The “One Big Beautiful Bill Act” Eliminates the Office of Financial Research—Threatening the Stability of the Treasury Market

Early last week I started working on a piece on why the Federal Reserve didn’t step in during the Trump Tariff Financial Panic. The basic idea of that piece is simply that “repo rates”- the interest rate at which you can, in essence, borrow funds with treasury securities as collateral- didn’t move outside of the Federal Reserve’s target range. In the language of Wall Street, the Federal Reserve didn’t step in because the “money market” didn’t meltdown. The Federal Reserve, as well as market participants themselves, knew the money market didn’t meltdown. But how did they know a meltdown wasn’t happening?

Simply put: they had the data. Specifically they had the data, known under the name “Secured Overnight Financing Rate Data”, tracking both the volumes and prices in the repo market, published daily by the Federal Reserve Bank of New York. Yet, under the surface, this data is less “New York Fed” than it seems. The FRBNY only collects one segment of the data. The rest comes from the Office of Financial Research, an entity within the United States Treasury created by the 2010 Dodd-Frank financial reform bill. 

Which brings me to the main subject of this piece. On Wednesday, the Financial Times Alphaville blog did a piece entitled “Could Trump’s ‘big beautiful bill’ kill the OFR and accidentally sabotage SOFR?” This possibility was very alarming, so Thursday I put aside the other things I’ve been working on and devoted myself full time to talking to numerous sources about this important issue. There are many extremely important and concerning things going on during this still-ongoing constitutional crisis. However, the combination of the obscurity of this issue, its far-reaching importance, and the rare combination of financial, macroeconomic and legal knowledge needed to report on its various aspects adequately demanded detailed Notes on the Crises coverage.

To start then, let’s focus on Dodd-Frank. Specifically, the unique method by which the Office of Financial Research is funded. In an attempt to avoid being subject to annual appropriations—a perpetual concern here at Notes on the Crises—Dodd-Frank created a fee (referred to as an “assessment”) on the largest banks (known as “Systemically Important Financial Institutions”) as well as any banks with 250 billion dollars, or more, in assets. Collecting this leads to a positive balance in the “Financial Research Fund”. This “fund”, in turn, authorizes expenditures by the Financial Stability Oversight Council (FSOC) and the Office of Financial Research. To put things more precisely: the secretary of the Treasury (who is chairman of FSOC) proposes an FSOC budget each year. Then, if ratified by a majority of Financial Stability Oversight Council voting members, that becomes FSOC’s budget. The OFR director meanwhile determines OFR’s budget “in consultation” with the Treasury secretary (in practice they treat that “consultation” as a veto).  Both budget processes lead to expenditures that “debit” the Financial Research Fund. 

In other words, we are back to the topic of accounting gimmicks. The Federal Government has all sorts of accounting gimmicks to distinguish different types of spending, even if payments ultimately flow out of the Bureau of Fiscal Service and the very same bank account. The point of this accounting gimmick is to avoid annual congressional appropriations fights. That means that for accounting purposes, the expenditures “come out” of this fund, rather than the “general fund”. But it's all public money. To be clear, I do not call this an “accounting gimmick” pejoratively. I think insulating financial regulators from annual appropriations is a good thing. It's just that trying to do so through avoiding the politics of government budgeting is self-defeating.

Enter the One Big Beautiful Bill Act, or OBBBA if you have the stomach churning misfortune of having to work on congressional issues right now. As FT Alphaville first reported, the house legislation limits the “assessments” that can be levied. Specifically, it limits the assessments to a three year rolling average of the Financial Stability Oversight Council’s expenses. Excess sums that happen to be “in” the Financial Research Fund get “moved” to the general fund. Sweeping “money” from one “fund” to the general fund is an accounting gimmick, meant to limit the expenditures those “side funds” authorize. Thus, without ever even mentioning the Office of Financial Research, this provision implicitly moves its budget to zero. So much for avoiding annual congressional appropriations fights! Live by the accounting gimmick—die by it too.

