The power of derivatives manufacturers is legendary. And apparently never comes to an end.
Derivatives manufacturers, including investment banks that hold no deposits and never have held deposits but are called 'banks' anyway, notoriously fought against regulation of their swaps. Years after Congress passed a law authorizing the U.S. Commodity Futures Trading Commission to finally regulate swaps, the derivatives manufacturers may have struck again by all appearances.
Swaps are so famously complex that very few people can understand these deliberately opaque financial transactions, let alone regulate them. The Federal Government turned to a company that held itself out as understanding swaps.
Equally important, the company, DTCC Data Repository, LLC, held itself out as having the software and hardware mechanisms in place to provide the CFTC with information required to regulate swaps. One of the theories behind the CFTC concept of effective regulation of swaps is transparency. This is kind of like Justice Brandeis's famous observation that sunlight is the best disinfectant.
Accordingly, for the purpose of transparency the CFTC designated DTCC as "a swap data repository pursuant to section 21 of the Commodity Act and section 49.3(b) of the Commission's regulations." CFTC Press Release, "CFTC Approves Application of DTCC Data Repository, LLC For Provisional Registration as a Swap Data Repository" (September 30, 2012).
Surprisingly to some, perhaps, the CFTC just issued a "Special Announcement" that the data it has been receiving from DTCC Data Repository "understated" the "notional rate values in the interest rate class" affecting, naturally, the values of interest rate swaps regulated by the CFTC. Special Announcement, "DTCC Data Repository (DDR)" (most recent CFTC "Weekly Swaps Report"). Parenthetically, in some circles and in some rather snarky reporting, the data failure is attributed not to DTCC whence it came, but to the CFTC which in reality is the victim of DTCC's data dump failure.
Information asymmetry. This is a concept familiar to bad faith practitioners. It occurs when one party has greater access to information concerning a mutual transaction involving another party which has little or no access to the same level of information about their mutual transaction. 2 DENNIS J. WALL, "LITIGATION AND PREVENTION OF INSURER BAD FAITH" § 9:5, "The Question of Bad Faith -- Presence or Absence of Fault" (Thomson Reuters West Third Edition and 2013 Supplement).
So, it may be very difficult to regulate swaps with inaccurate information, just as it was previously impossible to regulate swaps with no information at all.
For more on the story of the long and undying resistance to swap regulation by derivatives manufacturers and purveyors of similar weapons of mass financial destruction, as they say, see also Silla Brush and Robert Schmidt, "How the Bank Lobby Loosened U.S. Reins on Derivatives" (Bloomberg News, posted on www.bloomberg.com on September 4, 2013).
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© 2013 by Dennis J. Wall. All rights reserved. No claim to original U.S. Government works.
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