The blunt assessment of Dodd-Frank Act swaps market rulemaking thus far by Scott O'Malia, a commissioner on the Commodity Futures Trading Commission: an overly complicated, excessively expensive compliance burden .

O'Malia laid out his criticisms during a speech at the Annual Nuclear Industry Conference in Charlotte, NC, on May 22.

The Dodd-Frank Act requires all swap dealers to clear their trades to reduce counter-party risk and the interconnectedness of large financial institutions such as the “too-big-to-fail” banks. It mandates that cleared products be traded on designated contract markets or newly created swap execution facilities. It also requires  that all trades, whether cleared or traded over-the-counter, be reported to a new registered entity called a swap data repository.

O'Malia said this framework is aimed at bringing an “unprecedented level of transparency into the $600-plus trillion swaps market” and that “end-users and other ‘Main Street' swaps participants whose operations did not contribute to the financial meltdown are explicitly recognized through exemptions, exceptions, and accommodations from and to many of the clearing, trading and reporting requirements.”

“It is ultimately the role of the CFTC to flesh out the extent to which these commercial entities will be able to continue to hedge their risk and absorb the additional costs without negatively impacting their ability to remain competitive,” he said.

According to O'Malia, the Commission, thus far, has drafted and passed 33 final rules. Roughly half have been deemed “Major Rules” under the Congressional Review Act, meaning that the Office of Management and Budget has determined they are likely to result  in an annual effect on the economy of $100 million or more;  a major increase in costs or prices for consumers, individual industries,  government agencies, or geographic regions; or significant adverse effects on competition (global and domestic), employment, investment, productivity, or  innovation.

“Unfortunately, many of the rules have shifted the application of statutory mandates from a flexible, principles-based regime to a prescriptive rules-based scheme,” O'Mailia said. “While I agree that there is generally a preference for the legal certainty that specific versus general mandates provide, many of these new rules are unnecessarily complicated, confusing, and, in some cases, redundant.”

The result, he said, is that “entities whose financial resources are already limited by the continued economic downturn must set aside additional resources to pay for more legal and compliance personnel who will be tasked with sorting through thousands of pages of rules to ensure that they don't run afoul of new regulation.”

“We can foster cost-effective compliance by clearly articulating the purpose and desired effect of our regulatory requirements,” O'Mailia said. “The Commission's objective in implementing the Dodd-Frank Act should be compliance, and not enforcement. Commercial firms utilizing the futures and swaps markets to mitigate risk should be focused on managing that risk, and not on the risk that they will take a mis-step into a regulatory trap.”

A recently finalized swap dealer definition as the “poster-child for this regulatory confusion.”

“While I agree that the de minimis exemption currently set at $8 billion provides a sizable margin of error, the reality of relying on a de minimis is that, but for the level of the exemption, you are a swap dealer," O'Mailia told the audience."Would you rather be expressly carved out of the swap dealer designation, or carved out by a temporary technicality subject to change? And how does it make you feel knowing that you could have avoided the order of operations, the de minimis, and ramping up of legal personnel if the Commission had utilized its authority under the statute to simply carve you out based on the nature of your swap trading activities?”

“In implementing the massive Dodd-Frank Act, I believe the Commission has the responsibility to implement clear rules that provide end-users with bright regulatory lines,” he added. “Unfortunately, I believe we have not achieved that objective and instead have crafted a definition for swap dealers that is vague and complex. Ultimately, this definition will drive some firms out of the market or force them to reduce their market exposure and hurt liquidity.”

The Commission, O'Mailia said, must develop a more thorough process for conducting cost-benefit analyses that appropriately inform their rulemaking of the challenges facing the market, “especially with regard to the necessary integration of technology.

“Unfortunately, we have minimized the role of performing a cost benefit analysis to a check-the-box exercise, rather than developing a range of rule alternatives and adopting the most cost-effective,” he said. In developing comprehensive supervision of Wall Street swap trading, officials “must be more sensitive to the massive costs these rules will impose on all entities and the impact this will have on cost-effective risk management.”