The Commodity Futures Trading Commission (CFTC) needs to take action by mid-December to avoid a repeat of Oct.12, when the agency issued an 11th-hour flurry of no-action letters deferring the compliance deadline for a number of Dodd-Frank Wall Street rules, said Commissioner Scott O’Malia. Just as the nation faces a fiscal cliff, the agency faces the Dodd-Frank Regulatory Cliff.

“Friday, Oct. 12, was a day of great drama, but certainly not in a good way and certainly not by design,” O’Malia said Tuesday at George Mason University in Fairfax, VA. “Friday the 13th may have been more appropriate, given the nightmare scenario the Commission was trying to avoid at the absolute last minute.”

By the end of Oct. 12, “the Commission had rushed out 18 no-action letters and guidance documents in a last-minute attempt to mitigate the chaotic impact of all the rules that were to take effect the following Monday. Think about that for a second: 18 relief documents issued on the day before the compliance deadline,” O’Malia told students and faculty (see Daily GPI, Oct. 15).

Even now, “we are not out of the woods,” he said. “The temporary relief provided [on Oct. 12] expires on Dec. 31, and we can’t risk keeping the markets in the dark until the 11th hour again. The Commission needs to take action by mid-December in order to provide adequate clarity to the markets through the New Year. Think of this as the Dodd-Frank Regulatory Cliff.”

In one of the more significant no-action letters issued on Oct. 12, the Commission provided relief from the requirement that certain cleared swaps and swaps exchanged for futures referencing exempt commodities (such as energy commodities or metals, and agricultural commodities) be counted toward the threshold of $8 billion aggregate gross of notional amount of swaps. Exceeding the $8 billion threshold subjects a party to swap dealer registration regulations under Dodd-Frank.

“The big storyline [last month was] the migration of cleared energy products to the futures markets. In response to regulatory uncertainty in the swaps market, energy customers of both CME and ICE [IntercontinentalExchange] demanded that the markets move to listed futures instead of swaps. There are good reasons to stay away from the swaps market, including the expansive and ill-defined swap definition and regulatory consequences of becoming designated [as a swap dealer] as well as uncertainty as to what will be permitted to trade on SEFs [swap execution facilities],” O’Malia said (see Daily GPI, Oct. 17; Sept. 11).

“On Oct. 15…the entire market had shifted from a swaps market to the futures market. Liquidity simply dried up in the [over-the-counter] space. To me, this is evidence of the Commission’s struggle to get swap regulations right. This futurization of the cleared energy swap market may result in reduced flexibility for some firms because futures contracts, unlike swaps, can’t be individually tailored to meet specific needs. However, futures markets offer greater regulatory certainty and provide high liquidity to allow for the efficient hedging of commercial risk,” he said.

Although it was not the Commission’s intention to draft rules that would send market participants fleeing from the swaps market, the agency “has created such a regulatory nightmare that the energy markets have sought cover in the relative safe haven of the futures markets,” O’Malia said.

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