2006 Performance and Accountability Report

This report is in the public domain. Authorization to reproduce it in whole or in part is granted. While permission to reprint this publication is not necessary, the citation should be: Commodity Futures Trading Commission, FY 2006 Performance

and Accountability Report, Washington D.C., 20581.

All photographs in this document are proprietary and prior permission from the photographer

is required for any use or reproduction of the photographs.

page i:

Table of Contents

Message from the Chairman . . . . . 1

FY 2006 Commissioners . . . . . 2

How This Report is Organized . . . . . 3

MANAGEMENTS DISCUSSION AND ANALYSIS

Commission at a Glance . . . . . 5

Performance Highlights . . . . . 14

Financial Highlights . . . . . 26

Management Challenges . . . . . 30

Inspector Generals FY 2006 Assessment . . . . . 33

PERFORMANCE SECTION

Introduction to the Performance Section . . . . . 41

Strategic Goal One: Economic Utility . . . . . 42

Strategic Goal Two: Market User and Public . . . . . 54

Strategic Goal Three: Industry . . . . . 71

FINANCIAL SECTION

Message from the Chief Financial Officer . . . . . 95

Limitations of Financial Statements . . . . . 96

Principal Financial Statements . . . . . 97

Report of the Independent Auditors . . . . . 117

APPENDICES

FY 2006 Commissioners . . . . . 133

Enforcement Litigation by Strategic Goals . . . . . 136

CFTC Information Technology Systems . . . . . 153

Glossary of Abbreviations and Acronyms . . . . . 154

page ii:

In the Tradition of Quality Reporting,

the Commodity Futures Trading Commission

Proudly Presents the FY 2006

Performance and Accountability Report

page 1:

A Message from the Chairman

It is a pleasure to present to you the Commissions third

annual Performance and Accountability Report. This report

presents our accomplishments and audited financial

statements for Fiscal Year (FY) 2006.

The Commodity Futures Trading Commission (CFTC

or Commission) oversees the commodity futures and option

markets in the United States (U.S.). These markets are

the key source of commodity price discovery and are used

as a tool by participants in the global economy to offset

price risk. In recent years these trillion dollar markets, with

massive economic force, have grown faster than almost

any other asset class. The markets are expanding steadily

in both volume and new users and their complexity is

rapidly evolving with new technologies, globalization,

product innovation, and greater competition.

The Commission accomplishes its mission through

three strategic goals, each focusing on a vital area of

regulatory responsibility. They are: to ensure the economic

vitality of the commodity futures and option markets; to

protect market users and the public; and to ensure market

integrity in order to foster open, competitive, and financially

sound markets.

In the audit report issued today, the public accounting

firm, KPMG LLP, on behalf of our Inspector General,

reports that our financial statements were presented fairly,

in all material respects, and in conformity with U.S. generally

accepted accounting principles for Federal agencies.

However, to achieve this result, the FY 2005 financial

statements, which reflected no material weaknesses, were

restated. This was necessary to conform with the Financial

Accounting Standards Boards Statement of Financial

Accounting Standards No. 13, Accounting for Leases. As a

consequence, the auditors reported a material weakness in

the controls over financial reporting. Included in this finding

was another significant deficiency related to how the

custodial fines and interest receivable balance was determined.

A full discussion of the material weakness can be

found in the Financial Section of this report, which also

highlights actions the Commission is taking to resolve it.

Over the last year, the Commission focused its

resources: to help ensure that customers were protected

when a futures brokerage firm collapsed amid an accounting

fraud; to take action against an energy company in

response to allegations of manipulation; and to actively

address governance conflicts at publicly listed exchanges.

We also addressed how best to disclose the impact of

hedge funds and other speculators on our markets. Internationally,

we engaged our regulatory counterparts and

stakeholders on whether it is appropriate for an exchange

based outside of the U.S. to be designated as a U.S. exchange.

