"The pace has been frenetic. We have not spent enough time thinking through all of the potential issues" - Scott O'Malia
New York City - Scott O'Malia of the Commodity Futures Trading Commission (CFTC) expressed growing worry over what he called "high frequency regulation", complaining that not enough analysis was being done and that market participants faced confusion due to the complexity and speed of regulatory reform.
O'Malia, who has been outspoken in his criticism of the approach regulators are taking, nonetheless said the CFTC was on track to implement OTC clearing in the fourth quarter for major banks. He emphasised the breakneck pace of reform by noting what was on the agenda for the CFTC in the next few months.
"The pace has been frenetic. We have not spent enough time thinking through all of the potential issues," O'Malia said in a speech.
"Similar to high-frequency trading, the market is unfamiliar with the exact goals and objectives of the Commission's rulemaking and can only react. Without a schedule of rules and clear compliance dates, the market is left guessing as to whom the rules apply, when they must comply and what venue they must connect. "
He said that while clearing of OTC contracts for major banks was set for the fourth quarter, he believed the Commission would not require managed money and end users to clear until early-to-mid 2013.
O'Malia expects the commission this summer will issue its definition of a swap, cross-border guidance, mandatory clearing determinations, and the final implementation timetable for clearing. In July, he expects a vote on rules regarding trade execution, including the final rules for SEFs, as well as Core Principle 9 for Designated Contract Markets.
"Without a doubt, the Commission will be busy this summer," he said.
The issue of cross-border guidance has been a major concern as firms fear that they could get caught in cross-fire between regulations issued by the United States and Europe, all of which are being put together to satisfy the mandate by the G20 issued in 2009, which calls for the OTC market to be subject to clearing by the end of this year.
O'Malia said cross-border guidance should take into account four
- it should not overreach or step on the toes of sovereign nations;
- it should be based on principles of international harmonisation and be a coordinated effort with the Securities and Exchange Commission as well as foreign regulators;
- it should demonstrate the costs and benefits of setting its jurisdiction;
- and it should ensure that its registrants and registered entities remain competitive in global financial markets.
One of five commissioners at the CFTC, O'Malia said the commission in the past issued perhaps three or four rules a year. Now, in order to complete the "Herculean task" of finalising more than 50 rules, the Commission has established more than 30 multi-disciplinary, rule-writing teams.
"As a result of our high-frequency regulatory approach, several of our final rules have created significant regulatory uncertainty and unnecessary angst; much like the uncertainty and angst surrounding the HFT activity during the Flash Crash of 2010," he said.
He described the recently finalised swap dealer definition -- which O'Malia termed the "poster-child for high-frequency regulation" -- as an overly complex definition that would require several commercial firms and cooperative banks to register as swap dealers if it were not for a generous and temporary de minimis threshold for swap dealing activities at $8 billion.
"Due to the complexity of this 600+ page final rule, some commercial firms will be confused as to whether they will be considered a swap dealer or not," he added.
The license approval process for swap data repositories and swap execution facilities has also been problematic, O'Malia said. The Commission has received four SDR applications, but has approved none. The problem, he added, will be compounded when dozens of SEF applications start to arrive.
O'Malia said the CFT needs to engage in reform based on facts and thorough economic analysis. The reform needs to provide participants with more certainty.