Commissioner O'Malia Criticizes CFTC Rulemaking and Implementation (with Lofchie Comment)
CFTC Commissioner Scott D. O'Malia gave a keynote address, which was bluntly critical of the CFTC's rulemaking and implementation process and focused on industry compliance and ongoing rule implementation, before the Edison Electric Institute CFTC Compliance Forum.
Commissioner O'Malia further expressed his doubts as to the statutory foundation of many rules and no-action letters, as well as his concern for the rules' impact on end users.
As to the quality of the CFTC's rules generally, O'Malia 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. He stated that this failed approach has compromised the legal soundness and consistency of the CFTC, which is evidenced by the large volume of exemptions and staff no-action letters. He also stated that the CFTC has issued over 130 exemptions and staff no-action letters, more than 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 required to be performed, statutory cost-benefit obligations must be revised, O'Malia said, affirming his support for proposed legislation that would require the CFTC to undertake a more rigorous analysis of its proposed rules.
With regard to position limits, he believes 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 intending to propose a new position limit rule asserting that it had performed a cost-benefit analysis, which O'Malia implied has not been performed.
With regard to new rules, he said that he was pleased the CFTC would be proposing a new rule requiring capital and margin for all OTC trades. 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 rulemaking with respect to swaps was expensive for the industry, that these expenses originally might be borne by dealers but 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 which it had no ability whatsoever to digest.
Lastly, O'Malia discussed the CFTC's lack of preparation for properly overseeing the new swaps market. He explained that, out of the 89 provisionally registered applications for swap dealers, not a single application had been signed off on as complete or final by the CFTC. A similar situation was happening regarding swap execution facilities, O'Malia stated, adding 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 for fixing the unworkable rules, and must focus on outcomes rather than setting arbitrary timetables tied to an individual agenda.
Lofchie Comment: CFTC Commissioner O'Malia has said what all of us who are working in this industry know: that the CFTC's rulemaking process does not work. While the Commission boasts of how many rules it has adopted (see, for example, the item in yesterday's news in which the CFTC effectively inserted an advertisement for itself in an enforcement action), it pays no attention 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 nothing to do with the financial crisis). On the rulemaking front, the CFTC pays either lip service or no attention to the Administrative Procedures Act, the most egregious instance 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 which Commissioner O'Malia highlights, they seem to be in an area where the CFTC's assertion of its successes in creating a transparent market is open to easy challenge. It would seem a safe assumption to make that the CFTC is in fact wasting tens of millions of dollars (largely other people's dollars) in collecting information that it has no ability whatsoever to use. One example of the waste in this area that seems fairly egregious: The CFTC's continuing to require the collection of information on "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 find for the information that would be remotely worth the cost.
Where is the press? Surely there is a story here.
See:Text of Commissioner's O'Malia Speech.