocks in Major Markets

Funding Market 

Incident and Date

Liquidity Analysis

“Flash Crash” 

May 6, 2010

The prices of many U.S. equities and equity-based 

products experienced a severe, short-lived sell-off, 

with many stocks falling 5 percent to 15 percent 

before reversing. 

“Taper Tantrum” 

Mid-2013

U.S. Treasury yields sold off sharply, beginning in 

late May, triggered by a change in U.S. monetary 

policy expectations, with spillovers across U.S.-

dollar denominated bond markets.

“Flash Rally” 

October 15, 2014

U.S. Treasury yields fell by seven-to-eight standard 

deviations during the day, despite the lack of a 

significant fundamental driver. The single-day 

trading range was the fourth largest on record. 

Bund sell-off

April-May 2015

After reaching historic lows, yields on German Bund 

futures rose sharply over several days as crowded 

trades associated with the European Central Bank’s 

asset purchase program were rapidly unwound. 

Price action on May 7 represented a four-standarddeviation move for a single trading day.

Equity and exchangetraded fund (ETF) 

dislocations

August 24, 2015 

U.S. equities sold off sharply, triggering market 

circuit breakers that halted trading in futures and 

cash equities. This sell-off complicated trading and 

pricing for ETFs linked to the equities.
2015 OFR Annual Report 18

Further Discussion of Selected Risks

This section discusses risk 

from divergent global 

policies and economic conditions, interest rate risk, 

volatility risk, and cybersecurity risk.

Risk from Divergent Global Policies and Economic 

Conditions

Economic conditions in the United States have diverged in recent years 

from conditions in Japan and countries that use the euro as their currency, 

known as the euro area. U.S. growth has been stronger than in these 

countries and the difference has led to differing monetary policies, which 

has been a powerful force in driving down U.S. interest rates since early 

2014. 

In the United States, the Federal Reserve ended its large asset-purchase program in October 2014 and began increasing interest rates in 

December 2015. In contrast, the Bank of Japan and the European Central 

Bank (ECB) have implemented large-scale asset purchase programs since 

2013 to combat weak growth and inflation (see Figure 9).

In Germany, expectations for the launch of the ECB program had the 

effect of pushing down yields on long-term government bonds in 2014 

and early 2015. The drop affected U.S. financial markets, increasing the 

attractiveness of long-term U.S. Treasuries. The upturn in demand for 

Treasuries drove down Treasury yields, despite pressure in the other 

direction from the Federal Reserve winding down its purchases of U.S. 

Figure 9. Asset Purchase Programs in Europe and Japan

Key Program Dates Monthly 

Purchases

Expected Central 

Bank Balance 

Sheet Expansion

Purchased Assets

Announced

Start-End

Local Currency

(U.S.$)

U.S.$ (% of Balance 

Sheet)

Bank of 

Japan

April 2013, October 2014

April 2013 - Indefinite

¥6.7 trillion

($60 billion)

$720 billion/year

(46%)

Government bonds, ETFs, 

J-REITs

European 

Central 

Bank

January, December 2015

March 2015 - March 2017

€60 billion

($68 billion)

$1.7 trillion by March 

2017 (70%)

Government bonds, corporate 

bonds, asset-backed securities, 

municipal bonds

Note: Using exchange rate from date of program announcement. Balance sheet size as of program initiation. Monthly purchase 

amount for Bank of Japan program is calculated based on purchase amounts announced on Oct. 31, 2014. ETFs = exchangetraded funds. J-REITS = Japanese real estate investment trusts. 

Sources: Bloomberg L.P., Bank of Japan, European Central Bank
19 Analyzing Threats to Financial Stability

Treasuries, the U.S. economy strengthening, and expectations increasing 

for the Federal Reserve to begin raising interest rates.

If these global forces intensify, they could amplify some of the vulnerabilities mentioned previously. Specifically, they could further depress earnings growth and erode credit quality in the United States and emerging 

markets, appreciate the dollar in foreign exchange markets, and depress 

prices for energy and other commodities. 

Interest Rate Risk

In the OFR Financial Stability Monitor, interest rate risk is a subcomponent 

of market risk and, in the heat map, its color is red to indicate a high level 

of risk. As mentioned, with investors striving to maximize their yields, 

bond issuers are extending the maturities of their debts. As a result, the 

sensitivity of bond prices to changes in interest rates (duration risk) is at a 

historic high.

In addition, investors’ exposures to fixed-income assets are substantial. 

Bond mutual funds and exchange-traded funds (investment funds whose 

shares are traded on an exchange) in the United States hold about $3.8 

trillion in assets. If the Barclays U.S. Aggregate Bond Index shown in 

Figure 10. Barclays U.S. Aggregate Bond 

Index Duration

3

4

5

6

1995 2000 2005 2010 2015

Modied

duration

years*

Prior tightening cycles

* Approximate percentage change in price in response to a 

1 percentage point change in interest rates. 

Source: Bloomberg L.P.

Figure 11. Loss to U.S. Bond Funds After 100- 

Basis-Point Shock to Interest Rates (Estimated)

1994-

1995

1999-

2000

2004-

2006

Sept.

2014

Sept.

2015

$40

$220 b 

bond 

fund

loss

$55

$77

$215

5.7%

estimated

loss 4.8%

Note: Bond funds include mutual funds and exchange-traded 

funds (representing $3.8 trillion in total assets) that report to the 

Investment Company Institute

Sources: Bloomberg L.P., Haver Analytics, OFR analysis
2015 OFR Annual Report 20

Figure 10 represents the yield on funds, a 100-basis-point increase in 

market interest rates would have a significant impact — an unhedged loss 

of $214 billion across these funds, or an average loss of 5.6 percent (see 

Figure 11). These losses would be larger than during other periods of 

interest rate increases because of the large current size of bond funds and 

the buildup of duration risk.

Against this backdrop, the Federal Reserve is beginning to adjust shortterm policy rates away from the near zero level of the past seven years. At 

its December 2015 policy meeting, the Federal Reserve’s Federal Open 

Market Committee (FOMC) increased the federal funds target range from 

near zero by 25 basis points. 

The Federal Reserve’s language about its future path for interest rates and 

the immediate reaction of the markets to the Federal Reserve’s announcement fell in line with expectations that future adjustments would depend 

on economic conditions and would probably be gradual, and there was 

the muted reaction in financial markets. U.S. stock markets and credit 

markets were relatively stable, the reaction in emerging markets was 

mixed but moderate, and the dollar appreciated slightly against currencies in other developed countries.

As mentioned, slower global growth, low inflation, and monetary policies 

in other countries are depressing interest rates worldwide. In addition, 

the requirements of recent regulations have increased the global demand 

for Treasuries and other high-quality liquid assets. These forces, together 

with gradual increases in rates in the United States, may keep U.S. interest 

rates low for some time, prolonging or amplifying the associated risks to 

financial stability.

At the same time, these circumstances leave investors vulnerable to significant losses if interest rates were to spike. If the environment changed 

suddenly and sharply at home or abroad, prompting officials to increase 

interest rates at a faster pace, the resulting shocks could threaten financial 

stability.

Even if the Federal Reserve raises rates gradually as expected and continues to communicate its policy intentions clearly, market participants 

still might overreact to changing circumstances, triggering a spike in 

volatility and worsening financial conditions. A likely example of this scenario occurred in the 2013 sell-off in bond markets known as the “Taper 

Tantrum,” sparked by new Federal Reserve communications before any 

change in policy. The vulnerability of market liquidity in bond markets 

could amplify any such shock.

Persistently low rates 

will continue to prompt 

investors to take higher 

risks to increase their 

returns on investment and 

may encourage excessive 

borrowing.
21 Analyzing Threats to Financial Stability

Volatility Risk

Volatility risk has declined since our last annual report. Volatility risk is the 

risk of losses on investments because of unpredictable changes in the volatility of the prices of underlying assets. Last year, we warned that expectations of low volatility and continued favorable economic conditions 

could create incentives for market participants to take too much risk. This 

concern has subsided somewhat as volatility has risen toward long-term 

average levels (see Figure 12).

Although volatility risk eased this year, the pockets of vulnerability related 

to market risks and market liquidity we discussed earlier create the potential for unsettling spikes in volatility. In fact, market metrics suggest that 

the recent rise in volatility is creating incentives for some investors to bet 

that volatility will stay at current levels or decline. Any sustained spikes 

in volatility could spell losses for market participants that had expected 

volatility to fall.

Value-at-risk (VaR) is a statistical measure of expected trading losses over 

a specified time and at a certain confidence level during normal market 

conditions. A VaR shock hits when a large spike in volatility forces investors such as hedge funds, broker-dealers, and banks that manage their 

risk by staying below a certain VaR to unload investments when their VaR 

calculations exceed predetermined limits. Such a shock could cause a 

cascade of fire sales of assets (see Figure 13).

Figure 12. Days of Unusually High Intraday 

Volatility for Asset Prices

2009 2011 2013 2015

0

30

15

45

days

Equities

Commodities

Foreign 

exchange

Rates

Note: Unusually high intraday volatility means the range (highest 

price minus lowest price as a percentage of prior day close) was 

greater than four standard deviations from the trailing threemonth average. 

Sources: Bloomberg L.P., OFR analysis

Figure 13. Large Broker-Dealers’ Value-at-Risk 

vs. Interest Rate Volatility

Total VaR

Total Rate

VaR

80

basis points

0

700

$1,400

billions

2008 2010 2012 2014

MOVE Index

Note: Total average daily value-at-risk (VaR ) for Citigroup, Goldman Sachs, Bank of America, JP Morgan, Morgan Stanley, and 

Lehman Brothers before its bankruptcy and merger with Merrill 

Lynch. VaR confidence levels varies from 95 percent to 99 percent 

and are at the firm level. 

Sources: Bloomberg L.P., OFR analysis
2015 OFR Annual Report 22

U.S. investment banks, which had elevated VaR levels leading up to the 

financial crisis, curbed their risk positions during the subsequent period 

of low volatility. Total VaRs reported by the five U.S. global trading banks 

declined 65 percent between the fourth quarter of 2009 and the third 

quarter of 2015.

Cybersecurity Risk

Cybersecurity breaches pose risks to financial stability. A cyberattack 

could impair the operations of individual firms and markets by disrupting 

electronic trading, transaction processing, and other computer network 

functions at the heart of the financial industry. Such an attack could undermine confidence in the resilience of the financial system. 

In both industry and government, officials have responded.

For example, the Financial Services Information Sharing and Analysis 

Center, an industry organization, promotes collaboration on critical security threats facing the global financial services industry.

The Financial and Banking Information Infrastructure Committee, made 

up of federal and state financial regulators, coordinates efforts to improve 

the reliability and security of the financial system’s critical infrastructure.

In addition, the Department of the Treasury, Department of Homeland 

Security, and regulators have collaborated to develop tabletop exercises 

with financial institutions and government agencies to assess and improve 

readiness to respond to cyber events.

In June 2015, the Federal Financial Institutions Examination Council, an 

interagency body of federal financial regulators, released a Cybersecurity 

Assessment Tool based on the Cybersecurity Framework of the National 

Institute of Standards and Technology. This framework is becoming a 

standard for firms seeking guidance about countering cyber threats.

Regulators also need to coordinate to collect data to assess the impact 

of cybersecurity attacks on the U.S. financial system, as noted in a recent 

report by the U.S. Government Accountability Office. Current information on the frequency and concentration of cybersecurity incidents in 

the financial sector may be inadequate to detect trends and determine 

investment priorities (see Figure 14). 

Although financial companies may be reluctant to disclose cybersecurity 

breaches because of concerns about undermining their reputations, U.S. 

regulators could require the firms they supervise to monitor and report 

details about the cost and frequency of cybersecurity breaches or risks in 

the financial system.
23 Analyzing Threats to Financial Stability

Figure 14. Sources for Public Information About Cybersecurity Breaches

Type of 

Provider

Information 

Provider

Collection 

Methodology

Limitations Report Contents

Narrative 

Description

Frequency 

Statistics

Cost 

Estimates

IT Industry Ponemon 

Institute, 

sponsored by 

IBM

Annual survey of 

350 firms in 11 

countries

Broader than financial 

sector. Underlying data for 

further analysis unavailable 

beyond annual report.

  

Symantec Corp. Annual 

proprietary 

collection by 

Symantec

Underlying data for 

further analysis unavailable 

beyond annual report.   

Information is 

Beautiful

Ongoing 

compilation from 

media reports 

of major cyber 

incidents

Data available for 

download but quality 

uncertain. Breaches 

of smaller firms not 

represented (except for 

media coverage).

 

Regulators SEC Quarterly 

reporting 

requirement in 

public company 

financial 

disclosures

Disclosure requirements 

are vague; narrative format 

only. No summary public 

data provided. 

New York State 

Department 

of Financial 

Services 

One-time survey 

of 154 banking 

institutions in 

New York state

Underlying data for 

further analysis unavailable 

beyond annual report.   

Law 

Enforcement

Financial 

Services 

Information 

Sharing and 

Analysis Center 

(FS-ISAC)

Ongoing selfreporting by FSISAC membersMost data are restricted 

to FS-ISAC members and 

law enforcement. Data 

shared provide information 

on cyber threats, though 

it may be relevant to 

assessing cyber-related 

operational risks.



Source: OFR analysis

RESEARCH

Key Findings from OFR’s Research 

and Analysis of the Financial System

This chapter discusses key findings in two 

areas of OFR analysis: (1) our evaluation of 

the effectiveness and potential unintended 

consequences of some financial stability 

policies, and (2) the results of OFR research.

We have produced a significant body of 

publicly available work that includes annual 

reports, OFR briefs, the Working Paper Series, 

staff discussion papers, Financial Markets 

Monitors, and the new annual Financial 

Stability Report. 

In 2016 and in coming years, we will organize 

our analytical and data initiatives in programs, 

as explained in Chapter 3.
2015 OFR Annual Report 26

Evaluating Financial Stability Policies

The OFR analyzes tools 

designed to address 

potential cyclical and structural vulnerabilities in the 

financial system and considers their effectiveness, 

as well as their possible 

unintended consequences. 

