March 25, 2014
Good morning to you all. Thank you very much for the kind introduction and for inviting me to speak here today.
Nearly 40 years ago, SWIFT was a transformative standard for financial transactions. Not only did SWIFT demonstrate that global cooperation could yield global solutions, but also that technology was the foundation that would pave the way for our modern, interconnected financial markets.
Now, we are at a similar inflection point as regulators across the world work together to implement a global framework for swaps regulation. The nearly $700 trillion1 notional OTC derivatives market presents unique challenges for regulatory oversight.
Before the financial crisis and international reform efforts, many OTC derivatives were unstandardized due to their bilateral nature and complex or bespoke terms. The resulting lack of transparency allowed systemic risk to build without appropriate oversight.
Today’s conference on the future of financial standards could not have come at a better time. Data standards can increase efficiency and reduce costs for not only the industry, but also regulators. Right now, the Commodity Futures Trading Commission (CFTC) is undertaking efforts to review its data challenges and recommend solutions that will improve the reporting and utilization of swaps data through standardization and harmonization.
Recently, I was told that the CFTC would never have the technology resources that it needs to get the job done and that we should settle for making do with what we have. But instead of becoming complacent, I hear this as a call to action.
I don’t believe we have allowed ourselves to consider what is possible if we integrate technology solutions into each and every one of our workflows and processes. Instead, our supervisory mindset is focused on the filing of forms and compliance checks. This is not an acceptable regulatory paradigm in the post-financial crisis world.
The technological landscape is evolving and changing rapidly. We need to leverage this resource and reform our surveillance and oversight mission in a significant and technologically-adept way.
Today’s discussion revolves around two themes:
(1) What role can standards play in enabling the industry to meet its latest challenges?
(2) What needs to happen for the full benefits of standardization to be realized?
I will attempt to answer these questions and chart a roadmap for successful cross-border regulation of the derivatives markets through the use of open, transparent, and standardized swaps data.
First, I will highlight how the use of big data and technology is critical to transform the CFTC into a 21st century regulator that can efficiently and cost-effectively surveil the derivatives markets.
Next, I will discuss the importance of a coordinated approach to swap data reporting by international regulators in order to comprehensively regulate OTC derivatives and monitor systemic risk.
Finally, I will outline current efforts by the CFTC to meet its swap data reporting challenges and expanded regulatory mission under the Dodd-Frank Act.
Technology and Data Darwinism: Adoption or Extinction
Technology can be a transformative force that changes the way we do things. It is disruptive because it is a catalyst for innovation.
Look at artificial intelligence: in only four years, IBM’s Watson (Jeopardy winner in 2011) has 100 times the computing power of Deep Blue (chess champion in 1997).2 The price of the fastest supercomputer in 1975 was $5 million—and yet the same performance can be had today from a $400 iPhone 4.3
Data can be the driver behind breakthroughs that maximize efficiency at the least cost: better, faster, cheaper. McKinsey Global Institute estimates that automation of knowledge work could have a potential economic impact of $5 to $7 trillion by 2025.4 That’s a big savings.
“Disruptive data,” then, is the technological utilization of big data in innovative ways that will transform the traditional regulatory paradigm—demanding that market supervisors evolve with market participants.
In a world where data is king and traders increasingly rely on cutting-edge technologies and automated strategies, regulators must also become early adopters. The technology of yesterday will not be able to keep up with the market realities of today. Call it Data Darwinism.
Originally, SWIFT was a 20th century solution to the problem of needing a worldwide data processing and communications link, as well as a common language for international financial transactions.
But in order to keep pace with technological innovations and developments into the 21st century, SWIFT evolved and expanded its capabilities to offer new products and services—including DTCC-SWIFT, the CFTC’s own designated provider of the CFTC Interim Compliant Identifier (CICI) Utility.
Just as SWIFT took advantage of technology and data standardization for its continued success, so too must the CFTC adopt and build new technologies and analytics if we are to succeed in overseeing vastly complex and high-speed electronic markets in the 21st century.
