Public Statements & Remarks

“Unreasonably Feeble”

Opening Statement of Commissioner Scott D. O’Malia Regarding Open Meeting on One Final Rule and One Proposed Rule1

February 23, 2012


The latest issue of The Economist features an article titled “Over-regulated America”2 that features as its archetype for excessive and badly-written regulation our own Dodd-Frank Act. The problem, the article points out, is that rules that sound reasonable on their own may impose a huge collective burden due, in part, to their complexity. Part of the problem is that we, as The Economist points out, are under the impression that we can anticipate and regulate for every eventuality. In our hubris, The Economist warns, our overreaching tends to defeat our good intentions and creates loopholes and perhaps unintentional safe-harbors, leaving our rules ineffectual and subject to abuse. The solution The Economist offers isn’t so unfamiliar, at least to this Commissioner. It is rather simple. It is just that: Rules need to be simple. Echoing President Obama’s 2011 Executive Order 13563 “Improving Regulation and Regulatory Review”3 (which applies equally to independent federal agencies such as the Commodity Futures Trading Commission (the “Commission” or “CFTC”) per a subsequent Executive Order4), The Economist advises that we ought to cut out the verbiage and focus on writing rules that articulate broad goals and prescribe only what is strictly necessary to achieve them.

In my own words, in several prior statements, I have argued that we must ensure that regulations are accessible, consistent, written in plain language, guided by empirical data, and are easily understood. I cautioned that, with each piecemeal rulemaking, we risk creating redundancies and inconsistencies that result in costs—both opportunity costs and economic costs—without corresponding benefits. Consistent with Executive Order 13563, which reaffirms prior guidance on the subject of regulatory review issued in the 1993 Executive Order 128665 as well as Office of Management and Budget (“OMB”) guidance to federal agencies with respect to said Executive Order6, agencies like the CFTC must go out of their way to ensure responsible rulemaking by, among other things, undertaking thorough cost-benefit analyses, both qualitatively and quantitatively, to ensure that new rules do not impose unreasonable costs.

I accepted wholeheartedly the mission put upon this administration by the President to “[T]o root out regulations that conflict, that are not worth the cost, or that are just plain dumb.”7 Today, in furtherance of that mission, I will not support the final rules governing various internal business conduct standards for futures commission merchants, introducing brokers, swap dealers and major swaps participants (the “Internal Business Conduct Rules”). These rules fail to articulate necessary and clear performance objectives, are needlessly complex, and create a collective burden without the benefit of even an appropriate baseline cost-benefit analysis. The fact that OMB’s Office of Information and Regulatory Affairs8 has concurred9 with our determination that this set of rules qualifies as a “Major Rule” under the Congressional Review Act with an annual effect on the economy of more than $100 million without a fulsome discussion of anticipated costs, let alone an analysis based on reasoned assumptions or evaluation of the impacts of this rulemaking against the pre-statutory baseline, is regulatory malpractice in my book. While we set the bar low here at the Commission for our cost-benefit analyses, and accept what is “reasonably feasible,” this rulemaking is nothing but unreasonably feeble.

Time for a Review of our Cost-Benefit Analyses

After reviewing the Internal Business Conduct Rules, I have reached a tipping point and can no longer tolerate the application of such weak standards to analyzing the costs and benefits of our rulemakings. Our inability to develop a quantitative analysis, or to develop a reasonable comparative analysis of legitimate options, hurts the credibility of this Commission and undermines the quality of our rules. I believe it is time for professional help, and I will be following up this statement with a letter to the Director of the OMB seeking an independent review of the Internal Business Conduct Rules to determine whether or not this rulemaking fully complies with the President’s Executive Orders and the OMB guidance found in OMB Circular A-4. To the extent that OMB finds any concerns with the Commission’s economic analysis, I hope that it will provide specific recommendations as to how the Commission can improve its cost-benefit analysis and analytical capabilities.

A Cost-Benefit Analysis without Costs?

