CFTC Commissioner O'Malia Criticizes CFTC Rulemaking, Supports Customer Protection and End User Relief Act and Cross-Border Issues (with Lofchie Comment)

CFTC Commissioner O'Malia delivered the keynote address at the Quadrilateral Meeting of European and American financial regulators and lawyers. He focused on what he viewed as the problems created by CFTC rulemaking during the tenure of Chairman Gensler.

Commissioner O'Malia asserted that the fundamental principle for reform is that "regulators must do no harm." He expressed his concern over continuing reports of market fragmentation and the fracturing of liquidity between U.S. and non-U.S. markets as a result of diverging regulatory approaches to the implementation of the G20 principles. In addition to market fragmentation, he said, the existing CFTC regulations are negatively impacting liquidity for end users and making hedging too costly, leading to high prices for commodities.

According to Commissioner O'Malia, effective regulation comes from a balance between protecting market participants and fostering transparent open, competitive and financially sound markets. He explained that the CFTC must reexamine rules that have negatively affected the market. One example he cited was the definition of "swap dealer." According to Commissioner O'Malia, the CFTC "failed to faithfully interpret Dodd-Frank by broadly applying the swap dealer definition to all market participants and ignored the expressed statutory mandate to exclude end users from its reach." Furthermore, Commissioner O'Malia stated, he supports the Customer Protection and End-User Relief Act (H.R. 4413) that was recently passed by the house, stating that it provides important market structure and CFTC reforms that recognize the "real problems" in the markets.

Commissioner O'Malia went on to explain that a holistic approach, which includes substituted compliance and mutual recognition, is essential to a successful cross-border regulatory policy. Commissioner O'Malia stated that he hopes the European Commission will continue to work with the CFTC to find the U.S. regulatory regime equivalent under the European Market Infrastructure Regulation so that the European Securities Market Authority may proceed with the recognition of U.S. central counterparty clearinghouses by the December 15, 2014 deadline under the Capital Requirements Directive ("CRD IV"). Commissioner O'Malia also identified international data sharing and harmonization as another area where mutual cooperation is critical.

Finally, Commissioner O'Malia touched on the technology problems that have plagued the CFTC. He explained that inadequate support for technology has left the CFTC with a "diminished automated surveillance capacity and an inability to manage the regulatory data stored in SDRs." Commissioner O'Malia called on the CFTC to make serious data technology investments in order to establish automated surveillance as the foundation of the CFTC's oversight and compliance program.

Lofchie Comment: Consistent with Commissioner O'Malia's "fundamental principle of reform" to do no harm, there should be a review of regulations (not only those adopted by the CFTC) that require the reporting of information which the relevant regulator has no ability to store or analyze. It would be useful if an impartial organization, such as the GAO, would conduct a study of the ability of the various financial regulators to make productive use of the various types of information they require to be delivered to them.

See: Commissioner O'Malia's Speech.Related news: House Votes to Reauthorize the CFTC, but with New Obligations as to Its Exercise of Authority (with Lofchie Comment) (providing a description of HR 4413) (June 24, 2014).