February 27, 2014
I respectfully dissent from the Commodity Futures Trading Commission’s (“Commission”) fiscal year (“FY”) 2014 spending plan. I would first like to note that this spending plan is a major change in course from the current and past budget requests. Unlike previous budget requests that exclusively focused on the expansion of federal hires at the expense of supporting the Commission’s hard working staff, this spending plan increases focus on Commission staff by providing them with increases to their compensation and benefits. Such a change in direction will prevent the Commission from falling even further behind other Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) agencies.1 Whether this is a lasting change in the Commission’s budgetary objectives remains unclear.
In addition, it is important to recognize the additional budget resources that Congress provided to the Commission, which increased the Commission's budget from $194.5 million in FY 2013 to $215.0 million in FY 2014. The Commission should use this increase to support its critical oversight mission and technology requirements. However, the FY 2014 spending plan fails to achieve these goals as it does not allocate enough funding to new and enhanced technology investments that are essential to the efficient surveillance and oversight of the futures and swaps markets. But, at the same time, the spending plan allocates too much funding to swap dealer oversight in duplication of the work that the National Futures Association (“NFA”) is already conducting.
To avoid unnecessary duplication of resources and to ensure responsible use of our limited budget, the Commission must undertake a strategic evaluation of its market, policy, and regulatory goals. Once the Commission establishes clear mission priorities it must develop a budget and timetable for their completion. The Commission can then develop a spending plan that invests in technology and staff for its mission priorities.
Change in Commission Staffing Priorities
As I noted above, this spending plan is a significant departure from the FY 2014 budget request and previous budget requests, which pleaded for additional resources to increase staffing to meet the Commission’s expanded mission under Dodd-Frank.2 In anticipation of continued staffing growth, the Commission has already expanded its office space resulting in increased annual rent by $5 million since 2010 to $20 million in 2014. However, the anticipated increase in staff has not materialized and thus the additional office space is not being utilized.
The FY 2014 spending plan instead increases focus on existing Commission staff by providing them with increases to their compensation and benefits. According to the spending plan, the Commission will use 32 percent of the funding increase to cancel seven furlough days (two taken days and five planned days), provide long neglected and deserving pay raises to staff, and initiate a new childcare benefit. The Commission will allocate the remaining 68 percent towards requested spending needs.
I am sympathetic to the needs of the Commission staff, who have worked long hours over the past three and a half years to implement the complex and challenging Dodd-Frank rulemakings. Additionally, ongoing requests for guidance and rule clarification continues to impose significant staffing demands as exhibited by the extraordinary number of staff guidance, enforcement no-action letters, and staff advisories produced since the implementation of the rules. I am also sympathetic to the lack of compensation increases for staff given the significant workload. It is a fact that Commission staff are falling behind with respect to compensation and benefits when compared to other financial regulatory agencies.3 Commission staff only received a 1% merit pay increase each year from 2011 to 2013, while other FIRREA agencies received between 2.89% to 3.34% during this same period. These limits were imposed to enable the Commission to hire additional employees.4
Technology, Surveillance, and Data Analysis Struggles for Resources
On the technology front, the Commission has consistently invested less in technology than has been provided by Congress, instead choosing to invest in new hires. The Commission's inadequate support for technology is evidenced by its annual transfer of $10 million to meet personnel needs since FY 2012.5 This has left the Commission with diminished automated surveillance capacity and an inability to adequately manage the regulatory data stored in swap data repositories. I also note that the Commission’s Inspector General identified ongoing management challenges, including the deployment of information technology, which I do not believe the spending plan adequately addresses.6
Since 2011, when the Office of Data and Technology was first created, overall technology spending has been limited to only a 6.8 percent increase in funding through 2014.7 During this same period, the Commission’s total appropriations have increased 11.7 percent.8 This spending plan allocates only $42.9 million for non-full-time equivalent (“FTE”) technology investments, which is a paltry 1.8 percent increase over FY 2013 spending levels.9 Moreover, this number is down from $51.1 million in FY 2012 when the Commission’s overall budget was almost $10 million less than this year.10 This funding level does not provide enough money to adequately support market oversight functions, increase automation of surveillance capabilities, or improve data analytics.
Given this spending level, funding for new and enhanced technology initiatives is reduced from $10.6 million in FY 2013 to $10.0 million in FY 2014 (23 percent of the non-FTE IT budget), while operations and maintenance funding grows from $19.2 million in FY 2013 to $24.1 million in FY 2014 (56 percent of the non-FTE IT budget). The reality is that the Commission spends more and more annually to support back office services and to store data required by the Dodd-Frank rules, but does not invest in the tools to utilize the information for surveillance to enforce Dodd-Frank rules and other mission critical purposes as it continues to cut back on new and enhanced mission automation initiatives. For example, this spending plan eliminates all funding for the order message data management effort. This effort would collect and analyze order data, which is important to our surveillance mission and essential to understanding events like the Flash Crash and automated trading strategies.
