In a far-ranging speech Thursday at MarkitSERV’s 2012 Outlook for OTC Markets event, CFTC Commissioner Scott O’Malia criticized the commission’s rush to finalize rules implementing the Dodd-Frank Act, comparing it to the kind of High-Frequency Trading (HFT) that has led to market disruptions such as the Flash Crash of 2010.
O’Malia also used his approach to HFT regulation as a model for how the CFTC should approach rulemaking in general. In addition to his trademark emphasis on cost-benefit analyses, O’Malia stressed that developing consensus on basic definitions through dialogue with industry is vital, especially when the CFTC is dealing with an area such as swaps, which is far removed from its long-developed expertise in futures regulation. Only when a definition is arrived at can the impact of any potential rule be measured.
While O’Malia is sharply critical of the CFTC’s current approach to cost-benefit analysis, he does see hope in the agency’s recent decision to work with the White House’s Office of Information and Regulatory Affairs (OIRA) to do cost benefit analysis.
O’Malia singled out the CFTC’s recently finalized swap dealer (SD) definition rule, calling the 600 page regulation too complicated and not always clear on who would fall under the definition and who would not. He was similarly skeptical of SDR and SEF registration guidelines.
O’Malia’s alternative to high-frequency regulation is what he calls smart regulatory reform, a process based on establishing facts, dialogue with industry, and accurate cost-benefit analyses, with the end result being regulatory certainty and a focus on prevention of violations rather than enforcement.
Moving from the general to the specific, O’Malia expressed his lack of optimism that forthcoming guidance on cross-border swap regulation, echoing his previous concerns over the need to harmonize rulemaking with similar international efforts, preserve US companies’ competitiveness, and the vagueness of the language. “The guidance should not overreach or step on the toes of sovereign nations,” O’Malia said.
