March 4, 2014
The purview of the Agency’s oversight, as a result of the Wall Street Reform and Consumer Protection Act (Dodd-Frank), has increased more than 40-fold, monitoring hundreds of trillions of annualized dollars of trading. I am disappointed that the President's budget, if adopted, would be insufficient to adequately fund the Agency at the levels required to oversee and enforce markets.
Dodd-Frank was passed in reaction to the 2008 economic collapse. I wonder if some forget why the meltdown occurred and what is needed to secure solid footing. Even during a time of deficit, our country must do all it can to avoid a repeat of what led to the economic mess. Better financial compliance, oversight and enforcement should play a large role in doing so. But those efforts need to be adequately funded.
The President’s request of $280 million, a $35 million cut from last year’s request, is woefully insufficient for needed oversight and enforcement.
The CFTC was given a large swath of the swaps market oversight and regulation--tens of trillions of dollars in formerly dark market trading. But we have not received a commensurate increase in funding to bring needed light to these markets, despite being assigned the authority to do so by Congress. We have the mandate, but not the money, to do the job.
This is a critical time at the Agency. We have issued major regulatory measures in accordance with the law. Now the hard work of compliance, surveillance, and enforcement needs to begin.
Market participants, exchanges, and foreign and domestic regulators have already experienced substantial delays associated with the limited bandwidth our current budget provides. It makes the derivatives industry less competitive and healthy and the markets more uncertain. This budget won’t help alleviate that unacceptable state of play.
In my years as a Commissioner, since 2007, there’s not one constituency in our regulatory sphere that hasn’t observed and downright complained that we need more people and resources to do our job.
Our staff is on its knees, some reaching for the exit doors and others already having bailed. Employee morale is the lowest I’ve witnessed, dropping 13 percent in just the last year. The last three years of late nights and weekend work, of doing as many as three jobs at once, was rewarded with...wait for it...administrative furlough days! That’s a punch to the gut of any worker, but for those in government service who already receive less than they could command in the private sector, it is an unacceptable and unsustainable circumstance.
Yet, the President’s budget request would fund 100 less employees than we need, 100 less than he requested last year. What occurred to make the mandate less needed or less important? Are we done with all of the rule writing? No. Is there less to oversee? Nah. Have all the bad actors in the financial sector cleaned up? Nope.
I’m frustrated to say: the funding requested is insufficient to do the job. Here are some ugly impacts of the President’s request.
1. Our technology people may not be able to support implementing the regular collection of key data in the marketplace. I am fearful to say where, so as not to tip off market participants, but our coverage will not be as robust or comprehensive as is required. Our ability to enhance and supplement surveillance activities will be too limited.
2. Our Division of Enforcement has substantial staff resources expended in litigation. The inability to fully resource our enforcement efforts will mean, at a minimum, investigations will be slowed and we will have to prioritize the cases. We are already investigating cases that are years old. We may not even be able to get to many cases. That means some may escape justice. I am greatly concerned that we, in our enforcement area particularly, will lose more staff over the next few months. And, generally, CFTC staff, who have gone without any substantial raises for three years and counting, will continue to seek employment elsewhere.
3. Our Division of Clearing and Risk cannot expect to examine all of our derivative clearing organizations annually, as is needed, under the proposed budget. The budget will not permit us to effectively manage the risk of cleared positions. Given that clearing organizations are one of the cornerstones of Dodd-Frank, hobbling our DCR Division from adequate inspection and management under our new rules is unacceptably risky.
4. With such a limited budget, the development of our compliance and exam programs in the Division of Swap Dealer and Intermediary Oversight will be drastically slowed. These funds leave us unable to adequately exam and monitor risk of our registrants. At best, we are left only with the ability to react in our monitoring and oversight of the firms – instead of proactively looking for and identifying potential red flags that may indicate a firm is in trouble (like MF Global or Peregrine Financial). Plus, it greatly limits our ability to respond in a timely manner to requests for interpretation and relief in this very important rule implementation phase.
5. In our Division of Market Oversight, there are significant, unmet needs for additional resources for data and reporting, registration, and surveillance. For example, we won't be able to keep up with the high frequency cheetah traders who are scooping up microdollars in milliseconds and potentially roiling markets. Again, we will only be reactive.
Finally, for several years, the President’s budget has called for a transaction fee to fund the Agency. Calling for such allows the out-year budgets (those beyond the requested year funding) to not score. That is, suggesting that a transaction fee will fund the Agency instead of appropriations from Congress, means when the out year budget totals are tabulated, it costs nothing. But there is no real desire to see Congress enact such a transaction fee. It's the old smoke and mirrors, but with a strobe for enhanced misdirection. If the request were genuine, a thoughtful, formal legislative proposal would have been forthcoming as part of the budget, as had been promised, years ago.
That’s an unfortunate condition because all of the other four main financial regulators have, in some part, self-funding. Yet, the CFTC does not. When the government shut down last October, equity markets were still overseen by the Securities and Exchange Commission. The Federal Reserve was open for business. Yet futures and most swaps markets were left with essentially no cop on the beat.
This budget request portends a self-inflicted wound upon the essential goal of appropriate and needed oversight and enforcement. Dodd-Frank is a success story, and the under-resourcing of the CFTC is pushing us dangerously close to seizing defeat from the jaws of victory.
In summary, this budget asks a strained and exhausted CFTC staff to do the impossible with too little. We work hard here, and have been granted needed regulatory tools to do the job. A magic wand, however, is not among those tools, and we are not magicians. The Agency requires basic, minimal support to accomplish our newly assigned tasks. Sadly, in this regard, the President’s budget request fails.
Last Updated: March 4, 2014