US derivatives regulators are failing to keep track of the swaps market because of inconsistencies in data reporting, according to a top regulator.
Scott O’Malia, a commissioner on the Commodity Futures Trading Commission, said the “problem is so bad” that the agency has not been able to find the JPMorgan Chase trades entered into by a group of traders led by the “London whale” that led to more than $6bn in losses.
JPMorgan had large positions in credit default swap indices, trades the CFTC is meant to monitor under new authorities it acquired under the 2010 overhaul of US financial regulation known as Dodd-Frank.
But trading data that would identify large positions are crashing government computers, Mr O’Malia said. Derivatives dealers are reporting data in their own format, making it difficult for agency staff to analyse trades.
CFTC employees have said that it often takes at least three days to analyse data from the Depository Trust & Clearing Corporation, a data warehouse, due to inconsistencies in how market participants submit data to the DTCC and how the company stores it.
An agency spokesman and the DTCC declined to comment.
Gaps in market surveillance were partially to blame for regulators not spotting JPMorgan’s increasing positions in a once-opaque corner of the credit markets, officials have said.
Eliminating data gaps was a key aim of Dodd-Frank, after regulators failed to spot that AIG, the insurer, was selling massive amounts of insurance on mortgage-linked securities. Soured mortgages brought AIG to the brink of insolvency, necessitating a $182bn bailout.
A goal of increased data reporting was to ensure market regulators could identify large swaps positions that could have a destabilising effect on markets, Mr O’Malia said.
Since the start of the year, large dealers have been required to report interest rate and credit index swap trades to data warehouses known as “swap data repositories”.
The CFTC has issued rules governing how swaps data should be collected and sent to the agency, but it failed to specify the data format to be used by market participants, Mr O’Malia said.
“Unfortunately, I must report that the commission’s progress in understanding and utilising the data in its current form and with its current technology is not going well,” he added.
“The commission now receives data on thousands of swaps each day. So far, however, none of our computer programs loads this data without crashing,” Mr O’Malia said.