FT Alphaville was unsure whether this was an intentional move or not. The Republican Majority on the Senate Banking Committee released a press release Friday confirming that they were intentionally eliminating the “duplicative Office of Financial Research (OFR)”. According to sources I’ve talked to in the Senate, Republican committee members have shown little concern with the elimination of the Office of Financial Research. They also seem aware of the concerns over SOFR, because both their “one pager” and “section by section” documents claim their proposals are preserving financing for SOFR. Yet, this “preservation” is not in their legislative text proposal. Confusingly, the “section by section” document even claims, falsely, that their proposed legislative text “provides the Treasury Department with the necessary authority/funds to continue collecting data on the Secured Overnight Financing Rate (SOFR)”.

There are many reasons to doubt the Majority Senate Banking’s claims. For one thing, if they plan on replicating the OFR’s activities then the alleged budgetary savings would disappear. No one, not least the Congressional Budget Office, has estimated the cost of replicating OFR activities at “main Treasury”. Even if you took the CBO’s estimates at face value, the supposed reduction of the deficit is equivalent to 0.000001% of 2024 GDP per year. Those estimates also come from assuming that the elimination of the bank fees will lead to higher taxable bank income and thus increase corporate tax revenue (I’m not kidding). This is, to say the least, a highly questionable assumption. But let's pretend to take this seriously for a moment. Even if this were true, to call this generously estimated sum a rounding error would be too generous. This highly questionable budgetary saving is not remotely worth risking the stability of the financial system.

Beyond the impracticability of replicating crucial Office of Financial Research activities while “saving money”, there are also various legal and logistical barriers to duplicating that work altogether. To understand the extreme difficulties involved I spoke to Stacey Schreft, who spent a decade as Deputy Director for Research and Analysis at the Office of Financial Research. Schreft only left OFR March 22nd of this year. This is how she summarized the various problems with transferring the OFR’s data collection efforts:

The Office of Financial Research is the only organization with the authority to collect its data on repurchase agreements from across market participants. The OFR has automated, fully audited pipelines for high-frequency data ingest, transformation, and validation from 80+ industry reporters. These connections are governed by tailored Memorandums of Understanding and interagency agreements, supported by the OFR’s statutory authorities. Transferring or modifying the authority, necessary agreements, and final rules for the OFR’s data collections would likely seriously delay or disrupt the collections. 

But it gets worse. The OFR’s modern IT systems are separate from and stand in sharp contrast to the Treasury’s systems. My understanding is that Treasury could not just take over the collections tomorrow. It would need to take possession of the OFR’s infrastructure because its existing systems aren’t configured to process the kind of data the OFR collects, especially for things like the repo data intake and validation and quality checks. At a time when there has been much talk about the need to modernize federal IT systems to make the government more efficient, defunding the OFR, with its state-of-the-art systems, and moving its data collections elsewhere, especially to Treasury, seems to make little sense.

Finally, the OFR’s analysts and technologists possess unique expertise in financial market structure, repo markets, counterparty risk, and systemic data modeling. These aren’t general-purpose skill sets easily transferred or replicated elsewhere. While FSOC members have technology and research units (or had research units, as many of those units have been or are slated to be eliminated or drastically reduced), none is resourced or mandated to fulfill the OFR’s statutory duties. The OFR’s data stewardship, validation, and transparency mandates are central to collecting data for FSOC and its members and monitoring systemic risk.

In other words, I am extremely skeptical that the work of the OFR will be readily replicated elsewhere. And I worry that, if this provision becomes law, crucial data about repo markets, hedge funds, short term funding, and money markets won’t be collected without interruption or made available publicly in an accessible way. [Emphasis Added]

To summarize, there are various legal, information technology and manpower reasons to think that the claims of the Republican Senate Banking Committee members that another part of the Treasury will take on this work without disruption is not credible. It's also important to emphasize that a key reason the Office of Financial Research is such an effective organization is that it is not a financial regulator. This means that agencies aren’t as averse to sharing their data with it, in a way they would be with other financial regulators. This issue applies to an even greater degree to private actors who took years to become comfortable sharing data with the Office of Financial Research, assured that that data would not be used for supervisory purposes by a regulator. This issue is especially important if the Treasury as a whole doesn’t inherit the OFR’s ability to require data reporting, and has to undertake a volunteer survey.

