CFTC Commissioner Scott D. O’Malia delivered a speech titled “Derivatives Reform: Assessing and Improving the Change” at TabbForum, Fixed Income 2013: Liquidity, Products, Platforms. Commissioner O’Malia specifically discussed: (1) customer protection measures and the supervision of automated and high-frequency trading; (2) the phenomenon known as the “futurization” of the swaps markets; (3) swaps margin; and (4) the Commission’s upcoming rules governing swap execution facilities (“SEFs”).
Commissioner O’Malia’s remarks began with his customary expression of dissatisfaction with the CFTC rulemaking process. According to the Commissioner:
“[In addition to various rules and proposals, the CFTC has] issued a total of 73 exemptions, interpretations, Q&As, and no-action relief letters – 63 of them since October alone. We have been sued three times – won one, lost one, and one has been withdrawn for the moment – and I wouldn’t be surprised to see more lawsuits. The lawsuits and the ad-hoc barrage of exemptions point to a flawed rulemaking process that prioritized getting the rules done fast over getting them done right.”
The Commissioner then talked about the need to use technology to protect customer assets. He then moved on to a discussion of high-frequency trading, and indicated that he hoped to have a proposal on the topic released before April 30.
Next, he discussed the topic of “futurization” (as to which the CFTC is holding a conference shortly): the move of swaps into futures. He suggested that some of this transition is to the good, but that some exists so that market participants may avoid swaps rules which are “vague, poorly understood, and now riddled with temporary exemptions and no-action relief. . . . “
As to the topic of the swaps margin, he worried that the cost of increased margin requirements might be so high as to do significant damage to the financial markets. In this regard, he cited a speech by Janet Yellen, Vice-Chairman of the Federal Reserve Board, in which she described the additional margin requirements as “eye-opening.”
Finally, he turned to the topic of SEFs and provided some insight as to the struggles that the CFTC is going through in adopting rules on this topic.
View speech in full here (links externally to CFTC website).