Although these accomplishments are very significant

in themselves, they are only part of the important contributions

made daily by the dedicated staff of the Commission.

We hope you will join us in applauding their efforts,

which are highlighted in the pages to follow using data,

both financial and performance, that is reliable and complete.

Reuben Jeffery III

Chairman

November 15, 2006

CFTC

Fiscal Year 2006 Commissioners

From left; Sharon Brown-Hruska1, Commissioner; Walter L. Lukken, Commissioner; Reuben Jeffery III, Chairman; Frederick

W. Hatfield, Commissioner; Michael V. Dunn, Commissioner

1 Sharon Brown-Hruska resigned from the Commission on July 28,

2006.

How This Report is Organized

The CFTCs FY 2006 Performance and Accountability Report is the third such report published by the Commission. This

document is comprised of three primary sections:

MANAGEMENTS DISCUSSION AND ANALYSISCommission at a Glance.......................................5Performance Highlights.......................................14Financial Highlights...........................................26Management Challenges.....................................30Inspector Generals FY 2006 Assessment...............33

Managements Discussion and Analysis

The Managements Discussion and Analysis (MDA) section

is an overview of the entire report, as supported and

detailed in the Performance Section and the Financial Section.

The MDA presents performance and financial highlights

for FY 2006, in addition to compliance with legal

and regulatory requirements and the Inspector Generals

assessment of management challenges facing the Commission.

For more information on this section, please contact

Mark Carney, Chief Financial Officer, at 202-418-5477.

Performance Section

The Performance Section compares the Commissions

performance to the annual goals as set forth in the

20042009 CFTC Strategic Plan, Keeping Pace with Change.

For more information on this section, please contact

Emory Bevill, Deputy Director for Budget and Planning, at

202-418-5187.

Financial Section

The Financial Section is comprised of the Commissions

financial statements and related Independent Auditors

report. For more information, please contact Jeanne Ring,

Deputy Director for Accounting and Financial Systems, at

202-418-5184.

PERFORMANCE SECTIONIntroduction to the Performance Section................41Strategic Goal One: Economic Utility...................42Strategic Goal Two: Market Users and Public........54Strategic Goal Three: Industry..............................71

FINANCIAL SECTIONMessage from the Chief Financial Officer..............95Limitations of Financial Statements.....................96Principal Financial Statements............................97Report of the Independent Auditors......................117

Questions and comments about this report can be directed to Mark Carney, Chief Financial

Officer, at 202-418-5477 or, via e-mail at mcarney@cftc.gov

An electronic version of the Commodity Futures Trading Commission FY 2006 Performance and

Accountability Report is available on the Internet at www.cftc.gov/cftc/cftcreports.htm. The 2004

2009 CFTC Strategic Plan, Keeping Pace with Change, is also available at this Web site.

MANAGEMENTS DISCUSSION AND ANALYSIS

Commission at a Glance........................................5

Performance Highlights........................................14

Financial Highlights............................................26

Management Challenges......................................30

Inspector Generals FY 2006 Assessment................33

Commission at a Glance

CFTC

Organization and Locations

The CFTC consists of five Commissioners who are appointed

by the President to serve staggered five-year terms.

All Commissioners are confirmed by the Senate. No more

than three Commissioners at any one time may be from

the same political party. The President designates one of

the Commissioners to serve as Chairman, with the advice

and consent of the Senate.

The Commissions organization chart is aligned with

its 20042009 Strategic Plan, and its functions are divided

between program policy and internal management. The

Office of the Chairman oversees the Commissions principal

divisions and offices that administer the policies, regulations,

and guidance regarding the CEA. The Office of the

Executive Director, by delegation of the Chairman, directs

the internal management of the Commission, ensuring

that funds are responsibly accounted for and that program

performance is measured and improved effectively.

Attorneys at the Commission work on complex and

novel legal issues in litigation, regulation, and policy

development. They participate in administrative and civil

proceedings, assist U.S. Attorneys in criminal proceedings

involving futures law violations, develop regulations and

provide a wide range of analysis and guidance on regulatory

issues, and provide legal advice to the Commission

on policy and adjudicatory matters.