Next Generation: New Technological Capabilities for New Dodd-Frank Objectives
The global community came together, under the leadership of the G20, to agree on four fundamental principles for OTC derivatives reform: (1) transaction reporting to trade repositories; (2) exchange or platform trading for standardized contracts; (3) clearing through central counterparties (CCPs) for standardized contracts; and (4) higher capital and margin requirements for non-centrally cleared transactions.
In the United States, the Dodd-Frank Act,5 among other things, requires that all swaps be reported to swap data repositories (SDRs). The objective is to provide the CFTC with the ability to identify and monitor large swap positions that could have a destabilizing effect. But utilizing this data to identify risk patterns is a new skill set that we haven’t mastered yet because the data is not in a form and format that is readily usable.
There are three critical areas where the CFTC needs to make immediate technological improvements in order to efficiently and cost-effectively surveil the markets to meet Dodd-Frank mandates.
First, the CFTC must improve swaps data quality.
Second, the CFTC must develop additional automated surveillance tools.
Third, the CFTC must develop automated risk analytics.
By developing these technological capabilities, the CFTC can build the infrastructure and tools it needs to perform its fundamental mission: to ensure market integrity and protect market participants and the public from fraud, manipulation, abusive practices, and systemic risk in the futures and swaps markets.
Improving Swaps Data Quality
It has been often said that in order to experience change, you must first look inwards. I couldn’t agree more. The first order of business for the CFTC is improving swaps data quality.
Over a year has passed since swap data reporting began in the United States. Yet, the CFTC still cannot crunch the data in SDRs to identify and measure risk exposures in the market. Lack of automation, inconsistent reporting, technical challenges, and poor validation and normalization have crippled our utilization of swaps data.
The technological deficit in our ability to aggregate, search, and navigate through these varied data structures have made our efforts to develop a basic level of analysis unsuccessful.
For example, conducting surveillance of swaps data reported to SDRs entails navigating to each SDR’s portal, inputting search parameters to request a report, and then manually scrolling through as many as 200+ columns of data fields—for each swap.
(Keep in mind that one SDR estimates it handles 60 million messages a week. That’s two or three times more every day than Twitter.)6
None of these processes are automated. Is it any wonder that the CFTC weekly swaps report requires two full-time economists to produce it?
These breakdowns in functionality can be traced in large part to the lack of data standards. The swap data reporting rules failed to provide for standardized data fields or reporting formats. As a result, entities are reporting trades using different message types and in varying record formats.
Further, inconsistent validation by the SDRs makes acceptance and rejection of data problematic. This makes it incredibly difficult to aggregate the swaps data across all reporting parties.
This standard-setting process should have been the foundation of the CFTC’s rules for the reporting and disclosure of massive amounts of new market data. The failure to use a common metric increases the risk of misapplication and misunderstanding of critical market information. The result is a waste of resources—for both regulators and market participants.
Developing Additional Automated Surveillance Tools
Besides improving swaps data quality, the CFTC must have a system that can process and perform analytics on big data.
Presently, the CFTC doesn’t have a database that links the futures and swaps markets to aggregate and perform cross-market analytics, horizontal reviews, and surveillance for systemic risk. In fact, we don’t have a single database for all swaps data. We have to rely on the four registered SDRs to store the data and perform first-order analysis.
With 60 million messages reported weekly to a single repository and millions of trades executed on the Chicago Mercantile Exchange (CME) in a day, it is impossible to accomplish any amount of credible oversight without extensive use of automated tools to identify suspect behavior.
Taking this to the next logical step is for the CFTC to invest in surveillance tools to oversee the real-time order messages and not rely on stale transaction data.
Millions of order messages flood the futures exchanges on a minute-by-minute basis. But, just 8 percent of all order messages result in completed transactions. Doing the math, that means that we are presently not looking at roughly 90 percent of the market activity.
Having the ability to perform market surveillance at this granular level will help us understand the behavior of automated trading systems and identify suspicious activity.
