CFTC Commissioner O’Malia Blasts Cross-Border Guidance and Potential Position Limits Rule

CFTC Commissioner Scott O’Malia spoke at the Global Forum for Derivatives Markets regarding regulatory harmonization, among other topics. The Commissioner began by highlighting his concerns regarding the CFTC Cross-Border Guidance that was finalized in July. He stated that the guidance failed to justify its overbroad extraterritorial reach under the statute’s “direct and significant standard,” noting that this standard was meant to act as a limit on the CFTC’s authority, not “to bring the world under the Commission’s jurisdiction.” Additionally, Commissioner O’Malia stated that the CFTC should have issued the document as a rulemaking and not an interpretive guidance. The Commissioner explained that an interpretive guidance does not have a force of law, unlike a CFTC rule which imposes a practical binding effect. Additionally, he noted that the interpretive guidance allowed the CFTC to avoid both a proper cost-benefit analysis and the requirements of the Administrative Procedure Act, which ensures public participation and accountability from the CFTC. The Commissioner stated that the CFTC “got the process and order of things all wrong.” He stated that finalizing the interpretive guidance was a preemptive unilateral move that will make the task of reaching a harmonized global framework more difficult. In order to combat the flawed interpretive guidance from the CFTC, Commissioner O’Malia discussed a key part of global harmonization, which is supervisory memoranda of understanding (“MOUs”). The Commissioner stated that MOUs have the flexibility to fill the gaps left by similarities and differences in jurisdictions. He noted that the rest of the world cannot and will not abide by a one-size-fits-all regulatory standard, and stressed the importance of regulators having a mutually agreed upon solution to resolving differences.

 

Commissioner O’Malia went on to voice his optimism about the potential innovative trading opportunities which swap execution facilities (“SEFs”) can provide to the futures marketplace. He stated that markets will be improved by the increased liquidity and will evolve as these platforms become more standardized. He further noted that it would make sense to delay the October 2 compliance date in order for market participants to transition to new venues. Commissioner O’Malia also touched on numerous concerns that marketplace participants brought up during the Technology Advisory Committee Meeting.

Lastly, Commissioner O’Malia discussed two rules currently being considered by the CFTC. First, he mentioned a draft final rule that is currently before the CFTC to make various reforms to accounting standards and reporting requirements, and to introduce a controversial new provision requiring FCMs to maintain enough residual interest in their segregated customer accounts in an amount that would ensure that at no point does a customer’s funds margin or extend credit to another customer. Second, he noted that the CFTC is considering a new proposed rule for position limits, stating that this is an “unsavory maneuver” to execute while the current rule is being argued in courts. 

Lofchie Comment: I agree with Commissioner O’Malia that procedural issues with the cross-border guidance are not going to disappear. In addition to the substantive flaws that are present in the “guidance” resulting in part from the fact that there was no opportunity for corrections resulting from public comments, the CFTC is likely to experience significant problems with bringing any enforcement actions based on the “guidance,” which does not have the same force of law as does a rule.

See: Commissioner O’Malia Speech “Regulatory Harmonization, Not Imperialism: A Workable Cross-Border Framework”.
See also: CFTC Technology Advisory Committee Meeting (with Delta Strategy Group Summary) (September 16, 2013); CFTC Commissioner O’Malia’s Opening Statement at Cross-Border Guidance and Exemptive Order Open Meeting (July 15, 2013); Commissioner O’Malia Speaks on Cross-Border, ”Made Available to Trade” and Data Management (June 13, 2013); SIFMA President Bentsen Takes a Side on Cross-Border Conflict (June 10, 2013); CFTC Commissioner O’Malia on Ensuring a Backup Plan on Cross-Border Guidance to Give Markets Certainty (June 7, 2013).