Commissioner O’Malia Speaks on Cross-Border, “Made Available to Trade” and Data Management

CFTC Commissioner Scott D. O’Malia gave the keynote address before the OpRisk European Conference. He focused on three topics.

As might be expected, given the European audience, the first topic was cross-border regulatory issues and his reasoning for seeking an extension of the July 12, 2013 deadline for the implementation of cross-border application.

The second was the CFTC’s adoption of rules governing swap execution facilities (“SEFs”) and related trade execution rules, particularly the oddly-named “Made Available to Trade Rule.”  “Made Available to Trade” really means “must be traded on a SEF.”  Commissioner O’Malia argued that the CFTC standard for when a cleared swap is required to be traded on a SEF is too low, and is allowed to be decided by an entity that is subject to a substantial conflict of interest.

Third, the Commissioner observed that, while the CFTC is collecting a good amount of data, in its haste to require the transmission of data, it has failed to adopt rules and procedures that will allow it to make use of that data.

Lofchie Comment:  As stated in a previous comment, CFTC Chairman Gensler is now in the difficult position where the most responsible course of action as to cross-border regulation is to take an action that he has previously opposed: extending the current cross-border guidance and conceding that no final rule on cross-border regulation will be reached during his term as Chairman.  See, e.g., Trade Associations Request a Six-Month Extension of the CFTC’s Cross-Border Exemptive Guidance.

As to “made available to trade,” the Commissioner points out what are significant flaws in the CFTC’s rulemaking. As discussed in the news item, CFTC Publishes Text of SEF Rules, once a swap is subject to clearing, a SEF is able, by issuing an analysis that the CFTC estimates will cost $938.40 (in other words, for a very cursory analysis), to force the entire market to trade that swap on a SEF and not in the OTC market.  Given that there is no experience with how SEFs will function, that seems an imprudently low standard of analysis. Indeed, why bother with an analysis at all, given how cursory the standard seems to be?  One might as well allow any SEF to mandate an end to OTC trading of any swap that is subject to mandatory clearing.

Commissioner O’Malia’s third comment is one that may be made as to other regulators and other rules:  the government mandates the collection of information, at great expense to market participants, that it has no means to use.

The common theme that runs through Commissioner O’Malia’s remarks is that the CFTC, in attempting to implement Dodd-Frank quickly, has acted in too-great haste.  It is now in a position where it can continue racing ahead, but it seems inevitable that if the Commission does not take a break and reevaluate the rules it has already adopted, it will soon be forced to do so in response to market disruptions that those rules have created. 

See: Taking the Time to Get It Right: The Cross-Border Regulatory Framework.