The failure to share Big Data threatens finance; Early warning system is beyond reach because countries do not trust each other

March 20, 2014 6:34 pm
The failure to share Big Data threatens finance
By Gillian Tett
Early warning system is beyond reach because countries do not trust each other
Once upon a time, the antics of US spies in cyber space was of interest only to other spooks and to internet geeks. No longer.
Last year Edward Snowden stirred political outrage with revelations that the US National Security Agency was spying on American citizens and European officials. Dianne Feinstein, chairman of the Senate intelligence committee, has created more furore by accusing the Central Intelligence Agency of snooping on Senate officials.But there is another area where the activities of American cyber spooks have created unexpected fallout: in financial exchanges and market data groups. Investors should watch this saga since it may have financial stability implications.
The issue revolves around the question of who can see the data generated in relation to complex securities. In decades past, information about issues such as private derivatives deals was patchy because trading records were scattered among numerous institutions and locations.
However, since the financial crisis, regulators have been trying to find ways to collate these data so that they can be easily monitored. That is sensible. After all, the reason nobody spotted the risks in institutions such as insurer AIG before 2008 was that dangerous activities fell between the cracks of reporting systems. So creating a holistic data base is a self-evidently good step as it could help regulators and investors to see where financial risks are building up.
“With the current structure of trade repositories, no authority [is] able to examine the entire global network of over-the-counter derivatives data at a detailed level,” a committee linked to the Bank for International Settlements lamented last year in a report, demanding the creation of a “joined up” database.
Indeed, the need for better monitoring seemed so self-evident after the financial crisis that the US Congress created an Office of Financial Research, which is supposed to use Big Data and other computing advances to track financial flows in a holistic manner. “The financial crisis revealed serious deficiencies in our understanding of vulnerabilities in the financial system and the financial data needed to measure them,” Richard Berner, OFR head, told Congress last month. “[Our] mission is to fill in those critical gaps in analysis and data.”
While these efforts have made some progress and are laudable, they have encountered a hitch: the US spying scandals are making European politicians and bankers more nervous about giving information to centralised databases.
These concerns first started to bubble in the European parliament in the past decade, when it emerged the US government had subpoenaed the Brussels-based Swift banking payment system to force it to hand over confidential information about financial transactions to enable the tracking of terrorists. The NSA scandal has fuelled the anger. In October, members of the European parliament passed a motion demanding that the European Commission restrict US access to the Swift system. Last week MEPs reiterated that appeal.
And, while the commission has not yet acted, the anger is making it harder to promote data-sharing in other areas such as derivatives.
The net result, then, is that those databases remain as fragmented as ever. “The financial crisis demonstrated the need for financial supervisors to get a holistic view,” says Kay Swinburne, a British MEP who sits on the chamber’s influential economic and monetary affairs committee. “Sadly [this] may be in jeopardy. The NSA scandal has caused many to reassess the risks of their personal data being shared across borders.”
Could this be fixed? European politicians still hope so, perhaps if the EU and the US sign a data protection agreement as part of a transatlantic trade deal. In the meantime, OFR officials keep chasing their transparency dream in other ways. They are trying, for example, to force banks to use standardised legal entity identifiers (or “tags” that mark financial securities, like bar codes, to make them easy to track).
But do not expect those efforts to bear fruit soon. While the advent of Big Data has created the tantalising vision of a more transparent financial system, the grubby reality of Big Geopolitics has turned this into a mirage. It is an irony not even Mr Snowden could have foreseen.