Anthony Malakian: Regulators Literally Doing the Best They Can

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Anthony Malakian, US editor, Waters

Let’s face it: The English language is, at times, downright perplexing. It has always blown my mind that the word “read” can be used in both the present and the past tense, and has a different pronunciation depending on which one you use. It’s like someone was intentionally trying to confuse non-English speakers.

And then there’s the word “literally.” I’ve gone my whole life knowing that this word means actually and exactly. I enjoy correcting my friends when they use it incorrectly. Then, just the other day, a colleague pointed out that literally no longer means literally. Sure enough, Merriam-Webster now defines literally as also meaning “in effect” or “virtually.” My head literally exploded.

Good Effort?
Which brings me to the regulators. I recently spoke with the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), among others, about the IT projects they have undertaken to carry out the mandates in the Dodd–Frank Act, which means providing transparency to the marketplace while guarding against systemic risk.

Since these are the two agencies most responsible for Dodd–Frank compliance as it pertains to the capital markets, I thought it would be interesting to investigate the challenges they’re facing. As expected, the term big data was thrown around a lot. If avoiding another meltdown such as that of 2008 is the goal of the regulatory community, then they need more than just data—they need to be able to analyze that data in a manner that has never before been thought necessary.

Thomas Bayer, CIO of the SEC, notes that the regulator has purchased—and in some cases, developed—a series of analytical tools that will allow it to better analyze Dodd–Frank data more efficiently and effectively. This is all part of an overarching project entitled “Working Smarter,” aimed at making staff more efficient and effective.

While money has been walled off for technology-only spending, it is consistently diverted to staffing, often for staff members with no technology remit whatsoever.

The effective part is a must. Another 2008 simply cannot be allowed to happen. There’s no “trying” to analyze the data in a way to guard against systemic risk—if Wall Street firms are required to submit this massive swath of information, then the SEC must be in a position to use it to protect investors. 

A Budgetary Thing
But “efficient” is what can get lost in the shuffle, even if that goes against its own definition. The regulators’ budgets are not the result of making a good or bad bet on a credit default swap—they’re approved by the US Congress and come out of taxpayers’ pockets.

CFTC commissioner Scott O’Malia has consistently looked to improve the regulator’s IT budget, but it’s been a painfully slow process. He contends that 76 cents of every dollar spent on the CFTC’s IT budget goes toward staffing rather than technology. O’Malia says that while money has been walled off for technology-only spending, it is consistently diverted to staffing, often for staff members with no technology remit whatsoever.

“We’re way too heavy in terms of staffing—we really need to increase the funding for hardware/software development,” he says. “I know it doesn’t develop itself and I know it doesn’t run itself, but we’ve got to improve that mix so that we can leverage technology, because it will pay dividends in the future as we reduce our surveillance demands. Right now, it’s more of a pit-trading strategy of yesterday to survey markets for tomorrow.”

O’Malia can talk more openly about difficulties in meeting technology demands because he’s a politician. In contrast, I doubt a CIO or CTO would ever be so blunt, or they risk the wrath of the more powerful folks in the C-suite.

Regulators are always going to face an uphill battle when it comes to investing in technology. It’s hard to justify long-term projects—technologies that may not have an immediate return on investment but will help build an analytical data culture—at a time when Congress is battling over budgets and sequestration.

So, are the regulators literally doing the best they can? Absolutely … but I’ll leave the definition of “literally” up to you.

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