We base our policy analysis on our monitoring and 

assessment of vulnerabilities — their causes and 

consequences.

Although the OFR does not make policy, the Office has a mandate under 

the Dodd-Frank Act to conduct studies and provide advice on policies 

related to financial stability.

Financial policies and regulation come in two forms — microprudential 

and macroprudential. Regulators issue microprudential policies to assure 

the safety and soundness of individual financial companies and the 

functioning and integrity of financial markets. Examples of microprudential policies include standards for bank capital and liquidity, requirements 

for stress testing of individual banks, and reporting requirements for 

broker-dealers and asset managers.

Macroprudential policies are designed to make the overall financial 

system more stable and able to withstand shocks. Macroprudential 

policies can be cyclical — related to fluctuations in financial or economic 

activity — or structural, which means related to the underlying structure of 

the financial system. Examples of macroprudential policies include tools 

to limit firms’ overreliance on short-term funding, new rules for money 

market funds to reduce the risk of runs, and risk-retention rules requiring 

entities that originate and sell loans packaged into securities for sale to 

retain some of the risk, or “skin in the game.”

Systemically Important Financial Institutions

Since the financial crisis, a major policy question has been how to restore 

market discipline for large, complex financial institutions whose material 

distress — or whose size, complexity, or interconnectedness — could 

threaten financial stability. Eliminating the implied taxpayer support for 

such firms has required determining which firms to designate for consolidated supervision by the Federal Reserve and enhanced prudential 

standards to reduce the risk of failure and, in some cases, to make them 

easier to resolve.

Global systemically important banks (G-SIBs) are identified by national 

banking supervision authorities, primarily based on a scorecard of systemic importance established by the Basel Committee on Banking 

Supervision in 2011. The Basel scorecard includes 12 financial indicators 

across five categories to identify G-SIBs (see Figure 15). 

In July 2015, the Federal Reserve issued a final rule implementing the 

requirement for U.S. G-SIBs to hold additional capital — a “capital addon.” The final U.S. rule uses both the Basel Committee methodology and 

an alternative formula, and then selects the higher of the two surcharges 

as the requirement (see Figure 16). 
27 Key Findings in Research and Analysis

Figure 15. Top 25 Global Systemically Important Banks (International)

Bank Holding 

Company

(basis points)

Size Interconnectedness Substitutability Complexity CrossJurisdictional 

Activity

2014 Score

Bucket

Total exposuresassetsIntrafinancial system liabilitiesIntrafinancial system outstandingSecurities Payments activitycustodyAssets under activityUnderwriting counter derivativesAmount of over the sale securitiesand available for Adjusted trading Level 3 assetsForeign claimsliabilitiescross-jurisdictional Total

Weight (percent) 20 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 10 10

JPMorgan Chase 417.5 483.0 530.2 432.7 1248.3 1495.7 759.9 843.7 811.6 631.5 294.5 328.8 494.7

4

HSBC 362.9 350.7 370.8 281.4 331.1 451.5 666.9 352.7 147.6 220.7 742.3 800.1 438.4

Citigroup 308.5 332.1 426.0 341.1 1061.7 887.6 574.2 710.3 423.3 538.4 398.1 397.5 426.0

3

BNP Paribas 305.1 322.9 471.9 275.2 203.6 392.0 303.8 552.9 630.7 416.5 574.1 482.9 404.7

Deutsche Bank 224.7 326.1 217.3 187.9 635.4 189.7 526.6 741.9 213.9 432.8 479.3 356.8 360.0

Barclays 262.7 358.0 366.5 199.7 190.0 14.5 626.3 600.1 344.0 630.9 396.6 352.1 349.4

Bank of America 313.4 319.6 211.4 337.0 359.9 9.9 690.5 672.6 576.4 278.7 167.3 146.4 324.5

2

Credit Suisse 147.7 276.4 180.1 188.2 132.8 11.7 371.2 632.7 269.6 498.3 320.3 371.4 269.5

Goldman Sachs 165.5 342.2 105.3 221.4 43.7 71.8 535.8 691.3 373.4 559.0 159.3 152.3 260.5

Mitsubishi 315.4 217.1 207.7 212.7 288.4 108.8 129.1 147.5 307.3 148.0 349.9 262.4 242.1

Morgan Stanley 142.9 232.1 109.9 166.0 45.0 111.6 513.1 446.2 720.4 277.1 167.3 156.7 235.7

Ind. and Comm. 

Bank of China 420.7 369.6 243.9 210.5 179.1 66.6 127.9 5.3 253.2 312.7 70.5 97.9 218.9

1

Royal Bank of 

Scotland- 191.0 251.7 229.2 110.8 236.5 12.1 231.6 599.9 94.0 103.5 274.3 222.8 212.5

Société Générale 190.8 155.6 199.5 164.2 129.7 331.7 177.7 290.8 330.6 108.9 247.5 214.7 210.3

Bank of China 327.6 283.2 235.0 192.1 272.4 72.8 109.6 7.7 151.2 61.4 165.3 340.2 208.4

Banco Santander 197.1 174.8 251.7 260.8 61.2 81.2 55.6 64.6 133.2 38.9 479.5 462.5 208.4

Wells Fargo 244.5 174.8 158.7 398.0 132.5 177.2 259.7 72.9 339.5 404.6 48.0 77.5 202.6

UBS 110.0 162.4 134.0 151.9 87.1 240.6 216.6 312.9 217.5 149.0 271.3 286.4 189.2

Crédit Agricole 233.3 216.0 216.3 214.3 106.2 202.5 125.4 204.3 160.7 99.8 178.2 188.2 186.3

China Construction 

Bank 341.4 332.4 180.1 187.1 88.9 48.9 99.5 3.7 42.5 367.4 29.7 63.0 167.6

Unicredit 140.1 192.1 242.1 152.4 45.4 22.8 135.2 39.2 129.4 105.1 254.2 410.2 165.4

Agricultural Bank 

of China 321.6 184.2 144.7 164.5 143.7 56.7 75.6 2.1 29.9 627.2 15.2 33.5 164.4

Mizuho 200.7 88.2 165.7 159.3 219.0 82.3 119.4 120.5 214.8 148.2 176.2 140.0 159.6

Groupe BCPE 181.0 233.6 240.0 237.8 152.1 6.4 68.3 168.5 57.5 233.8 144.0 75.1 151.3

Bank of NY Mellon 46.7 62.2 230.9 45.1 844.3 1746.3 7.6 15.3 62.8 1.1 45.0 91.3 150.8

Note: Bucket assignments for individual companies reflect data that the Basel Committee released in November 2015. 

Sources: Company G-SIB disclosures, OFR analysis
2015 OFR Annual Report 28

Global systemically important insurers (G-SIIs) are insurance firms 

whose distress or failure could harm financial markets because of their 

size, market position, and global interconnectedness. In July 2013, the 

Financial Stability Board (FSB) released an initial list of nine G-SIIs that 

were identified using the assessment methodology of 

the International Association of Insurance Supervisors. The list included 

the three insurance holding companies the FSOC 

designated for heightened supervision by the Federal 

Reserve in the United States: American International 

Group, MetLife, and Prudential (see Figure 17). (The 

FSB identified no additional U.S. insurers.)

Although U.S. insurance companies are currently not 

subject to federal capital or reserve requirements, 

state and foreign regulators are developing capital 

standards for insurance companies. In addition, the 

Federal Reserve will establish enhanced prudential 

standards for the three designated insurers.

The FSOC has also designated for enhanced 

risk-management standards eight systemically 

important financial market utilities primarily supervised by the Commodity Futures Trading Commission 

(CFTC), the Securities and Exchange Commission 

(SEC), or the Federal Reserve. Five of them are 

central counterparties (CCPs) and the other three are 

companies that provide critical services for financial 

markets.

As a nonvoting member of the FSOC, the OFR 

Director is not involved in designation decisions. 

However, the OFR plays an important supporting role 

in the process by providing data and the analysis of 

the data to FSOC for the first stage of the designation process.

In OFR working papers and briefs, our researchers 

have analyzed how best to measure systemic importance and the level — currently at $50 billion or more 

in assets — for U.S. bank holding companies to be 

designated as systemically important.

For example, a paper in the OFR Brief Series in 

February 2015 used a new dataset collected by the 

Federal Reserve to analyze the systemic importance 

of the largest U.S. bank holding companies. The brief 

Figure 16. Global Systemically Important Banks’ 

Tier 1 Risk-Based Capital Surcharge 

China Construction Bank

Santander

Unicredit

Bank of China

Mizuho

Standard Chartered

Industrial and Commercial

Bank of China

Sumitomo

Bank of NY Mellon

Wells Fargo

State Street

BPCE

Société Générale

Royal Bank of Scotland

ING

Crédit Agricole

Nordea

UBS 

2016 2019

0 10 20%

1.0%

surcharge

1

BUCKET

JPMorgan Chase

4 HSBC

2.5%

surcharge

BNP Paribas

Barclays

Citigroup

Deutsche Bank

2.0%

surcharge

3

Mitsubishi

Agricultural Bank of China

Goldman Sachs

Bank of America

Morgan Stanley

Credit Suisse

1.5%

surcharge

2

Note: Vertical lines show Basel III total capital requirements, including capital conservation buffer and G-SIB add-on, as of 2016 and 

as fully phased-in by 2019. Horizontal bars reflect Tier 1 capital as 

a percent of risk-weighted assets as of December 31, 2014. Bucket 

assignments for individual companies reflect data that the Basel 

Committee released in November 2015. 

Sources: Basel Committee on Banking Supervision, OFR analysis
29 Key Findings in Research and Analysis

compared the companies based on their 

size, interconnectedness, complexity, 

global activity, and “substitutability,” a 

measure of the companies’ dominance 

in customer services.

Capital is a critical buffer against failure 

for banks and regulators typically require 

riskier banks to hold more capital. A brief 

in August 2015 found that G-SIBs with 

higher systemic importance scores do 

not consistently have higher risk-based 

capital ratios (see Figure 16).

Two papers in the OFR Working Paper 

Series in May 2015 also covered subjects 

related to systemically important financial institutions. One paper explored 

evidence of a too-big-to-fail subsidy for 

large financial firms and found that the 

expectation of government bailouts did not uniformly lead to lower borrowing costs for the largest financial firms. The second paper examined 

credit default swap spreads in a sample of international banks and found 

evidence of a benefit related to possible measures of systemic importance (see Research and Data Publications — Financial Institution Risks 

and Regulation for details about these papers).

We summarize key themes in the OFR’s FY 2015 research later in this 

chapter (see Research and Data Publications).

Central Clearing and Central Counterparties

Derivative contracts such as credit default swaps and interest rate swaps 

historically traded over the counter between dealers or between dealers 

and clients. This bilateral approach exposes each party to the risk of 

its counterparty defaulting. The Dodd-Frank Act mandates that certain 

swaps be cleared with a central counterparty (CCP) between the buyer 

and seller in the transaction.

CCPs have three benefits for regulators and market participants. 

First, prices are typically updated more frequently and reliably than for 

trades between two parties. Second, through their operations, CCPs have 

access to data on derivatives trades. These data give regulators a view 

into the operations of derivatives markets. 

Third, central clearing can reduce the risk of counterparty default — as long 

as the CCP has the resources to meet payment obligations. However, a 

Figure 17. Top Five U.S. Financial Institutions by Systemic 

Risk Ranking Score

5

4

3

2

1

JP

Morgan

Freddie

Mac

Merrill

Lynch

Bear

Stearns

Lehman

Bros.

Freddie

Mac

Fannie

Mae

Morgan

Stanley

JP

Morgan

Bank of

America

Morgan

 Stanley*

American

Internat’l

Group

Merrill

Lynch

Goldman

Sachs

Citigroup

Bank of

America

MetLife

Prudential

Citigroup JP

Morgan

Investment 

bank

Governmentsponsored 

enterprise

Insurance 

company

Bank holding 

company

Q4 2001 Q4 2005 Q4 2009 Q3 2015

Risk Ranking Score

* Morgan Stanley converted into a bank holding company in September 2008.

Source: New York University Volatility Institute 
2015 OFR Annual Report 30

CCP is a single point of vulnerability for failure and creates the potential for 

propagation of risks, potentially offsetting the advantage.

CCPs require each clearing member to post a payment called a “margin” 

that is deposited in a default fund. If a member defaults, the defaulting 

member’s deposits and other resources would cover losses. If those 

resources are not sufficient, the CCP’s own funds or funds paid by other 

members would cover the losses. 

The CFTC and SEC require CCP default funds to be able to cover losses 

of the single largest clearing member. Some CCPs have a stricter requirement that their CCP default funds cover a loss if the two largest clearing 

members default.

CCPs in the United States are required to conduct stress tests to determine if CCP resources are adequate. Discussions among international 

regulators have centered on the merits of standardizing CCP stress tests. 

Standardization could resolve testing inconsistencies, but might fail to 

account for the diversity of CCP products and services.

The FSOC has designated five CCPs as systemically important: CME 

Clearing, the Fixed Income Clearing Corp., ICE Clear Credit, the 

National Securities Clearing Corp., and the Options Clearing Corp.

These five CCPs are connected with G-SIBs that serve as settlement banks 

and where CCPs and their members deposit funds (see Figure 18). U.S. 

G-SIBs are also clearing members of multiple CCPs. A G-SIB default could 

cause a CCP default and possible strain multiple CCPs at once, a scenario 

that current CCP stress tests may fail to capture.

Some CCPs also have connections to each other, for example, through 

“cross-margining” agreements by which positions can be netted across 

CCPs to central counterparties overseas, and to CCPs not designated as 

systemically important.

A CFTC rule requires (and an SEC proposed rule) would require CCPs to 

have recovery-and-resolution plans for continuing services to market participants even if they face losses, liquidity shortfalls, or other weaknesses. The 

SEC’s proposed rule would add a layer of protection against the risks of a 

potential CCP default by requiring CCPs to hold net liquid assets funded 

by equity to cover potential losses.

