The commissioner just wanted rule-making done right, not rushed.
In the immortal lyrics of George Harrison, “All things must pass.” And so it goes with Scott O’Malia, the pugnacious Republican Commissioner at the Commodity Futures Trading Commission who gave voice to those objecting to what many felt was overreach when it came to rules and rule-making. On Monday Commissioner O’Malia announced he was resigning his post and Wednesday said he will join the International Swaps and Derivatives Association (ISDA).
Commissioner O’Malia’s legacy will be, depending on one’s point of view, of a man fighting the good fight for order, function and efficiency in regulating swaps, or just a mouthpiece for financial institutions (he’s already been criticized by Better Markets for hopping to ISDA). But since the crisis and the passage of the Dodd-Frank Act, Commissioner O’Malia has been more about process than the rules themselves. In Commissioner O’Malia’s world, there were those who caused the crisis and those who didn’t. And as far as he was concerned, his duty was to protect derivatives users who used them for actual risk mitigation and who had no role in causing the financial crisis.
“I have consistently advocated for the protection of end-users from Dodd-Frank’s expansive regulatory reach,” he said July 15, 2014 in one of his final speeches as a CFTC commissioner. And he has been very vocal about it, railing at the rushed nature of implementation of many of DFA’s statutes, the lack of effort in global rules harmonization, as well as the lack of technology in helping the CFTC do its job.
Over the course of his CFTC career – from late 2009 to this week – Commissioner O’Malia gave dissenting statements to rule decisions on at least 23 occasions. In fact, type “dissent” into the search box on the CFTC.gov web site and with the exception of a few dissenting statements from former CFTC commissioner Jill Somers, the entire search results is made up of O’Malia dissents.
And in the same July 15 speech, as perhaps a final warning to his colleagues in the CFTC and other agencies, he was no less dissenting, telling his audience that the “fundamental principle” underlying global derivatives markets reform was to, much like the Hippocratic Oath, “first do no harm.”
Herewith, are a few more of the “Best of” Scott O’Malia nuggets over the past several years.
On DFA in general:
The CFTC, he said in September 2012, has applied “a vague, overbroad and truthfully, unprecedented regulatory reach of the Dodd-Frank rules.” Not only do the rules exceed the CFTC’s authority, he said, but they also “trample on foreign regulatory authority and put US financial institutions and commercial firms at a competitive disadvantage.” This rule, he added, “couldn’t do more to confuse the objective of coordinated global oversight.”
On end-user exemptions:
“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.” Commissioner O’Malia also pointed out a joint letter circulated by former Senators Chris Dodd and Blanche Lincoln 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.”
A few years later, end-users exclusion remained an issue. “The Commission has failed to follow the express direction of Congress in promulgating its rules. As a result, end-users are getting caught up in the Commission’s rules or are spending too much time and resources to get the necessary reassurance from the Commission,” Commissioner O’Malia said at CFTC roundtable on April 3, 2014.
On harmony:
“Unless the Commission and foreign regulators undertake serious efforts to recognize each other’s regulatory regimes on data, clearing, and execution based on a flexible, outcomes-based approach, we risk developing micro-solutions that highlight our differences rather than our commonality” … “I call on the commission and the EU to sign an international data sharing agreement, collaborate to harmonize both the form and format of data being reported, and recognize each other’s swap trade repositories. We must get back to the substituted compliance process and follow a flexible, outcomes-based approach,” — May 6, 2014 conference sponsored by the Tabb Group.
He told a Global Forum for Derivatives Markets in September 2013 that he hoped recent cross-border squabbles can be “mitigated through a transparent, structured, and consistent process for the Commission’s substituted compliance determinations.” This, he said, was crucial to the rules coordination effort and will be able to “take credit for choosing the path of regulatory harmonization over the path of regulatory imperialism.”
On the Volcker Rule:
Commissioner O’Malia held particular contempt for the Volcker Rule, which he said was “unworkable.” With “the implementation of one of the most important mandates issued by Congress in response to the financial crisis, the Commission seems to have forgotten the basics of agency rulemaking … I am deeply troubled by the egregious abuse of process in this rulemaking. Without a doubt, it far surpasses all other previous transgressions to date.”
“I do not support the commission’s version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule. Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that.”
On the nature of a swap dealer:
“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.”
On the costs of the rules:
According to Commissioner O’Malia’s CFTC analysis, each of the swap reporting rules “will impose costs of more than $100 million on the American economy, thus making each rule a major rule.” He noted that the latest rule makings brings the current total of major rules written by the CFTC to seven, “which means that just this handful of Dodd-Frank rules may have a minimum impact on the American economy of at least $700 million.”
On technology:
“I can’t emphasize enough how important it is for the Commission to improve our data quality so it can have an accurate and complete picture of the swaps market. Our ability to perform risk assessments and market oversight will hinge on the quality of our data.”
“I don’t believe we have allowed ourselves to consider what is possible if we integrate technology solutions into each and every one of our workflows and processes. Instead, our supervisory mindset is focused on the filing of forms and compliance checks. This is not an acceptable regulatory paradigm in the post-financial crisis world. The technological landscape is evolving and changing rapidly. We need to leverage this resource and reform our surveillance and oversight mission in a significant and technologically-adept way.”
There’s been no word on who will replace the Commissioner.