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Dodd-Frank Swap Data Fails to Catch JPMorgan Whale, O’Malia Says

JPMorgan Chase & Co., regarded on Wall Street as one of the best-managed banks in the world, lost more than $6.2 billion last year in a derivatives bet on companies’ creditworthiness that reached a net notional value of $157 billion. Photographer: Peter Foley/Bloomberg
JPMorgan Chase & Co., regarded on Wall Street as one of the best-managed banks in the world, lost more than $6.2 billion last year in a derivatives bet on companies’ creditworthiness that reached a net notional value of $157 billion. Photographer: Peter Foley/Bloomberg

March 19 (Bloomberg) -- Dodd-Frank Act derivatives rules are failing to give regulators a full picture of the swaps market and wouldn’t help them detect a loss similar to JPMorgan Chase & Co.’s London Whale trades, according to Commodity Futures Trading Commission member Scott O’Malia.

Swap-trade data the agency has been receiving since the end of last year from repositories including the Depository Trust and Clearing Corp. is inadequate to identify large positions and have overwhelmed government computer systems, O’Malia said in a speech prepared for a Securities Industry and Financial Markets Association conference in Phoenix.

The data “is not usable in its current form,” said O’Malia, 45, one of the agency’s five commissioners. “The problem is so bad that staff have indicated that they currently cannot find the London Whale in the current data files.”

JPMorgan, regarded on Wall Street as one of the best-managed banks in the world, lost more than $6.2 billion last year in a derivatives bet on companies’ creditworthiness that reached a net notional value of $157 billion.

Dodd-Frank was enacted in part to give regulators better oversight of the $639 trillion global swaps market after largely unregulated trades help fuel the 2008 credit crisis. The CFTC and Securities and Exchange Commission were granted authority to write rules requiring trade information to be reported to so-called swap data repositories that function as central recordkeepers.

Swaps Databases

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 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; the London Whale trades came to light after steep losses in the first quarter of 2012.

Different swap dealers and trading counter-parties are using their own reporting formats because the government failed to specify standards, O’Malia said.

“It means that for each category of swap identified by the 70-plus reporting swap dealers, those swaps will be reported in 70-plus different data formats because each swap dealer has its own proprietary data format it uses in its internal systems,” he said. “The permutations of data language are staggering. Doesn’t that sound like a reporting nightmare?”

The CFTC’s computer systems are failing to handle the incoming data. “None of our computer programs load this data without crashing,” O’Malia said.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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