In a keynote address at the New Risk in Energy 2014 Conference, CFTC Commissioner Scott O’Malia discussed how Dodd-Frank rulemakings have impacted the energy sector and its use of financial markets.
Commissioner O’Malia’s speech focused on, among others, the following key areas:
- the importance of technological innovation as the CFTC moves to implement and enforce its new rules;
- the need to limit the costs imposed on end users; and
- the “futurization” of swaps and the negative impact that has on end users’ hedging activity.
Commissioner O’Malia began by discussing the CFTC’s technological shortcomings. He urged the CFTC to adopt a broader and more effective technology footprint and to ensure that CFTC regulations keep up with technology and the evolving market structure.
In his discussion of the implications of Dodd-Frank rulemakings for energy traders and other end users, Commissioner O’Malia observed that the CFTC “rushed to implement” 68 rules, noting that it has since issued over 180 staff no-action letters offering “some relief from our hastily drafted rules.” Considering the implications of this process, the Commissioner stated that the relief issued by the CFTC often “imposed new conditions and arbitrary deadlines” and that, “in more than two dozen cases, these no-action letters provided indefinite relief.” Detailing issues with the bona fide hedging requirements and safe harbor determinations stemming from the swap definition, Commissioner O’Malia further urged the CFTC to confront shortcomings in its rules in a way that is consistent with the Administrative Procedure Act.
Commissioner O’Malia concluded his speech by discussing the futurization of swaps and, in particular, the fact that futures do not provide the same tailored hedging benefits to end users that swaps provide. Noting the expansion of this practice, the development of new products, and growing interest in FX, interest rates, and credit products, O’Malia encouraged the CFTC to hold a hearing on these matters before it makes recommendations, suggesting that a Concept Release may be useful to initiate an open dialogue.
Lofchie Comment: For the remaining post-Gensler CFTC Commissioners, and for the three incoming Commissioners, including the new Chairman, assuming new responsibilities will be a bit like cleaning up the morning after a very wild party: the place is a mess, the neighbors (i.e. the neighboring countries) are angry and no one is sure why there is a sick goat in the bathtub. The temptation is to burn the place down and rebuild, but the Commissioners are stuck with cleaning it up.
See: Commissioner O’Malia’s Keynote Address; Commissioner O’Malia’s Slide Presentation.
Related news: CFTC Acting Chair Wetjen and Commissioner O’Malia Issue Statements Regarding End-User Issues (April 4, 2014); CFTC Commissioner O’Malia Delivers Speech Discussing Technology and the Future of Financial Standards (March 26, 2014); CFTC Commissioner O’Malia Remarks on the Impact of Dodd-Frank on Commodity Futures and Swaps Markets (March 24, 2014); CFTC Commissioner O’Malia: ”It’s Time to Review Our Rules and Make Necessary Changes” (January 28, 2014).