WASHINGTON Market operators' failure to cooperate to provide the Commodity Futures Trading Commission with adequate data is preventing the regulator from effectively monitoring the global swaps market, according to sources familiar with the matter.
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 blowup.
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 said.
The CFTC declined to comment for this article.
Its Acting Chairman Mark Wetjen 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 IntercontinentalExchange.
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 comes through the data is that it is either incomplete or that some trades are counted twice.
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.
"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 sources said.
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 regulation.
"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 cooperation.
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.
(This story corrects spelling of Wetjen in paragraph 10)
(Reporting by Douwe Miedema; Editing by Martin Howell)