Lest anyone think that I am inadvertently waiving a work-product or other privilege, the Commission’s May 13, 2011 internal Staff Guidance on Cost-Benefit Considerations for Final Rulemakings under the Dodd-Frank Act (“Staff Guidance”) was made public as Exhibit 2 to the CFTC’s Office of Inspector General’s June 13, 2011 Review of Cost-Benefit Analyses Performed by the CFTC in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act, which is available on the CFTC’s website.10 While it is not my intent to walk you through the Staff Guidance (or the Inspector General’s report for that matter), I do think it warrants attention for the inattention it gives to both the principles of Executive Orders 13563 and 12866 and OMB guidance found in Circular A-4 (“OMB Circular A-4”). More specifically, and among other things, the Staff Guidance provides that each rulemaking team should, “incorporate the principles of Executive Order 13563 to the extent they are consistent with section 15(a) [of the Commodity Exchange Act] and it is reasonably feasible to do so.” Keep in mind that while Section 15(a) of the Commodity Exchange Act requires the CFTC to consider the costs and benefits of its proposed regulations, the Commission has interpreted the language of section 15(a) to neither require quantification of such costs and benefits, nor to require the agency to determine whether the benefits exceed costs or whether the proposed rules are the most cost-effective means of reaching goals.11 “Rather, section 15 simply requires the Commission to ‘consider the costs and benefits’ of its action.”12 That was a direct quote from the Federal Register.

Further, under the Staff Guidance—and clearly consistent with the Commission’s interpretation of section 15—rulemaking teams need only quantify costs and benefits “to the extent it is reasonably feasible and appropriate to address comments received.” As additional guidance, staff is advised that “reasonably feasible and appropriate” means “the extent to which (i) certain analyses, quantitative or qualitative, is [sic] needed to address comments received (“appropriate”) and (ii) whether such an analysis may be performed with available resources (“reasonably feasible”). Accordingly, our interpretation of our duties pursuant to section 15(a) and Staff Guidance provides that we need not quantify the costs or benefits of our rules unless we need to do so in order to respond to comments, and that we can do so with whatever resources are immediately at our fingertips. As for the Executive Orders, it appears that we will incorporate their principles only when they neatly align with our own interpretation of section 15(a), and only when we can do so without utilizing the resources immediately within our coffers.

Setting the Bar Low

Setting the bar this low is pretty remarkable. Indeed, former Commissioner and Acting Chairman William P. Albrecht recently remarked that expecting any detailed cost-benefit analysis of the proposed Dodd-Frank rules is impossible in part because, “[T]he CFTC has never had to develop CBA expertise.”13 Commissioner Albrecht advised that, “A good starting point might be to require more detailed analysis of the costs of alternative means of accomplishing a particular goal. This would help the agency develop CBA expertise and should, over time, lead to a deeper understanding of the costs of regulation.”14

I believe that Commissioner Albrecht’s advice is already well-articulated in both Executive Orders and OMB Circular A-4 as incorporated directly into the Staff Guidance. However, the Commission skirts these requirements and apparently refuses to develop expertise. Instead, the Commission limits itself to responding to comments, but only when it doesn’t require any analysis beyond that which it did for the proposal.

Pick Any Baseline You Like

Additionally, as in today’s final rulemaking, the Commission has determined, in contradiction of OMB guidance directly on point, that in setting the baseline for comparison of the costs and benefits of regulatory alternatives, it may set the “baseline” to incorporate the costs of statutorily mandated rulemakings, regardless of how the CFTC has interpreted the statutory goals and regardless of the existence of alternative means to comply with such goals. Thereby, the Commission is relying on an arbitrary presumption that, “To the extent that ... new regulations reflect the statutory requirements of the Dodd-Frank Act, they will not create costs and benefits beyond those resulting from Congress’s statutory mandates in the Dodd-Frank Act.”15 What does this mean? Well, according to the Commission in this rulemaking, it means that for commenters who “posit that there is no benefit to be derived from internal business conduct standards as mandated by Congress and that the mandated provisions do not generate sufficient benefits relative to costs or contribute to the purposes (e.g. mitigating systemic risk and enhancing transparency) of the Dodd-Frank Act. ...these commenters’ concerns fall outside the Commission’s regulatory discretion to implement sections 4s and 4d of the CEA and fail to raise issues subject to consider[ation] under section 15(a).”16 That is, the Commission will ignore comments related to required rulemaking provisions that mirror statutory language in spite of the fact that the Commission always has some level of discretion in determining the means to achieve such mandates. Rather the Commission will consider comments on new regulations “that reflect the Commission’s own determinations regarding implementation of the Dodd-Frank Act’s provisions. ... It is these other costs and benefits...that the Commission considers with respect to the section 15(a) factors.”17 It is unacceptable that the Commission ignores pre-Dodd-Frank reality and establishes its own economic baseline for its rulemakings. This practice defies not only common sense, but rigorous and competent economic analysis as well.

