CFTC Commissioner O'Malia Gets Frank on Dodd-Frank Regulatory Framework (with Lofchie Comment)
CFTC Commissioner Scott D. O'Malia delivered a keynote address at Energy Risk USA 2013, in which he (i) criticized the Dodd-Frank rulemaking process, (ii) asserted that a significant number of unknowns had been created by Dodd-Frank and the implementing rules, (iii) wondered whether Dodd-Frank had not made the markets worse for end users and (iv) questioned whether Dodd-Frank had not made the markets even riskier by centralizing risk in a very limited number of clearing corporations.
As to the rulemaking process, Commissioner O'Malia said that, in its "rush to implement all the rules," the CFTC had chosen to adopt rules in some cases that are "either unworkable or simply make no sense." He then went on to say that, rather than attempting to fix its rules, the CFTC dealt with the problem temporarily by issuing "an unprecedented number of no-action letters and exemptions" providing "indefinite relief" in a "process . . . at odds with the basic principles of the Administrative Procedure Act." According to Commissioner O'Malia, the CFTC's flawed rulemaking process had led to litigation against the CFTC, and the "shortcuts and inconsistencies" in the process will make the litigation difficult for the CFTC to defend.
As to the CFTC's cross-border regulatory proposal, he describes them as "over-reaching and overly prescriptive."
In terms of wildcards and the future shape of the market, he pointed to the process of futurization (as market participants are driven out of swaps by "vague and complex" rules), the rules for the operation of SEFs, and Volcker.
As to end users, Commissioner O'Malia indicated that they will have to pay a high price to obtain hedge customization.
He wondered whether clearinghouses will reduce systemic risk given the massive amounts of credit that are being centralized there.
Lofchie Comment: Commissioner O'Malia's view of Title VII and the related rulemaking process is bleak. He indicates there is one bright spot in the CFTC's rulemaking process: "market participants are now familiar with the Commission's definition of a swap." Alas, in this the Commissioner is wrong. According to a recent count, in the adopting release for the definition of a swap, the CFTC and the SEC used the phrase "facts and circumstances" (or something similar) in providing guidance as to what constitutes a swap 278 times. In other words, the definition of a swap may be a "final rule," but, to use the language of the Commissioner's speech, it is a "known unknown." As more final rules come into force, it will become clearer just how problematic the ambiguous and overbroad definition of a swap is. As to the CFTC's adopted rules, virtually everyone who is participating in the market shares the Commissioner's view that they are, in many cases, "unworkable or simply make no sense." The danger for our economy is that this is perceived in the press as a partisan truth, so that it becomes impossible to hear criticisms and thus to make corrections.
See: Dodd-Frank Regulatory Framework: What Questions Remain Unanswered?