In FY 2015, the OFR staff conducted research on risks in CCPs. For 

example, the Office released two working papers in May 2015. One paper 

focused on risks in markets cleared by multiple CCPs. The paper found that 

swaps dealers can split their positions among multiple CCPs, effectively 

obscuring potential liquidation costs and gaining cost advantages over 

The FSOC has 

designated five 

CCPs as systemically 

important:

1. CME Clearing 

2. Fixed Income Clearing 

Corporation

3. ICE Clear Credit

4. National Securities 

Clearing Corporation

5. Options Clearing 

Corporation
31 Key Findings in Research and Analysis

competitors. Unless CCPs share information, the result can be a “race to 

the bottom,” and CCPs with the most optimistic views of liquidation costs 

could drive competitors out of the market. The second paper showed that 

concentration risks to a CCP posed by large clearing members can increase 

over time. The concentration increases the exposure of a CCP to the failure 

of its largest clearing members (see Research and Data Publications — 

Central Counterparties).

For the OFR, improving the quality of data available for evaluating risks 

in CCP operations is critical. We are following such a recommendation 

from our Financial Research Advisory Committee and planning ways to 

improve the quality and scope of related data.

In FY 2016, risks in CCPs and CCP data quality will be part of an 

OFR program, as explained in Chapter 3 (see Core Programs: 

The Next Step). 

Figure 18. Globally Systemically Important U.S. Central Counterparties 

and U.S. Banks (How They Are Linked)

1

2

3

4

5

Citigroup

Inc.

Goldman Sachs 

Group, Inc.

State Street 

Corp.

Wells

Fargo & Co.

Bank of

America 

Corp.

JPMorgan

Chase & Co.

Morgan

Stanley

Bank of

New York

Mellon Corp.

CME Clearing

1

2

3

4

5

Central Counterparties

Fixed Income 

Clearing Corp.

National Securities 

Clearing Corp.

Options Clearing 

Corp.

ICE Clear US, Inc.

Sources: Membership data from individual central counterparty websites, OFR analysis
2015 OFR Annual Report 32

Stress Testing 

Regulators now routinely require stress testing to assess the safety and 

soundness of individual financial institutions, such as banks, and to set 

requirements for the capital that banks must hold as a buffer against 

losses and other shocks. 

Large, global financial institutions began to use stress tests internally in 

the 1990s and regulators significantly expanded their use after the financial crisis. Stress testing can also be a macroprudential tool for monitoring 

risks to financial stability.

In a typical bank stress test, a bank is given a stress scenario, and the 

bank and its supervisor measure how the scenario would affect the bank’s 

revenue and the performance of its loans and other assets. Since 2010, 

the Federal Reserve has conducted an annual stress test for bank holding 

companies, the Comprehensive Capital Analysis and Review (CCAR). The 

Federal Reserve, Office of the Comptroller of the Currency, and Federal 

Deposit Insurance Corporation (FDIC) have conducted the Dodd-Frank 

Act Stress Test (DFAST) since 2013.

CCAR and DFAST help determine the resilience of large banks, specifically, 

whether they could continue to provide key financial services during a 

severe economic downturn. The results of the supervisory bank stress tests 

are integrated with banks’ capital planning processes to ensure banks have 

enough capital to continue lending after a severe shock.

The OFR staff produced several research papers about stress testing in FY 

2015. For example, an OFR brief in July 2015 discussed how stress tests 

could incorporate liquidity shocks. Another paper explored whether stress 

test results had become predictable (see Research and Data Publications 

— Stress Testing).

Stress testing will be an OFR program in the coming year, as discussed in 

Chapter 3.

Asset Management Stress Testing — Stress testing is less developed in 

asset management than in banking. In 2014, the SEC updated a 2010 rule 

and began requiring money market funds to test their ability to maintain 

10 percent of assets in securities that could be liquidated within one 

week. The rule requires that funds disclose the test results to their boards 

of directors at regular intervals. It does not require reporting results to 

regulators.

Hedge funds are required to run limited stress tests and report results in 

Form PF, while stress testing for mutual funds has been discussed but not 

adopted. 
33 Key Findings in Research and Analysis

Stress testing could also 

take a “macroprudential” 

perspective, becoming a 

potentially powerful tool 

for monitoring risk across 

the financial system and 

crafting policy responses by 

incorporating interactions 

among the parts of the 

financial system and 

broader economy.

Insurance Company Stress Testing — Stress testing of insurance companies should assess whether insurers have adequate reserves and capital 

to meet their obligations in adverse scenarios.

Insurance companies face some of the same risks as asset management 

firms; both hold large investment portfolios, subjecting them to risks 

from drops in the prices of stocks, bonds, and real estate. However, 

insurance companies help households and businesses manage risks, such 

as risks related to life, health, and property damage. So, insurers hold 

investments as reserves to meet expected obligations to policyholders, 

while asset managers generally hold them on behalf of clients. Insurance 

companies also face risks that vary by their lines of business. For example, 

property and casualty insurers face underwriting risks from natural disasters and property damage, while health insurers face risks from poor 

health and pandemics.

In 2012, the National Association of Insurance Commissioners adopted a 

model law for stress testing to be phased in by 2015. To date, 34 states 

have adopted the law. The guidelines for stress tests have few specifics 

about stress scenarios or analysis.

CCP Stress Testing — The CFTC requires CCPs to conduct weekly or, in 

some cases, daily stress tests to determine if CCPs would have sufficient 

resources to continue operating after failure of a clearing member. Some 

CCPs designated as systemically important must demonstrate they can 

continue to operate even if two members fail. CCPs also use stress tests 

to determine how much clearing members should contribute to each 

CCP’s default fund.

These tests are not standard among CCPs, but some market participants have called for standardized CCP stress tests. In May 2015, 

two international standards groups, the Committee on Payments and 

Market Infrastructures and the International Organization of Securities 

Commissions, began a review of CCP stress testing practices.

Systemwide Stress Testing — Stress testing could also take a “macroprudential” perspective, becoming a potentially powerful tool for monitoring risk across the financial system and crafting policy responses by 

incorporating interactions among the parts of the financial system and 

broader economy.

A key area of stress-testing research relates to risk-propagation and contagion. Analysis of financial networks and agent-based modeling can be 

helpful in applying a systemwide framework to stress testing.

For example, a recent OFR working paper presented a dynamic macroprudential stress-testing framework (see Research and Data Publications 
2015 OFR Annual Report 34

— Stress Testing). We also contributed to a recent Basel Committee 

working paper suggesting that supervisory stress tests could consider 

recent research on agent-based models and could make more use of network analysis to evaluate the role of bank networks in transmitting risks.

Losses in a few heavily 

leveraged funds could 

cause market fluctuations 

and shocks could spread 

quickly. Fire sales sparked 

by large-scale redemptions 

could create the possibility 

of these funds becoming 

channels for transmitting 

and amplifying risks across 

markets to otherwise 

unconnected investors.

Asset Management 

The financial crisis showed that the activities of asset managers such 

as mutual funds and hedge funds can generate risk because investors 

expect to be able to redeem their shares quickly, and the assets underlying the fund often are not all easily converted to cash. The risk lies in 

the mismatch between the liquidity of the assets a fund manages and the 

liquidity of investors’ shares. 

The severity and scope of these risks differ considerably among types 

of funds. Regulations based on the Investment Company Act of 1940 

make mutual funds unlikely primary causes of a systemic market event. 

But losses in a few heavily leveraged funds could cause market fluctuations and shocks could spread quickly. Fire sales sparked by large-scale 

redemptions could create the possibility of these funds becoming channels for transmitting and amplifying risks across markets to otherwise 

unconnected investors.

These kinds of risks can pose threats when fund investments are concentrated in illiquid assets, such as bank loans or emerging market debt. 

Fund managers must hold sufficient cash and other liquid assets to satisfy 

redemption requests by investors, margin calls, and other obligations in a 

timely manner.

Regulators around the world are assessing the risks in asset management 

activities. For example, the FSOC released a notice in December 2014 

seeking public comment on potential risks associated with the asset 

management industry (particularly liquidity and redemptions, leverage, 

operational functions, reinvestment of cash collateral in securities-lending 

transactions, activities in separately managed accounts, and resolution). 

Determination of any potential risks is pending its further work.

Information on separately managed accounts is scant. These accounts are 

portfolios of assets or securities directly owned by investors and managed 

by professional investment firms. More detailed information about holdings in these accounts, estimated to be worth tens of trillions of dollars, 

is essential to understanding potential vulnerabilities. Toward this end, 

the SEC has proposed amendments to its Form ADV, filed by registered 

investment advisers, to gather basic data on advisers’ separately managed account businesses. The data will include investment composition, 

derivatives use, and borrowing. 
Focus on Financial Networks

Connections among financial institutions can serve as shock 

absorbers that diversify risk and increase the resilience of the 

financial system, but they can also propagate systemic shocks 

and act as vulnerabilities. Financial networks are part of the 

structure of the financial system and understanding them is 

essential to understand contagion — when a shock in one 

part of a network leads to significant losses in other parts and 

spreads through the network.

The OFR is studying financial networks to learn more about 

how they support resilience or vulnerability in the financial system. OFR researchers produced a working paper in 

February 2015 that examined financial network models to 

trace the path of potential instability in the financial system. 

Another OFR research paper in October 2015 surveyed 

academic research about contagion in financial networks 

(see Research and Data Publications — Connectedness, 

Contagion, and Risk Concentration).

OFR researchers are mapping the financial system as a multilayer interdependent network, investigating connections and 

dependencies between the layers, and evaluating the implications for financial stability (see Figure 19). 

Network analysis can also help in understanding contracts 

between market participants in asset markets, for example, in 

the credit default swap (CDS) market. OFR researchers have 

been using CDS data from the Depository Trust & Clearing 

Corporation to apply Federal Reserve stress tests scenarios to 

all counterparties in the U.S. CDS market. The research is 

exploring how the failure of a bank’s single largest counterparty 

could affect the bank, compared with the impact of such a 

failure on the bank’s other counterparties.

35 Key Findings in Research and Analysis

Bank/Dealer nk/Dealer Bank/Dealer nk/Dealer

Central 

CP

Central 

CP

D D

F F

COLLATERAL LAYER

FUNDING LAYER

B

HF HF

HF HF

PB PB

F F

DEALER DEALER

Cash

Provider

Cash

Provider

HF HF

HF HF

PB

ASSET LAYER

DEALER DEALER

HF

HF

HF

HF

HF Exchange

T T

D D

F

Financing Desk

T

Trading Desk

D

Derivatives Desk

PB

Prime Broker

DEALER

CP

Counterparty

HF

Hedge Fund

Figure 19. The Financial System as a Multilayer Network

Sources: OFR ananlysis
2015 OFR Annual Report 36

In September 2015, the SEC proposed a rule to strengthen management of liquidity risk and improve public disclosures by open-end mutual 

funds (funds without restrictions on how many shares they may issue) and 

exchange-traded funds (funds traded on an exchange). Under the proposed rule, these funds would be required to adopt programs to manage 

liquidity risk and disclose information for investors and regulators to evaluate the liquid assets available to meet redemptions. 

After the financial crisis, the SEC began collecting confidential data in 

Form PF to measure risk exposures for private funds, including hedge 

funds. OFR analysis of Form PF data shows that the 50 largest hedge 

funds managed $1.93 trillion in gross assets on June 30, 2015, an 

increase from $1.53 trillion on March 31, 2013.

In a working paper in July 2015, OFR researchers analyzed the effectiveness of Form PF data for measuring the risk exposures of these funds. The 

paper’s findings suggested that although Form PF represents a significant step toward more effective reporting by hedge funds, the data from 

the form may not completely identify all potential risks related to the 

funds. In fact, our paper found that the form could result in private funds 

with different risk profiles reporting similar risk measurements to regulators (see Research and Data Publications — Data and Data Analytical 

Techniques). We maintain an active dialogue with the SEC on potential 

ways to improve Form PF.

Leverage Ratio

Since the financial crisis, international regulators have strengthened the 

leverage ratio, which is aimed at determining the minimum capital that 

banks must hold and is calculated as the ratio of a bank’s high-quality 

capital to its exposures (both on and off their balance sheets). A recent 

OFR working paper documented a pattern of regulatory arbitrage 

(circumventing regulations) by foreign-owned, U.S.-based broker-dealers. 

They reduced their borrowing in the U.S. triparty repo market, a key 

source of short-term funding in the financial system, at quarter end and 

immediately returned to the market in the following quarter. This activity 

reduced their capital requirements under the leverage ratio because 

foreign regulators do not measure compliance on a continuous basis 

(see Research and Data Publications — Financial Institution Risks and 

Regulation).

U.S. regulators implemented a more stringent “enhanced supplemental” 

leverage ratio for the largest U.S. banks and their holding companies. A 

potential unintended consequence of making the leverage ratio more 

stringent is that the change could encourage banks to shed low-return, 

A potential unintended 

consequence of making 

the leverage ratio more 

stringent is that the change 

could encourage banks 

to shed low-return, lowrisk investment positions 

in favor of higher-return, 

higher-risk positions.
37 Key Findings in Research and Analysis

low-risk investment positions in favor of higher-return, higher-risk 

positions.

OFR analysis of data collected by the Federal Reserve on the triparty 

repo market suggests that, after the proposal to introduce more stringent 

leverage ratio requirements, broker-dealers associated with U.S. bank 

holding companies reduced the percentage of their total repo funding 

backed by government securities and increased the percentage backed 

by more volatile collateral. No comparable trend was evident for broker-dealers not affiliated with banks. The substantial changes in the repo 

market have generated interest in more central clearing of repo transactions to allow large banks to engage in greater netting and reduce the 

effects of the leverage ratio. However, as discussed earlier in this chapter, 

central clearing creates risks as well as benefits. 

The 2015 Shared 

National Credit Review 

of bank loans and loan 

underwriting standards by 

federal banking agencies 

showed that nonbanks 

owned less than a quarter 

of total loans but more 

than two thirds of the 

highest-risk loans. Many 

of these leveraged loans 

made by nonbanks are 

known as “covenant-lite” 

loans because they 

contain fewer restrictions 

or legal covenants to 

protect the lender.

