Official: CFTC needs ‘Plan B’ for swaps rules

By Reuters
Posted Jan. 3 at 3:47 p.m.

The Commodity Futures Trading Commission needs to consider a “Plan B” on how it will police the $600 trillion swaps market if Congress fails to deliver a 50 percent increase in its budget, one of its top officials said Monday.

The futures regulator has been counting on getting a $92 million budget hike for 2011 — and even more in 2012 — to take on new responsibilities to oversee the over-the-counter market in the bank reform law, but may come up short as lawmakers look to slash government spending.

“We may not get more dollars, so what are we going to do next? What’s our Plan B?” said Scott O’Malia, a Republican commissioner on the CFTC, in an interview with Reuters.

His comments were among the most frank acknowledgments from top CFTC officials that the agency faces an uphill battle implementing reforms without new funding.

O’Malia said he didn’t have the answers, but said CFTC staff were beginning to think about options, including asking private industry regulators like the National Futures Association to shoulder more responsibilities.

It’s an idea that has been raised by other CFTC commissioners as one way to help the chronically underfunded agency cope with the dramatic overhaul of its role under the Dodd-Frank financial law.

Republican lawmakers, who now control the House of Representatives and increased their numbers in the Senate, have said they want to review regulatory expansion plans and slow reforms passed by Democrats last year.


Agency staff have been working nights and weekends to meet the July deadlines to finalize CFTC rules that were set out in the Dodd-Frank law, O’Malia said.

“If Congress wants to change that (deadline), I’m sure everybody would breathe somewhat of a sigh of relief, and it certainly would allow us to take a little slower approach to this,” he said.

There has been no total price tag put on the CFTC’s share of Dodd-Frank reforms, which will require most types of over-the-counter derivatives to trade on exchanges or new swap execution facilities, pass through clearinghouses, and be recorded in new swap data repositories, O’Malia said.

“I think it’s more expensive than we imagine, not only to the commission but to the industry, and it’s going to take a lot longer than we expect,” O’Malia said.

The agency’s technology advisory committee, which O’Malia chairs, will discuss the costs and needs of the new market structure required to report on and track swaps trades from inception through conclusion at a Jan. 27 meeting, he said.

O’Malia is pushing the CFTC to restructure to create a new ”Office of Market Data Collection and Analysis,” which he said could require more spending on technology even while lawmakers push to rein in staff expansion plans.

“I think the mortgage for technology is a cheaper bill to pay than if we were going to hire many more people,” he said.

“I think we need to be very careful about our hiring and where we’re spending money right now,” O’Malia said.


The CFTC had aimed to unveil the first draft of all its rules by the end of the year, a self-imposed deadline it met for all but a handful of rules, including capital and margin requirements for swap dealers and major swap participants.

Also in the wings are its controversial curbs on speculative trades in commodity markets. The CFTC proposed a rule on Dec. 16, but commissioners have not yet agreed on whether to issue the plan for public comment.

“I think there needs to be some further negotiations and discussion among the commissioners,” O’Malia said, declining to comment further on the position limit rule.

The agency aims to finalize its first major rule for the swaps market — ownership caps and governance rules for clearinghouses, exchanges and swap execution facilities — at its first hearing of the year, slated for Jan. 13, he said.


The CFTC also needs to work on giving traders clearer guidance on three trading practices banned in the Dodd-Frank law as “disruptive,” O’Malia said.

The banned practices include “banging the close” — acquiring a big position and then offsetting it before trading ends — and “spoofing” — when a trader makes bids or offers but cancels them before execution.

“Providing the certainty and nailing what is inappropriate behavior is going to be very difficult,” he said, adding he doubted it was even possible.

“I think we’re going to be, unfortunately, too vague.”

The CFTC is also looking at whether to rein in high-frequency traders using computer-driven algorithms.

That task took on more profile after the May 6 “flash crash,” when markets briefly plunged before recovering. Some analysts argue algorithms contributed to the volatility, although a government review did not blame high-frequency traders for the crash.

A panel of experts examining the flash crash is slated to make recommendations to the CFTC and Securities and Exchange Commission on Jan. 26, O’Malia said.

He said he thought the CFTC should focus on recommending ”best practices” to preventing high-frequency errors and runaway algorithms rather than trying to ban more types of trades.

“We’re having a hard enough time defining the current (disruptive) practices. Expanding that would not help the market,” O’Malia said.

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