Auditors examine records and operations of futures

exchanges, clearinghouses and firms for compliance with

the CFTC regulations on financial requirements and trade

practices.

Economists evaluate filings for new futures and option

contracts and amendments to existing contracts to

ensure they meet the Commissions regulatory standards.

Economists also analyze the economic effect of various

Commission and industry actions and events and advise

the Commission accordingly. In addition, economists

monitor trading activity and price relationships in futures

markets to detect and deter price manipulation and other

potential market disruptions.

Futures Trading Specialists perform regulatory and

compliance oversight of alleged fraud, market manipulations,

and trade practice violations.

The CFTC is headquartered in Washington, D.C.

Regional offices are located in Chicago, New York, Kansas

City and Minneapolis.

Additional information about the Commissions history

and its divisions can be obtained from the Commissions

Office of External Affairs or through its Web site,

www.cftc.gov.

CFTC

Commodity Futures Trading Commission Organization StructureChairmanCommissionerCommissionerCommissionerCommissionerOffice of General CounselDivision of Clearing &

Intermediary OversightEastern Region(New York)

Central Region(Chicago)

Kansas City OfficeOffice of Inspector GeneralOffice of the SecretariatEastern Region(New York)

Central Region(Chicago)

Kansas City OfficeMinneapolis OfficeDivision of MarketOversightEqual Employment OpportunityOffice of External AffairsOffice of International AffairsEastern Region(New York)

Central Region(Chicago)

Kansas City OfficeDivision of EnforcementOffice of Executive DirectorOffice of Chief Economist

MANAGEMENTS DISCUSSION AND ANALYSIS

CFTC History and Transformation

Futures contracts for agricultural commodities have been

traded in the U.S. for more than 150 years and have been

under Federal regulation since the 1920s. Congress

created

the CFTC in 1974 as an independent agency

with the

mandate to regulate commodity futures and option markets

in the U.S. At the time of the Commissions

founding,

the vast majority of futures trading took place in the

agricultural sector. These contracts

gave farmers, ranchers,

distributors, and end-users of everything from corn to

cattle an efficient and effective set of tools to hedge against

price movements.

Over the years, however, the futures industry has

become increasingly complex. While farmers and ranchers

continue to use the futures markets as actively as ever

to effectively lock in prices for their crops and livestock

months before they come to market, highly complex

financial contracts based on interest rates, foreign currencies,

Treasury bonds, stock market indices, and other

products have far outgrown agricultural contracts in trading

volume. The latest statistics show that approximately

five percent of on-exchange derivatives activity occurs in

the agricultural

sector, while financial derivatives make

up approximately

86 percent, and other contracts, such as

those on metals and energy products, make up about nine

percent.

In recognition of this changing environment, Congress

and the President reauthorized the Commission

through FY 2005 with the passage of the Commodity

Futures Modernization Act (CFMA) in December 2000.

The CFMA repealed the ban on single stock futures and

instituted a regulatory framework for such products to be

administered jointly by the CFTC and the Securities and

Exchange Commission (SEC). It codified the principal

provisions

of a new regulatory framework adopted earlier

by the Commission. It also brought legal certainty to the

trading done in bilateral, over-the-counter derivatives

transactions and clarified the CFTCs jurisdiction over the

retail, off-exchange foreign currency market. It gave the

CFTC authority to regulate clearing organizations in a

way that enables the CFTC more effectively to foster open,

competitive, and financially sound markets.

Keeping Pace with Change

In February 2004, the Commission

issued Keeping Pace

with Change, a strategic plan for FY 2004-FY 2009.2 This

plan reflects the new direction of the agency, driven by

the CFMA, including three key objectives: 1) modernizing

regulations affecting trading platforms and market

intermediaries;

2) permitting futures based on single stocks

or narrow-based stock indices; and 3) providing legal

certainty for over-the-counter derivatives.