Nonbank Lending

When regulators restrict risk-taking by banks, other firms with different 

or fewer regulatory requirements or less supervisory oversight can take 

their places in the market. Over the past five years, bank lending has 

grown moderately, while lending through nonbanks such as managers of 

collateralized loan obligations (CLOs), business development companies, 

mutual funds, and hedge funds has advanced more rapidly. Although 

banks may use deposits to finance their lending activities, nonbank 

lenders may use wholesale funding such as repurchase agreements, or 

repos, that are more vulnerable to runs, as described in Chapter 1.

“Leveraged loans”— loans to companies already heavily indebted— 

are a case in point. To reduce excessive risk-taking, banking regulators 

issued guidelines in 2013 to restrain leveraged lending by banks. Partly in 

response, leveraged lending has shifted significantly to nonbanks in the 

past few years and has accelerated. That acceleration eased somewhat in 

2015, in part because of impending rules to require managers of CLOs to 

retain some risk — called “skin in the game.” CLO issuance in the United 

States, for example, declined from $124 billion in 2014 to an estimated 

$97 billion in 2015. Still, the U.S. leveraged corporate credit market is 

sizable, with an estimated $1 trillion outstanding of leveraged loans and 

$1.5 trillion of speculative-grade corporate bonds (lower-graded bonds 

commonly called junk bonds).

The 2015 Shared National Credit Review of bank loans and loan underwriting standards by federal banking agencies showed that nonbanks 

owned less than a quarter of total loans but more than two-thirds of the 

highest-risk loans. Many of these leveraged loans made by nonbanks are 
2015 OFR Annual Report 38

known as “covenant-lite” loans because they contain fewer restrictions or 

legal covenants to protect the lender.

The parts of the financial system most exposed to credit shocks when the 

corporate default cycle turns are difficult to pinpoint with available data. 

But, as the Shared National Credit Review suggested, they are likely to lie 

where persistent structural deficiencies are found in loan underwriting.

Credit Risk Sharing in Housing Market Finance

In its role as conservator of the Federal National Mortgage Association 

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 

Mac), the Federal Housing Finance Agency has pushed them to reduce 

the risk they pose to taxpayers.

The government-sponsored enterprises (GSEs) have responded by 

offering credit risk-sharing deals to private investors. The deals are 

noteworthy because they expose investors to the risk of GSE default and 

signal the impaired condition of private housing finance since the crisis.

Each of these debt offerings is linked to the performance of a specified 

pool of 30-year fixed-rate agency mortgages, with the GSEs retaining a 

minimum of 5 percent. 

Fannie Mae and Freddie Mac have used their market power to help 

assure loan quality through “putback clauses” that force loan originators 

to repurchase loans that have underwriting defects. Investors have shown 

strong interest in the offerings. In 2014, credit-risk-transfer bonds accompanied more than half of the GSEs’ issuances. 

Although credit-risk-transfer issuances have increased, private-label loan 

securitizations remain rare and primarily limited to pools of extremely 

high-quality loans.

OFR analysis of loan origination data from the GSEs and CoreLogic, Inc., 

for mid-2013 through mid-2015 suggest that the risk-sharing deals allow 

investors to take credit risk while limiting their exposure to defects that 

can arise in private-label securitizations. They also reduce taxpayer exposure to mortgage losses, but they are not a cure-all because they expose 

investors to the risk of GSE default. This possibility is remote under federal conservatorship, but potentially problematic in the future.
39 Key Findings in Research and Analysis

Research and Data Publications

The OFR has three 

publication series — 

briefs, working papers, 

and discussion papers — 

designed to advance understanding of topics related to 

financial stability analysis 

and measurement, test 

theories and hypotheses, 

and elicit discussion among 

researchers, industry and 

market participants, regulators, academia, and the 

public. 

From our last annual report, through FY 2015 and to the end of November 

2015, researchers in the OFR Research and Analysis Center and their 

coauthors produced seven briefs, 24 working papers, and three staff 

discussion papers. All are on the OFR website at financialresearch.gov.

This section groups these publications, some of which we have already 

mentioned, by theme. Several themes relate to the OFR programs initiative discussed in Chapter 3 (see Core Programs: The Next Step).

Central Counterparties

•	 Hidden Illiquidity with Multiple Central Counterparties (Paul 

Glasserman, Ciamac C. Moallemi, and Kai Yuan). This working 

paper focused on the systemic risks in markets cleared by multiple 

central counterparties. Each CCP charges margins based on the 

potential impact from the default of a clearing member and subsequent liquidation of a large position. Swaps dealers can split their 

positions among multiple CCPs, effectively hiding potential liquidation costs. A lack of coordination among CCPs can lead to a “race 

to the bottom” because CCPs with lower perceived liquidation costs 

can drive competitors out of the market.

•	 Systemic Risk: The Dynamics Under Central Clearing (Agostino 

Capponi, W. Allen Cheng, and Sriram Rajan). This working paper 

developed a model for concentration risks that clearing members 

pose to central counterparties. Over time, larger clearing members 

crowd out smaller clearing members. High clearing member concentration results in relatively lower lending, a higher cost of capital, and 

increasingly costly hedging, creating systemic risk. To address this 

risk, the paper proposed a self-funding systemic risk charge.

y

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

v+ (y)

-10

-8

-6

-4

-2

0

2

4

6

8

10

v+ (V y) > 0

v+ (V y) 5 0

y = V y

y = A1

It is worth noting again 

that views and opinions 

expressed in these papers 

are those of the authors and 

do not necessarily represent 

official positions or policies 

of the OFR or of the 

Department of the Treasury.
2015 OFR Annual Report 40

Stress Testing

•	 Measuring the Unmeasurable: An Application of Uncertainty 

Quantification to Financial Portfolios (Jingnan Chen, Mark D. 

Flood, and Richard B. Sowers). Uncertainty is a crucial factor in 

financial stability, but it is notoriously difficult to measure. This 

working paper extended techniques from engineering to quantify 

fundamental economic uncertainty, and applied the method to an 

example of portfolio stress testing. By this measure, uncertainty 

peaked in late 2008.

•	 Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests 

(Jill Cetina). This brief discussed how stress tests could incorporate 

four types of shocks — credit, funding, liquidity, and collateral values 

— and showed that shocks can affect regulatory ratios for capital 

and liquidity simultaneously. Additionally, in times of stress, a bank’s 

responses to a binding regulatory ratio can spread shocks to other 

banks.

•	 Are the Federal Reserve’s Stress Test Results Predictable? (Paul 

Glasserman and Gowtham Tangirala). This working paper examined 

the results of four rounds of stress testing of the largest U.S. bank 

holding companies, starting in 2009. The data revealed a growing 

correlation in results from one year to the next, highlighting whether 

the stress tests in their current form may be losing some of their 

information value over time. The authors discussed the implications 

of these patterns and recommended greater diversity in the stress 

scenarios analyzed.

•	 Dynamical Macroprudential Stress Testing Using Network Theory 

(Dror Y. Kenett, Sary Levy-Carciente, Adam Avakian, H. Eugene 

Stanley, and Shlomo Havlin). This working paper presented a 

dynamic bipartite network model for a stress test of a banking 

system’s sensitivity to external shocks in individual asset classes. As 

a case study, the model was applied to investigate the Venezuelan 

banking system from 1998 to 2013. The model quantifies the sen-

sitivity of bank portfolios to different shock scenarios and identifies 

systemic vulnerabilities that stem from connectivity and network 

effects, and their time evolution. The model provides a framework 

for dynamical macroprudential stress testing.

Data and Data Analytical Techniques

•	 Repo and Securities Lending: Improving Transparency with Better 

Data (Viktoria Baklanova). This brief focused on data gaps in U.S. 

repurchase agreements and securities lending markets. A paucity 

of data and a limited understanding of the institutional structure 

of these markets prevented regulators from fully identifying and 

responding to vulnerabilities during the 2007-09 financial crisis. The 
41 Key Findings in Research and Analysis

OFR and Federal Reserve conducted a pilot data collection to close 

these data gaps.

•	 Contract as Automaton: The Computational Representation of 

Financial Agreements (Mark D. Flood and Oliver R. Goodenough).

This working paper showed that the fundamental legal structure of a 

well-written financial contract follows a logic that can be formalized 

mathematically as a “deterministic finite automaton.” This allows, for 

example, automated reasoning to determine whether a contract is 

internally coherent and complete. The paper illustrated the process 

by representing a simple loan agreement as an automaton.

•	 Clustering Techniques and Their Effect on Portfolio Formation 

and Risk Analysis (Victoria Lemieux, Payam S. Rahmdel, Rick 

Walker, B.L. William Wong, and Mark D. Flood). This discussion 

paper showed that risk can be distributed in complex and unex-

pected ways across financial markets. Grouping financial assets into 

broad portfolios is a common practice, but this aggregation tends 

to hide important nuances of the overall risk profile. For example, 

large long and short positions may individually be important, but 

they may cancel out in the aggregate. This paper introduces the 

“RiskMapper,” an interactive, visual tool for exploring the benefits 

of different approaches for aggregating and disaggregating finan-

cial portfolios. It describes early-stage research into the strengths, 

weaknesses, and ramifications of different rules, risk measures, and 

visualization approaches.

•	 Gauging Form PF: Data Tolerances in Regulatory Reporting on 

Hedge Fund Risk Exposures (Mark D. Flood, Phillip Monin, and 

Lina Bandyopadhyay). This working paper examined the precision 

of Form PF, a regulatory filing introduced after the financial crisis to 

measure risk exposures for private funds, including hedge funds. 

The paper found that Form PF’s measurement tolerances are large 

enough to allow private funds with dissimilar risk profiles to report 

similar risk measurements to regulators.

Market Structure

•	 Concentrated Capital Losses and the Pricing of Corporate Credit 

Risk (Emil Siriwardane). This working paper used credit default 

swap (CDS) data from 2010 to 2014 to show that capital fluctuations 

for sellers of CDS protection are an important determinant of CDS 

spread movements. 

•	 Market Liquidity and Heterogeneity in the Investor Decision Cycle 

(Richard Bookstaber, Michael D. Foley, and Brian F. Tivnan). This 

working paper presented a model of market liquidity where those 

who need to sell come into the market with a greater need for 

immediacy than those who are willing to buy. This is a critical market 

dynamic behind the illiquidity that arises during market dislocations 
2015 OFR Annual Report 42

and crises, when some are in forced-selling mode, while others are 

hesitant to come in and take the other side of the trade.

•	 Systemwide Commonalities in Market Liquidity (Mark D. Flood, 

John C. Liechty, and Thomas Piontek). This working paper identified hidden liquidity regimes (high, medium and low) across a broad 

range of financial markets that can be used for characterizing periods 

of market stress and identifying underlying predictors of liquidity 

shocks. This regime could have provided meaningful predictions of 

liquidity disruptions up to 15 trading days in advance of the financial 

crisis. These methods offer a potential framework for monitoring and 

predicting a systemwide collapse in market liquidity, which could 

signal a collapse of liquidity in the funding markets as experienced in 

the crisis.

•	 Reference Guide to U.S. Repo and Securities Lending Markets

(Viktoria Baklanova, Adam Copeland, and Rebecca McCaughrin).

This working paper is a reference guide on U.S. repo and securities 

lending markets. It discussed the main institutional features of these 

markets, their vulnerabilities, and data gaps that prevent market participants and regulators from addressing known vulnerabilities.

•	 Quicksilver Markets (Ted Berg). This brief stated that U.S. stock 

prices appeared high in late 2014 and early 2015 by historical 

standards, using a quantitative threshold to identify potential stock 

market bubbles. Although the financial stability implications of a 

market correction could be moderate because of limited liquidity 

transformation in the U.S. equity market, the brief discussed other 

financial stability issues that may be more relevant, such as leverage, 

compressed pricing of risk, interconnectedness, and complexity.

Financial Institution Risks and Regulation

•	 Systemic Importance Indicators for 33 U.S. Bank Holding 

Companies: An Overview of Recent Data (Meraj Allahrakha, Paul 

Glasserman, and H. Peyton Young). This brief analyzed new data 

about the nation’s most systemically important bank holding companies — financial institutions whose failure could pose the greatest 

threat to financial stability.

•	 A Comparison of U.S. and International Global Systemically 

Important Banks (Paul Glasserman and Bert Loudis). Among 

global systemically important banks (G-SIBs), U.S. banks rank high in 

systemic importance relative to foreign banks, this brief said. G-SIBs 

with higher systemic importance scores do not consistently have 

higher risk-based capital ratios, despite the importance of capital as 

a buffer against failure.
43 Key Findings in Research and Analysis

•	 More Transparency Needed for Bank Capital Relief Trades 

(Jill Cetina, John McDonough, and Sriram Rajan). This brief stated 

that more data are needed to allow investors and counterparties to 

assess how banks reduce their required regulatory capital by transferring credit risk to third parties. The authors used public regulatory 

data to show that 18 banks purchased $38 billion in credit protection 

as of the fourth quarter of 2014 to obtain regulatory capital relief. 

They also estimated the impact of these transactions on banks’ riskbased capital ratios and noted that no data exist for other types of 

capital relief transactions.

•	 Regulatory Arbitrage in Repo Markets (Benjamin Munyan). This 

working paper documented a pattern of foreign-owned broker-dealers 

reducing their borrowing in the U.S. triparty repo market, a key source 

of short-term funding in the financial system, at quarter end and 

immediately returning to the market when a new quarter begins. This 

activity reduces their capital requirements under the leverage ratio.

•	 Private Fund Data Shed Light on Liquidity Funds (David C. Johnson).

This brief analyzed for the first time new confidential data on 

liquidity funds collected by the SEC on Form PF. Liquidity funds 

generally invest in short-term assets and have portfolios structured 

to meet investors’ near-term liquidity needs. Compared with prime 

money market funds, liquidity funds hold assets with relatively longer 

maturities, have larger holdings of Treasury securities, and invest in a 

broader range of asset classes.

•	 Are the Borrowing Costs of Large Financial Firms Unusual? 

