More than two years after Congress voted to bring swap transactions out of the shadows so they could be tallied and monitored, U.S. regulators are still struggling to build a system that works.
Officials at the Commodity Futures Trading Commission have found inconsistencies and gaps in the trading data the Depository Trust and Clearing Corp. began to supply late last year, according to three people familiar with the matter.
The agency is also threatened with litigation by DTCC and competitor CME Group Inc., which are at odds over how information about the market should be routed and stored. The CFTC is preparing to approve CME’s view on the issue by March 6, according to one of the people.
As a result, two months after the agency said it had opened an “important new window” into the $639 trillion swaps market, the regulator is falling short of a key goal of the 2010 Dodd-Frank Act and the trades are still taking place without clear government oversight.
Gary DeWaal of consulting firm Gary DeWaal and Associates and former general counsel at Newedge USA LLC, said the agency encountered problems by seeking to build a new type of data collection system from scratch.
“When you create something new, all the vested interests get interested and create debates and litigation,” DeWaal said in a telephone interview. “People are asking if we made it any better.”
President Barack Obama enacted Dodd-Frank in part to regulate the over-the-counter swaps market, which was blamed for exacerbating the 2008 financial crisis triggered by the collapse of Lehman Brothers Holdings Inc.
“Regulators did not know nearly enough about the over-the-counter derivatives activities at Lehman and other investment banks, which were major OTC derivatives dealers,” the Financial Crisis Inquiry Commission concluded in a report in 2011. “There was no way to know who would be owed how much and when payments would have to be made -- information that would be critically important to analyze the possible impact of a Lehman bankruptcy on derivatives counterparties and the financial markets.”
Congress granted authority to the CFTC and Securities and Exchange Commission to write rules requiring data to be reported to regulators and the public. The law set up so-called swap data repositories as central recordkeepers of information about buyers and sellers, volume and prices.
Hundreds of pages of rules governing the databases were among the first regulations completed by the five-member commission and began to take effect at the end of 2012. Swap dealers including JPMorgan Chase & Co. and Goldman Sachs Group Inc. had to begin reporting price and other data on interest rate and credit swaps by the end of last year.
In a Jan. 2 news release, the agency said the reporting was helping oversight of the swaps market.
“This week’s implementation of transparency and oversight reforms begins to fulfill key goals of the Dodd-Frank Act,” CFTC Chairman Gary Gensler said in the statement.
Steven Adamske, a CFTC spokesman, said yesterday that he could not comment on the matter.
Larry Thompson, general counsel at DTCC, said the agency has been in touch with the company and officials “have raised with us questions about how timely the information is and things of that sort.”
The CFTC has also raised questions about the formatting of data, Thompson said, in a telephone interview. “I believe we’ve responded to all of that and have dealt with it,” he said.
The recordkeeping process for the repositories including DTCC, CME Group’s database and one run by Intercontinental Exchange Inc. is also raising questions about how the data is captured for cleared trades. Dodd-Frank seeks to have most swaps guaranteed at clearinghouses as a way to limit risk in the market. Clearinghouses collect collateral from buyers and sellers to protect one side from a counterparty’s default.
A clearinghouse replaces a trade between a buyer and a seller by standing between the parties and guaranteeing the transaction. How the trade terminations are accounted for in the process is also at issue in the recordkeeping rules.
“Our participants have given very explicit instructions to both ICE and CME that they control whether or not their transactions are terminated and not the clearinghouse,” DTCC’s Thompson said. The company accepts requests to terminate the trade from parties to the original trade, he said.
The CFTC is planning by March 6 to decide whether to approve a rule request from CME that would require its clearinghouse to route data to its own swap data repository instead of allowing buyers or sellers to decide.
The CFTC is planning to support CME’s argument over the objections of DTCC and banks including JPMorgan, Citigroup Inc. and Deutsche Bank AG., according to the people briefed on the matter.
The approval would come after CME filed a lawsuit in December that sought to block the agency’s cleared-swaps reporting regulations. A day after the agency amended one of its policies and sought comment on the CME proposed rule filing, CME withdrew the lawsuit.
DTCC faulted the CFTC in a Nov. 29 statement for amending its policies after spending more than a year crafting rules for data reporting. The change was “an abrupt reversal of course,” the DTCC said in the statement.
If the CFTC approves the CME rule filing, DTCC would consider all options including litigation, Thompson said in the interview.