They said it means the CFTC, which is the derivatives market
regulator, has yet to meet a major goal it was set after the credit
crisis: to get on top of what is happening in the opaque $690
trillion market so that it can be confident of preventing another
Four people involved in talks between the CFTC and the industry say
that bickering between participants is the reason that the agency
still does not get the quality of data it needs, something it has
been complaining about ever since buyers and sellers were required
to report trades more than a year ago.
The CFTC intends to use the data to get a grasp on which banks and
funds may be taking on too much risk through swaps, used to hedge
and speculate on most financial markets.
"The data is still not working," said a person involved in talks
between the market parties and the regulator. "Nobody is covering
themselves in glory on this one. Everyone is being pretty difficult
to deal with."
The problems reflect how companies and the authorities are
struggling to create from scratch the infrastructure needed for
effective regulation of the massive market.
Unlike stocks and futures that have been regulated for decades, the
swaps market had grown up without such oversight.
As a result of the new rules, the three main data providers are
required to share certain data so that the CFTC can monitor the
overall market, as well as individual positions. But they are not
always willing to do so because of commercial interests, the people
The CFTC declined to comment for this article.
Its Acting Chairman Mark Wetjien told reporters earlier this month
that it wasn't getting a full and clear picture of what was
happening in the market because of the data issue.
The struggle involves the Depository Trust & Clearing Corp (DTCC),
which performs administrative services for the Wall Street banks
that own it, against the world's largest futures exchange, CME Group
Inc, and the owner of the New York Stock Exchange, the
At issue are so-called "termination messages" which a clearing house
is often required to send to another institution.
When a bank and an asset manager, for instance, enter into a swap
agreement, they must report that trade to a computer system that
stores data maintained by one of the three operators, known as Swap
Data Repositories (SDR), a regulatory category introduced by the
2010 Dodd Frank financial reform law.
The next step is that the trade is sent to a clearing house, which
extinguishes the original trade, and enters into two new trades, one
each with the bank and the asset manager. The rules require the
clearing house to send a message to the first SDR saying that the
original trade has been terminated.
But that is where the problems begin.
According to several sources, the DTCC has not been accepting some
of the termination messages. One industry source said that the CME
and ICE are not sending some of the messages in the first place.
Even when the messages are sent, they are not always formatted in a
way that is compatible with DTCC systems, several of the sources
said, though it was not clear which of the three parties was to
blame for this. The result for the CFTC as it combs through the data
is that it is either incomplete or that some trades are counted
DTCC said that its data repository "is accepting all messages that
comply with CFTC regulations and continues to do so on an ongoing
basis." ICE said it was fulfilling all its obligations as a
derivatives clearing organization, and Chicago-based CME also said
it was confident that it was meeting all the reporting rules.
MONOPOLY AT RISK
Two economists at the CFTC have to scrub the data every time it puts
out a weekly report on swaps. The report is one of one of its most
visible achievements after it was put in charge of the swaps market,
but the CFTC had to make a major correction to it in January.
[to top of second column]
"When the (CFTC) put(s) together the swaps data report they ... do
an estimate as to how many of these trades are occurring ... whether
(they) got it all right or half right, I don't know," one of the
The root of the problem goes back to the years before the crisis,
when then unregulated swaps could only be traded through banks. The
banks cleared their trades through LCH.Clearnet — which they owned — and administered them in DTCC. As a result, DTCC had a near monopoly
on swaps data.
But since Dodd-Frank, CME and ICE have set up their own SDRs to
compete with the DTCC's SDR. And they have a massive strategic
advantage over DTCC: both own a clearing house as well as an SDR,
and send all their cleared trades automatically to their own SDR,
guaranteeing a constant data flow.
DTCC relies for its data flow on LCH.Clearnet, but this is an
unaffiliated entity, and is no longer owned by the banks as it was
acquired by the London Stock Exchange in 2012.
To support its case, DTCC is suing the CFTC in the District of
Columbia District Court to prevent ICE and CME from automatically
feeding their SDRs, something it says is contrary to the intent of
"The more you can aggregate that data, the more you become the
central and key repository. And DTCC would say they made major
investments, tens of millions of dollars to maintain this
infrastructure," one senior executive said at an industry conference
in Florida this month.
Some CFTC critics say it only has itself to blame for the problem
because its rules were unclear from the beginning. Last week, it put
out a long list of questions for public comment, seeking help from
any stakeholder to sort the problem.
Wildly different data formats that are used by the three providers
are an additional problem, that are making it virtually impossible
to aggregate the data.
Even simple information such as a timestamp, or the format of a day,
is not harmonized between the three, and a CFTC working group is now
regularly meeting with the industry to agree on standards. Some of
the people said this was an example where the industry did show good
Work on one type of swap — credit default swaps, which insure
against default risk — is now finished, one of the sources said. But
CFTC staff at a recent meeting could not say when the entire project
would be over.
And while credit default swaps may only require the 30 or so data
fields the working group is looking at, interest rate swaps — an
area where DTCC is strong — can have up to 1,000 data fields.
The problems are a sign that the swaps industry — long dominated by
Wall Street's most powerful banks — is only slowly coming to terms
with regulation and the insight into the business that it is now
required to provide, people watching the industry say.
"It is not in an individual firm's interest to have transparency on
prices and volumes and so their likely position would be to
disparage the quality of such data," said Amir Khwaja, who runs
Clarus Financial Technology, which publishes a weekly report with
aggregated SDR data on its website.
"But it is in the interest of the industry that this data is
available, timely and of good quality," he said.
(Reporting by Douwe Miedema; editing by Martin Howell)
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