The plan also reflects the enormous and continuing

changes in the markets, including rapid growth in volume,

globalization, and the movement from open outcry on-exchange

trading floors to all-electronic trading from widely

dispersed geographic

locations.

The charts that follow reflect many of the changes

affecting the CFTC: 1) industry growth versus staff growth;

2) growth in actively traded futures and option contracts;

3) enforcement actions in energy and foreign currency

(forex) markets; 4) growth in foreign commodity trading;

5) registrants; 6) contract markets designated by the

CFTC; 7) CFTC-registered derivatives clearing organizations

(DCOs); 8) exempt commercial markets (ECMs); 9)

exempt boards of trade (XBOTs); and 10) customer funds

held at futures commission merchants (FCMs).

2 In November 2006, the Commission will begin its three-year update

of the five-year Strategic Plan for the period 2007-2012

Growth in Volume of Futures & Option

Contracts Traded & Full-time Equivalents

(FTEs), 1996 2006

Trading volume has quintupled in the last decade while

staffing levels have decreased in recent years.

05001000150020002500CONTRACT TRADING VOLUME (MILLIONS)

FTE (STAFF YEARS)

96 97 98 99 00 01 02 03 04 05 06541553560567546514521497517491490FTEsContract Trading Volume

Actively Traded Futures & Option

Contracts, 1996 2006

The number of actively traded contracts on U.S. exchanges

has more than quintupled in the last decade. The number

is projected to grow to over 1,400 contracts by FY 2008.

020040060080010001200CONTRACTSFISCAL YEAR96 97 98 99 00 01 02 03 04 05 061992582862512662502785386629061135

Spotlight on Energy and Foreign Currency Markets

Actions Taken Since Enron Bankruptcy in December 2001

Energy Markets

Number of Cases Filed or Enforcement Actions

Number of Entities/Persons Charged

Number of Dollars in Penalties Assessed

Civil Monetary Penalties

$ 302,863,500

Actions Taken Since the Passage of the CFMA in December 2000

Foreign Currency Markets

Number of Cases Filed or Enforcement Actions

Number of Entities/Persons Charged

354

Number of Dollars in Penalties Assessed

Civil Monetary Penalties

$ 292,042,098

Restitution

$ 182,471,571

u Number of Customers

25,070

Growth of Foreign Commodity Trading

Since 2000, the number of foreign customers trading on

U.S. exchanges has more than tripled and the number of

U.S. customers trading on foreign exchanges has more

than quintupled.

050100150200AMOUNT IN THOUSANDSFISCAL YEARForeign Customers Trading on U.S. Commodity Exchanges2000 200554.027.0184.3145.0U.S. Customers Trading on Foreign Commodity Exchanges

Number of Registrants

Companies and individuals who handle customer funds, solicit or accept orders, or give trading advice must apply for

CFTC registration through the National Futures Association (NFA), a self-regulatory organization (SRO) with delegated

oversight authority from the Commission.

The Commission regulates the activities of over 70,000 registrants:

Type of Registered Professional

Number as of September 30, 2006

Associated Persons (APs) (Salespersons)

54,258

Commodity Pool Operators (CPOs)

1,570

Commodity Trading Advisors (CTAs)

2,589

Floor Brokers (FBs)

8,203

Floor Traders (FTs)

1,512

Futures Commission Merchants (FCMs)

2103

Introducing Brokers (IBs)

1,7414

TOTAL

70,083

Customer Funds Held at Futures

Commission Merchants, 1996 2006

The amount of customer funds held at FCMs has more

than quadrupled in the last decade.

$ 0$ 50$ 100$ 150AMOUNT IN BILLIONSFISCAL YEAR96 97 98 99 00 01 02 03 04 05 06$33.0$38.7$47.5$54.1$56.7$59.7$64.3$75.6$94.5$116.7$139.4

3 Includes 16 notice-registered FCMs.

4 Includes 45 notice-registered IBs.

Contract Markets Designated by the CFTC, 2001 2006

Designated contract markets (DCMs) are boards of trade or exchanges that meet CFTC criteria and core principles for

trading futures or options by both institutional and retail participants.

