CFTC Commissioner Scott O’Malia says clearing rules will make costs too high for all end-users.
Corporate end-users may have dodged having to clear their swaps on exchanges when all the rules are eventually written, but they will not be able to avoid higher costs of hedging in general, according to a CFTC commissioner.
“I have serious concerns about the cost of clearing,” CFTC Commissioner Scott O’Malia told an audience at a technology conference in New York on January 24. And no matter what those rules look like, “hedging commercial risk and operating in general will become more expensive as costs increase across the board, from trading and clearing, to compliance and reporting.”
Mr. O’Malia said that in an effort to reduce risk, the rules end up concentrating market risk in clearinghouses to mitigate risk in other parts of the financial system. But there is a correlation of reducing risks and rising costs, he said. “Anytime the clearing rule-making team discusses increasing risk reduction, it is followed by a conversation regarding the cost of compliance and how much more cash is required.”
Mr. O’Malia then outlined a few examples:
- More stringent standards for those clearinghouses deemed to be systemically significant.
- Establishing a new margining regime for the swaps market that is different from the futures market model, which requires individual segregation of customer collateral, which in turn increases costs to the customer.
“Are we creating an environment that makes it too costly to clear and puts risk management out of reach?,” Mr. O’Malia said, and reiterated President Obama’s recent directive for government to find more affordable and less intrusive means to achieve its goals. Mr. Obama’s speech, he said, echoed his own objectives “to promote predictability and reduce uncertainty and ensure that regulations are accessible, consistent, written in plain language, guided by empirical data, and are easily understood.” Instead, the CFTC is writing piecemeal rules that risk creating “redundancies and inconsistencies that result in costs—both opportunity costs and economic costs—without corresponding benefits.”
Heavy load so far, shrinking resources
Mr. O’Malia in his speech detailed the rule-writing load the CFTC carried so far. Since August, he said the CFTC has written 732 Federal Register pages, including four Advance Notices of Proposed Rulemaking,
33 Notices of Proposed Rulemaking, two interim rules, one order, one notice, and two requests for comment pursuant to the Dodd-Frank Act.
And, as fellow Commissioner Michael Dunn indicated in a recent speech, the amount of resources to continue at the above pace is rapidly shrinking. “At our current funding level,” he said at one of the CFTC’s public meetings on Dodd-Frank, “the Commission is under serious strain. We lack the staff and resources necessary to both implement Dodd-Frank and continue to fulfill our pre-Dodd-Frank duties under the Commodity Exchange Act.”
Without the additional funding, he said, the CFTC will have to make “very hard” choices in allocating resources to enforce both Dodd-Frank and the Commodity Exchange Act. Choices perhaps critics will approve of.