The power of technology to leverage current capabilities and scale up to handle increased data flows is astonishing. In the field of cancer treatment research, the IBM Watson cloud computing system is being used to analyze brain tumors that require sequencing of 800 billion base pairs of DNA.7 It took a doctor one year to sequence 140 pairs by himself.8 It takes Watson one second to sequence 75 million base pairs.9
When technological capabilities like this exist, I refuse to believe that even a small regulatory agency like the CFTC can’t harness technology to explore the data that we currently receive or can access. It is exciting to imagine what our potential can be.
Developing Automated Risk Analytics
Automation is also important for risk analytics. The CFTC must implement a strategy to integrate swaps, futures, and options data to perform risk analysis and surveillance.
Identifying risk can only be done effectively if we are able to manage our data. The CFTC, however, is struggling to ramp up and meet its new goals and objectives.
In this area, I believe we have two challenges. The first, of course, is technology. The second is personnel.
Risk analysis is a sophisticated discipline and there isn’t an app for this. This requires sophisticated analytics and staff expertise.
A year ago, I gave a speech where I repeated what CFTC staff had told me: “We can’t see the London Whale in the data.”10
Since that time, we still struggle to identify and quantify the risk exposure of systemically important entities in both the OTC derivatives and futures markets. Without this crucial risk functionality, the CFTC literally has a blind spot.
Right now, we lack the tools and useful data to surveil the markets. We must regulate more efficiently and cost-effectively by relying more on automation and less on sweat equity. Starting with these three areas of needed technology investment is the first step to solving our data challenges.
Regulating for Tomorrow by Working Together Today
Looking outwards, I am encouraged by the focus and attention that international regulators have devoted to working on the data challenges presented by a global swaps market. These recent developments will forge a coordinated approach and will provide solutions to transform regulatory oversight of OTC derivatives. We can’t miss this opportunity to work together, when the US and the EU are facing the same problems at the same time.
International Data Sharing Agreement
Yesterday, I went to Brussels and specifically requested that the US and the EU engage in an immediate discussion to (1) recognize each other’s swap trade repositories and develop a means to share the data and (2) collaborate to harmonize both the form and format of data being reported.
By accomplishing these two objectives, our two jurisdictions will be able to enhance our cross-border cooperation in carrying out the G20 OTC derivatives reform mandates. To accelerate the process, I hope we can build on existing work and global initiatives.
The urgency for a holistic view of the financial markets, without borders, was underscored by how the financial crisis caught the world by surprise. Data that could have identified systemic risk was fragmented across regulators and nations.
Risk knows no boundaries. Our ability to monitor it shouldn’t have any either.
This common-sense approach was easily agreed to by G20 leaders. It was their clear intent that a data sharing arrangement should be established so that regulatory bodies are able to identify risk that could lead to financial instability. Accordingly, both the Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR)11 included provisions for international data sharing.
I couldn’t agree more with the concept that regulators must improve their own capacity and capability to intake data, as well as the development of analytical tools to identify and monitor risk. The ability to compare and aggregate data across SDRs and EU trade repositories (TRs) is critical to the analysis and monitoring of threats to financial stability. And, by mutual recognition of SDRs and TRs, we would eliminate the need for duplicative reporting.
This need is even more imperative now that reporting under EMIR started last month on February 12. I urge international regulators to quickly and—dare I say—swiftly come together to sign an agreement that will rely on substituted compliance and allow for the standardization and sharing of swaps data.
Global Standards Initiatives
In January 2012, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) issued their final report on OTC derivatives data reporting and aggregation requirements.12
CPSS-IOSCO made comprehensive recommendations on (1) minimum data reporting requirements; (2) access to data; (3) methodology and mechanism for aggregation of data; (4) international legal entity identifier (LEI) development and principles; (5) continued international consultation regarding LEI implementation; and (6) development of a standard international product classification system.
This should serve as a template for data coordination and help focus the discussion on these priorities. There is no sense in reinventing the wheel when so much work has already been done.
