CFTC proposals would increase end-user cost: O'Malia

WASHINGTON Thu May 5, 2011 3:42pm EDT

WASHINGTON (Reuters) - The futures regulator has proposed rules that would increase costs for power companies, airlines and major manufacturers, a consequence Congress told the agency to avoid when it crafted new financial reform measures, a top official said on Thursday.

Scott O'Malia, a commissioner at the Commodity Futures Trading Commission, renewed his concern that the agency's proposal defining a swap dealer is too broad and could end up including businesses that use swaps primarily to hedge their risks, pushing costs higher.

In prepared remarks, the Republican commissioner also said the CFTC's plan for exempting end-users -- those who rely on derivatives to guarantee the price and supply of raw materials -- from clearing was too narrow in scope.

"I believe costs for commercial end-users will increase. Congress did not want us to impose increased costs on non-systemically relevant commercial firms and force those firms to decide between hedging risk and investing in their business," O'Malia said before a Federal Reserve Board of Chicago conference.

"Unfortunately, I believe the draft rules ignored congressional direction," he said.

The proposals were among dozens the CFTC has introduced to implement the Dodd-Frank law, enacted last July, that extended federal regulation to the $600 trillion over-the-counter derivatives market.

It requires derivatives to go through clearinghouses and trade on exchanges as much as possible, with more disclosure and reporting also required.

Bart Chilton, a Democratic commissioner at the CFTC, said the Congressional Budget Office had estimated the financial reforms being implemented would save taxpayers $3.2 billion by 2020.

"We certainly need to look at costs and savings from a holistic perspective, not to mention guarding against another economic meltdown," he said.

The CFTC has been criticized by parts of the industry, lawmakers and several of its own commissioners for its fast pace, and what a few have called an "irrational" sequence of rules, making the process hard to follow. For his part, O'Malia has called for the agency to release a detailed schedule for when the rules will go into effect.

"The market needs to know when they will be expected to implement the rules so appropriate investments, staffing and reorganization decisions can be made," said O'Malia.

A Republican-controlled committee in the U.S. House of Representatives voted on Wednesday for an 18-month delay in implementation of regulations intended to reduce risk in the vast over-the-counter derivatives market.

Meanwhile, the CFTC, which has nearly wrapped up releasing drafts of more than 40 regulations, said last week it was reopening the comment period for most of the rules it has already proposed for as much as 30 days. Regulators are expected to start finalizing the swaps rules this summer.

(Editing by John Picinich and Dale Hudson)