Fourth CFTC exit marks Dodd-Frank anniversary

Scott O’Malia has resigned from his post at the Commodity Futures Trading Commission after over four years of serving the regulator during one of the most influential chapters in its history.

Scott O’Malia has resigned from his post at the Commodity Futures Trading Commission (CFTC) after over four years of serving the regulator during one of the most influential chapters in its history.

Never one to hold back from criticising his own agency’s decisions, O’Malia’s outspoken character helped drive the implementation of the Dodd-Frank Act in the US derivatives markets since 2009. 

He will leave his role as head of the CFTC’s Technology Advisory Committee on 8 August.

O’Malia said he would pursue other opportunities in his letter of resignation to President Obama.

He added, “although I did not support all 63 rules that the Commission has implemented under Dodd-Frank; I am pleased to have contributed to the policy deliberations to improve Commission rulemakings and encouraged the Commission to be mindful of negative policy outcomes.”

O’Malia’s departure means that only Mark Wetjen remains at the US watchdog from the initial group which took on the duty of implementing sweeping reforms into the derivatives markets in 2010.

Commissioners Jill Sommers, Bart Chilton and former chairman Gary Gensler oversaw the agency during the pivotal time and have now moved on from the CFTC.

This week marks the fourth anniversary of Dodd-Frank coming into force in the US. The Act aimed to transform the financial markets as part of the G20 requirements.

The introduction across the US capital markets has been slow, however the CFTC has been an exception to the global trend of failing to meet the G20’s 2012 deadline.

The Commission has finalised 83% of the rules it was charged with introducing, while only 2% of its reforms have not been proposed at all, according to data from law firm DavisPolk.

These statistics far exceed the CFTC’s regulatory counterparts.

The Securities and Exchange Commission (SEC) has finalised 46% of its rulemaking requirements, while it missed the deadline on 43% and has not proposed the remaining 11%.

However as O’Malia often pointed out, many of the CFTC’s rules were rushed through and resulted in a stream of no-action relief letters as market participants struggled to keep up. 

One of his biggest complaints over the past year has been around the failings of reporting of swaps data, which the Commission has subsequently been unable to analyse.

O’Malia constantly flagged up the lack of sufficient technology along with flaws in the reporting process as contributing to this inefficiency, which counteracted the objective of bringing more transparency to the US derivatives markets.

“Scott was always willing to roll up his sleeves and dive into complex regulatory issues, and under his leadership the CFTC’s Technology Advisory Committee has developed into a remarkably effective forum for thoughtful discussion on the technological innovations that are transforming our industry,” said FIA CEO and president, Walt Lukken.

“I also want to thank him for his efforts to bring the end-user perspective into the regulatory dialogue, particular with respect to Dodd-Frank, and for his emphasis on the value of empirical data in the rule-making process.”

Before leaving at the beginning of this year, ex-Commissioner Chilton, was another outspoken critic of the CFTC’s implementation of Dodd-Frank rules.

The mandatory central clearing of OTC derivatives was rolled out in 2013 in three phases, as was the introduction of electronic platforms for swaps trading.

In comparison with Europe and Asia, the US was far ahead by launching these requirements, though the many mistakes made during the process should equip their continental equivalents with more knowledge on how to avoid such scenarios. 

Many of the reasons the CFTC felt it could not successfully oversee the swaps and futures markets was a lack of technology and staff. 

Along with central clearing and data reporting the CFTC also registered swap dealers, introduced new capital and margin requirements and introduced swap execution facilities (SEFs).

There is still a long way to go though.

One of the biggest issues facing the regulator concerns cross-border issues surrounding the Dodd-Frank Act and how it will be enforced in other jurisdictions.

The CFTC’s harsher stance on extraterritoriality, where it would apply the rule to all entities involved in trading a swap in the US, was met with legal action from trade associations and conflicting rules from the SEC.

The Volcker Rule also has to be rolled out, a law restricting banks from proprietary trading, in a bid to avoid similar mistakes that led to the financial crisis. 

Four years on from the Dodd-Frank Act coming into force and the CFTC has a different image, as do the derivatives markets following the changes.

Many rules have been introduced, many mistakes have been made and there is still a long way to go, but the future will depend on a new line up at the Commission, under the leadership of new chairman Timothy Massad.