CFTC Commissioner Scott O'Malia Criticizes CFTC's Approach to Cross-Border Swaps Regulation and Urges Rethink of Dodd-Frank Implementation (with Lofchie Comment)

CFTC Commissioner Scott O'Malia suggested that the CFTC rethink Dodd-Frank implementation within a framework of good governance, highlighted several places where the CFTC has failed (including the position limits rule), and urged the Commission to "scrap" its entire cross-border guidance. As to the cross-border guidance, he stated that he "cannot support a Commission proposal that puts U.S. firms at a competitive disadvantage to foreign banks." In terms of following a platform of good governance in implementing Dodd-Frank, O'Malia suggests the following three guiding principles:

1. For rules that have already been finalized, provide transparent implementation guidance that is consistent with the final rules;
2. Be aware of the consequences of CFTC regulations on market activity; and
3. Maintain the flexibility to reassess and revise such regulations where appropriate.

In terms of content, O'Malia focused on three Dodd-Frank rulemaking areas:

1. The October 12 effective date for swap regulations and the resulting "futurization" of the swaps world, with a resulting reduction in the availability of tailored products;
2. The CFTC's final rules for swap execution facilities (SEFs); and
3. The CFTC's guidance on cross-border issues.

O'Malia's most detailed criticisms addressed cross-border rulemaking. In this, he suggested that the CFTC "review the comparability of non-U.S. regulations with Commission rules . . . [which] should be a broad, big-picture assessment of comparability, not a rule-by-rule analysis." He further urged the Commission to engage more actively and meaningfully with foreign regulators to "develop a more harmonized approach in order to eliminate redundancy and inconsistency among the respective regulatory regimes."

Lofchie Comment: In a newsletter from last week, we published a news item linking to a speech by Commissioner Chilton, in which he took the view that the CFTC's swap implementation rules were ready to go; today, we find a speech by fellow Commissioner O'Malia in which he takes an equally negative view of the rulemaking process. My own view, as is reasonably known, is more akin to that of Commissioner O'Malia, but I leave it to readers in the financial industry to judge which speech strikes them as closer to their personal experience. I did say in a prior comment that I believed that the CFTC would have to retreat on its rulemaking and withdraw from many of its majority positions. There was, in my view, simply too much criticism of the CFTC's rulemaking by non-U.S. regulators for the CFTC to go straight forward. But there is implicit in Commissioner O'Malia's remarks a more significant criticism of the CFTC's rulemaking: the rules simply make it too expensive to enter into swaps. This may seem a good result to those who believe "swaps: bad," but given the broad usage of swaps by commercial users, governmental entities and pension plans, the market generally believes "swaps: pretty good." Thus, a regulatory regime that makes U.S. financial institutions noncompetitive with non-U.S. institutions is bad, but a regulatory regime that makes swaps needlessly expensive, to the point of unavailability to commercial users, is even more problematic. In any case, it seems even clearer now than it did when I first predicted that the CFTC will have to rethink its approach to cross-border regulation. That leaves open the question implicit in Commissioner O'Malia's remarks as to whether the CFTC will rethink its approach to purely domestic regulation.

Click here to view speech in full (links externally to CFTC website).