With apologies to William F. Buckley, CFTC Commissioner Scott O’Malia certainly likes to “stand athwart” rulemakings, “yelling Stop!” at every chance he gets. Since the beginning of the rule-making process following the passing of the Dodd-Frank Act, Mr. O’Malia has done his best to make sure the rules being written aren’t just passed without thought, asking for more analysis and more transparency.
And in a speech today, he continued that theme, highlighting the “very serious concerns” he has with the CFTC’s rulemaking process, including that lack of transparency. Thus far, he finds the timeline for rule implementation and compliance opaque. Mr. O’Malia also rails against what sees as the the “tenuous connections some of our rules have to the statute they are based on.”
“It isn’t good enough to follow the statute when it suits us; we must do so each and every time,” Mr. O’Malia said. “I believe, in our rush to implement rules, we have taken shortcuts in defining the critical terms and applied our rules inconsistently.”
Such a voice of dissent should be fully supported by treasury, which will likely see its cost of doing business go up as a result of the provisions of the Dodd-Frank Act, particularly those related to the derivatives portion of the Act, aka Title VII. Here companies could see bank fees go up as well as the burden of margining (in some circumstances). Never mind whatever exemptions companies get, costs are going up.
So it’s critical Mr. O’Malia succeed in his efforts to make sure these costs aren’t arbitrary, overly burdensome or even necessary. Speaking at a University of Notre Dame Business Law Forum, Mr. O’Malia took aim at three areas where he is most concerned: swap data reporting rules, proposed cross-border guidance and the fact that swap rules will drive shift to regulatory security of futures markets.
For swap data repositories, Mr. O’Malia noted that as a result of failures by companies to properly manage risk (and the failure of regulators to get insight into these risks), Congress mandated that all swap data be reported to centralized record-keeping databases called swap data repositories (SDRs).
And in keeping with its mandate, the CFTC published 234 pages of regulations requiring SDRs to register and comply with tech standards “in order to report specific swap data for real-time public reporting or for regulatory use.” But when companies like the CME went to register, some of the regulations had changed. “I find it frustrating that the rules are being adjusted after they have been approved and I can only imagine the frustration market participants must feel when the standards are changed with deadlines looming,” Mr. O’Malia said. “If that is what has transpired, I can assure you this is not good government… It is not easy to comply with regulations when the goal posts are constantly moving.”
The cross-border issues are another concern. This was also a concern for another CFTC commissioner, Scott Wetjen, who last week said his office was sensitive to concerns, particularly from Asia where US investors may be shut out of derivatives markets because of burdensome swap rules. Mr. Wetjen told attendees at an International Swaps and Derivatives Association conference that the Commission must be “clear and make measured and workable policy … in our cross-border documents.” He also suggested that given the CFTC’s limited budget it would encourage foreign regulators to help out with their own local rules.
But Mr. O’Malia echoed the concerns of many on that point. The CFTC, he said, 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.”
Mr. O’Malia’s third example was in the shift to futures markets, citing the ICE’s recent announcement that it would start listing energy swap contracts as futures contacts instead of keeping the swap designation. Although he acknowledged that the move would offer “far greater regulatory certainty and … allow deeply liquid markets to hedge commercial risk, it may reduce flexibility “in terms of tailoring the contracts to meet specific risk needs.”
“I certainly don’t believe it was the intent of Congress or the Commission to draft rules that would drive people out of the swaps market, but I believe the regulatory uncertainty was so great that energy markets voted with their pocket-books and moved their trading business from the complex regulatory nightmare of the swaps markets to the well-functioning futures markets.”