Scott O’Malia continued what is fast becoming his “Look, the Emperor’s naked!” tour with a speech this week at the London School of Economics. His latest critique focuses on technology (or the lack of it), an area where the CFTC is known to be weaker than other regulators, who are merely presumed to be technologically feeble. His argument, which is worth reading in full, resolves to two strands: the data is flawed by lack of standardisation and the CFTC is incapable of analysing large volumes of data whatever its quality. Criticism of the agency’s technological prowess is nothing new, however telling and eloquently phrased; however, O’Malia’s numerous points regarding the harmonisation of SDR data, both domestic and international, are more interesting. His proposed adaptations to a world of “Data Darwinism” follow in excerpted summary:
- Data Quality-“The first order of business for the CFTC is improving swaps data quality…Over a year has passed since swap data reporting began in the United States. Yet, the CFTC still cannot crunch the data in SDRs to identify and measure risk exposures in the market…The failure to use a common metric increases the risk of misapplication and misunderstanding of critical market information. The result is a waste of resources—for both regulators and market participants.”
- Automated Surveillance- “the CFTC doesn’t have a database that links the futures and swaps markets to aggregate and perform cross-market analytics, horizontal reviews, and surveillance for systemic risk…We have to rely on the four registered SDRs to store the data and perform first-order analysis…the next logical step is for the CFTC to invest in surveillance tools to oversee the real-time order messages and not rely on stale transaction data…Doing the math, that means that we are presently not looking at roughly 90 percent of the market activity.”
- Automated Risk Analysis- “Risk analysis is a sophisticated discipline and there isn’t an app for this…we still struggle to identify and quantify the risk exposure of systemically important entities in both the OTC derivatives and futures markets”
- International Data Sharing- he has proposed to the EU a mutual recognition of SDRs and the development of shared reporting and data standards- “Risk knows no boundaries. Our ability to monitor it shouldn’t have any either”.
- “The Rosetta Stone of Swaps Data: Creating Universal Identifiers”
- LEI- he notes that international regulators are “well on their way”
- UTI- discussions are underway regarding the feasibibility of a globa unique transaction identifier
- UPI- the CFTC is developing principles to guide the framework and maintenance for unique product identifiers
At a different London venue on the same day, similar topics were addressed by Patrick Pearson, EU head of financial markets infrastructure. He was broadly in agreement with O’Malia: data difference is hampering international collaboration; however, good progress is being made. Pearson also made an intriguing reference to the US-EU democracy gap “In the US, if the CFTC is going to implement something that will cause problems, Congress can’t stop them and say ”that’s not what we meant”. In Europe you can.”
All families argue, democratic-deficit sniping aside both speeches may mark the beginnings of a new phase in regulation. The principal structure is largely in place, the next phase is to move from defining and enforcing compliance, to fulfilling the regulations’ initial purpose- monitoring and controlling systemic risk. The clear first step is to rationalise the reporting burden, maximise coordination and eliminate duplicated and/or useless data. We should expect to see increasingly strenuous efforts to standardise and internationally harmonise data- it remains to be seen whether any regulators will be capable of the “analyse” end-goal.