I will briefly highlight how these rules not only fail to include a rational, rigorous, and sustainable cost-benefit analysis, but fail to articulate necessary and clear performance objectives, are complex, and create an unjustifiable cumulative burden within this rule and when considered with other CFTC regulations and those of prudential regulators.

Internal Business Conduct Rule Ignores OMB Guidance

I believe the Commission has failed to carefully and precisely identify a clear baseline against which the Commission measured costs and benefits and the range of alternatives under consideration in this rule. Specifically, the Commission’s cost-benefit analysis with regard to this rule fails to comply with the basic direction in Circular A-4 to establish an appropriate baseline that includes an evaluation of the pre-statutory baseline in light of the range of Commission discretion as to the manner in which the rules implement the statutory goals of section 4s.18 The circular also directs the Commission to consider alternatives available “for the key attributes or provisions of the rule.”19 The Circular goes on to recommend that, “It is not adequate simply to report a comparison of the agency’s preferred option to the chosen baseline. Whenever you report the benefits and the costs of alternative options, you should present both total and incremental benefits and costs.”20 It is at this most basic level of analysis where the Commission has failed to provide alternative options for consideration or has failed to justify its choice of regulation with a specific cost-benefit analysis.

In two examples articulated by the Commission, the Internal Business Conduct Rules dismisses out of hand, and without specific justification the concerns raised by two commenters: (1) the Federal Home Loan Banks who raised concerns regarding compliance burdens and duplicative nature of regulations for comparably regulated entities; and (2) The Working Group of Commercial Energy Firms, which raised concerns that the rules failed to provide benefits with regard to risk management and compliance that matched, much less exceeded, the cost of compliance. Both concerns were dismissed without consideration of alternatives and without any attempt to quantify the cited costs.

Does the Technology Exist?

With regard to recordkeeping requirements, the Internal Business Conduct Rules impose a substantial burden on Swap Dealers (“SDs”) and Major Swap Participants (“MSPs”) to maintain extensive audio recordings including the requirement to tag each taped conversation and make it searchable by transaction and counterparty. Understandably, section 4s(g) does require the maintenance of such daily trading records for each counterparty and that they be identifiable with each swap transaction. However, in spite of enormous technological challenges it is unclear as to whether or not the Commission undertook any independent effort to determine the technical challenges of implementing such a system, including, whether such technology currently exists, the costs of acquiring and installing such technology, and whether such a system could be developed and/or installed within the timetable set by the Commission. The Commission has failed the fundamental test in Circular A-4 to establish an appropriate baseline and consider a range of alternatives with associated costs and benefits. Although the Commission modified its original proposal to not require each telephone record to be kept as a single file, it fails to quantify the specific cost of complying with a costly and technically challenging mandate. Moreover, in determining that such audio recordings are to be maintained for a one-year period, the Commission provides no analytical support for this retention period over a more reasonable six-month period other than to say that such period will be “most useful for the Commission’s enforcement purposes.”21

Duplicative Record Keeping Requirements

Further, the Commission also ignored commenters’ requests to allow firms to rely on swap data repositories (“SDRs”) for recordkeeping requirements. The analysis states:

The Commission considered this alternative to its recordkeeping rules, but determined that it is premature at this time to permit SDs and MSPs to rely solely on SDRs to meet their recordkeeping obligations under the rules. ... At present, SDRs are new entities under the Dodd-Frank Act with no track record of operations; and, for particular swap asset classes, SDRs have yet to be established.22

