CFTC Commissioner Scott O’Malia says rules inappropriately target characteristics of a swap dealer.
Regulators that want to know the content of a swap dealer’s character should actually be paying more attention to why and for what purpose they use swaps. That’s the argument Commodity Futures Trading Commission’s Scott O’Malia used in testimony Tuesday in advocating for clearer rules.
The 2010 Dodd-Frank legislation defines a “swap dealer” as any person that:
- Holds itself out as a dealer in swaps;
- Makes a market in swaps;
- Regularly enters into swaps with counterparties in the ordinary course of its business for its own account; or
- Engages in any activity causing the person to be commonly known in the trade as a dealer or market-maker in swaps.
But, said Mr. O’Malia in testimony before the US House Agricultural Committee, the structure of the rule makes it too difficult for firms to determine whether they are end-users or swap dealers.
“The swap dealer rule is a good example of how the Commission failed to accurately interpret Dodd-Frank by broadly applying the swap dealer definition to all market participants and ignoring the express statutory mandate to exclude end-users from its reach,” Mr. O’Malia, currently the lone Republican member of the CFTC and a persistent proponent of making the rules clearer and subject to cost-benefit analysis. “Instead, the swap dealer rule makes it unnecessarily difficult to determine whether an entity is a swap dealer or an end-user.”
In fact this was par for the course for the CFTC, which Commissioner O’Malia said has repeatedly overstepped its mandate in drafting and proposing rules. This despite repeated attempts by Congress to not broadly apply the rules. “Members of Congress who drafted the Dodd-Frank Act repeatedly [have] attempted to make it clear to the Commission that commercial end-users should be exempted from Dodd-Frank’s swap provisions,” Mr. O’Malia said, even citing a joint letter circulated by former Senators Chris Dodd and Blanche Lincoln – no fans of derivatives – that Congress “does not intend to regulate end users as Major Swap Participants or Swap Dealers just because they use swaps to hedge or manage commercial risks associated with their business.”
In order to fix the problem, Mr. O’Malia said Congress should “expressly exclude end-users” from the swap dealer definition. Alternatively, he said, Congress should consider ways that would “encourage risk-mitigating behavior by end-users and also remove the costly burden imposed by the swap dealer definition.”
Mr. O’Malia went on to suggest other ways that the CFTC might lessen the burden on business. These included fixing hedging and clearing: “I am concerned that the swap dealer rule does not provide any legal or factual justification for the threshold amounts used in aggregation of swap dealing activity.” Clarifying the term “Financial Entity” in the CEA, which addresses mandatory clearing. Also, “Raising the De Minimis Threshold for Special Entities,” which include state, city, and county municipalities that fall within the swap dealer rule. This, he said was “another group that deserves to be reevaluated for fair treatment.”