Also, last month the Financial Stability Board (FSB) released a consultation paper to analyze various options for aggregating OTC derivatives data in TRs across multiple jurisdictions and whether to develop a global aggregation mechanism.13 This study will focus on the feasibility of options for data aggregation in the current regulatory and technological environment and given the existing (and planned) global configuration and functionality of TRs.14
I would like to commend John Rogers, Director of the CFTC’s Office of Data and Technology (ODT), for his leadership as co-chair of this study, as well as Benoît Coeuré of the European Central Bank.
It is my hope that the US and EU use these important works as a guide to cooperating on and coordinating swap data standards.
Treasury and the Office of Financial Research
The CFTC, thankfully, is not going it alone in tackling its data challenges. I applaud US Treasury Acting Deputy Secretary and Under Secretary for Domestic Finance Mary Miller for her public support for improving swaps data reporting, standardization, and sharing.15
I am pleased to announce that the CFTC has been working with the US Treasury’s Office of Financial Research (OFR) on a memorandum of understanding that will enable us to take the first steps towards gaining the benefit of OFR staff expertise. OFR has long recognized that granular swap data is essential to assess exposures, interconnectedness, and concentration in the market. Their assistance and work in this area will be a tremendous help.
I thank Richard Berner, Director of OFR, for his support. Together, by leveraging our resources, we will be able to start doing some of the heavy lifting of our big data problem.
The Rosetta Stone of Swaps Data: Creating Universal Identifiers
Much progress has been made internationally on creating universal identifiers that are the keys to understanding and analyzing swaps data and market characteristics.
Legal Entity Identifiers
Today, international regulators are well on their way to putting global LEIs into place. I look forward to the continuing developments on this front.
Unique Product Identifiers
I am also pleased to announce that last week, CFTC staff held a kick-off meeting for a cross-divisional working group to assess CFTC needs with respect to swap product identification and associated product taxonomy/unique product identifiers (UPIs).
ODT is engaging subject matter experts from each CFTC division and office to help define (through use cases) the taxonomy requirements needed in order to perform the CFTC’s regulatory functions. The working group plans to focus first on the credit asset class and then on the interest rate asset class.
The CFTC staff is also developing technical principles and a governance model that will help guide the framework and operational elements for future taxonomy maintenance.
The CFTC is working in collaboration with the OFR on this initiative. In addition, the CFTC is also coordinating project activities with other regulators, both domestic and foreign, to facilitate dialogue regarding a standard for product identification.
Unique Swap/Transaction Identifiers
Further, CFTC staff has begun a dialogue with other regulators to discuss the feasibility of a standard for the structure of a global unique transaction identifier (UTI).
CFTC regulations establish requirements for the generation of the unique swap identifier (USI) that must be used to comply with the CFTC’s swap data recordkeeping and reporting rules, and the CFTC has developed a data standard that reflects these requirements.
However, there is not an adopted standard internationally. The International Swaps and Derivatives Association (ISDA) has proposed an alternative UTI structure that is based on the CFTC USI standard, but with deviations.
I am encouraged by these international standardization efforts. By continuing to maintain an open dialogue, we are working together to build a global regulatory framework that will be much stronger and promote financial stability for not only today, but tomorrow and ever after.
No Time Like the Present: Current CFTC Efforts
While international efforts are ongoing, immediate attention must also be focused on solving CFTC data challenges.
I believe we are beginning to make progress in our domestic efforts, but we still have a long way to go. Allow me to highlight several CFTC initiatives that are currently underway.
Technology Advisory Committee
As chairman of the CFTC’s Technology Advisory Committee (TAC), I have committed the TAC to help solve our data challenges.
After a year partnering with industry and market participants, the TAC Data Standardization Subcommittee made recommendations to the Commission in March 2012 on product and entity identification, standardization of machine-readable legal documents, semantic representation of financial instruments, and storage and retrieval of financial data.16
The TAC continues to focus on swap data reporting to ensure that the current momentum and dialogue result in tangible and immediate reforms.