In addition to finalizing rules governing registration standards, duties and core principles for SDRs23, the Commission has already voted on the final rules that establish and compel the reporting of swap transaction information to SDRs for purposes of real-time public reporting (the “Real-Time Reporting Rule”) and to ensure that complete data concerning swaps is available to regulators throughout the existence of each swap and for fifteen years following termination.24 In addition, the track record of entities that will likely be our first registered SDRs is considered proven as data from these repositories in both rates and credit have been used to establish the foundation for today’s re-proposal of Procedures to Establish Appropriate Minimum Block Sizes For Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions (the “Block Proposal”).If the Commission truly has doubts as to the fidelity and reliability SDR data, then it ought not to have relied upon it in a proposed rulemaking. That being said, although the analysis seems to indicate that the Commission considered alternatives, it is curious as to how the Commission came to the conclusion that the Internal Business Conduct Rules are cost-effective, given that they require firms to keep duplicative and redundant trade records when all trades must be reported to an SDR and stored by the SDR for the life of the swap, plus an additional fifteen years—which is ten years more than our rules require that such records be kept by registrants.

I would also point out that the Real-Time Reporting Rule provides that a party to a publicly-reportable swap transaction satisfies its real-time reporting requirements by executing the swap on or pursuant to the rules of an exchange or swap execution facility.25 That is, SDs and MSPs, among others, may rely on exchanges and swap execution facilities to report all on-exchange trades; there is no mandated separate reporting requirement. However, the Internal Business Conduct Rules undermine this relief by requiring redundant recordkeeping and by mandating that SDs and MSPs save all transaction records and by failing to trust our own regulatory-creation to actually serve as a repository for all trade data as envisioned by Dodd-Frank Act. I have serious concerns about the Commission’s ability to monitor and reconcile two sets of records, which is the rationale put forth in this final rule.

Unreasonably Feeble

Ironically, the SDRs were created in the Dodd-Frank Act to facilitate market transparency and reporting. The Commission could provide greater transparency into its own cost-benefit analysis by disclosing its assumptions and data to support its conclusions. OMB Circular A-4 outlines standards for transparency with the following direction, “A good analysis should be transparent and your results must be reproducible. You should clearly set out the basic assumptions, methods and data underlying the analysis and discuss the uncertainties associated with your estimates.”26 It goes on to recommend that, “To provide greater access to your analysis, you should generally post it, with all the supporting documents, on the internet so the public can review the findings.”27 I presume the Commission feels that this level of compliance is not appropriate, given that the commenters failed to demand it, and is simply not reasonably feasible.

Regulating for Every Eventuality with No Deference to Our Fellow Regulators

One of my major criticisms is that the Internal Business Conduct Rules, and, in particular, section 23.600 - Risk Management Program for Swap Dealers and Major Swap Participants, attempt to cover every possible contingency instead of articulating goals and performance objectives. Section 4s(j)(2) simply requires that the SD or MSP “establish robust and professional risk management systems adequate for managing the day-to-day business of the swap dealer or major swap participant.” Could anyone truly argue that that provision could not stand largely on its own as a performance objective? Did the Commission need to specify to the nth degree the behavior and manner of compliance that SDs and MSPs must adopt in order to meet that objective? And in doing so, has the Commission created loopholes and unintentional safe harbors for those who meet the regulatory requirements, but still manage to violate other provisions of the Commodity Exchange Act and regulations?

Another concern is that the Internal Business Conduct Rules do not provide for substituted compliance with any of these requirements for SDs and MSPs for which the CFTC is not their prudential regulator. While one distinct part of the preamble regarding rules pertaining to business continuity and disaster recovery suggest that if an SD or MSP is subject to other rules that meet the requirements of the Commission’s rule, then such SD or MSP would be in compliance with the Commission’s rule, the rules themselves do not evidence any attempts to coordinate our regulatory requirements with those of our fellow prudential regulators through the explicit provision for substituted compliance. More egregiously, section 23.603(h) - Business Continuity and Disaster Recovery Plans Required by Other Regulatory Authorities, specifically requires SDs and MSPs to comply with the business continuity and disaster recovery requirements of this regulation “in addition to any business continuity and disaster recovery requirements that are imposed on the swap dealer or major swap participant by its prudential regulator or any other regulatory or self-regulatory authority.”28 There is no quantification or qualification of costs and benefits of this regulatory decision, and I am not surprised.