The Financial Stability Oversight Council is the Office of Financial Research’s main “client” within the Federal Government. Their data collection and publishing efforts are the main thing which distinguishes FSOC activities from a simple excuse for financial regulators to get together and meet in a fancy room. It's also important to emphasize that since the Treasury secretary is the one who “proposes” the FSOC’s budget, Secretary Bessent could also permanently defund FSOC. In the most extreme scenario, his next three proposed budgets could be 0 dollars—which would mean that even a hypothetical future Democratic administration could not refund the council without new congressional legislation. At the very least, he could propose budgets that reduce the FSOC to a skeleton staff, like Secretary Mnuchin did during the first Trump administration. The difference this time would be that a Democratic Treasury Secretary would be prevented by law from rebuilding the Financial Stability Oversight Council.

Nellie Liang, Brookings senior fellow and most recently under secretary for domestic finance at the U.S. Treasury Department in the Biden administration, told me over the weekend that:

Given the importance of market-based intermediation and that it often draws collectively on banks, securities firms, private funds, and insurers to provide credit to households and businesses, it is critical to have FSOC to improve communication and coordination across the different regulators since no individual regulator will have the visibility or ability to ensure that systemic financial risks are not building [emphasis added]

Even if Treasury Secretary Bessent doesn’t gut the Financial Stability Oversight Council’s budget itself, its work will be greatly weakened if it doesn’t have OFR to support it.

Let's take a step back for a moment. That was an enormous amount of detail, and I’m sure most readers are overwhelmed. The reason this issue is so important is that the Office of Financial Research provides both the federal government and Wall Street with key information about the evolution of the financial system and daily data about the state of the repo market, and short term funding markets in general (it’s worth revisiting the last interview Paul Krugman did with me on these topics). In such erratic times, having less data in a less timely manner on the various markets that have the potential to meltdown when volatility spikes too much could be the difference between a stressed but resilient financial system and a full blown financial crisis.

Which brings me to a major Office of Financial Research project that has been more than a decade in the making. In the 2008 Global Financial Crisis one factor which was seen to exacerbate the crisis was that financial derivatives were so often agreements between two parties. That meant that not only did companies risk that their bet would “go wrong”: they also risked that their bet would “go right”, but their counterparty couldn’t pay. Thus, a major part of the Dodd-Frank legislation was to try to mandate the use of central clearinghouses for derivative contracts. That way, the only counterparty uncertainty that mattered was with the clearinghouse itself. (For the basics of clearinghouses, check out this “Monetary Policy 101” piece from 2020)

What Dodd-Frank didn’t do was mandate central clearing in government securities and repurchase agreement markets. Remember that we said some data was collected by the Federal Reserve Bank of New York? That data was from the “Bank of New York Mellon” (“BNY”), one of the main government securities clearinghouses. The other data that goes into the Secured Overnight Financing Rate (SOFR) comes from the Depository Trust & Clearing Corporation, another absolutely crucial clearing bank, and is collected by the Office of Financial Research. Having OFR collect data for this series was an intentional choice to prepare for the entrance of other clearing banks into these businesses, and data collection would need to reach those new clearinghouses to enter SOFR. In any case, a major part of the market had been missed by not collecting data in the dark underworld of repurchase agreements that are not centrally cleared.

So it was intuitive for the Office of Financial Research to step into the breach. After multiple data collection pilots OFR began the process of making this a permanent dataset, with mandatory reporting by various financial institutions, over the last few years. The final rule requiring institutions to report this data only came into effect July 5th 2024, while the data collection itself only began in December. More entities are required to report starting July 1st, just a few weeks from now. This data, known by the ugly acronym “NCCBR” or “Non-Centrally Cleared Bilateral Repo”, has already provided a great deal of insight. Biden Treasury Under secretary for Domestic Finance Nellie Liang told me, in relation to this topic, that:

Treasury repo markets are the anchor of US funding markets and financial market liquidity, and SOFR provides market-sensitive information each day on the cost and conditions in that market. We should not be dismantling repo data collections at this time, when Treasury market debt is growing rapidly and concerns about market liquidity are increasing.  Instead, we need to continue to improve Treasury repo data, including adding the new data from OFR on uncleared bilateral repo, which has been a key source of fire sale risks in recent years. [emphasis added]

Like other quotes from former government officials I’ve published in Notes on the Crises, this statement may seem subdued. But for an on the record quote from a very senior recent United States Treasury Official, this is quite alarming language. 

