Departing O’Malia stresses SEF data challenge

Scott O’Malia, who will leave his position as a commissioner at the Commodity Futures Trading Commission (CFTC) in August after almost five tumultuous years at the regulator, pulled few punches in one of his final interviews when it came to discussing problems with the implementation of new swap execution facility (SEF) rules.

O’Malia, who resigned his position shortly after the announcement of Tim Massad as the new CFTC chairman, sympathizes with market participants who have struggled to adapt to the rules the CFTC put in place.

“I am very sympathetic to the market place and their level of confusion,” he tells Euromoney. “We have gone through a three-year rule-making process in which we’ve done 68 final rules.

“In that time we have rushed through these rules at record pace. I’ve never seen any other federal agency move this many rules this quickly. And as a result we’ve made some mistakes.”

As chairman of the CFTC’s technology advisory committee, O’Malia had particular responsibility for how data is compiled and assessed under the new regulations. He admits this is a work in progress.

“Data is complex and it requires very specific outcomes and inputs, and we need to make sure that we understand what those are so we get good-quality data, so we’re able to aggregate it and do good comparisons across different jurisdictions,” he says.

“Right now I would characterize our data quality as poor only because we haven’t solved all of these problems. There are inconsistencies coming in, in terms of how people report, and I think we have four different data architectures that make our job more complex.”

O’Malia also warns that the CFTC has a lot of work to do before it reaches the necessary level of ability to analyze the data it is collecting.

“We do [have data analysts], but we don’t have nearly enough,” he says. “We haven’t focused intensely enough on our priorities and the specific technology and mission functions that we want to achieve.

“Those are hard decisions to make, but there hasn’t been enough attention paid to it and therefore we don’t have any results to show for it. I keep talking about it, raising the pressure and the issue to hopefully create some sort of catalyst in order to get this done.”

While O’Malia stresses that co-operation across different regulatory jurisdictions is good, he admits the different pace and detail of the swaps rulebook is adding to the challenges facing market participants.

“From time to time we will need to share data about certain market participants,” he says. “We’ve made some headway in terms of bringing that together. We have the facilities in place and we have reporting.

“The US has had reporting for over a year, Europe has had it for a quarter, but we need to take the next steps and we need to do so immediately.”

However, he says co-operation needs to go further and faster, adding: “If we don’t recognize global clearing structures, we will fracture liquidity and that could be intractable for a while, which wouldn’t be good for anybody.

“I’ve sent a letter to [EU] commissioner [Michel] Barnier making sure we stay focused on these issues and I know they are supportive of these goals, but at the same time we actually have to recognize one another’s jurisdiction and the entities within it.”

O’Malia adds: “We are never going to get to a rule-by-rule analysis that develops comparability. It’s an outcomes-based objective. We have to be flexible to some extent so we can continue to recognize one another’s rules, even though they don’t exactly match up.

“If we tried to make them exactly match up we will not succeed, so there has to be a dialogue which is a little bit more aggressive in terms of getting to outcomes by the end of the year to achieve them.”

December 15 is the announced deadline for existing European central counterparties (CCPs) to achieve recognition as a qualifying CCP. Institutions using CCPs will see a substantial increase in the own fund requirements for their exposures to any CCPs that have not yet been authorized or recognized by the time the deadline hits.