CFTC Commissioner Scott O’Malia gave a speech late last week at the workshop on the Financialisation of Commodity Markets. The Republican Commissioner recast a number of his favourite bêtes noires with a commodity-specific slant, his argument separates into thee main strands:
- Commodity markets are highly volatile, legitimate hedging is an important part of their business.
- The Agency’s swap rules\definitions are “unjustifiably complicated” and “unjustifiably expensive”.
- End-users are unfairly prejudiced against by the essentially unworkable Swap Dealer de minimis threshold.
- Regulatory-driven complexity and expense are effectively forcing participants to use the futures markets in place of swaps, resulting in less than perfect hedging with attendant costs.
The (near) Future
- The CFTC is considering a futures block rule to limit block trade availability. Currently low threshold sizes may increase.
- OTC margin and capital rules for uncleared swaps will increase the cost of hedging.
- The CFTC is working on an expansion of mandatory clearing determinations for IRS and NDFs.
- The commodity position limits re-proposal may curtail legitimate end-user hedging.
- The CFTC does not have a clear view of either the swaps or futures markets, including the effects of regulation.
- They’re working on it, but need to do more.
In summary- it’s bad, it’s going to get worse and we can’t see what we’re doing. As usual, O’Malia makes some partisan, but incisive points. His particular focus in the speech is that excessive and ineffective regulation has significant cost implications for end-users with little concomitant benefit- an inarguable, but infrequently-voiced (by regulators) view. The assertion that end-users are being driven to swap futures echoes a frequent criticism of the CFTC- if you only have a hammer, everything looks like a nail. The CFTC’s mindset hammer has always been the regulation of the relatively simple futures market, perhaps an inappropriate tool for the re-structuring of wholly un-nail-like, amorphous OTC derivatives. The SEF rollout/fallout is still ongoing and has been smoother than expected; the question is not swap futures vs. swaps, it’s whether when the dust settles, the end-user will have a choice beyond an inflexible futures market or an SEF-straitjacketed shadow of the swaps market.