(Javed Ahmed, Christopher Anderson, and Rebecca Zarutskie). 

This working paper examined evidence of a too-big-to-fail subsidy for large financial firms by comparing borrowing costs of large 

and small firms across industries. The paper found that larger firms 

borrow more cheaply in many industries. This size effect is often 

largest in nonfinancial industries. These results challenge the notion 

that expected government bailouts are behind borrowing cost 

advantages enjoyed by the largest financial firms.

•	 The Influence of Systemic Importance Indicators on Banks’ Credit 

Default Swap Spreads (Jill Cetina and Bert Loudis). This working 

paper examined CDS spreads in a sample of international banks 

for evidence of a benefit related to possible measures of systemic 

importance. The authors found a consistent, statistically significant 

negative relationship between five-year CDS spreads of banks and 

nine different systemic importance indicators. The paper showed 

that the benefit is most pronounced for banks within a certain assetsize range. The evidence was weaker for banks identified by regulators as global systemically important banks.

−20 −15 −10 −5 0 5 10 15 20 0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

Penalty parameter, θ

Volatility = 3%

Volatility = 5%

Volatility = 7%
2015 OFR Annual Report 44

•	 The Difficult Business of Measuring Banks’ Liquidity: 

Understanding the Liquidity Coverage Ratio (Jill Cetina and 

Katherine Gleason). Bank regulators adopted a new requirement 

called the liquidity coverage ratio after the financial crisis to help 

ensure banks maintain enough liquid assets to cover their financial 

obligations during times of stress. This working paper used a series 

of increasingly complex examples to demonstrate issues in analyzing 

this new liquidity metric.

•	 Bounding Wrong-Way Risk in Measuring Counterparty Risk 

(Paul Glasserman and Linan Yang). This working paper proposed 

a new method for bounding the impact of “wrong-way risk” on 

counterparty credit risk measurement for a portfolio of derivatives. 

Wrong-way risk refers to the possibility that a counterparty’s default 

risk increases with the market value of the exposure.

•	 Corporate Governance Responses to Director Rule Changes 

(Benjamin S. Kay and Cindy M. Vojtech). This staff discussion paper 

explained the governance changes induced by the director rules 

under the Sarbanes-Oxley Act and stock exchange rule changes. The 

paper used the law change as a natural experiment to test how firms 

adjust the choice and magnitude of governance tools given a “floor 

level” of monitoring from independent directors.

Connectedness, Contagion, and Risk Concentration

•	 Contagion in Financial Networks (Paul Glasserman and H. Peyton 

Young). This working paper surveyed the rapidly growing literature 

about interconnectedness and financial stability. The paper focused 

on insights in the literature on the relationship between network 

structure and the vulnerability of the financial system to contagion.

•	 Process Systems Engineering as a Modeling Paradigm for 

Analyzing Systemic Risk in Financial Networks (Richard 

Bookstaber, Paul Glasserman, Garud Iyengar, Yu Luo, Venkat 

Venkatasubramanian, and Zhizun Zhang). This working paper 

demonstrated the value of signed directional graphs, a modeling 

methodology used for risk detection in process engineering, in 

tracing the path of potential instabilities and feedback loops within 

the financial system. This approach expanded the usefulness of network models of the financial system by including critical information 

on the direction of influence and the points of control between the 

various nodes of the network.

•	 Liquidity Risk, Bank Networks, and the Value of Joining the 

Federal Reserve System (Charles W. Calomiris, Matthew Jaremski, 

Haelim Park, and Gary Richardson). The Federal Reserve was created 

to reduce risks related to seasonal swings in loan demand and to 

stabilize fluctuations in interest rates. Early on, many statechartered banks chose not to join the system because of the cost 

-0.35

-0.25

-0.15

-0.05

0.05

0.15

0.25

0.35

0.45

-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Principal forgiveness increases with

pre-modificaon LTV;

Post-modificaon LTV unchanged as

LTV increases

Principal forgiveness unchanged as premodificaon LTV increases; 

Post-modificaon LTV increases with

pre-modificaiton LTV
45 Key Findings in Research and Analysis

of the Federal Reserve’s reserve requirements. This working paper 

focused on the decisions of state-chartered banks in New York about 

joining the Federal Reserve System from 1915-24. The inability to 

attract many state-chartered banks created indirect access to government protection (lender of last resort) without federal regulation.

•	 Economic Uncertainty and Commodity Futures Volatility 

(Sumudu W. Watugala). This working paper investigated the 

dynamics of commodity futures volatility and analyzed the impact 

of increased emerging market demand on commodity markets.

•	 How Lead-Lag Correlations Affect the Intraday Pattern of 

Collective Stock Dynamics (Chester Curme, Rosario N. Mantegna, 

Dror Y. Kenett, Michele Tumminello, and H. Eugene Stanley). This 

working paper explored how the increasing correlation among 

intraday stock returns affects the possibility to diversify investment 

risk and potentially may affect market stability.

•	 An Agent-based Model for Crisis Liquidity Dynamics 

(Richard Bookstaber and Mark Paddrik). This working paper presented an agent-based model for examining price impacts and 

liquidity dynamics during financial crises, which are often characterized 

by sharp reductions in liquidity followed by cascades of falling prices. 

The model highlights the implications of changes in market makers’ 

ability to provide intermediation services and the decision cycles of 

liquidity demanders versus liquidity suppliers during a crisis.

•	 Safe Assets as Commodity Money (Maya Eden and Benjamin Kay).

This working paper examined the systemic implications of the supply 

of liquid safe assets, such as Treasury bills. The paper explored how 

liquid safe assets facilitate the trades of risky assets. The paper found 

that financial markets may be remarkably resilient to changes in the 

stock of liquid assets.

Housing and Financial Stability

•	 The Effect of Negative Equity on Mortgage Default: Evidence 

from HAMP PRA (Therese C. Scharlemann and Stephen H. 

Shore). This working paper used data from the Home Affordable 

Modification Program’s Principal Reduction Alternative to examine 

the effect of principal forgiveness on mortgage default. On average, 

3.1 percent of loans become delinquent and exit the program each 

quarter. The authors estimated the rate would have been 3.8 percent without principal forgiveness, which averaged 28 percent of the 

initial mortgage balance.

•	 The Effects of Housing Adjustment Costs on Consumption 

Dynamics (Benjamin S. Kay). This discussion paper examined how 

household consumption responds to infrequent and costly adjustment of housing when housing is a complement to other forms of 

consumption.

MISSION

Status of the Efforts of the OFR 

in Meeting its Mission

The OFR made significant progress in FY 

2015 toward meeting its unique, multipart 

mission related to financial data and 

research. This chapter documents that 

progress and outlines plans for continued 

advancement.

To meet our mission and be transparent 

and accountable to the public, we have 

developed a five-year strategic plan and 

launched parallel efforts in workforce 

planning and resource planning. We have 

assembled a world-class staff and built a 

robust technical infrastructure with powerful 

computing tools and multiple levels of 

security to safeguard sensitive data. 
2015 OFR Annual Report 48

To advance our mission further in coming 

years, we are building on our strategic 

plan with a programmatic approach to our 

work. OFR programs will align our priorities 

with our mission and strategic plan, clearly 

communicate those priorities to our 

stakeholders, and set clear direction and 

milestones for achieving them.

For example, we will organize our work 

on central counterparties, or CCPs, in a 

single program covering risk assessment, 

our analytical framework, data collection, 

and evaluation of risk-mitigating policy 

tools. Likewise, our work on stress testing 

under another program will contain similar 

elements.
Meeting Our Mission 49

Our Accomplishments Over the Past Five Years

•	 Filling critical gaps in data for understanding the markets for repurchase (repo) 

agreements and securities lending by 

launching pilot projects in collaboration with 

the Federal Reserve and the Securities and 

Exchange Commission to collect and analyze 

such data and using that analysis to plan for 

permanent data collections;

•	 Leading the establishment of the global 

Legal Entity Identifier (LEI) system, a 

linchpin for precisely identifying parties to 

financial transactions, including heading the 

effort to include information in the system 

about corporate ownership and subsidiaries, 

and promoting wider use of LEIs by U.S. 

financial regulators;

•	 Working with international groups, 

domestic regulators, and the financial 

services industry to build consensus and 

develop standards to classify financial instruments, uniquely identify derivative products, 

and develop best practices for sharing financial data and making them accessible; 

•	 Assisting the Commodity Futures 

Trading Commission, a member of the 

Financial Stability Oversight Council, in harmonizing and standardizing derivatives data 

reported to swap data repositories;

•	 Creating our Financial Stability 

Monitor, including a public online version, 

which helps identify vulnerabilities in the 

financial system based on five areas of risk;

•	 Developing and publishing our 

Financial Markets Monitor to examine 

themes and developments in global markets 

related to financial stability;

•	 Supporting the FSOC and member 

agencies in ongoing work to assess and 

monitor threats to financial stability;

•	 Supporting FSOC by providing data 

and analysis as inputs to the process of 

designating nonbank financial companies for 

heightened prudential oversight;

•	 Publishing three annual reports and our 

2015 Financial Stability Report;

•	 Publishing more than 50 OFR research 

products, including briefs, working papers, 

and discussion papers, about financial 

stability data, analysis, and the evaluation of 

financial stability policies;

•	 Creating a website at www.financialresearch.gov to make our work more transparent and easily accessible to the public;

•	 Establishing our Financial Research 

Advisory Committee and engaging with it 

for advice on our activities on data, research, 

and current analysis;

•	 Hosting and cohosting conferences, 

workshops, and seminars to promote 

discussion of financial stability data, analysis, 

and policy; and

•	 Building a robust information technology infrastructure for securely 

collecting and maintaining financial data 

and to support the analytic and visualization 

tools required for analyzing and monitoring 

financial activity and vulnerabilities.
2015 OFR Annual Report 50

Strategic and Workforce Planning

I

n the OFR’s first five 

years, we have evolved 

from a start-up organization to an Office that is 

leading improvements in the 

quality, scope, and accessibility of financial data and 

in assessing and monitoring 

threats to financial stability.

To advance our mission further in coming years, we are building on our 

strategic plan with a programmatic approach to our work. OFR programs 

will align our priorities with our mission and strategic plan, clearly communicate those priorities to our stakeholders, and set clear direction and 

milestones for achieving them.

To guide our work, we developed a five-year strategic plan that gives our 

staff a clear framework for achieving our mission and explains how our 

work produces value for stakeholders.

The plan, released in February 2015, evolved from our previous strategic 

framework and is based on the statutory mandates in the Dodd-Frank Act 

(see FYs 2015-19 Strategic Plan on our website).

Building on the foundation of the plan, we translate our goals and objectives into specific programs, activities, and deliverables that we strive 

to embed in the performance plans of our staff. The result is a roadmap 

for realizing our mission and holding ourselves accountable. To assure 

transparency and accountability to all stakeholders, we articulate those 

programs and activities to the public.

FYs 2015-19 Strategic Plan 

The OFR’s mission is to promote financial stability by delivering high-quality financial data, standards, and 

analysis for the Financial Stability Oversight Council and the public.

Goal: The OFR is an essential 

source of data and analysis for 

monitoring threats to financial 

stability.

•	 The OFR’s monitoring tools 

and analyses are widely used 

and critical to assessing 

financial stability.

•	 Data used to monitor financial stability are comprehensive, reliable, and accessible 

to policymakers and the 

public through the OFR.

•	 Data providers and the 

public trust, acknowledge, 

and recognize that OFR data 

are protected and secure.

Goal: Standards that improve the 

quality and usefulness of financial 

data are identified and adopted.

•	 Recognition of the need for 

standards by policymakers 

and industry.

•	 The OFR is the source of 

expert knowledge needed 

to develop and implement 

types and formats of data 

reported and collected.

•	 Financial data standards that 

create efficiencies and facilitate analysis are widely used.

Goal: Leading-edge research 

improves financial stability monitoring and the scope and quality of 

financial data, and informs policy 

and risk management.

•	 The OFR is the recognized 

center for objective, innovative research on financial 

stability.

•	 OFR research is widely 

cited and used to improve 

policymaking, risk management, financial stability, 

and the scope and quality of 

financial data.
Meeting Our Mission 51

In our planning process, we used recognized workforce planning techniques to determine our needs for skills and staffing, and to determine 

the tools necessary to achieve our mission.

As we described in our recently released 2015 Annual Report to Congress 

on Human Capital Planning, we used those tools to build a strong organization with a world-class staff and a robust technical infrastructure with 

powerful computing tools and multiple levels of security to safeguard 

sensitive data.

The planning process also directs our focus toward ensuring that our 

stewardship of the resources entrusted to us is effective and economical. 

Our strategic plan is designed to last for the next several years, but our 

planning process must also be flexible enough to accommodate changing 

circumstances, including changes that can arise from financial innovation. 

It also must accommodate our need to reach out to FSOC member agencies, the financial services industry, and international regulators to collaborate on projects and initiatives that advance the study and measurement 

of potential risks to financial stability.

Core Programs: The Next Step

Our programmatic approach extends from our strategic planning process 

and identifies core areas of concentration that align our priorities to our 

mission. Each program includes an array of elements that typically include 

an analytical framework, assessment of risks, identification of data requirements, and evaluation of program-specific policy tools. In each case, we will 

link program goals to our statutory requirements. This approach, which we 

expect to continue and expand over the long term, conveys clearly to our 

stakeholders how our work ties to progress on achieving our mission.

In 2015, the OFR identified eight programs for coordinating our work on 

data, research, and analysis. We expect to expand that number over time. 

We will strengthen our work in each program by developing technology 

tools, gathering market intelligence, and engaging with stakeholders.

Our approach is designed to complement, not duplicate, others’ work. 

Consequently, we will focus each of our program efforts primarily on three 

areas uniquely related to our mission: 

1. Improving the quality, scope, and accessibility of financial data; for 

example, determining and filling gaps in data needed for assessing 

and monitoring vulnerabilities;

2. Assessing and monitoring vulnerabilities arising from the interconnections in the financial system; and

3. Conducting policy studies and evaluating tools designed to mitigate risks to financial stability.
2015 OFR Annual Report 52

In the descriptions that follow, we outline the logic and goals 

for each program. More details are also discussed in the next 

section. Our current core program areas are:

Monitors – We are developing a suite of tools to assess, measure, and monitor risks across the financial system. The OFR has 

launched two monitor products so far, the Financial Stability 

Monitor and the Financial Markets Monitor.

