(Commodity Futures Trading Commission (CFTC) Commissioner Scott
O'Malia was not given the opportunity to comment
pre-publication. Following is a statement from Mr O'Malia)
"Had I been provided the opportunity to respond to this
piece before publication, I would have explained that I take
great pride in my thorough, legally grounded comments. Whether I
agree or disagree with my fellow commissioners, I believe that
reasoned public statements attached to the official Commission
record ensure that my concerns are clearly articulated. In
areas I find Commission rules in contradiction of the statutory
language and congressional intent or that they fail to
appropriately justify the Commission's positions, I do not
hesitate to voice my opposition. My legal acumen comes from
helping draft federal legislation as professional staff for 15
years on Capitol Hill and my tenure at the CFTC. It also is
reflected by the fact that my office is staffed full-time by
By John Kemp
LONDON, July 2 (Reuters)- Commissioner Scott O'Malia has
emerged as the most consistent and formidable opponent of
Chairman Gary Gensler's rule-writing efforts at the U.S.
Commodity Futures Trading Commission (CFTC).
On everything from position limits to the legal definition
of swap dealers and rules for derivatives clearing
organisations, O'Malia has issued a string of long and carefully
reasoned dissents from regulations proposed by CFTC staff and
endorsed by a majority of the other commissioners.
In the process, he has emerged as Wall Street's staunchest
defender on the commission.
O'Malia's criticisms about the content and process of
rule-making have been cited approvingly by lawyers challenging
position limits on behalf of the International Swaps and
Derivatives Association (ISDA) and the Securities Industry and
Financial Markets Association (SIFMA).
Asking the U.S. District Court for the District of Columbia
to stop the rules being implemented, lawyers for the industry
cited O'Malia's objections extensively. His comments lie at the
heart of their case that the CFTC violated the Commodity
Exchange Act and the Administrative Procedure Act by failing to
consider costs and benefits properly and by acting in an
arbitrary and capricious manner.
All the comments cited by industry lawyers were read into
the record when O'Malia issued a lengthy dissenting statement on
Oct. 18, 2011, while a majority of the other CFTC commissioners
voted to issue the new rules (76 Fed Reg 71,700).
O'Malia's comments have proved immensely useful to lawyers
seeking to have the regulations struck down, because they cast
doubt on the commission's internal decision-making process and
potentially make it easier for the reviewing court to find that
the CFTC majority acted unlawfully.
In recent months, O'Malia has broadened his criticism to
include a host of other areas of rule-writing under the
Dodd-Frank Act, reading lengthy dissents against a number of
other rules into the record, and launching a more general attack
on the lack of quantified cost/benefit analysis underlying all
the CFTC's rule-making activities.
None of these other rules have yet been challenged in court.
But they have drawn complaints from exchanges, dealers and
industry representatives and could all be questioned on much the
same grounds as position limits some time in future. If a legal
challenge is eventually mounted, O'Malia's dissents look certain
to provide much of the underpinning.
FROM SENATE STAFFER TO THE CFTC
Born at South Bend, Indiana in 1967, O'Malia earned a
bachelor of arts degree from the University of Michigan in 1990,
according to records made public at his confirmation hearing
before the Senate Agriculture Committee in September 2009.
Between 1991 and 2001, O'Malia spent a decade on the
legislative staff of Republican Senator Mitch McConnell, leaving
to spend two years working as a policy director for energy firm
Mirant (2001-2003), before returning to work for the Senate
Energy Committee (2003-2004) and the Energy and Water
Development Subcommittee of the Committee on Appropriations
McConnell has subsequently risen to lead the Republican
minority in the U.S. Senate and put O'Malia forward as a
possible commissioner on the CFTC under arrangements that
require that at least two commissioners come from the minority
party, with the president normally leaving it to minority
leaders to suggest nominees for the slots.
Prior to returning to the Senate staff, O'Malia worked with
Mirant's chief risk officer and five other energy companies to
establish the Committee of Chief Risk Officers (CCRO).
