CFTC Commissioner Scott D. O’Malia gave the keynote address. which was bluntly critical of the CFTC rulemaking and implementation process, before the Edison Electric Institute CFTC Compliance Forum focusing on industry compliance and on-going rule implementation.
Commissioner O’Malia further expressed his doubts as to the statutory foundation of many rules and no-action letters, and expressed concern for the rules’ impact on end-users.
As to the quality of the CFTC’s rules generally, he criticized the CFTC for sacrificing transparency and certainty for speed. He voiced his disappointment at the CFTC’s failure to develop a transparent rulemaking schedule that would enable market participants to plan for compliance with the massive new obligations imposed by these rules. O’Malia stated that this failed approach has compromised the legal soundness and consistency of CFTC, which is evidenced by the large volume of exemptions and staff no-action letters. O’Malia stated that the CFTC has issued over 130 exemptions and staff no-action letters, over two exemptions for every rule passed. He noted that in many cases, the provided relief was for an indefinite period of time, thus rendering them “de facto rulemakings” which are not subject to a proper cost-benefit analysis. In order for a complete cost-benefit analysis to be performed, O’Malia stated his full support for proposed legislation that would require the CFTC to undertake a full cost-benefit analysis of its rulemaking.
As to position limits, he believed that the CFTC was taking inconsistent positions. On the one hand, the CFTC was arguing in court that it need not perform a cost-benefit analysis; and on the other hand, the CFTC was intended to propose a new position limit rule asserting that it had performed a cost benefit analysis, which he implies has not been done.
As to new rules, he said that he was pleased that that the CFTC would be proposing a new rule requiring capital and margin for all otc states However, he cautioned that these requirements would raise the cost of hedging for all market participants, including end users. He further cautioned that all of the CFTC’s rule making with respect to swaps was expensive for the industry, that these expenses might be originally borne by dealers but they were necessarily passed onto customers, and that the CFTC was largely ignoring the costs of its rulemaking.
As to regulatory reporting, he stated that the CFTC was collecting a huge amount of information that it had no ability whatsoever to digest.
Lastly, O’Malia discussed the CFTC’s unpreparedness to properly oversee the new swaps market. He explained that out of the 89 temporarily registered applications for swap dealers, the CFTC has not signed off on a single application as complete or final. A similar situation is happening regarding swap execution facilities, O’Malia stated that the CFTC “didn’t read the rulebooks in order to meet the arbitrary October 2 effective date.” He stated that the CFTC needs to do a better job of understanding the significant compliance challenges facing new market participants as a result of new regulations. He noted that the CFTC needs to take responsibility of fixing the unworkable rules, and focus more on outcomes rather than setting arbitrary timetables tied to an individual agenda.
Lofchie Comment: CFTC Commissioner O’Malia says what all of us working in this industry know: that that CFTC rule making process does not work. While the Commission boasts of how many rules it has adopted it pays no mind to whether its rules are consistent with good public policy or with each other; it ignores cost-benefit analysis by implying that whatever it does can be justified in light of the financial crisis (notwithstanding that the interest rate and currency swaps that are required to be cleared had not the least to do with the financial crisis). On the rule-making front, the CFTC pays lip-service or none to the Administrative Procedures Act, the most egregious instance of this being the CFTC’s adoption of its “rules” on extraterritoriality in the form of “guidance” so as to avoid the APA requirements.
As to the regulatory reporting issues that Commissioner O’Malia highlights, that seems a place where the CFTC’s assertion of its successes in creating a transparent market are open to easy challenge. It would seem a safe assumption that the CFTC is in fact wasting tens of millions of dollars (largely other people’s dollars) in collecting information that the CFTC has no ability whatsoever to use. One example of the waste in this area that seems fairly egregious: why is the CFTC continuing to require the collection of information as to “historical” swaps. There is (a) no possibility that this information could be back-generated in a form that the CFTC would find usable and (b) no use that the CFTC could make of the information that would be remotely worth the cost.
Where is the press in this? Surely there is a story here.