Data Harmonization Efforts
Any SDR data harmonization effort must be multipronged and address: (1) data standardization; (2) data consistency; (3) data capability, including aggregation and analysis of data; and (4) validation to improve data quality and integrity.
There are a number of challenges that the CFTC faces in ensuring that data formats are standardized and harmonized within and across all SDRs.
We have huge challenges with the consistency of reporting from registered entities and proper classification of reporting parties. The level of complexity and customization inherent in swaps challenges the CFTC’s capability to aggregate and sort reported trades, even though there are fewer trades reported in the swaps space than the futures markets. Then, the next challenge is to develop protocols and the technology for the CFTC to access and aggregate specific data in each SDR’s portal as needed.
These simple principles should guide the CFTC’s efforts to improve data quality:
First, the CFTC must require that all filings be submitted electronically in a mode and manner that is specified by the CFTC and is consistent and cost-effective for the market.
Second, the data requested on mandated forms, to the greatest extent possible, ought to conform to the form and standards currently utilized by entities to minimize compliance costs and confusion for market participants.
Finally, the CFTC must do a better job of quantifying the cost of reporting burdens and the additional cost of requiring different data streams across various rules.
We will need to work with the registered SDRs to develop common reporting guidelines and implement a validation process to improve data quality and integrity. Longer term, the Commission must work with other regulators, the SDRs, and industry associations to come to agreement on universal reporting conventions.
Developing a consistent reporting convention will improve data quality and cross-market and international data harmonization as envisioned by the G20. To achieve this, the CFTC must clean and organize its data in a format that can be easily aggregated, readily usable by various divisions within the CFTC, and shared, as appropriate, with other domestic and foreign regulators.
The CFTC has made progress in addressing the shortcomings in our swap data reporting rules. In August 2013, the staff released data harmonization guidance on data elements standards.17
The first phase was for credit default swaps (CDS) and included 30 data elements. Phases 2, 3, and 4 will follow with approximately 30 additional data elements each. The SDRs have prepared action plans that will implement multiple phases of delivery per asset class and field-by-field. Next, the CFTC will address interest rate swaps. Other commodities will follow in the future.
Cross-Divisional Data Team
I am pleased that this year, on January 21, the Commission acted on my recommendation to form a cross-divisional data team to review the swap data reporting rules and make recommendations for resolving reporting challenges.
This staff interdivisional working group will be part of the CFTC’s ongoing efforts to improve swap transaction data quality and its ability to utilize the data for analysis and other regulatory purposes.
The data team has been tasked with the following objectives: (1) identify and make recommendations to resolve reporting challenges, if any; (2) review industry compliance with reporting obligations; (3) consider data field standardization and consistency in reporting among market participants; (4) recommend additional reporting guidance or requirements, as appropriate; and (5) explore whether the agency should seek additional regulatory and technology improvements and data analysis expertise.
Request for Comment on Swap Data Reporting Rules
Just last week, the data team took a critical first step to achieving these goals by releasing a request for public comment on the CFTC’s swap data recordkeeping and reporting requirements under Part 45 and related provisions.18 The request for comment will be open for 60 days and seeks public input on approximately 70 questions around data reporting compliance and data quality.
The questions address topics such as the reporting of primary economic terms, confirmation and continuation data; the manner in which the reporting rules address different transaction types, business models and data flows present in swaps markets; the reporting of cleared swaps; and data harmonization.
I look forward to reviewing the recommendations from the data team, which should be completed by the end of July.
Strategic Plan and Technology Plan
There are always competing demands on resources. The trick is to prioritize and come up with innovative ways to leverage what you have.
It is abundantly clear that technology is the only way to leverage our limited resources. This is our best shot at properly overseeing our markets and preventing and deterring market abuses.
I have called for the CFTC to meet its resource challenges head-on through careful planning and prioritizing. Like any organization, the CFTC should develop a detailed strategic plan that integrates a technology investment plan. This plan must include annual milestones and budgets and hold each division and office accountable for achieving its goals.