The Financial Stability Monitor is a high-level snapshot of vulnerabilities in the financial system based on five risks: credit, 

contagion, funding, macroeconomic, market, and funding and 

liquidity.

The Financial Markets Monitor is an overview of major developments and emerging trends in global markets related to financial 

stability.

We are planning additional monitors to focus on areas such as 

money market funds, credit default swaps, hedge funds, volatility, and cross-asset correlations. The program’s ultimate goal is 

to have a monitoring toolkit that indicates emerging risks across 

the financial system and within its components. The program 

will involve systematic testing of the toolkit and its elements, 

refining the tools to be more forward looking, and periodically 

incorporating new data and information.

Central Counterparties – We have begun to evaluate and 

measure vulnerabilities in central clearing and in CCPs. The 

increased use of central clearing and CCPs in the derivatives 

markets increases price transparency and improves risk management, but it also can introduce concentration and contagion 

risks in replacing a network of two-way trading relationships with 

a centralized approach.

In addition, central clearing can have the unintended consequence of creating incentives for market participants to obscure 

the costs of potential defaults and liquidation. Data are lacking 

in scope and quality to assess and analyze those risks. Finally, 

the policy toolkit to address those risks is still in development 

and requires evaluation. 

CCPs are supervised by multiple regulators. Although the OFR 

does not have a supervisory role, we have a unique ability to 

study CCPs across institutions and markets. We can also develop 

monitoring tools and improve the data available to regulators and market participants. Our Financial Research Advisory 

Program Components: Monitors

1. Make a comprehensive description of 

the Financial Stability Monitor and its 

components accessible on our website at 

financialresearch.gov.

2. Continue to develop techniques to 

make the Financial Stability Monitor 

more forward looking, test its performance, and include additional data on 

quantities and prices.

3. Bring monitors from development into 

production for money market funds, 

credit default swaps, hedge funds, and 

cross-asset correlations and volatility. 

4. Identify data gaps through the monitoring program, work to fill them, 

and make the data available publicly as 

appropriate.

Program Components: 

Central Counterparties

1. Analyze central counterparty (CCP) 

design, risks, risk management practices, 

and potential systemic impacts.

2. Identify and address data gaps (potentially through a pilot data collection and 

ultimately a permanent collection in 

collaboration with primary regulators) 

to improve the CCP data available to 

regulators and market participants.

3. Develop tools for monitoring CCP 

activities and publicly publish data or 

monitors to help market participants 

assess risk exposures to CCPs.

4. Evaluate policies designed to mitigate 

these risks.
Meeting Our Mission 53

Committee made two recommendations in July 2015 that 

the OFR further analyze risks in CCPs and launch a CCP data 

collection. 

Data Quality – The financial crisis demonstrated to regulators 

and industry that standardizing data collected from financial 

services companies is necessary for effective oversight of the 

financial system and its parts. 

Data quality is particularly important to the OFR and the FSOC 

because complete, accurate, and timely data are essential to 

identify and analyze vulnerabilities in the U.S. financial system. 

Data standards do not assure quality, but without standards, 

comparing, aggregating, and analyzing the data essential for 

financial stability analysis are nearly impossible. That’s why the 

OFR has a mandate to standardize the types and formats of data 

we report and collect, and to assist FSOC member agencies with 

the development and use of data standards.

The financial services industry, unlike other industries, has been 

slow to agree on consistent data standards and formats required 

for high-quality data. Solving this “collective action problem” 

and speeding development of data standards requires concerted effort from the public sector. Much of our work with our 

FSOC counterparts and international authorities revolves around 

developing and promoting data standards so data collected 

and shared can support a wide range of analysis to understand 

financial system risks.

Data Scope – The OFR has a mandate to collect from any 

financial company the data necessary to assess to what extent a 

financial activity or financial market poses a threat to U.S. financial stability. 

To assess data gaps and to prioritize filling them, we collaborate 

with our regulatory colleagues to identify key questions and the 

data needed to answer them. We use data inventories or catalogs to compare the needs to the available data and to prevent 

the duplication of existing data collection efforts.

Before building permanent data collections, we will engage with 

industry — the sources for financial data — and conduct pilot 

projects to ensure that the data collected are defined precisely 

and meet specific data-quality criteria.

Program Components: 

Data Quality

1. Develop and publish a financial instrument reference database — an authoritative source for precise, common 

definitions and descriptive data, known 

as metadata. 

2. Continue to identify and implement 

data standards for markets and critical 

instruments, such as derivatives, repos, 

and mortgages, by collaborating with 

domestic and international authorities 

and industry standard-setting bodies.

3. Establish a data stewardship function to 

make datasets required to analyze threats 

complete, accurate, and timely.

4. Work toward requiring the use of 

the LEI and appropriate instrument 

standards for all reporting entities to 

improve data quality and promote their 

use on a consistent, global basis.

5. Add information to the LEI system to 

identify relationships among entities, 

such as ownership and subsidiaries. 
2015 OFR Annual Report 54

We will require the LEI and other data standards, as they 

become available, in all OFR data collections.

To measure financial activity for financial stability monitoring, 

data scope must be both comprehensive and detailed. It must 

be comprehensive to analyze sources and uses of funds, the 

behavior of borrowers and lenders, and risks wherever they 

arise. It must be detailed, at times even to the transaction 

level, because assessing vulnerabilities involves measuring risk 

throughout the distribution of outcomes, not just at the mean or 

median. For example, an analysis of average lending terms and 

conditions might hide important concentrations of risk. Taking 

these factors into consideration, we will collect highly detailed 

data when they are essential for such analysis.

Working with our FSOC counterparts, we are preparing to amass 

new, permanent collections of bilateral repo data and securities 

lending data. These datasets will provide a clearer view of the 

functioning, risks, and vulnerabilities in two significant markets 

essential for securities financing, price discovery, and market 

making. We have been careful to align these efforts with those 

of other agencies.

Data Accessibility – The Dodd Frank Act requires the OFR to 

collect data on behalf of the FSOC, provide data to the FSOC 

and its member agencies, and maintain data security and 

confidentiality. After consulting with member agencies, we will 

appropriately provide data to financial industry participants and 

the public to increase transparency and facilitate research on the 

financial system. For the OFR to achieve these objectives, secure 

and appropriate data sharing with other officials and industry 

must be a key priority.

To implement this program, we are promoting the use of catalogs of metadata — data about the data. Metadata catalogs 

inform parties about the data before any access is granted to 

the actual datasets. We will build on the existing Interagency 

Data Inventory that catalogs basic information describing data 

collected by FSOC member agencies and help them link their 

metadata catalogs or help create catalogs as needed.

Linked metadata catalogs can provide information useful in 

crafting agreements to share data with other regulators in this 

country and globally and, as noted in the data scope program, 

for deciding how to fill data gaps. The linked catalogs will also 

help in applying consistent safeguards and controls to assure 

security and confidentiality. We will also create and promote 

Program Components: 

Data Scope

1. Assess and prioritize data needs for 

critical risk topics using mapping techniques and metadata catalogs.

2. Develop and implement pilot projects 

to ensure data are fit for the intended 

purpose.

3. Develop and implement rules for permanent data collections that require the 

use of appropriate data standards and 

security protocols.

Program Components: 

Data Accessibility

1. Move beyond the existing Interagency 

Data Inventory and help FSOC 

member agencies link their metadata 

catalogs or create such catalogs.

2. Create and promote a set of best practices and techniques for data sharing 

among regulators and between regulators and the public.

3. Promote the standardization and 

efficient development of memorandums of understanding that set the 

terms for timely and appropriate access 

to nonpublic data for the regulatory 

community.
Meeting Our Mission 55

a set of best practices for data sharing among regulators and 

between regulators and the public.

Stress Tests – The Dodd-Frank Act directs the OFR to evaluate 

and report on stress tests. The mandate is broad — not limited 

to stress testing of banks. The OFR’s stress testing program has 

three parts, covering banks, nonbanks, and the U.S. financial 

system as a whole.

The bank stress testing part of the program is well underway. We 

have published several working papers and briefs on bank stress 

testing and will be extending this research.

Stress testing of nonbank financial institutions aims to address 

several questions. Which types of nonbank financial institutions 

should perform stress tests? What should those tests look like? 

How effective are current stress tests? What improvements 

should regulators consider?

Research on stress testing of the entire U.S. financial system is an 

essential component of the OFR’s stress testing program. Stress 

tests of individual institutions could shed light on the kinds of 

financial activities and firms that might pose risks to financial stability. Those activities and firms could warrant additional attention from the FSOC. The impact of stresses on individual firms or 

types of firms can spread to other parts of the financial system 

through financial markets or connections among firms. 

Risks in Changing Market Structure – The Dodd-Frank Act 

broadly requires the OFR to conduct, coordinate, and sponsor 

research to support and improve regulation of financial markets. 

It also directs the OFR to investigate disruptions and failures in 

financial markets. We are fulfilling this mandate, in part, through 

our program on market structure. 

A market is characterized by its structure. Who are the buyers, 

sellers, and market makers? How many participants are on each 

side of the market? How easy is it to enter the market? What 

information do the participants have and how do they use it? 

How much influence do they have on price quotes and transaction prices? How are trades executed? Clearly, all these characteristics are fluid and have implications for market outcomes.

In financial markets, market structure varies based on the assets 

traded and the rules governing the market. Changes in a market’s structure can have implications for financial stability. For 

Program Components: 

Stress Tests

1. Compile supervisory data needed to 

evaluate stress-testing methodologies. 

2. Develop coherent stress scenarios 

beyond those currently used. 

3. Conduct research on methodologies for 

stress testing of individual firms and the 

U.S. financial sector as a whole. 

Program Components: Risks In 

Changing Market Structure

1. Analyze how financial innovations and 

regulations alter the incentives of financial firms, trading and funding decisions, and the functioning of markets.

2. Identify gaps in data needed to monitor 

changes in market structure and collaborate with primary regulators to close 

them.

3. Develop tools to monitor changes in 

market structure and evaluate policies 

to improve market transparency by 

releasing aggregate information.
2015 OFR Annual Report 56

example, nonbank financial firms may transform into shadow 

banks, engaging in credit intermediation as banks do but 

without the same oversight as banks. High-frequency trading 

can alter trading speed, transparency, and market efficiency. 

After a merger, a larger surviving firm can have more influence 

on price. Changes in how prices are quoted can alter price 

volatility. 

Assessing the systemic impact of market structure changes 

requires transaction-level data across markets and market participants. The OFR can meet this challenge because of its mandate to collect and standardize data across financial markets. 

Research under this program reflects this unique position.

Risks in Financial Institutions – The Dodd-Frank Act broadly 

requires the OFR to conduct, coordinate, and sponsor research 

to support and improve regulation of financial institutions. We 

fulfill this mandate through our research on financial institutions.

Our research in this area is unique because we focus on financial stability and have no direct policymaking role for particular 

financial institutions. This perspective frees us to consider how 

risks migrate across the U.S. financial system. It also positions us 

to evaluate the unintended consequences of regulations. 

Our research matches the breadth of the mandate. It spans bank 

and nonbank financial institutions. Nonbanks within its scope 

include asset management firms, insurance companies, brokerdealers, and central counterparties.

OFR research addresses a range of questions. Which types of 

financial firms pose risks to the U.S. financial system as a whole? 

What aspects of those firms or their activities underlie those 

risks? Are firms engaging in shadow banking activities, and if 

so, how does that contribute to the risks they pose? How do 

financial regulations reduce the risk firms pose to the financial 

system? How are these firms adapting to regulatory changes? 

What innovations are occurring in the products or services they 

offer? How are the firms’ internal operations changing, and what 

risks could those changes introduce? What are participants’ 

business models? How are business models evolving with the 

introduction of new products and services? How are regulatory 

changes driving business models?

Program Components: Risks In 

Financial Institutions

1. Assess the risk financial institutions 

pose to financial stability that current 

regulations do not address.

2. Identify and fill gaps in data needed 

to assess systemic risks and stability 

policies. 

3. Evaluate regulatory policies adopted 

to promote safety and soundness and 

financial stability.

4. Monitor innovations in the financial sector in response to regulatory 

changes. 
Meeting Our Mission 57

Further Discussion of Data Quality and Scope

The OFR has a unique 

mandate under the 

Dodd-Frank Act to improve 

the scope, quality, and 

accessibility of financial 

data. Financial data have 

improved substantially 

since the crisis, but significant deficiencies remain. 

Challenges include gaps in 

data, poor data quality, and 

lack of access to data. In 

addition, the array of financial regulators in the states 

and other countries inhibit 

coordination.

A significant portion of our data-related work entails gathering, cleaning, 

and making data appropriately available for our financial stability research 

and the FSOC, including for its consideration of nonbanks for designation 

as systemically important financial institutions.

As discussed in the preceding section, data quality, scope, and accessibility will each be an OFR core program in the coming year. The following 

discussion describes key aspects of our work on data quality and scope. 

Data Quality

High-quality data are standardized, interoperable, and housed in robust 

information technology systems that facilitate data reporting, sharing, and 

risk management.

Data standards are agreements on how to define, represent, format, and 

exchange data. Standards facilitate productive data sharing and improve 

the quality of data collected from firms, utilities, and other data repositories. We are working with industry standards groups and financial regulators to promote the development and adoption of standards for entity 

identifiers, instrument identifiers, product identifiers, transaction identifiers, and financial and business reporting.

The Legal Entity Identifier Project

Our most significant data quality project, the initiative to establish the 

global LEI system, has achieved remarkable success and is now developing standards for representing corporate ownership structures. 

The LEI is a unique, 20-character code similar to a bar code that precisely 

identifies each legal entity of companies that participate in global financial markets. The OFR has led the global LEI initiative as it has progressed 

from conception to full-fledged operational system in just a few years. 

