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 (2004-2009).
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 regulations.
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, 2009)
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 convincing.
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 unusual commissioner.
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 on average).
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 footnotes (http://graphics.thomsonreuters.com/ce/CFTC-STATEMENTS.pdf).
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 (http://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)
(John Kemp is a Reuters market analyst. The views expressed are his own)