With the lion’s share of the Dodd-Frank rulemakings now complete, the time is right for the CFTC to establish key mission priorities that will inform its future investments in technology and staffing.
I look forward to working with my fellow Commissioners and CFTC staff to develop a strategic plan to achieve these goals. Putting off this discussion only delays necessary and important decisions that must be made.
Let me conclude with a couple of simple reminders as we move on towards implementing OTC derivatives reform and achieving the G20 objectives to prevent another great financial crisis.
Just like SWIFT revolutionized the bank payment system several decades ago, it is now time for international regulators—working together with market participants—to standardize the massive amount of financial markets data and revolutionize our market oversight functions.
The 20th century evolution from an open outcry to an almost exclusively electronic futures market benefited from a tremendous amount of innovation. The CFTC needs to be equally as innovative in adopting technology for the swaps market.
We cannot settle for the status quo.
Disruptive data isn’t the only breakthrough that we can harness. Partnering with other regulators, industry, and academia must play a critical role in expanding the CFTC’s technological capacity in the shortest time frame by the most cost-effective means.
To conquer big data, we must also think big. Now is the time to throw the switch on the 21st century and experience transformative change as a regulator of the futures—and now swaps—markets.
Thank you. I welcome any questions you might have.
1 Bank for Int’l Settlements, Derivatives statistics (updated Nov. 7, 2013), http://www.bis.org/statistics/derstats.htm.
2 McKinsey Global Inst., Disruptive technologies: Advances that will transform life, business, and the global economy (May 2013), http://www.mckinsey.com/insights/business_technology/disruptive_technologies?cid=disruptive_tech-eml-alt-mip-mck-oth-1305.
5 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
6 Fiona Maxwell and Duncan Wood, DTCC Did Not Anticipate Client ‘Avalanche’, Says Broderick, Risk.Net, Mar. 21, 2014.
7 Associated Press, IBM’s Watson to help sequence cancer DNA, S.F. Chron., Mar. 19, 2014, available at http://www.sfgate.com/technology/article/IBM-s-Watson-computer-joining-brain-cancer-battle-5332258.php.
10 Scott D. O’Malia, Comm’r, Commodity Futures Trading Comm’n, Keynote Address at the SIFMA Compliance and Legal Society Annual Seminar (Mar. 13, 2013), http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-22.
11 European Market Infrastructure Regulation, Regulation (EU) 648/2012, of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, Central Counterparties and Trade Repositories, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF.
12 Comm. on Payment and Settlement Sys. and Technical Comm. of the Int’l Org. of Sec. Comm’ns, Report on OTC derivatives data reporting and aggregation requirements (Jan. 2012), http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf.
13 Fin. Stability Bd., Consultation Paper: Feasibility study on approaches to aggregate OTC derivatives data (Feb. 4, 2014), http://www.financialstabilityboard.org/publications/r_140204.pdf.
14 Fin. Stability Bd., Press Release: Feasibility study on approaches to aggregate OTC derivatives trade repository data (Feb. 4, 2014), http://www.financialstabilityboard.org/press/pr_140204.htm.
15 Oversight of Financial Stability and Data Security: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 113th Cong. (2014) (testimony of Mary J. Miller, Acting Deputy Sec’y. & Under Sec’y. for Domestic Fin., U.S. Dep’t of Treasury), http://www.treasury.gov/press-center/press-releases/Pages/jl2286.aspx.
16 Presentations from the March 29, 2012 TAC Meeting are available at http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.
17 These guidelines were discussed at the Sept. 12, 2013 TAC Meeting and are available at http://www.cftc.gov/ucm/groups/public/documents/file/dataharmonization.pdf.
18 Commodity Futures Trading Comm’n, Press Release 6882-14: CFTC Requests Public Comment on Swap Data Reporting Rules (Mar. 19, 2014), http://www.cftc.gov/PressRoom/PressReleases/pr6882-14.
Last Updated: March 26, 2014