CFTC eyes how to build “bulletproof” ID system

By Christopher Doering and Roberta Rampton

WASHINGTON | Fri Jan 28, 2011 1:53pm EST

WASHINGTON (Reuters) – Regulators seeking a barcode-like system to keep track of thousands of traders and millions of swaps contracts face an uphill battle to do it quickly and efficiently, firms that will be impacted by the new framework said on Friday.

The U.S. Commodity Futures Trading Commission is crafting an identification system for the swaps industry — one that it wants to mesh with similar ID systems under consideration by securities and systemic risk regulators in the United States and Europe.

The numbers and the databases behind them will be a key part of the market infrastructure, and must be accurate and secure, said participants at a roundtable held to collect input from those who would be assigned a ID and organizations vying to collect the data.

“If you launch something, it must be bulletproof from the start,” said Paul Janssens, product manager with the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which records most global money transfers.

Currently, the financial services industry has a hodgepodge of many identifiers that regulators are trying to mesh.

The CFTC sees the ID system as a “crucial regulatory tool” for monitoring risk, preventing market manipulation and enforcing position limits, said David Taylor, part of the rule-writing team that put together the CFTC’s proposal, which is open for industry comment until February 7.

Cost is an issue for the regulator, which currently collects some of the data for its oversight of the futures market by fax.

The CFTC is struggling with how to pay for the new staff it needs with its budget frozen by Congress, and may run out of room to store data by October because of cutbacks to its technology budget, Commissioner Scott O’Malia said this week.

The Dodd-Frank bank reform law passed by Congress last July gave the CFTC and Securities and Exchange Commission sweeping new powers to oversee the over-the-counter derivatives market, which had been virtually unregulated, despite its tremendous size.

Globally, the market in swaps in interest rates, currencies, credit risk and other underlying values is worth about $600 trillion.

There are an estimated 40,000 entities in over-the-counter derivatives markets, said Melissa Goldman of Goldman Sachs, noting the complexity of the job ahead needs “strong support” from regulators.

It will be challenging to move quickly to get a practical system in place, said representatives from banks including Morgan Stanley, JPMorgan, Bank of America, Citigroup and Deutsche Bank.

Some members of the roundtable told the CFTC one way to reduce the burden for regulators and the industry would be to use an existing ID system.

Mark Bolgiano, the former head of XBRL US, a national consortium for business reporting standards, said regulators have a mandate from the new law, but the industry needs to accept it for the new system to work.

“More than half the battle is thinking about what contributes to market acceptance, to the user acceptance. Even a perceived lack of stability will have a drastic impact on market acceptance,” Bolgiano said.


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