Even as banks build new technology in response to threats from fintech upstarts, some of their existing systems are struggling to keep up with new regulations
The Commodity Futures Trading Commission in the past several months has fined Deutsche Bank AG, J.P. Morgan Chase & Co. andBarclays PLC over failure to report of derivatives trades in a timely and accurate way. The problem: technology issues in the banks’ back-office systems for accurately or rapidly reporting trades of swaps, which are bets on the direction of interest rates, commodities and other assets.
This underscores the challenge of creating real-time views of opaque parts of financial markets as called for by the postfinancial-crisis regulatory overhaul. The Dodd-Frank Act mandated reporting these complex trades to a central repository operated by regulators and private firms.
But that is easier said than done. Banks say it requires them to rapidly compile and relabel data from different business units while often undertaking expensive system updates when reporting standards change.
The reporting requirements put a strain on banks’ back-office systems, which “have been cobbled together over decades across several businesses,” said Caitlin Long, a former banker at Morgan Stanley and Credit Suisse Group AG who worked on technology projects before joining startup bank-tech firm Symbiont.io this year. “Many of those systems weren’t generating enough revenue to be worth upgrading.”
Swaps represent an unusual challenge because, unlike in other markets such as for stocks and options, derivatives prices hadn’t been systematically tracked in real time before.
More broadly, the problems point to the tough technology investment choices facing banks struggling under superlow interest rates that are crimping their profits. Tending to legacy systems is costly, even though banks world-wide are spending billions of dollars annually on technology.
Besides cost, there is complexity. Christian Nentwich, chief executive of Duco, a technology firm that works with banks to integrate disparate data feeds, said one bank he worked with “had setups where 20 to 30 systems were all touched in the life cycle of a single trade." And many of those systems produced data in different formats, sometimes resulting in different names for the same trading partner.
With banks looking to improve profits by slashing expenses, getting such systems up to speed is a big ask, especially in derivatives products where the Dodd-Frank reforms have reduced revenues with tougher rules. “It’s hard to improve things while taking hundreds of millions in costs out,” said Mr. Nentwich.
Dodd-Frank toughened trade-reporting requirements in hope of staving off the kind of uncertainty in the opaque derivatives market that helped fuel the financial crisis. The law also aimed to prevent banks from having a private view of prices. Regulators feared that late reporting of trades could be used to give the bank’s own traders an information advantage.
In practice, however, it has proved difficult to produce a comprehensive and clear view of the trillions of dollars worth of such trades. The CFTC has long identified problems with the data being produced, and has worked with banks to give them new guidelines. This year it adopted a new rule designed to streamline reporting requirements.
Swap-trade reporting has been “a big spend in terms of actual time and wallet allocation over the past few years,” said Colby Jenkins, an analyst at financial-services consulting firm TABB Group LLC, in an email. Even new, clearer rules still require continual spending on tweaks and upgrades, he said.
And that has led to problems. Earlier this year, the CFTC said that Barclays and J.P. Morgan provided inaccurate reports of large trading positions, due in part to matching the swaps contracts to outdated prices for oil, gas, and other commodities. The banks provided corrected data and modified their systems, the CFTC said; the banks declined to comment.
Deutsche Bank’s problems have run deeper. In 2015, the CFTC charged that it had “technology-related issues,” resulting in public data reported to the market and to the CFTC that was “incomplete and inaccurate.” The bank didn’t admit to the CFTC’s conclusions, but agreed to pay $2.5 million and undertake certain corrective measures.
This August, the CFTC said in a complaint filed in federal court that when Deutsche Bank tried to update its systems in April, some files were corrupted when the bank switched back and forth from a backup system.
The CFTC further argued that in July, when Deutsche Bank staffers tried to update the swaps-reporting system’s link to foreign-exchange data “unbeknownst to relevant management,” the staffers “disconnected an essential computer connection.” When the system started up again and there were fewer trades than usual, the staffers assumed it was a “slow week” and didn’t report the problem, the agency said.
Besides fining the bank, the CFTC and Deutsche Bank are asking a court to appoint an outside technology monitor, since this is the second year the bank has been cited for shortcomings related to the reporting of derivatives trades.
“We understand the concerns raised by the CFTC and have agreed on steps to resolve this matter,“ a spokeswoman for Deutsche Bank said in an email. ”We continue to work on enhancing our reporting systems, and we are committed to meeting all regulatory requirements.”
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