Former Deputy Director of the Office of Financial Research Stacey Schreft also had much to say about this, having spent so much time and energy on collecting and understanding this data:

Visibility into the huge NCCBR segment of the repo market matters for two reasons in particular. First, NCCBR activity can affect liquidity in Treasury markets and money markets. The OFR has a pulse on this through its NCCBR data collection. In the global financial crisis of 2008-09, disruptions in the repo market played a pivotal role, spreading stress across the financial system more widely. The NCCBR market segment is also proving to be much larger than expected, accounting for more than 40% of all repos. Should the collection of these data vanish, or be disrupted, forces like those observed in the 2008-09 crisis could build without the public or the government being aware of them. [Emphasis added]

This is already bad enough, but as we’ve discussed previously, the institutions that are likely to explode are hedge funds. The Office of Financial Research has also collated and harmonized data on hedge funds from across the federal government, providing greater insight into their leverage and vulnerabilities in what it calls its “hedge fund monitor”. Losing OFR thus costs insight and understanding from a key area of our financial system from multiple directions

The last I heard from congressional sources, defunding the Office of Financial Research was still on track to happen, as long as the One Big Beautiful Bill Act itself passes. Senator Elizabeth Warren’s office gave me this quote from Elizabeth Warren in response to my request for comment:

At a moment when most American families are worried about a potential recession, President Trump and Congressional Republicans are trying to eliminate the Office of Financial Research and destroy the Financial Stability Oversight Council with their “Big, Beautiful Bill.” These offices were created after the 2008 financial crisis to identify financial sector risks that could set off the next major financial crash, and their destruction at the hands of Republicans would leave millions of American families vulnerable to the next crisis.

I think Elizabeth Warren’s assessment of the situation is both fair and accurate. 

Democrats on the Senate Banking committee are looking to make their case to the senate “Parliamentarian”, the infamous interpreter of Senate rules and procedure. Their case centers around the “Byrd rule” which was aimed to stop so-called “abuse” of the legislative budgetary process to insert “non-budgetary” items that would not get past a filibuster. The senate procedure experts I’ve talked to are skeptical that this will succeed; And, in any case, Senate majority leadership can just… ignore the Parliamentarian. Thus, it will take a surprise outcry from both the public, or Wall Street, to derail killing this obscure little agency that is doing such important work.

Which brings me to my final point. Last Thursday the Financial Stability Oversight Council released its March 20th 2025 minutes, its first meeting minutes of the second Trump administration. The minutes have many interesting details, but their summation of what Treasury secretary Bessent said about FSOC is especially interesting:

The Chairperson said in conclusion that history indicates that markets will not always be calm, and this Council would likely face financial stress at some point. He said that this Council can be a critical forum for helping to evaluate the different vulnerabilities facing the financial system, so that whatever shock materializes, members have a better collective understanding of how it may impact the broader financial system. He said that this approach would also help the Council to be ready to address shocks that arise. He noted that markets and institutions are interconnected, and he said that many financial issues implicate the authorities of multiple agencies. He noted that collaboration and coordination are critical and that the Council is important.

Does Bessent still think the Council is “important”? Does he support or oppose the Funding of the Office of Financial Research? As of this writing, a Treasury spokesperson had not provided a response to my questions. Bessent, other regulators (including Fed Chairman Jay Powell) and Wall Street executives should be asked if they support, oppose or are neutral on the defunding of the Office of Financial Research, the threat to the Financial Stability Oversight Council—and the risks this attack poses for the stability of the Treasury market, as well as the overall financial system.