The committee was an industry response to the California
power crisis and intended to prevent and avoid the trading
abuses that had been "used by some in the industry to manipulate
the California and Western energy markets", O'Malia told
senators at his confirmation. O'Malia has subsequently cited
approaches pioneered by the CCRO as a template for federal
EVOLVING VIEWS ON REGULATION
Before a committee dominated by Democrats, O'Malia testified
about, "my strong belief that regulators are critical in
ensuring that markets operate in a fair and transparent manner".
He promised, "I will work to ensure that the CFTC uses all
of its legal authorities to curb excessive speculation and
prevent abusive trading practices, including fraud and
manipulation" (Statement of Scott O'Malia before the Senate
Agriculture Committee, Sept. 30, 2009).
Answering a question from Senator Maria Cantwell, a noted
campaigner for position limits, O'Malia said, "Yes, I support
the appropriate application of position limits for energy
commodities", though he warned that any proposal should not
drive trading into less regulated markets and countries.
He earlier noted that position limits had been used
effectively in agricultural markets for 70 years. "I do believe
[position limits] could contribute to slowing the growth in oil
prices, but will not correct the fundamental long-term supply
and demand pressures." (Questions for the Record, Sept. 30,
In his first year as a commissioner, O'Malia proved
relatively conventional. Like many other Republicans, O'Malia
offered guarded support to the principle of more financial
regulation, while disputing some of the detailed approaches. He
appeared to be a possible supporter for new regulations proposed
by CFTC Chairman Gensler, albeit one who would need strong
But since summer of 2011, O'Malia has become much harsher in
his criticism and a reliable opponent of new rules. His drift
into outright opposition has mirrored a similar evolution in the
financial industry and congressional Republican Party, from
cautious critique to opposition.
A MOST UNUSUAL COMMISSIONER
All commissioners approach the job in their own way.
Democrat Bart Chilton is famous for getting his point across
through speeches at conferences and statements with informal
titles like "Huggy Bear and Position Limits" and "Lettuce
Produce". O'Malia's published wit is much drier.
Even so, the string of lengthy, highly detailed and very
legalistic dissents that O'Malia has issued in response to
rule-making since the middle of 2011 mark him out as a very
Since September 2009, by my count, O'Malia has issued around
37 formal statements in conjunction with CFTC rulemakings, far
more than either his fellow Republican and objector Jill Sommers
(25) or Democrat Chilton (22).
What is much more remarkable is the nature of those
statements. O'Malia's have averaged just under 2000 words,
compared with under 800 for Sommers, and around 400 for Chilton.
Moreover, unlike the others, O'Malia has used footnotes (eight
But what is really interesting is the apparent change in
O'Malia's statements dating from around October 2011. Before
that point, O'Malia's statements on rule-making averaged about
1240 words, with two footnotes, so were not very different from
those of his colleagues.
Since October 2011, O'Malia's word count, which was already
rising, has soared to an average of 3,020 per statement, and the
footnote count jumped to 17.
There have been extraordinary examples, including his
dissent on position limits, which reached 8,700 words and 49
footnotes; the investment of customer funds (2,833 words, 13
footnotes); and his dissent on the definition of swap dealers
(8,033 words and a staggering 59 footnotes).
In contrast, his fellow Republican Jill Sommers limited her
comments to less than 1,500 words apiece and precisely zero
Unlike the other commissioners, who have written their
statements in general terms, O'Malia's have been written like
legal briefs, using very exact and technical language to
articulate their disagreements with rule-making such as might be
produced by plaintiffs in federal court.
The latest blockbuster, issued on June 29, weighs in at
4,286 words and 20 footnotes about some interpretative guidance.
It agrees with the decision but disagrees with the rationale
and explains its disagreement under five headings about
"statutory misconstruction", "inconsistent application of CEA
Section 2(i)", "loose consideration of principles of
international comity", "commission should engage in real and
meaningful cooperation with foreign and domestic regulators,"
and "interpretive guidance or an interpretive rule?"
With no law degree, it seems unlikely O'Malia is writing the
dissents himself. Like the other commissioners, he has a small
staff (www.cftc.gov/Contact/index.htm). The question is:
who exactly is writing these lengthy statements-cum-briefs and
with what purpose?
(editing by Jane Baird)