On December 23, 2022, US President Joe Biden signed the 2023 National Defense Authorization Act (NDAA) into law. Just a few days earlier, on December 15, 2022, the NDAA had been passed by the US Senate. The NDAA included the Financial Data Transparency Act (FDTA), which requires regulatory agencies under the Financial Stability Oversight Council to adopt uniform machine-readable data standards to collect financial information from their regulated entities. The regulatory agencies include…
- The Securities and Exchange Commission
- The Federal Reserve
- The Federal Deposit Insurance Corporation
- The Office of the Comptroller of the Currency
- The Consumer Financial Protection Bureau
- The Federal Housing Finance Agency
- The National Credit Union Administration
- The Commodity Futures Trading Commission
In addition, the Municipal Securities Rulemaking Board (MSRB) will be required to adopt the same standards for information published on the Electronic Municipal Market Access (EMMA) portal. The regulators mentioned above – and mainly the Securities and Exchange Commission (SEC) – are tasked with proposing rules for establishing the new data standards and releasing them for public comment within 18 months of the FDTA’s enactment.
About Machine-readable Data Standards
US regulators have been using machine-readable data standards since 2005. The Federal Deposit Insurance Corporation (FDIC) was the first to adopt them to receive bank call reports. Thereafter, the SEC introduced the standards for public companies’ financial reports in 2009. The Federal Energy Regulatory Commission (FERC) adopted the standards in 2021.
XBRL or eXtensible Business Reporting Language has been the preferred machine-readable standard for these regulators. For organizations, adopting XBRL for digital financial reporting can provide a host of benefits including improved regulatory compliance and better stakeholder communication.
Having covered the basics of the FDTA and the machine-readable standards involved, we now move on to the implications of the new Act.
Implications of the Financial Data Transparency Act
A Smarter Way of Creating Information
Introduced in the early 2000s, XBRL has quickly become the go-to standard for regulators worldwide to collect data from the entities they oversee. Regulators release XBRL taxonomies or machine-readable versions of the accounting standards to be used by the entities they oversee. Taxonomies are a collection of individual XBRL tags or codes that entities use to mark up the data in their reports. This process is known as XBRL tagging. Entities are advised to take the help of XBRL International certified software or service providers for the XBRL tagging process.
XBRL is a smarter format for producing and submitting financial data to regulators because computers understand the machine-readable tags it is composed of. Software interacts efficiently with machine-readable tags, making it easier for users to arrange their data into smart templates or create reports that seamlessly cross over to the regulator’s portal. Moreover, a report needs to be led through the tagging and submission process just once. The next time a similar document needs to be created, users can simply upload the data and let the software take over the tagging process. They only need to review and validate the document to ensure that the data retains the intended appearance and quality.
Easier Data Access, Analysis, and Comparison
Information shared on printed paper or PDF documents can only be read and understood by human readers. To interact any further with such information, users must key it in on a spreadsheet or word processor. XBRL, on the other hand, is a machine-readable language that is understood by computers. XBRL allows users to interact with data in ways not possible when the data is locked away on paper or PDFs. XBRL allows data to be transmitted from one computer terminal to another without the need for any more manual intervention than the click of a mouse. Moreover, XBRL tags allow users to slice and dice through data in various ways for financial analysis. And since every entity submitting information to a regulator uses the same set of machine-readable tags, users can compare data across peer companies and industries for greater insights. So, with the FDTA coming in, regulators, analysts, and other stakeholders can expect a rich store of information to parse through and understand the financial position of entities filing with eight regulatory agencies.
More Traction for Municipal Bonds
We have mentioned above that the Municipal Securities Rulemaking Board (MSRB) will be required to adopt digital standards for information published on the Electronic Municipal Market Access portal. This will make high-quality, machine-readable information available to bond analysts and investors and bring more participants to the municipal bond market.
The value of municipal bonds is currently opaque, says Barnet Sherman, a Forbes contributor, in this article. The FDTA will provide the market with data crucial to the accurate pricing of municipal bonds. “With hard, evidence-based data, risk spread values could be established by the market and pricing services alike with more transparency and objectivity. Along with this improved data comes improved liquidity. The lubricant of an efficient market is information,” Sherman writes in his article.
Here’s the XBRL International take on what the FDTA will do for the municipal bond market: “By introducing XBRL for reporting of municipal financial data, the FDTA would provide investors, regulators, and the general public with far more accessible, transparent, usable data. The result would be for data on cities, towns, and local authorities’’ cash flows, assets, debts, and more to be widely available for simple and quick analysis.”
Data Interoperability Across Regulators
The FDTA requires regulators to establish common identifiers for the digital information produced by the covered entities. This includes information about their financial transactions, products, or instruments. Moreover, the FDTA also requires interoperability of regulatory data across the Financial Stability Oversight Council’s members. These requirements will promote easier access and transferability of financial information across regulators.
Compliance with the provisions of the FDTA will not be a burden to any entity since the Act does not introduce any new disclosure requirements. To minimize the burden on smaller entities coming under the purview of the FDTA requirements, the Act allows agencies to “scale data reporting requirements…(to) minimize disruptive changes to those affected by regulations”.
Data Transparency across the Economy
The Financial Data Transparency Act will turn the United States into an economy built on transparent digital information. Data from most entities and enterprises across the US will be freely available for access, analysis, and comparison leading to valuable business insights. Such economy-wide transparency is something every country must aspire to. Similar efforts for a digital and transparent economy are underway in the European Union, with multiple regulators such as the European Securities and Markets Authority (ESMA), European Banking Authority (EBA), and European Insurance and Occupational Pensions Authority (EIOPA) collecting digital financial information from the entities under their purview. A European Single Access Point (ESAP), which will be set up by 2024, will provide access to publicly disclosed information on financial services, capital markets, and sustainability across the European Union.
