CFTC swaps rules inconsistent: O’Malia

Shortcuts and inconsistent outcomes...

CFTC building, sign CFTC building, sign

The U.S. Commodity Futures Trading Commission is overreaching in its Dodd-Frank Act rulemaking, undermining efforts to provide certainty to the swaps market, according to Scott O’Malia, a Republican commissioner.

The CFTC has taken shortcuts and reached inconsistent outcomes on regulations including those for market-information databases and the international reach of the new rules, O’Malia said in remarks prepared for delivery today at the University of Notre Dame Business Law Forum in Indiana. The agency should release guidelines for implementing the rules, he said.

“In a mad rush to implement the rules, the commission quite often forgets to make sure that all these rules should work together to achieve the overall objectives of enhancing transparency and reducing systemic risk,” O’Malia said. “It’s not easy to comply with regulations when the goal posts are constantly moving.”

The CFTC and Securities and Exchange Commission are writing regulations for the global swaps market after largely unregulated trades helped fuel the 2008 credit crisis. Dodd- Frank, the 2010 financial-regulation overhaul, is designed to have most swaps guaranteed by central clearinghouses and traded on exchanges or other venues to increase transparency.

Current Timeline 

The CFTC is working to complete many of the regulations by the end of the year. Under the current timeline, swap dealers probably will register with regulators by January. JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley controlled 96 percent of cash and derivatives trading for U.S. bank holding companies as of March 31, according to the Office of the Comptroller of the Currency.

The CFTC probably will release a series of no-action letters and exemptive relief from rules before some begin to take effect Oct. 12, according to Jill E. Sommers, the other Republican commissioner on the five-member panel. “There are a very long list of compliance problems,” she said today at a Security Traders Association conference in Washington.

Questions about rules already completed as well as those surrounding a mandate to guarantee swaps at clearinghouses are being considered by the CFTC, Sommers said. Rules governing trading facilities that have yet to be completed and “may not actually even come until next year,” she said.

O’Malia renewed his request that the agency produce guidelines for implementing swaps rules.

“I urge the commission and the National Futures Association to provide clear and consistent guidelines for applicants to follow,” he said.

Inconsistent Outcomes 

The CFTC has reached inconsistent outcomes in the process for registering swap data repositories because agency employees have adjusted rules after they have been approved by commissioners, O’Malia said. Employees have shifted and sped up requirements for how quickly data must be reported to the public, according to a letter from CME Group Inc. to the agency.

“When CME asked to see these new directives in writing to ensure there was no miscommunication, division staff advised they did not have, and we should not expect to receive, a written confirmation of these new directives,” Timothy R. Elliott, executive director and associate general counsel at CME, said in the letter.

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