There is a new film making the rounds where the evil ‘Lord Business’ locks up all the master builders in a think-tank and uses them to design his empire. Quite apart from giving JWG analysts a lot to laugh about, it’s a useful theme when exploring what is going on with OTC trade reporting.
One of the ways the empire is controlled is through a song called ‘Everything is Awesome’ in which they extol the virtues of teamwork and living out a dream.
The point is that we now expect regulators to be plugged in, wired-up and ready for action! They should have all the information needed to mitigate future systemic risks and protect against market abuse.
Like Lord Business, regulators should really now be in control and be using their power to protect us. The reality is, everywhere we look we see signs that there are not only problems with the consistency of reported trade data, but the regulators’ ability to observe that data.
Whether it means identifying specific trading patterns for further investigation or more gradual build-ups of exposure that could prompt systemic risk concerns, it would seem there are some serious question marks around whether regulatory reporting will help to make the markets safer. Given the billions spent on fulfilling the political mandate thus far, these are serious issues that need proper debate. The debate has started, but it is moving slowly and getting more complicated.
In a speech this week, Mark Wetjen, acting head of the CFTC stressed the need to accept differences in OTC regimes and put in place an expanded comparability framework for global execution and clearing venues. He was quick to point out that the results will not be immediate and the CFTC staff is busy ‘engaging’ with global regulators to ‘facilitate progress’.
He did, however, get a sigh of relief from operations and technology folks as he recognised that “Regulators across the globe cannot know before implementation whether regulations will achieve anticipated outcomes… they often must agree in some amount of detail on the specific means for achieving those ends.” For those who have been struggling with the multiple sets of standards (e.g. data, process, legal) introduced by transatlantic regulation, any focus on the regulatory detail will be welcome.
As JWG previously observed here, CFTC Commissioner Scott D. O’Malia has bemoaned the lack of resources being allocated to the Commission’s IT budget – and perhaps more frighteningly, the lack of any real IT plan. In essence, he suggested, if the CFTC did not have the IT resources to decipher the data, that the increased trade reporting requirements brought about by Dodd-Frank may not actually improve market surveillance or reduce risk..
Without investments in those kinds of IT projects, the Commission will struggle to meet its goals of ensuring market integrity and protecting the market (and general public) from “fraud, manipulation, abusive practices, and systemic risk”.
It isn’t just the US that is complaining about regulators’ ability to aggregate and make sense of trade data. The Financial Stability Board’s consultation paper on aggregating OTC derivatives data, which closed for comment at the end of February, will look to propose solutions to the challenges currently faced by regulators in aggregating trade data for more meaningful analysis.
If we are talking about a global data transparency battle with the US crying the loudest about the need for more support, why aren’t we hearing the same from Europe? As we have noted, it’s difficult to get an ‘apples to apples’ comparison between US and EU regulatory oversight spend, but it would appear to some quick JWG calculations that Europe is spending less than 20% than the US for a regime that is exponentially more complex.
Perhaps this explains why, on a DTCC sponsored webinar this week, it was revealed that few of the 28regulators have been in touch to get access to the data that they are meant to be monitoring.
At the end of the day, we know that life is not a movie and everything data will never be awesome. However, this regulatory reporting race cannot be stopped.
Deciding on the best path forward and defining the end-goals will be crucial to the success of this undertaking. Clearly, it would be easy to penalise market participants for incorrectly reporting, but surely that is not the point.
Rather, the market should be asking itself some serious questions. Will the politicians re-engage and audit what has happened? Will real regulatory leadership emerge? Can the laws be modified and the standards worked out now that the race is on? The answers are unknown but, if we don’t figure out what awesome looks like soon, this will be an awfully long, and painful race.