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Tuesday, March 19, 2013

Dodd-Frank swap data fails to catch JP Morgan's "Whale" trade

Bloomberg reports that the Dodd-Frank derivative rules are inadequate for helping regulators catch the existing JP Morgan "Whale" trade or any other similar position.

Regular readers are not surprised by this because Dodd-Frank was effectively written by and for Wall Street.  The derivative rules are an example of this as rather than use a simple direct solution they rely on the combination of complex rules and regulatory oversight.

The simple, direct solution is to have each financial institution disclose to all market participants on an ongoing basis its current global derivative exposure details.

This makes it easy for the regulators to find risky positions (at a minimum, the regulators tap the analytical expertise of the market for help in finding and assessing these positions).

Instead, Dodd-Frank proposed complex regulations where the authors knew they were creating a data nightmare.  Remember, Wall Street wants to protect opacity and they knew what they allowed to be written into Dodd-Frank and the subsequent regulations would protect opacity by creating this data nightmare.

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. (JPM)’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... 
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.”... 
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.

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....
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.

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