CFTC Announces It Is Undercounting Size Of Swaps Market By As Much As $55 Trillion

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U.S. commodity regulators are stumbling at one of their primary goals: bringing transparency to the multitrillion-dollar swaps market.

The Commodity Futures Trading Commission said Wednesday that technical errors at two so-called swaps data repositories, which collect and supply regulators with transaction data, have led the CFTC to misreport the overall size of the swaps market by undercounting its size.

The lack of clarity over the size of the market may undermine a key plank of the 2010 Dodd-Frank law aimed at bringing transparency to the opaque derivatives market. Swaps, which were at the heart of the 2008 financial crisis, are complex financial contracts that allow financial firms and their clients to hedge against risks or bet on an asset's value.

The CFTC has issued a number of rules to bring transparency to swaps trading so regulators can detect risks that could pose a threat to a firm or the financial system.

Regulators aren't sure how much the repositories are undercounting. One CFTC official familiar with the matter said the discrepancy could be as high as $55 trillion, though another official said the figure is closer to $10 trillion once regulators cancel out certain transactions to prevent double counting. The CFTC estimates the size of the notional value of swaps market at about $390 trillion under the more conservative method.

The CFTC said in a footnote to its weekly swaps report that the largest data repository, the Depository Trust & Clearing Corp., "has informed us that due to a…technical coding issue, the notional values in the interest rate asset class have been understated." The agency also reported "a processing error" by a separate repository operated by CME Group Inc. CME -0.76%

A CME spokeswoman didn't respond to a request for comment.

A CFTC official characterized the data problems as "growing pains." The agency formally began to report swaps data on a weekly basis just last month.

The official said the error also reflects the agency's chronic lack of resources. Just two employees at the agency are charged with putting together the weekly swaps report and it takes them 12 days to prepare the data for publication compared with three for another report the agency publishes. The agency is reviewing the matter and hopes to have firmer figures by next week's report, due Thursday.

In a statement, DTCC said: "We notified the CFTC immediately after we uncovered this matter and are working overtime to resolve these issues as soon as possible to ensure that the agency has timely access to the most accurate, highest quality market data."

Scott O'Malia, the CFTC's sole Republican, said one of the most significant reforms in the Dodd-Frank law involved requiring the reporting of all swaps data. He said it is the foundation for overseeing the market and analyzing its risks.

"This further illustrates the importance of the commission quickly and proactively addressing our data problems, to make sure we have accurate and clean data for both the market and for regulatory purposes," he said.