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CFTC Data Crisis Provides Lessons for Developers of the Global Legal Entity Identifier System

The Regulatory Oversight Committee (ROC) of the global legal entity (LEI) initiative has yet to comment publicly on the data crisis at the Commodity Futures Trading Commission (CFTC) involving the use of pre-LEI CFTC Interim Compliant Identifiers, or CICIs, in swaps reporting. But it must be observing the situation – and absorbing valuable lessons learned – as its Committee on Evaluation & Standards (CES) works to develop a failsafe LEI system.

Difficulties with the CFTC’s swap reporting rules were highlighted by Scott O’Malia, a CFTC commissioner and chair of the regulator’s technology advisory committee, at a Sifma conference last month. In no uncertain terms, he said: “One of the foundational policy reforms of Dodd-Frank is the mandatory reporting of all OTC trades to a swap data repository (SDR). The goal of data reporting is to provide the Commission with the ability to look into the market and identify large swap positions that could have a destabilising effect on our markets. Since the beginning of 2013, certain market participants have been required to report their interest-rate and credit-index swap trades to an SDR. 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.”

O’Malia went on to say that data submitted to SDRs and, in turn, to the Commission, is not usable; Commission systems crash when being loaded because the reporting rule requires each swap to have over 1,000 data fields, much of which data is not required; and that the Commission’s IT capability is not up to the mark.

He explained: “In a rush to promulgate the reporting rules, the Commission failed to specify the data format reporting parties must use when sending their swaps to SDRs. In other words, the Commission told the industry what information to report, but didn’t specify which language to use. This has become a serious problem. As it turned out, each reporting party has its own internal nomenclature that is used to compile its swap data. The end result is that even when market participants submit the correct data to SDRs, the language received from each reporting party is different…. To make matters worse, that’s just the swap dealers; the same thing is going to happen when the Commission has major swap participants and end users reporting. The permutations of data language are staggering. Doesn’t that sound like a reporting nightmare?”

A grim report, then, from the CFTC for all those involved in swaps reporting and mandated to use the CICI, particularly ahead of the April 10 deadline, when all swaps must be reported. But a valuable lesson for development of a global LEI system aimed at measuring and monitoring systemic risk.

Fortunately, the latter system is not yet up and running on a large scale, and the ROC continues to consider issues including languages, in terms of country languages; relationship and hierarchy data that must be attached to each legal entity within the system; how and which Local Operating Units (LOUs) will issue LEIs; and who will maintain them for the benefit of a federated global system providing consistent data that can be rolled up to provide regulatory surveillance of the market.

Clearly, there is still much to do, but the CFTC’s experience in swaps reporting should help the CES avoid some of the painful pitfalls experienced by the Commission.

Underlining the serious nature of the CFTC’s data problem, O’Malia concluded: “Solving our data dilemma must be our priority and we must focus our attention to both better protect the data we have collected and develop a strategy to understand it. Until such time, nobody should be under the illusion that promulgation of the reporting rules will enhance the Commission’s surveillance capabilities.”

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