Interview with CFTC commissioner Scott O’Malia

Catherine Snowdon
Published on:

When Scott O’Malia approved the final swap execution facility (SEF) rules in August 2013, he did so “reluctantly”. His fears were realized when the regime quickly wrought international havoc. In one of his last interviews before leaving the US Commodity Futures Trading Commission (CFTC), he relives the ordeal of bringing these rules to market and highlights many of the challenges still to come.

Scott O'Malia-envelope 
Scott O’Malia resigned as commissioner shortly after Tim Massad was named the new CFTC chairman

Are you happy with how the introduction of the SEF regulations has gone so far?

I am very optimistic about swap execution facilities (SEFs). We were able to create an environment that was flexible, that would give everybody the opportunity to find the best way to transact their products and recognize the differences between the swaps and futures markets.

There are large notional size trades, but relatively few of them. So we’ve shown that people can transact through an electronic platform so we get the transparency that suits the market and our regulatory purpose. Now we are trying to figure out the best way to really move this forward. In credit default swaps you’ve got tremendous uptake on screen, but these are more standard products of course. Dollar denominated interest rate swaps are seeing more volume than non-dollar-denominated. Our challenge is to bring more liquidity to the market and more buy-side participation. Poor buy-side participation is eminently fixable. Any issues they have regarding SEF access, rule-book issues, how many SEFs they want to access, what products are being traded, where the liquidity is in these markets – those are the issues we want to attack.

What about broadening the range of products available on SEFs?

We need to consider newer products, such as packaged trades. We have more and more of these going on-screen: let’s see if that helps increase participation.

We’ve spelled out a schedule for new products so people have some certainty. It’s important to phase these things according to the complexity and different features of each product.

Further reading
Scott O'Malia-large
Departing O’Malia stresses SEF data challenge

For example, if the CFTC determines that non-deliverable forwards (NDF) are suitable for clearing, the next step will be to determine the process for making them available to trade. When it comes to NDFs, I’ve heard concerns about integration, physical connection, transaction integration, clearing and exchange trading intermediation and so on. This is not the futures market. We need to understand if there are complications around the role of prime brokers, for example. But as I understand it the NDF proposal is complete from a staff level and it is ready to go to the CFTC fairly soon.

How aware are you of the widespread confusion in the market when it comes to the SEF rules?

I am very sympathetic to the marketplace and their level of confusion. We have gone through a three-year rule-making process in which we’ve done 68 final rules. We have rushed through these rules at record pace. I’ve never seen any other federal agency move this many rules this quickly. And as a result we’ve made some mistakes.

Our challenges manifest themselves in the data. We’ve had well over 190 staff no-action letters [statements overriding or changing specific parts of the final rules]. We’ve issued temporary relief, permanent relief and every variety thereof, all trying to accommodate the rules. I’m supportive of the no-action relief obviously because we have to offset the rush that we did the rules in and the complications that we’ve created as a result.

My frustration is when you look at the entire way we’ve gone about this. Going so quickly we haven’t asked the right questions. We didn’t expect many of these outcomes and as a result we’re actually backtracking through the no-action relief to try to accommodate technological policy changes that the market is not ready for.

What are you doing to address the issue?

Early on I have been consistently asking for a schedule, what rules we are going to do and when, so people can get their minds around the rule order and the phase-in of the implementation dates.

The market needs to know when they need to have connections, relationships and new paperwork in place to make sure they are able to trade and clear all of these products as expected. And report data too, which is important.

We also need to consult the market and ask what is possible. The schedule is a problem and it’s been a consistent problem for the past three years.

What sort of response do you get from the market when you ask questions?

The market has had a very steep learning curve. Early on there was a little bit of denial about the expectation of how far we would get and how quickly we would get there, but everybody now completely understands what the rule set looks like.

They are anticipating and helping us understand how the infrastructure, the SEFs, the clearing houses and the data reporting will function and does function and what can be done in what period of time. That’s very positive.