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FIBO, Helping to Comply with Dodd-Frank

FIBO is a direct model of all the financial instruments that a bank or trading company might have.

The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010, bringing the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry.

There is much debate on whether Dodd-Frank accomplishes the stated goal. One thing we can be sure of, it is very complex and costly to implement.

The overall goal of the legislation is to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes. There is much debate on whether Dodd-Frank accomplishes the stated goal. One thing we can be sure of: it is very complex and costly to implement. Each page of Dodd-Frank law translates to 10 pages of rules in practice. It has been almost four years, and we have not begun to get a handle on this problem.

Some Ways to Deal with Compliance

We have discussed FIBO (Financial Industry Business Ontology) and XBRL (eXtensible Business Reporting Language) — both of which help enterprises deal with financial reporting and financial compliance regulations imposed on them since 2009.

What is the relationship between these two standards? FIBO is a direct model of all the financial instruments that a bank or trading company might have. The financial reports will be partially dependent upon these, but they are also dependent upon non-financial aspects of the company: sales, costs, inventory, etc. While FIBO attempts to be a complete model of all financial assets at the current time, an XBRL report represents a summary of the business activities over a specified time period, and includes standard aggregations of values calculated in specific ways. These two standards are different and complementary.

XBRL relies upon taxonomies to provide the definitions of the values in the report. The SEC provides a standard base taxonomy for generally accepted accounting principles, and that taxonomy can be extended by industry groups and by individual companies. FIBO provides a standard semantic representation of the financial instruments with precise meanings of the assets, and the relationships that exist with all other assets. Thus a derivative will have a clearly specified relationship to the assets it is derived from, and a credit default swap will be tied in different ways to its related assets. In both cases common terms and domain-specific terminology are required.

What Ontology and FIBO Provide?

Many understand that you can’t manage what you can’t measure. Assessing the risk of a collection of assets is impossible when the relationship between those assets is vague. Assessing the value is equally difficult. Basically, the banks had no way to really know what they had on hand, and they lacked a standard that would allow them to collect this understanding. If they did know internally what they had, they lacked a way to communicate that to other businesses.

Regulations and Meanings

A second and more pervasive problem is about regulations of the industry. Those regulations must be described somehow in terms that carry the same meaning to all the main players. The existing laws are flawed by ambiguous category definitions, particularly when different organizations use terms differently. Some organizations will purposefully manipulate the language to game the regulations, but many of the existing derivative instruments were simply so complicated that it was not clear at all where they should fit and how the laws applied.

That is why understanding and utilizing ontology is so critical. Utilizing ontology, and specifically the FIBO implementation, allows one to be able to ask questions about the assets that a company holds, and get correct answers. How many of the assets are taxable? What is the tax liability? More interesting questions are along the line of “if this asset became worthless today, which of these other assets would have their value affected and what other things would be affected in turn by that?” To run the business, and to regulate it, you need to get accurate answers to these kinds of questions quickly and consistently.

Given a standard ontology, the rules and regulations can be expressed in terms of these semantics as well. Financial institutions go through all their assets and assign semantic meaning by representing those assets in the ontology. The resulting data set can be queried with SPARQL, and a clear, meaningful answer results. This FIBO semantic map will return the same result for the bank and for the regulators. It will provide tremendous clarity both to the leadership of the bank, and to the regulators.

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