George Orwell was mostly right in 1984 when he warned us against a Big Brother government that runs every aspect of our lives. What Orwell didn’t foresee was the emergence of other Big Brothers such as Wall Street behemoths facing off an overreaching government. He also couldn’t foresee the mess we’re in because of this strife-filled dynamic. The impact of big government is real even when the government shuts down. For instance, the confusing start of trading via swap execution facilities (SEFs) was made worse by a flurry of last-minute decisions by the CFTC on the eve of the shutdown. Sadly, the actions did not provide clarity.
The result is that post-shutdown the CFTC will have to further clarify the situation. Firms wanting to comply with the never-ending new rules for cleared and executed over-the-counter (OTC) trading will have to call in an army of lawyers to sort it out again, and then revamp and/or refine operations and IT infrastructures. All of which is very expensive and time-consuming.
But it doesn’t stop there or even in the U.S.
In a mostly symbolic gesture this week, the European Parliament voted to suspend an agreement that allows the global financial messaging and services cooperative SWIFT (supported by major financial institutions) to exchange data with the US. A majority of the parliament members want to stop US access to SWIFT’s story of data in light of media reports the National Security Agency expanded its anti-terrorism mandate and has been spying on a wider variety of financial transactions. This and other revelations have surfaced after whistleblower-in-exile Edward Snowden leaked key NSA documents.
A month ago, German media outlet Der Spiegel reported that the NSA had gathered SWIFT data because “SWIFT was named as a ‘target,’ according to the documents, which also show that the NSA spied on the organization on several levels, involving, among others, the agency’s ‘tailored access operations’ division. One of the ways the agency accessed the data included reading ‘SWIFT printer traffic from numerous banks.’ ”
So, Big Government’s reach easily extends into the operations of firms and vendors. Yet there is a ray of hope in that there may be more substantive votes and actions to come from the European Parliament over this matter as the Europe Union members (and everybody else) would like to know more about the NSA’s activities.
The fight between the Big Brothers of the U.S. federal government and Wall Street is also playing out via headline-grabbing prosecutions and record fines for JPMorganChase (which acknowledged its culpability) and other major institutions. The government is also striking back for IT and operational fiascos such as the $12 million SEC fine for Knight Capital Americas when it suffered an operational error last year for its equity order routing system that resulted in a $460 million loss.
The ramifications of this contentious dynamic are many and far-reaching. For the foot soldiers of middle- and back-office operations, one of the biggest impacts of this ongoing war between Wall Street and Big Government is a halt to innovation just when firms desperately need it.
A case in point is reconciliation and exception management, which is mired in a quasi-manual, partially automated, hellish limbo.
As revealed by panelists at FTF’s ReCon event in New York earlier this week, approximately 50% of recs processing is done manually and 80% of the processing is facilitated via Microsoft Excel spreadsheets and Access databases — vintage, retro technology. Another conference participant from a major bank reports that most of the recs processing at the firm is supported by faxing key documents back and forth. While many during the conference passionately made the case against spreadsheets and manual systems, apparently no one is listening.
What firms would pay attention is a killer recs app or system that is so innovative and useful that it would pull people away from their spreadsheet and fax addictions. But firms and vendors have become so caught up in regulatory battles, compliance and one-upmanship that advances in financial technology have become the first casualty.
This clash of the Big Brothers will have to move into a more cooperative phase — meaning less institutionalized corruption and a less intrusive, blundering government — before innovation returns as a top priority. But don’t hold your breath. It will be a while before we reach the Promised Land.
For more on SEFs and the imact of derivatives regulation on the industry, attend FTF’s DerivOps NY event on November 13th.
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