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SPEECHES & TESTIMONY

  • Opening Statement, Twelfth Series of Proposed Rulemakings Under The Dodd-Frank Act

    Commissioner Scott D. O’Malia

    February 24, 2011

    Thank you, Mr. Chairman, and let me thank the teams for their hard work in developing the four rulemaking proposals and the interpretive guidance before us today.

    I would like to recognize Andy Chapin and Claire Noakes for their work on Part 3 of our regulations, and Barbara Gold and Chris Cummings for their work on Part 4. I would like to extend my thanks to Bob Pease, Mark Higgins and their team for the work on the interpretive guidance proposal regarding anti-disruptive practices. I am grateful for the efforts of David Taylor, Irina Leonova and their team, on the Swap Data Recordkeeping and Recording proposal. Finally, I would like to thank John Lawton, Phyllis Dietz and their team for their efforts on the proposed processing rule.

    The staff here at the CFTC is definitely working hard. As of today, the Commission will have put out over forty various proposals since August, totaling around 975 Federal Register pages. If you were to lay those pages end-to-end lengthwise, they would stretch for 892 feet. That is more than the height of the Statue of Liberty from its base to the tip of the torch, with the Washington Monument balanced on top. I remain concerned that we are moving at a pace that makes it very difficult, if not impossible, for the public to dig out of that mountain of paper and piece together all of these new requirements in a meaningful way.

    For example, the proposal before us today regarding the requirements for processing, clearing and transferring customer positions illustrates just how difficult it is to put out rulemakings at this punishing pace and get it right. At the end of January just a little over a month ago, the Commission put forward a rule proposal that addressed Core Principle F for Designated Clearing Organizations.1 Today’s rulemaking re-proposes a regulation interpreting Core Principle F to supplement the proposals made in January, even though the comment period on the original proposal will not end until March 21st. To comment on both proposals, the public will have to read both rules together and submit comments on both. Also, the comment period for the proposed rulemaking before us today is only 30 days, instead of the standard 60 days. None of this seems to make sense, nor does it seem to be in keeping with the spirit of the President’s Executive Order on regulations that reminds us to seek meaningful public participation and afford comment periods that should generally be at least 60 days.

    Implementation

    As we come to the end of this stage of the Dodd-Frank rulemaking process where we’re putting forward the Commission’s proposals, I think back over the past months when I asked that, moving forward, we give thought to organizing the rulemaking process. The last time I raised the rulemaking process in the middle of December, I had suggested an order for considering final rules, and have received some helpful feedback, but we need more input into this process. I encourage the Commission to consider input from the public on the order in which the final rules should be considered, and that we provide the public with the order in which we intend to consider the final rules before we begin that process this spring. It is very important that we have a roadmap for going forward, and that the public has the benefit of knowing which direction we’re going in. I’ll be posting a list of all of our proposed rules so that the public might sort through the list. I strongly urge the public to think about their suggested order for the final rules, and provide any input to both my office at techadvisory@cftc.gov and to the rest of the Commission through the General Comments mailbox at dfarulemakings@cftc.gov. I appreciate the efforts that the Chairman has made to have us all work together on these rulemakings during the proposal stage, and I look forward to continuing that work together through the next stage.

    Anti-Disruptive Trading Practices

    Today we are issuing a proposed interpretive order to provide guidance on the scope of the statutory prohibitions set forth as anti-disruptive trading practices in new §4c(a)(5) of the Commodity Exchange Act.  The admittedly vague statutory prohibitions have presented some tough issues, and we have spent long hours debating the appropriate course of action: do nothing and leave the statutory interpretation to the market participants versus issue regulations interpreting the statutory language to bind us all to concepts that we may not yet appreciate given the changes to market structures and trade practices.  After one round of comments and a roundtable, we have taken the middle ground and are issuing a proposed interpretive order to provide guidance as to the types of trading, conduct and practices that will constitute violations of new §4c(a)(5).

    I am pleased that the Commission is recognizing the vital role that the exchanges and self regulatory organizations will play in the surveillance for and enforcement of these practices.  The Commission is simply not technologically equipped to monitor the markets at this time, and as the markets and trade practices evolve, it is imperative that we work cooperatively with the individuals and entities on the front lines.

    I believe that Commission staff has worked wholeheartedly to respond to the many comments and concerns raised thus far, and while this proposal may not be perfect, it is certainly a step in the right direction.  This is especially so because market participants and the public will now have the opportunity to tell us whether interpretive guidance is simply not enough.

    I identify with the desire to have clear-cut rules and definitions, but I’ve come to understand that there is value in providing for flexibility.  For example, the proposal makes clear that the onus is on market participants to “assess market conditions and consider how their trading practices and conduct affect the orderly execution of transactions during the closing period.”  This seems pretty basic; however, how does this apply with the market participant is a trading algorithm?  If the algorithm is not programmed to assess market conditions in this manner, than who could be liable if we have another May 6th?  I’d like for staff to answer that question today, and I’ll have a few more before I commit to a vote.

    Finally, again, I know that all the teams have spent long hours working on these proposals, and I am grateful for their efforts. I look forward to participating in the discussion today.

    Definitions

    • Swap (products – Joint w/ SEC)*
    • Agriculture Swaps
    • Swap Dealer / MSP
    • End User

    Time Limited Rules

    • Position limits (180 days) Agriculture (270 days)
    • Governance (180 days)
    • FERC MOU 2X (180 days)*

    Trade Execution

    • SEF Definition
    • DCM Core Principals
    • Foreign Board of Trade

    Clearing

    • DCO Core Principals
    • DCO (Systemically Important)
    • Segregation and Bankruptcy
    • Capital & Margin Rules for non-banks*
    • Portfolio Margining*

    Reporting

    • Swap Data Repository
    • Data Recordkeeping (I.D.)
    • Real Time Reporting
    • Large Trader Reporting (Final Rule)

    Trade Practice

    • Anti-Manipulation rules
    • Disruptive Trade Practices

    Other

    • Business Conduct Standards
    • Registration (270 days)
    • Internal (2X)
    • Counterparty
    • Whistleblower
    • Investment Advisor Reporting
    • Alternative to Credit Ratings
    • Volcker Rule *

    * Rules not released

    1 See 75 FR 3723 (Jan. 21, 2011).

    Last Updated: February 24, 2011



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