CFTC Commissioner O’Malia Delivers Speech Discussing Technology and the Future of Financial Standards

CFTC Commissioner Scott O’Malia delivered the keynote address at the SWIFT Institute’s Future of Financial Standards Forum in which he discussed how to transform regulatory oversight both domestically and internationally through technological innovation. 

Commissioner O’Malia addressed the future of financial standards, specifically stating that developing technology and data standards can “increase efficiency and reduce costs for not only the industry, but also regulators.”  Pointing to SWIFT’s success in using technology and data standards to evolve and keep pace with technological innovations and developments, Commissioner O’Malia stated that the CFTC, too, must adopt and build new technologies and analytics to become a 21st-century regulator.

To do this, and to “efficiently and cost-effectively surveil the markets to meet Dodd-Frank mandates,” Commissioner O’Malia noted, the CFTC should make immediate internal technological improvements in three critical areas:

  • swaps data quality: the Commissioner stated that, although it has been a year since swap data reporting began in the United States, the CFTC is still unable to crunch the data in swap data repositories (“SDRs”);
  • additional automated surveillance tools: according to Commissioner O’Malia, the CFTC does not presently have a database that links the futures and swaps market to aggregate and perform cross-market analytics, horizontal reviews, or surveillance for systemic risk, and developing such a database is vital to understanding the behavior of automated trading systems and identifying suspicious activity; and
  • automated risk analytics: Commissioner O’Malia stated that the CFTC must implement a strategy to integrate swaps, futures and options data to perform risk analysis and surveillance. 

Beyond these areas, Commissioner O’Malia stated, immediate attention also must be focused on SDR data harmonization efforts.  O’Malia provided principles to guide the CFTC’s efforts to improve data quality, including: (i) requiring that all filings be submitted electronically and in a consistent mode and manner, (ii) conforming the data requested on mandated forms to the standards currently utilized by entities to minimize compliance costs and confusion, and (iii) better quantifying the cost of reporting burdens and additional costs of requiring different data streams across various rules.

Additionally, on an international level, Commissioner O’Malia mentioned that, during a recent visit to Brussels, he requested that the U.S. and EU engage in an immediate discussion to recognize each other’s swap trade repositories and develop the means to share data, as well as collaborate to harmonize both the form and format of reported data.  According to O’Malia, this mutual recognition of SDRs and trade repositories (“TRs”) is critical to the analysis and monitoring of threats to financial stability and would eliminate duplicative reporting.  Commissioner O’Malia also stated that he hopes the U.S. and EU use recent works to supplement and guide the coordination of swap data standards, such as the Committee on Payment and Settlement System (“CPSS”) and IOSCO final report on OTC derivatives data reporting and aggregation requirements, as well as the Financial Stability Board (“FSB”) consultation paper on the aggregation of OTC derivatives data.

Additionally, Commissioner O’Malia noted the recent international progress in creating universal identifiers, stating that international regulators are “well on their way” to putting global Legal Entity Identifiers (“LEIs”) into place, and that discussions are underway regarding the feasibility of a standard for the structure of a global unique transaction identifier (“UTI”).  Finally, O’Malia stated that the CFTC held a kick-off meeting for a cross-divisional working group to assess swap product identification and associated product taxonomy/unique product identifiers (“UPIs”), and added that the CFTC is developing technical principles and a governance model that will help guide the framework and operational elements for future taxonomy maintenance.

Lofchie Comment:  CFTC Commissioner O’Malia is ahead of the curve among regulators calling for a much more systematic and disciplined approach to the collection of information by the CFTC and, implicitly, by other regulators.  His persistent demand for reexamination of the CFTC’s recordkeeping and reporting requirements very clearly led to the CFTC’s recent decision to reexamine its Part 45 Rules. Further, his insistence that U.S. and European regulators should coordinate their requirements is critical going forward.

That said, U.S. and European regulators aren’t the only ones who must do a better job at coordination.  The various U.S. regulators (the SEC, the CFTC, the NFA, FINRA, the various exchanges, the banking regulators, and everyone with respect to the Volcker Rules) are simply overwhelming the financial industry and, indeed, the economy with onerous recordkeeping and reporting requirements, which yield large amounts of information that is either useless or unusable.  There ought to be some way for the U.S. financial regulators to come to an agreement as to what information is actually required and in what format, and as to establishing priorities.

One might expect that the new Office of Financial Research established by Dodd-Frank would be a logical center from which to establish a consensus as to the government’s information requirements.  However, given that the OFR is understood to be the agency largely responsible for the draft of Form PF (information required to be collected from private funds), expectations must be tempered.  Form PF is generally regarded as an ill-considered and utterly wasteful information collection exercise.  There must be a better place to turn.

See:  Commissioner O’Malia’s Speech
See also:  CFTC Announces It Is Requesting Public Comment on Swap Data Reporting Rules (Pre-Fed. Reg.) (March 20, 2014).