In trying to improve data transparency in financial futures trading, regulators are learning the hard way about the importance of specifying formats.
When Congress tightened up financial data reporting regulations following the Wall Street securities trading scandals, few would have thought that once they were in place regulators wouldn’t be able to find the London Whale.
That’s the nickname given to a JP Morgan trader who became infamous for making bets upwards of $1 billion that companies would default on trades, the likes of which the new rules were designed to stop.
But while the Dodd-Frank Act called for increased public access to data related to credit swaps and other risky business, it left regulators on their own when it came to managing the data deluge and management challenges that came with it. The problem comes down to one many public-sector agencies can relate to: a mash of formats that aren’t interoperable, and therefore resistant to search.
And that’s what brought commissioner Scott O’Malia, a member of the Commodities Futures Trading Commission (CFTC), which regulates futures swaps, in front of a legal society audience March 19 with a warning that, “big data is the commission’s biggest problem.”
Dodd-Frank provided for greater transparency of financial trades so the commission could “look into the market and identify large swap positions that could have a destabilizing effect on our markets.”
However, the commission’s progress in understanding and using the data, O’Malia said, “is not going well,” according to a CFTC transcript of his remarks.
“The problem is so bad that staff have indicated that they currently cannot find the London Whale in in the current data files,” O’Malia reported.
In its rush to promote the new reporting rules, CFTC “failed to specify the data format parties must use when sending their (records to the database),” O’Malia said. “In other words, the commission told the industry what information to report, but didn’t specify what language to use. This has become a serious problem.”
And one that’s apparently mushrooming. That’s because each type of swap identified by 70-plus swap dealers will be reported in more than 70 different data formats.
“The permutations of data language are staggering,” O’Malia told the lawyers, adding, “doesn’t that sound like a reporting nightmare?”
To make matters worse, CFTC anticipates additional incoming data streams once major swap participants and end-users begin filing. “The commission now receives data on thousands of swaps each day,” the commissioner said. “So far, however, none of our computer programs load this data without crashing.”
Looking head, CFTC must “significantly improve its own IT capability,” said O’Malia. “Until such time, nobody should be under the illusion that promulgation of the reporting rules will enhance the Commission’s surveillance capabilities.”
In the meantime, O’Malia said, he would use his position as chairman of CFTC’s technology advisory committee, “to leverage the expertise of this group to assist in any way I can.”