Conclusion...But Only For Now

I believe our reasonably “feasible standard” as articulated in our own Staff Guidance has caused us to miss any marker for identifying and using the best, most innovative and least burdensome tools to meet the regulatory ends laid out in section 4s of the Commodity Exchange Act. We should be held accountable for not only failing to even attempt to meet the goals set by the President, but for deliberately eschewing them. I agree with Chairman Albrecht that the CFTC ought to be required to undertake more rigorous cost-benefit analyses. I believe all of our analyses should be more rigorous. While it may not solve all of our problems with putting out complex and inefficient regulations, as noted by Chairman Albrecht, it should help.29 I will be sending a letter to Acting OMB Director Jeffrey Zients requesting his assistance in determining just how far off the baseline the Commission has fallen. If OMB Circular A-4 means anything at all, then OMB should take action and hold the Commission to the Circular’s standards.

1 This statement focuses primarily on the Internal Business Conduct Rules (as such term is defined below). I intend to release a second statement focusing primarily on the Block Proposal (as such term is defined below).

2 Over-regulated America, Economist, Feb. 18, 2012, at 9.

3 Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 21, 2011).

4 Exec. Order No. 13,579, 76 Fed. Reg. 41,587 (July 14, 2011).

5 Exec. Order No.12,866, 58 Fed. Reg. 51,735 (Oct. 4, 1993).

6 OMB Circular A-4 , available at

7 Barack Obama, Toward a 21st-Century Regulatory System, Wall St. J., Jan. 18, 2011, at A17.

8 The Office of Information and Regulatory Affairs (“OIRA”), among other things, reviews draft regulations under Executive Order 12866. See Office of Information and Regulatory Affairs (“OIRA”) Q & As, available at:

9 I use this term loosely since the only verification we received at the Commission was a perfunctory e-mail from an OMB employee stating, “OMB concurs that the rule is major.” It is unclear as to what data OMB could have relied upon in reaching its conclusion.

10 Office of the Inspector General of the Commodity Futures Trading Commission, A Review of Cost-Benefit Analyses performed by the Commodity Futures Trading Commission in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act, June 13, 2011, available at:

11 A New Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations, 66 Fed. Reg. 14,262, 14,267 (March 9, 2001).

12 Id.

13 William P. Albrecht, Cost Benefit Analysis and the Commodity Futures Trading Commission (“CFTC”), Discussion Paper, May 2011, available at

14 Id. at 9.

15 See Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and Conflicts of Interest Policies and Procedures; Futures Commission Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance Officer, Final Rule, 77 Fed. Reg. [ ] ([ ]), at Section IV of the Preamble.

16 Id. at note 63.

17 Id. at Section IV.

18 OMB Circular A-4 at 15-16.

19 Id. at 16.

20 Id.

21 See Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and Conflicts of Interest Policies and Procedures; Futures Commission Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance Officer, Final Rule, 77 Fed. Reg. [ ] ([ ]), at Section IV of the Preamble.

22 Id.

23 Swap Data Repositories: Registration Standards, Duties and Core Principles, 76 Fed. Reg. 54,538 (Sept. 1, 2011) (to be codified at 17 C.F.R. pt. 49).

24 Real-Time Public Reporting of Swap Transaction Data, 76 Fed. Reg. 1,182 (Jan. 9, 2012) (to be codified at 17 C.F.R. pt. 43); Swap Data Recordkeeping and Reporting Requirements, 76 Fed. Reg. 2,136 (Jan. 13, 2012) (to be codified at 17 C.F.R. pt. 45).

25 Real-Time Public Reporting of Swap Transaction Data, 76 Fed. Reg. 1,182, 1,244 (Jan. 9, 2012) (to be codified at 17 C.F.R. pt. 43).

26 OMB Circular A-4 at 17

27 Id.

28 Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and Conflicts of Interest Policies and Procedures; Futures Commission Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance Officer, Final Rule, 77 Fed. Reg. [ ] ([ ]), at §23.603(h).

29 Albrecht, supra, at 10.

Last Updated: February 23, 2012