The LEI system represents an unprecedented collaboration of more than 

80 public authorities from more than 50 jurisdictions. By September 30, 

2015, almost 400,000 LEIs had been issued to entities in 191 countries. 

Many U.S. and European regulators require that derivatives traders 

include their LEI when reporting transactions to data repositories. 

We have been working for several years to persuade financial regulators in 

the United States and overseas to require companies to use the LEI in other 

types of financial reports. A Global LEI System task force, co-chaired by the 

OFR, is developing protocols for the system to collect and link data about 

the parent companies, subsidiaries, and affiliates of each legal entity. 
2015 OFR Annual Report 58

As momentum builds and the LEI system grows, the benefits are growing 

as well, such as efficiencies for financial companies in internal reporting 

and risk management, and in collecting, cleaning, and aggregating data. 

We also expect to reduce companies’ reporting burdens by generating 

efficiencies in reporting data to regulators.

The greatest benefits of the LEI will be realized when the standard is pervasive worldwide.

Swap Data Repositories

Swap data repositories (SDRs) collect and maintain records of over-thecounter derivatives trades. Financial reform sought to improve transparency in derivatives markets by requiring that data on swap transactions 

be reported to SDRs. Swap data are critical to understand exposures 

and connections across the financial system, and the repositories are 

designed to be high-quality, low-cost collection points. Although market 

participants across the world have begun to report these trades, different 

reporting standards by SDRs and low-quality data block a comprehensive 

view of the markets.

The Dodd-Frank Act divided regulatory authority over swap data repositories between the CFTC, which oversees most swaps, and the SEC, 

which oversees a smaller market for security-based swaps.

Regulators face significant challenges in understanding and aggregating 

the swap data submitted to SDRs because the requirements for reporting 

are not precise. In addition, SDRs have not been required to check the 

quality of data submissions from firms and no provision exists for rejecting 

incomplete or inaccurate information. Authorities in the United States and 

overseas are focusing on these issues to improve the quality and accessibility of the data. 

In June 2015, we analyzed a sample of the swap data that the CFTC 

requires SDRs to publish on their websites and discovered a significant 

percentage of incomplete fields — a problem that better use of standards 

would help alleviate.

The OFR and CFTC announced a joint project in March 2014 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 SDRs. Under a second agreement, members of the OFR 

staff are working at the CFTC on the project.

Financial Instrument Reference Database

The inability to aggregate financial data during the financial crisis was a 

major hurdle to understanding the financial positions of counterparties 

in specific instruments. The OFR has a mandate to provide a financial 
Meeting Our Mission 59

instrument reference database easily accessible to the public. These 

databases will contain the common definitions, descriptive data, and 

syntax that form reference data and the identifiers that are essential to 

the integration of disparate datasets for identification of risks. Common 

definitions of financial instruments, and the meaning and syntax of 

their attributes, are essential for sharing, comparing, aggregating, and 

exchanging data. The financial instrument reference database will provide 

these definitions and details, and by doing so will serve as the basis for 

data quality.

Financial instrument reference data are digital definitions of financial contracts. Data providers break down contract types into essential elements, 

such as terms and conditions, instrument class, exchange venue, clearing 

venue, and other attributes. The digital representation of instruments 

enables information sharing among systems for accounting, portfolio 

management, compliance, and other areas.

Although these data are valuable for risk management by financial firms, 

they fall short of what market regulators need to manage risks to financial 

stability. The current lack of standardized instrument reference data coupled with the disjointed U.S. regulatory system impede data sharing. The 

need to assess and monitor threats to financial stability beyond national 

boundaries adds further complexity.

The OFR is uniquely poised to meet these challenges. To fulfill the DoddFrank mandate to prepare and publish a financial instrument reference 

database, the OFR will apply rigorous systems engineering practices and 

engage a wide range of stakeholders. As we noted in the discussion of 

our data quality program, public officials must solve the collective action 

problem that continues to inhibit industry in adopting common standards. The OFR will coordinate and lead market participants, regulators, 

and other stakeholders to advance standards that establish a universally 

accepted set of concepts, names, definitions, and data-exchange specifications for the financial industry. These activities require the OFR to find 

and develop a body of knowledge that clarifies the relationship between 

instrument reference data and financial stability.

Data Scope

Data must be comprehensive and detailed to have sufficient scope. To 

improve understanding of the financial system and threats to its stability, 

regulators and policymakers may have to require more companies to 

submit data or expand or tailor the types of data submitted to include 

information about evolving markets, institutions, and instruments. 

Detailed data will also be needed for a deeper view.

In addition, regulators and policymakers must recognize the burden on 

industry from data-collection requirements. Better data standards and more 
2015 OFR Annual Report 60

effective data sharing among regulators promise to reduce this burden, as 

well as improve the ability of supervisors to monitor, analyze, and respond 

to financial stability concerns.

Bilateral Repo and Securities Lending Data Projects

In partnership with the Federal Reserve and the SEC, the OFR is working 

on significant pilot projects to improve the scope of data about repurchase agreements, or repo, and securities lending activities. Repos are 

financial contracts for one party to sell a security to the other with the 

promise to repurchase it later for a previously specified price. In securities 

lending, one party transfers securities to another for a set fee and time in 

exchange for collateral. These markets were a source of contagion during 

the financial crisis.

The pilot programs promise to improve our understanding of short-term 

funding markets instrumental in providing the liquidity that helps to keep 

the global financial system operating. The U.S. repo market, for example, 

provides more than $3.4 trillion in funding every day. However, vulnerabilities in the repo market can also contribute to risks to financial stability.

The amount and quality of data about repo and securities lending have 

improved since the crisis but still do not offer a comprehensive view of 

risks in these markets. 

In the United States, the repo market has two segments based on differences in settlement. In triparty repos, clearing and settlement occur 

through a settlement system operated by a clearing bank (the third party). 

Data on the triparty repo markets are published regularly. In bilateral 

repo, no third party is involved in the settlement of the transaction. 

Information about bilateral repos is scant. For this reason, the first pilot 

project focused on bilateral repo, which we estimate represents about 

half of the total repo market.

The bilateral repo pilot marked the first time the OFR went directly to 

market participants to collect financial market information. Participation 

in the pilot project was voluntary and participating companies have given 

input on what data should be gathered. 

The bilateral repo pilot occurred during the first half of 2015. The securities lending pilot is underway and expected to be completed during the 

first quarter of 2016. As mentioned, these pilots may lead to permanent 

data collections (see Core Programs: The Next Step). 

A recent OFR working paper and an OFR brief detailed the institutional 

structure of repo and securities lending markets, the role and motivation of 

market participants, potential systemic risks, and data gaps (see Research 

and Data Publications — Data and Data Analytical Techniques and 

Market Structure). More recently, we released an OFR brief describing the 

results of the bilateral repo pilot and lessons learned. 
Meeting Our Mission 61

Collaboration and Outreach

Collaboration and outreach are vital for the 

OFR to achieve our multipart, data-and-research mission. Although we have built 

an organization that delivers 

on that mission, collaboration is essential for looking 

across the global financial 

system. 

To enhance our capabilities to produce the best possible work, the OFR 

frequently collaborates with a wide range of stakeholders. Our collaborators are in government, industry, and academia. They include members 

of the FSOC and our Financial Research Advisory Committee. We also 

collaborate with other U.S. financial regulators, as well as policymakers, 

central bank officials, and others around the world. This collaboration creates a virtual research-and-data community that can have an impact much 

larger than the OFR alone.

To be transparent and accountable to the public, explain our mission, and 

develop support for it, we also engage with members of Congress, data 

quality groups, industry organizations, think tanks, and the public. 

An important way we share our work, make it available to the public, and 

promote debate and discussion among interested stakeholders is 

by organizing or cosponsoring events. Recent events included:

•	 On October 22-23, 2015, the OFR and the Center on Finance, Law, 

and Policy at the University of Michigan cosponsored a conference in Ann Arbor, Michigan, on “Interdisciplinary Approaches to 

Financial Stability.” The conference brought together experts and 

practitioners in policy, law, finance, economics, computer science, 

neuroscience, engineering, biology, ecology, mathematics, statistics, 

and other disciplines to learn from each other and gain fresh insights 

about financial stability.

•	 On May 8, 2015, the OFR held a workshop, “Understanding the 

Global Legal Entity Identifier (LEI) System,” to encourage U.S. 

financial regulators to require the 20-digit alphanumeric LEI code 

in industry submissions. The LEI is already required in derivatives 

trading and mortgage reporting. Expanding its mandatory use would 

give regulators a deeper view of financial system risks.

•	 On January 30, 2015, the OFR and the FSOC held our fourth 

annual joint conference, “Evaluating Macroprudential Tools: 

Complementarities and Conflicts.” Speakers and panelists 

included representatives of the Federal Reserve Board, FDIC, U.S. 

Department of the Treasury, the SEC, academia, and the financial 

services industry.

•	 On January 15-16, 2015, the OFR, the Bank of England, and the 

European Central Bank held the first of two workshops for central 

bankers and financial regulators, “Setting Global Standards for 

Granular Data.” Participants from around the world discussed ways 

to standardize and share financial data and the legal, technical, and 

semantic issues that must be addressed. A second workshop on 

October 29-30, 2015, in New York City extended and built on the 
2015 OFR Annual Report 62

first workshop. Participants discussed potential solutions and exam-

ples of global standards for detailed data, such as best practices for 

managing data inventories and taxonomies, and standards related to 

stress testing.

•	 On December 5, 2014, the OFR and the Federal Reserve Bank of 

Cleveland cosponsored a conference, “Measurement Challenges 

in Macroprudential Policy Implementation: Essential Data Elements 

for Preserving Financial Stability.” The event brought together 

academics, policymakers, and market participants to discuss tools 

that measure vulnerabilities in the financial system and advances in 

systemic risk measurement.

As part of our outreach to the public, OFR senior managers and special-

ists deliver presentations at industry, regulatory, and academic events 

throughout the year. For example, senior members of the OFR staff 

delivered formal remarks and participated in roundtable discussions at 

conferences and other events to discuss the OFR, key aspects of our 

mission, and our important work. Events included a conference on finan-

cial statistics hosted by the International Monetary Fund in November, 

2014; an operations conference and exhibition hosted by the Securities 

Industry and Financial Markets Association in April; a conference on 

shadow banking hosted by the European Systemic Risk Board in May; 

a financial stability conference hosted by the Brookings Institution in 

June; a Financial Fragility Symposium hosted by the Wharton School of 

the University of Pennsylvania in September; a conference on financial 

interconnectedness hosted by the Bank for International Settlements 

in October; and a conference on securities lending hosted by the Risk 

Management Association in October.

Members of the OFR staff also delivered presentations in other venues 

around the world. Economists and financial analysts in the OFR’s Research 

and Analysis Center regularly participate in events to exchange ideas with 

other financial stability experts. To share our work, get valuable feed-

back, and learn from other experts, the OFR research staff participated as 

invited speakers or panelists in more than 70 conferences, seminars, and 

workshops related to our mission in FY 2015.

In addition, more than 30 outside experts from government, academia, 

and international organizations gave presentations at the OFR as part of 

our Research Seminar Series. At those seminars, members of the OFR 

staff exchange ideas and debate theories with the presenters. Titles of 

the seminars in FY 2015 included, “Shadow Insurance,” “Are Large Banks 

Riskier?,” “Credit Risk Retention of Asset-Backed Securities,” “Credit 

Default Swap Spreads and Systemic Financial Risk,” “Impact of the DoddFrank Act on Credit Ratings,” “Crisis Transmission in the Global Banking 

Network,” and “Cascading Failures in Interdependent Networks: Theory 

and Applications.”
Meeting Our Mission 63

The OFR Data Center was also active in outreach efforts, delivering 

remarks and participating in panels on subjects tied to the OFR’s data-related mandate. For example, the OFR’s Acting Chief Data Officer moderated a panel in May at the North American Financial Information Summit 

in New York on, “Addressing the Challenges of Aggregating, Managing 

and Reporting Risk Data: Responding to the Implications of the Basel 

Committee on Banking Supervision’s Principles for Effective Risk Data 

Aggregation and Reporting.” More than 500 senior financial data professionals attended the event.

As head of the global body overseeing the LEI program, the OFR’s Chief 

Counsel delivered remarks on the LEI and other standards at several 

events in the United States and around the world.

We meet frequently with members of Congress and their staffs to explain 

our work on research and data. We gave substantive briefings on timely 

and relevant issues pending before Congress and made presentations to 

Congressional offices about areas of concern in the financial system whenever requested.

In addition, the OFR has regular contact with representatives of the financial services industry, data standards groups, academia, and regulators. 

These meetings are opportunities to discuss our work and seek valuable 

input. During the fiscal year, much of our analysis benefited from this regular outreach to industry practitioners and academics. 

Collaboration with Global Counterparts

Today’s financial markets are global, and the financial crisis showed how 

a problem can rapidly jump national boundaries to affect trading in other 

areas and asset classes. The OFR holds leadership roles in several international groups involved with financial data standards or financial stability 

issues. In addition to providing our unique expertise, we have the opportunity to discuss the groups’ priorities and help shape their agendas on 

data standards, data quality, and other issues. Here are some examples of 

how the OFR is working with international groups to achieve our mission:

•	 A senior OFR researcher is a member of the Data Experts Group created by the international Financial Stability Board to develop standards and processes for global data collection of securities lending 

and repo agreements, a key part of the financial system plumbing. 

In November 2015, the group issued a report recommending how 

national or regional regulators can use specific data elements to 

collect and aggregate the data for a clearer view of interconnectedness across jurisdictions and the growing concentrations of risk in a 

particular market segment or group of counterparties. 

•	 The OFR’s Chief Counsel is completing a third and final year as 

chairman of the Regulatory Oversight Committee that oversees the 
2015 OFR Annual Report 64

global legal entity identifier system. This international committee 

rolled out the LEI program on behalf of G-20 (Group of 20) governments, set up a nonprofit foundation to manage the system, and 

continues to focus on broad policy standards. The G-20 is a forum of 

finance ministers and heads of central banks from 19 countries and 

the European Union.

