How Does This Happen?
It’s guess work. But a lot of large swaps dealers (and others) decided early on to build their own custom integration over to DTCC, ICE and CME reporting. What they ended up with was a mixed bag of highly custom code. The rub with this approach is that, under a tough deadline for meeting obligations, there is a huge incentive to take a shortcut or two. In this case it looked like the shortcut was not fully enabling trade cancellation messages to the SDR.
My guess is that the IT team that built it, moved off onto other things. Operations is then left with code where they really have no idea what it is doing and probably had little to no idea that cancellations was not working. That’s my guess at least.
How’d it get to the CFTC? Undoubtedly, the counter-parties to DB made the complaint. The US is single sided reporting, and as a swap dealer, DB is usually has reporting seniority. It probably became clear to some of them that their trade cancellations were not getting reported and got worried that since their deals were not being reported they were “compliance exposed.”
We’ve already seen some pretty brisk business of firms looking to replace their custom integration. After a couple years of custom code and slow turnaround from IT, firms are finally coming around to say “we’ve had enough.” Just don’t wait for the CFTC to tell you there are problems.