In addition, the two largest consumers of data, the Division of Market Oversight (“DMO”) and the Office of the Chief Economist (“OCE”) also receive some of the smallest funding increases in the spending plan with 1.3 percent growth and 6.1 percent growth, respectively.11 Since 2011, DMO has grown by 0.2 percent while the Commission’s total funding is up 11.7 percent.12 DMO should receive more resources to increase the automation of its surveillance capabilities for the swaps market and to integrate futures and swaps market data for surveillance purposes. The surveillance group also has critical expertise gaps in certain markets, such as oil, interest rate, and credit. In addition, DMO should receive additional funding for its data team to work on solutions to the data utilization, harmonization, and compliance issues. OCE needs additional resources to automate data analysis capabilities, such as the automation of the weekly swaps report and to support the yet to be developed risk analysis capabilities of the Division of Swap Dealer and Intermediary Oversight (“DSIO”), which does not have economists on staff and the spending plan does not provide for this position.
The Commission should fund technology and staffing for these key mission priorities rather than investing its scarce resources in areas where there is regulatory mission overlap, such as the registration and examination of swap dealers, work that the Commission delegated to the NFA.
Funding for Duplication of Work Already Being Conducted by the NFA
The Commission allocates $20.2 million (a 15.9 percent increase from FY 2013) to DSIO and $15.0 million (a 7.3 percent increase from FY 2013) to the Division of Clearing and Risk.13 Since 2011, both divisions have enjoyed considerable funding increases of 26.1 percent and 32.9 percent, respectively.14 In some respects, I applaud this expenditure on specific priorities, as I have called for such a focus.
However, I question whether a large investment in DSIO to conduct registration and examination for swap dealers is appropriate, considering the existing resources that the NFA is already investing in this same regulatory mission. Currently, the NFA has 55 compliance personnel devoted to the swap dealer (“SD”) and major swap participant (“MSP”) oversight program. The NFA expects to increase this number to 100 personnel by July 2014 and 130 personnel by July 2016. For this fiscal year, DSIO plans to have 18 people performing SD and MSP registration and compliance and 56 people performing SD and MSP examinations.
Combining the 74 DSIO staff and the 100 NFA staff, there will be more people reviewing the 98 SDs than the Commission’s Division of Enforcement (153 staff), or DMO (112 people) and the Office of General Counsel (50 people) combined. Furthermore, the Commission must consider the level of regulatory overlap that may exist between the Commission and prudential regulatory entities, such as the Federal Reserve Board and the Office of the Comptroller of the Currency. Considering the high level of duplication of work overseeing SDs, I suggest that the Commission reallocate its scarce resources and revise its priorities.
It is no surprise that the Commission is unable to develop any sustained focus on critical investments, including staff and cutting edge technology, because the Commission has failed to identify key mission priorities. Completing a robust strategic plan, as required by statute,15 will help the Commission to establish clear mission priorities and corresponding budgets and deadlines. The Commission can then allocate technology and staffing to its mission priorities through a spending plan.
While I take issue with the duplication and priorities in this spending plan, I certainly believe the time is right for the Commission to establish clear mission priorities that can inform its future investments in technology and staffing. The Commission should share these priorities with the Administration and Congress to justify their investment choices and to identify a consistent approach to the long-term funding needs of this Commission.
I recommend that Congress direct the Commission to develop and submit a detailed five-year strategic plan that integrates a technology investment plan. This plan must include annual milestones and budgets and hold each division and office within the Commission accountable for achieving its goals. This plan must also require each division and office to prepare a detailed technology strategy so that the Commission can develop a twenty-first century surveillance and risk management program.
Note: See Appendix A under Related Links.
1 Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989).
2 The Commission’s FY 2014 budget and performance plan is available at http://www.cftc.gov/reports/presbudget/2014/index.htm. The Commission has grown its budget and staff by 119.4% and 52.6%, respectively since its recent low funding level in 2007. In 2007, the Commission’s budget was $98.0 million and it had 437 Full-Time Equivalents (“FTEs”). Despite this growth, the Commission and staff have constantly pointed to inadequate funding as the reason why the agency cannot perform one function or another. See the following speeches pointing to inadequate funding: http://www.cftc.gov/PressRoom/SpeechesTestimony/opawetjen-5, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-153, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-147b, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-139.
3 Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134 (2002), which afforded the Commission with the ability to provide its employees with similar compensation and benefits to other FIRREA) agencies.
The Commission had 666, 684, and 682 FTEs in FY 2011, FY 2012, and FY 2013, respectively.
Consolidated and Further Continuing Appropriations Act of 2012, Pub. L. No. 112-55, 125 Stat. 552 (2011); Consolidated and Further Continuing Appropriations Act, 2013, Pub. L. No. 113-6, 127 Stat. 198 (2013).
The Inspector General memorandum is available at http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/oigmgmtchall2013.pdf.
See Appendix A for further details.
15 Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993), as amended.
Last Updated: February 27, 2014