•	 Three senior staff members in the OFR Data Center are members 

of a working group on the harmonization of data on over-thecounter derivatives organized by the Committee on Payments and 

Market Infrastructures and International Organization of Securities 

Commissions. The working group released an August 2015 report 

asking for public comment on its plan for structuring a unique 

transaction identifier to improve the transparency of the global derivatives market. The group also is working on a proposal for a unique 

product identifier and ways to identify the critical data elements for 

aggregating global derivatives data.

•	 An associate director in the OFR’s Data Center has a seat on the 

board of Accredited Standards Committee X9, an organization that 

devlops standards, and a senior standards specialist chairs the organization’s subcommittee on securities standards. 

•	 An associate director in the OFR’s Research and Analysis Center 

led a liquidity stress testing work group on behalf of the Basel 

Committee on Banking Supervision in FY 2015. The group published 

a November 2015 paper examining ways to improve bank supervisors’ stress tests to move beyond traditional counterparty analysis 

to more sophisticated approaches that consider a bank’s asset and 

funding linkages and how changes in behavior could destabilize 

markets.

•	 The OFR Director organized a panel discussion on “Addressing 

Global Data Availability Challenges” at the Eurofi Financial Forum 

in Luxembourg on September 10, 2015. The panel addressed three 

questions: (1) What are the critical gaps and inconsistencies in the 

data needed for financial stability monitoring and how can they 

be addressed? (2) How can the quality and integrity of the data be 

improved while reducing duplication and costs for the industry? (3) 

How can the data be shared appropriately among policymakers and 

market participants in a secure and confidential manner? Panelists 

included representatives from the European Central Bank, the Bank 

of England, the European Securities and Markets Authority, the 

International Organization of Securities Commissioners, and the 

financial services industry.
Meeting Our Mission 65

Collaboration with U.S. Financial Regulators

The OFR works closely with the FSOC and its member agencies. We 

continue to lead the FSOC Data Committee, leading discussions among 

member agencies about best practices for data sharing and data 

reporting efficiency. The OFR also provides monthly data and analysis to 

the FSOC. 

As mentioned, we conducted two pilot projects to collect data from 

volunteer companies on bilateral repo and securities lending transactions 

in partnership with the Federal Reserve and the SEC. We are working with 

the SEC to be sure our data collections complement, rather than duplicate, each other.

We also continue to assist the CFTC with a project begun in FY 2014 to 

improve the quality of data collected from swap data repositories. We 

gave recommendations for the standardization of the large amount of 

daily data that companies report to repositories about swap trades. We 

also analyzed existing swap data to determine the best approach for 

aggregating data to calculate risk exposures and liquidity.

We continue to work with U.S. regulators to include the LEIs of mortgage originators and servicers in mortgage transactions and data 

collections and to include LEIs in a universal loan identifier. We also 

continue to collaborate with the Consumer Financial Protection Bureau 

on the development of a universal loan identifier and on mortgage data 

standards. During 2015, the OFR helped plan an interagency workshop 

about integrating the fragmented data produced by the U.S. mortgage 

finance system.

Financial Research Advisory Committee

The OFR’s Financial Research Advisory Committee is an important forum 

for engagement between the OFR and key stakeholders. The purpose of 

the committee is to advise the OFR by commenting on our current work 

and recommending financial stability issues the Office should address. 

Established in 2012, the full committee meets in public twice each 

year. Its three subcommittees meet more frequently to discuss gaps in 

research, data and technology, and financial services and risk management. The subcommittees also develop proposals for the full committee 

to consider recommending to the OFR.

The committee, organized under the rules of the Federal Advisory 

Committee Act, has 31 members drawn from academia, think tanks, 

industry, data standards organizations, associations, and other areas. 

Members of the committee are recognized experts or practitioners in 
2015 OFR Annual Report 66

the fields of data, information standards, economics, accounting, corporate governance, law, statistical analysis, financial market analysis, and risk 

management.

Committee recommendations cover a wide range of financial stability topics. 

Virtually all of these recommendations have either been implemented or are 

being planned for implementation. For example, the committee has recommended that to evaluate stress tests, the OFR gain access to the data used 

for the Federal Reserve’s stress testing exercises collected on Form Y-14. We 

made that request and, in a public notice in September, the Federal Reserve 

announced its intention to share the data.

At its most recent public meeting in July 2015, the committee recommended 

that the OFR continue to assess and improve the quality of data available to 

evaluate U.S. central clearing of swaps and also collect data about central 

counterparty operations, which are taking on more financial system risk. We 

are following up on that recommendation through our CCP program (see 

Core Programs: The Next Step).

Earlier in 2015, a FRAC subcommittee recommended that the OFR design a 

research program to assess the interplay of different regulatory capital standards on bank behavior, particularly in times of stress. An OFR brief published in July described preliminary analysis of these issues (see Research 

and Data Publications — Financial Institution Risks and Regulation).

OFR Website

To make our data and research work more accessible to the public, we 

launched a website in February at financialresearch.gov. The new website 

allows anyone interested in our work to find information easily. The site also 

underscores the independence of the OFR’s research and analysis. The website displays a wide range of OFR products and information, 

including blogs from the Director and other senior managers, press releases, conference information, public 

speeches by senior leaders, and all OFR publications 

— annual reports, briefs, working papers, discussion 

papers, strategic plans, human capital reports, and 

monitors. 

The website also contains information about data 

standards and the Interagency Data Inventory, a 

catalog of data that FSOC member agencies buy 

from vendors, collect from industry, or derive 

from other data. This inventory is tied to the 

OFR program on Data Accessibility (see Core 

Programs: The Next Step).
Meeting Our Mission 67

Budget and Workforce

Under the Dodd-Frank 

Act, the OFR budget, 

the FSOC budget, and 

certain expenses related 

to the orderly liquidation 

authority of the FDIC are 

funded through industry 

assessments. 

The Department of the Treasury finalized a rule in 2012 that enabled the 

OFR to collect semiannual assessments from bank holding companies 

with total consolidated assets of $50 billion or more and nonbank financial companies supervised by the Board of Governors of the Federal 

Reserve System. Since our initial assessment in 2012, total assessable 

assets have increased from $17.8 trillion to $20.6 trillion. For the most 

recent assessment (September 2015), the fee rate was about $2,200 per 

$1 billion of assets held by the assessed companies.

We are managing our expenditures prudently as the OFR grows to 

ensure that all spending is closely tied to our strategic plan objectives 

and reflects good stewardship of the funds entrusted to us. For efficiency, 

we continue to use reimbursable administrative support services from 

Treasury’s Departmental Offices, personnel benefits services through 

the Office of the Comptroller of the Currency, and services related to 

human resources and procurement from the Bureau of the Fiscal Service’s 

Administrative Resource Center. 

In FY 2015, the OFR spent about $85 million (see Figure 20). Our estimated budget for FY 2016 is $99 million. OFR budget details appear 

annually in the President’s Budget proposal.

Figure 20. OFR Funds Obligated in FY 2015 By Quarter 

($ thousands) 

Q1 Q2 Q3 Q4

Compensation 7,909 6,914 7,174 7,039

Benefits 2,039 2,385 2,437 2,647

Labor Total 9,948 9,299 9,611 9,686

Travel 108 153 118 75

Rents, Communications, 

Utilities 1 1 1 3,809

Printing and Reproduction 2 5 20 4

Other Services 7,157 3,071 8,341 6,463

Supplies and Materials 1,044 2,939 2,914 1,161

Equipment 1,041 1,391 2,001 4,352

Nonlabor Total 9,353 7,560 13,395 15,864

TOTAL $19,301 $16,859 $23,006 $25,550

Source: OFR analysis
2015 OFR Annual Report 68

Workforce

We have built a diverse, talented workforce to carry out the OFR’s mission. At the end of FY 2015, we had 201 

employees (not including reimbursable and detailed staff members). Attracting and retaining diverse talent continues to be challenging because of competition for potential employees with the same specialized skills from business and academia, the Federal Reserve System, and other agencies covered by the Financial Institutions Reform, 

Recovery, and Enforcement Act. We have partly addressed this challenge by adopting tools to increase flexibility in 

our compensation policy while maintaining prudent stewardship of our expenditures. The OFR has also established 

work arrangements with outside academics and a partnership with the National Science Foundation to support 

research on financial stability.

At the end of FY 2015, we filled all senior management positions. We are now placing a high priority on filling 

the remaining mid-level management positions and building teams to deliver value for our stakeholders.

Most OFR employees are based in our headquarters in Washington, D.C. We also have an office in New York City 

to support interactions with the financial community there. The OFR has a small number of work arrangements 

with contributors outside of Washington, D.C., and New York to support research collaboration with academics. 

Figure 21. OFR Organization by Division

DIRECTOR

Research 

and Analysis

Center

Technology

Center 

Data Strategy 

and Standards

Strategic Data

Support

Data 

Operations

Data

Products

Data and

Business

Architecture

Financial 

Institutions and 

Risk Management

Business

Ofce

Current 

Analysis

Financial

Markets

Policy Studies

Research

Product Strategy

and Support

Human 

Capital

Other Support

Services

Finance

Application 

Development

Analytic

Systems

Information

Security

IT Strategic

Support

Technology

Strategy

Enterprise

Systems

Data

Center

Operations

Treasury’s 

General

Counsel

Legal

Industry and 

Academic 

Relations

Communications

Government

Affairs 

External

Affairs

Note: OFR General Counsel reports to the Department of Treasury’s Office of General Counsel
Meeting Our Mission 69

Information Security

Keeping sensitive data 

safe and secure is a 

high priority for the OFR. 

During the past five years, 

we have built a secure, 

world-class analytic environment and technology 

infrastructure to support 

and safeguard large amounts 

of data. 

To guard against potential access by unauthorized individuals, we strictly 

adhere to a data categorization and sensitivity classification methodology 

and conduct routine access reviews and security assessments. Our access 

control allows security groups and policies to be applied at a detailed 

level, ensuring a high degree of oversight. As required by the statute, 

all employees with access to nonpublic data are subject to post-employment restrictions to assure that data will be kept secure. Finally, we have 

created a strong OFR security culture — one in which security is a primary 

concern of all employees.

The OFR’s information security program is responsible for ensuring that 

the analytic environment has effective security controls and procedures 

equal to the level of risk posed by the information systems, tools, and 

data the Office holds. The program is guided by the following principles:

•	 Ensuring compliance with applicable Treasury policies and other 

federal policies.

•	 Implementing the supplemental controls necessary for appropriate 

security. 

•	 Maintaining compliance with Publication 199 (Standards for Security 

Categorization of Federal Information and Information Systems) of 

the Federal Information Processing Standards (FIPS) issued by the 

National Institute of Standards and Technology (NIST). The standards 

cover categorization, sensitivity, and classification of all systems and 

information. 

•	 Granting access to systems and information as needed and only to 

the extent necessary to accomplish the mission. 

•	 Providing multiple layers of security controls. 

•	 Promoting a culture of security awareness so everyone in the OFR 

workforce maintains a focus on information security.

The OFR analytic environment contains information systems and tools 

for conducting analytical analysis on data stored by the OFR. All aspects 

of the OFR’s information security program comply with the Federal 

Information Security Management Act, known as FISMA. In addition, all 

OFR systems have undergone a security assessment and accreditation 

process and received formal authorization to operate. To achieve and 

maintain this authorization, the environment is subject to rigorous security 

controls, audits, and continuous monitoring.

The security assessment and accreditation process conforms to NIST 

Special Publication 800-37 (Guide for Applying the Risk Management 

Framework to Federal Information Systems), which requires independent 
2015 OFR Annual Report 70

audits for compliance with security controls specified in NIST SP 800-53 

Revision 4 (Security and Privacy Controls for Federal Information Systems 

and Organizations). The security controls are continuously monitored and 

assessed for effectiveness internally, as well as by independent third parties, to ensure the confidentiality, integrity, and availability of the environment. All new information systems and tools added to the environment 

undergo a battery of security assessments to ensure they meet or exceed 

the security requirements for processing, storing, or transmitting data. 

Users’ access to the analytic environment is managed through documented procedures based on a need to know. Special security training 

is required for elevated privileges in accordance with NIST SP 800-16 

Revision 1 (A Role-Based Model for Federal Information Technology/

Cybersecurity Training).

Data processed, stored, and transmitted within the environment must 

receive a data classification level, following a documented process that 

begins with the identification and categorization of data in accordance 

with NIST FIPS Publication 199, (Standards for Security Categorization 

of Federal Information and Information Systems). The process defines 

security controls and associated handling requirements to ensure data are 

kept secure throughout their lifecycle. We review the classification process at multiple levels to ensure accurate FIPS categorization, including 

an assessment for identification of personally identifiable information and 

risk to personal privacy. After we determine an OFR data classification for 

a dataset, it is brought into the environment according to a process with 

multiple layers of security controls.

Once data are inside the analytic environment, OFR users must request 

permission for access and the request is reviewed at multiple levels to 

verify a valid need for access and to confirm that access adheres to terms 

of any applicable agreements related to the data. Data access is subject 

to periodic auditing and is granted only on a per-user basis. 

The Information Security Program promotes information security awareness to enhance the security posture of the OFR. A security briefing is 

part of the orientation process for new employees and contractors. All 

OFR staff members must pass rigorous security training tests annually. We 

also post security tips on the OFR’s intranet, on printed signs throughout 

our offices, and in the staff newsletter. 

The privacy program, an essential component of the Information Security 

Program, governs the safeguarding of personally identifiable information, 

including the appropriate collection, maintenance, use, dissemination, 

and destruction of such information. 

Promoting transparency and accountability about the OFR’s 

collection, use, and safeguarding of this information is essential to build 

and maintain public trust.

The OFR Privacy 

Program

•	 Ensures compliance with applicable laws, regulations, policies, 

guidance, and best practices for 

information privacy.

•	 Educates, trains, and promotes 

awareness of information 

privacy processes, practices, and 

responsibilities among OFR 

employees.

OFFICE OF

FINANCIAL

RESEARCH

FINANCIALRESEARCH.gov