Comment Text:
The ACTUS Financial Research Foundation is pleased to respond to the Commission’s request for comments regarding the structure, management and focus of a prize contest for the development of innovative capabilities that could assist the Commission (and potentially other agencies) in the fulfillment of their mission.
ACTUS believes that one of the most fundamental challenges facing both financial regulators and the companies they regulate is developing (and refreshing) a real-time understanding of the ongoing evolution of the full balance sheet of the financial obligations and counterparties of financial institutions, and creating an effective means of managing and sharing that understanding.
Recent financial crises laid bare serious shortcomings in risk management and financial regulation. In retrospect, the lack of timely granular data reported in a data standard capable of supporting financial analysis contributed much to the crises. The ACTUS project aims to remedy this weakness by creating a common standard for the consistent representation of financial instruments.
The centrality of expected cash flows for financial analysis is obvious and undisputed. Less obvious is the role of the financial contracts. Financial contracts are mutual agreements between counterparties to exchange cash flows. The agreements are written by lawyers in different languages, legal terminology, and jurisdictions. This leaves us with a plethora of terms and different contracts.
However, if one abstracts from the legal terms and focuses on the cash flow obligations, the diversity of financial contracts or agreements shrinks drastically. The vast majority of the relevant financial contracts are built on a manageable number of underlying mechanisms. Financial contracts follow a limited number of patterns.
The goal of ACTUS is to break down the diversity in financial instruments into a manageable number of cash flow patterns – so called Contract Types (CT). Thereby, ACTUS defines two standards:
• ACTUS Data Standard
• ACTUS Algorithmic Standard
The Data Standard defines a universal set of legal terms – or CT Attributes – used as parameters throughout the different financial agreements. It is implemented in form of a Data Dictionary with Attribute Applicability by Contract Type. The second standard defines the logic embedded in legal agreements that eventually turn the contract terms into actual cash flows, or more generally business events.
These two standards together support forward-looking financial and risk analysis, and, we believe, would be very useful to employ in the types of competitions that are being proposed.
ACTUS software code is available under an open source license and can be integrated with any commonly used risk and finance analysis platform. The ongoing maintenance of ACTUS will be ensured by the not-for-profit ACTUS Financial Research Foundation and the ACTUS Users Association. More information on ACTUS can be found at www.actusfrf.org .
Sincerely,
On behalf of the ACTUS Financial Research Foundation,
Jefferson Braswell
Chair, ACTUS Financial Research Foundation Board of Governors
