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CFTC’s O’Malia talks Dodd-Frank, flash crash and commodities speculation

5 min read

Modern Money

As the Commodity Futures Trading Commission has worked to write and implement the myriad of rules called for by the Dodd-Frank Act, Commissioner Scott O’Malia has been vocal with his opinions of the process. In this interview with SmartBrief Finance Editor Sean McMahon on the sidelines of the 36th annual International Futures Industry Conference, O’Malia shares his thoughts on the rule-making process and the chatter on Capitol Hill surrounding the budget for the CFTC. O’Malia also weighs in on the flash crash and talk of investigating speculation in the commodities markets.

What is the strongest aspect of Dodd-Frank?

The foundation of is risk management. It is the systemic relationships. And clearing is an important element of that. Transactions about data and the relationships all of these trading entities have to one another. And what is the exposure to the clearinghouse is critical. That is the foundation. Full stop.

Having said that, one of the things that we need to make sure that we do is to make sure that we don’t price clearing in a way that makes it to costly to clear. We want to make sure that is an accessible alternative for everybody; recognizing that end-users don’t have a mandate to clear, but if they want let’s make sure that we don’t make it unaffordable.

Transparency is going to make all of that and trade execution part of that. You are going to see a lot more of this market. You’re going to understand the relationships to the futures and swaps market. You’re gonna get better pricing data.

What can you share with us regarding the rule-making process for Dodd-Frank thus far?

The rule-making process has been all-consuming for the commission. We’ve worked extraordinarily hard. The staff has worked nights, weekends, holidays. All the credit goes to the staff for getting these rules in a format that we can vote on and make key decisions. We are under tight statutory deadlines. But in doing that, we have to make sure we get the rules right.

I am in favor of taking a more phased approach, while keeping in mind that we have these obligations to make sure that we do get input on our rule-making process before they go final, and think about how we need to phase-in the implementation of the rules in a way that makes sense for the market: data first, clearing second, execution third.

Right now we are asking the industry: What do you want to see in the market? What makes sense to you? Do we need definitions first? Do we need different things first?

We’re in a pause right now. We are completing our draft rules, so let’s make a decision about how we proceed forward after input.

What is your reaction to the talk on Capitol Hill surrounding the budget for the CFTC?

The commission has strong needs. I understand the difficult situation Congress finds itself in with a tight budgetary climate. The deficit is a serious, serious problem. I think that our budget request is not realistic in light of that budget situation. We need to probably have a more measured budget request and really put the focus on technology. Technology will leverage our ability to surveil markets and across markets.

I think we put too much emphasis on hiring new staff. It takes time to integrate the new staff, and the long-term mortgage of the staff is going to be expensive for the commission. I don’t think that is going to be sustainable. I would prefer to see technology as our primary focus and we can grow into our responsibilities using that.

Do you look at any of the rules you are writing with a global perspective? Are you looking to set a global standard or just domestic?

Every rule we think about we ought to think about the international ramifications. I give the staff a lot of credit and the chairman, who engages both Europeans and Asians on a regular basis to make sure that we are in close coordination. I don’t want to compromise liquidity in our markets or the commercial success in our markets due to a regulatory overreach.

How would you gauge the commission’s response to the “flash crash?”

We recently received the recommendations from the advisory committee of the SEC and the CFTC. There are a few recommendations that apply to the CFTC that I think we will work to incorporate into our rule-making process to make sure that there is harmonization — cross-market circuit breakers to make sure that when you have a problem in one market it doesn’t spread as quickly to the other market.

The flash crash occurred in the afternoon here. Europe had already closed and Asia hadn’t opened. What if it happens at 10 a.m. in the morning? We need to understand those relationships and how those markets trade. Speed and technology are making the globe a much smaller trading platform. We need to think about that going forward and make sure liquidity doesn’t freak out and leave the market.

What is your reaction to calls from lawmakers like Sen. Bill Nelson, D-Fla., for investigations into speculation in the commodities markets?

We have the best data in the world in terms of markets. … The CFTC is the world leader in financial-market transparency. That’s a good thing, and we can always do better. That’s what we are doing with the swaps markets. We’re going to take that out of the dark and put it on screens and make that as transparent as possible. That is absolutely the right thing to do. We need to see all of these markets and how they relate to one another.