The Financial Services Authority (FSA) has warned investment banks and hedge funds to sort out operational efficiencies in the credit derivatives markets and improve the way they handle corporate data or face penalties.
Thomas Huertas, head of the wholesale firms division at the FSA, told delegates at the regional conference of the International Swaps and Derivatives Association (Isda) in London that the trading systems being used for some products - such as equity derivatives - remain "dangerously sloppy".
Huertas also said that some firms in the derivatives market seem to be careless in their handling of confidential corporate data.
His comments illustrate ongoing worries among regulators that some dealers could be using private corporate data to trade ahead of the markets.
Furthermore, Huertas said the FSA has recently privately surveyed investment banks and discovered a wide dispersion in the value at risk that firms calculate in relation to identical portfolios.
Huertas warned that action would be taken against firms that are "not employing proper valuation techniques".
The comments come as the latest stats from Isda show that in the last six months, the size of all outstanding credit derivatives contracts has risen by $9000bn to stand at $26,000bn - six times the size of the industry three years ago.
At a meeting with the Federal Reserve Bank of New York in September last year 14 of the world's largest dealers pledged to cut the backlog of unconfirmed trades littering back offices by 70% by the end of June 2006.
But although this June target was exceeded Huertas said there were some signs of "backsliding" and that the July data on matching and confirmations was "not promising". Even now there are still a significant number of trades - around 20,000 - that remain confirmed over 30 days after the trade date.