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CFTC’s O’Malia highlights agency’s unknown unknowns that require attention

Scott O'Malia

Scott O’Malia

CFTC Commissioner Scott O’Malia spoke before Energy Risk USA’s recent conference on the commission’s “unknown unknowns,” areas of the rule implementation process that are “impossible to identify, but in hindsight…are the result of the Commission’s inconsistent rules.”

O’Malia said the first unknown unknown is futurization, which evolved out of two rules that led market participants to make changes in trading patterns. He said he hoped to hold a meeting in October to discuss the impact of futurization on end-users.

The second unknown unknown is the SEF rule. O’Malia said that, in order to prevent a regulatory debacle, the CFTC must devise flexible SEF rules “that provide for an efficient and clear registration process and that allow for various execution methods.

O’Malia said the CFTC’s position on the proposal is overly restrictive, which could hinder the flexibility and capacity of the platforms.

Additionally, the third unknown unknown listed by O’Malia is the controversial Volcker Rule. He said that, in order to effectively introduce the measure, the Commission must ensure that the final rule reduces systemic risk.

“Derivatives markets are becoming increasingly complex in the new post-Dodd-Frank era, as more and more transactions move to exchanges and clearing houses and market participants are trying to respond to new regulatory demands,” O’Malia said. “In this changing environment, it is crucially important for the Commission to provide regulatory clarity and reduce unknowns for all market participants. So, what questions should the Commission answer to provide regulatory certainty to the market and to accomplish Dodd-Frank objectives? First and foremost, to be able to effectively conduct its market oversight mission, it should be able to understand and analyze swaps data. Second, the Commission must fix broken rules and not wait for market participants to drag us into litigation. And last but not least, the Commission must ensure that its rules, while implementing the congressional mandate to regulate the derivatives markets, do not harm this country’s vital economic forces: the manufacturers, energy companies, real estate developers, and other businesses that provide important services to the American people.”

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