Commodity

Exchanges5

2001

2002

2003

2004

2005

2006

BTEX

CBOT

CCFE

CFFE

CFE

CME

CSCE

EPFE

Eurex US

HedgeStreet

INET

KCBT

MACE

MGE

NQLX

NYBOT

NYCE

NYFE

NYMEX

(incl. COMEX)

OCX

PBOT

TOTAL

5 Refer to the CFTC Glossary in Appendix 4 for full names of organizations.

Number of CFTC-Registered Derivatives Clearing Organizations, 2001 - 2006

Clearinghouses that provide clearing services for CFTC-regulated exchanges must register as DCOs. Currently, 11 DCOs

are registered with the Commission.

DCOs6

2001

2002

2003

2004

2005

2006

Clearinghouse

BTEX

CCorp

CBOT

CME

EnergyClear

FCOM

GCC

HedgeStreet

ICC

KCBT

LCH

MGE

NYCC

NYMEX

OCC

ONXCC

TOTAL

6 Refer to the CFTC Glossary in Appendix 4 for full names of organizations.

Exempt Commercial Markets, 2001 2006

Electronic trading facilities providing for the execution of principal-to-principal transactions between eligible commercial

entities in exempt commodities may operate as ECMs as set forth under the CEA and the Commissions regulations.

An ECM is subject to antifraud and anti-manipulation provisions and a requirement that, if performing a significant

price discovery function, the ECM must provide pricing information to the public. A facility that elects to operate as an

ECM must give notice to the Commission and comply with certain informational, record-keeping and other requirements.

An ECM is prohibited from claiming that the facility is registered with, or recognized, designated, licensed or

approved by, the Commission. To date, 17 ECMs have filed notices with the Commission.

Exempt Commercial

Markets7

2001

2002

2003

2004

2005

2006

CCX

CDXchange

HSE

ICE

IMAREX

NGX

OPEX

TFSE

TFS

ChemConnect

ICAP ETC

ICAP

ICAP HYDE

TCX

NTP

TOTAL

7 Refer to the CFTC Glossary in Appendix 4 for full names of organizations.

Exempt Boards of Trade, 2001 2006

Transactions by eligible contract participants in selected commodities may be conducted on an XBOT as set forth under

the CEA and the Commissions regulations. XBOTs are subject only to the CEAs anti-fraud and anti-manipulation provisions.

An XBOT is prohibited from claiming that the facility is registered with, or recognized, designated, licensed, or approved,

by the Commission. Also, if it is performing a price discovery function, the market must provide certain pricing

information to the public. To date, six XBOTs have filed notices with the Commission.

Exempt Boards

of Trade8

2001

2002

2003

2004

2005

2006

CME AM

MATCHBOXX

ATS

WBOT

WXL

Intrade

TOTAL

8 Refer to the CFTC Glossary in Appendix 4 for full names of organizations.

Introduction

The mission of the CFTC is accomplished through three

strategic goals, each focusing on a vital area of regulatory

responsibility: 1) to ensure the economic vitality of the

commodity futures and option markets; 2) to protect market

users and the public; and 3) to ensure market integrity

in order to foster open, competitive, and financially sound

markets. Accomplishing the three long-term strategic goals

is evidenced by the progress of nine key outcome objectives.

In most cases, due to the broad economic functions

that the Commission oversees, it is not a simple task to

identify specific detailed objectives that will be accomplished

each year; however, it is possible to identify conditions

that, if present, are indicators that the Commissions

activities are contributing successfully to the health of the

industry it regulates.

Annually, the performance metrics are analyzed to

determine the measure of success the programs activities

have achieved in accomplishing the Commissions overall

strategic mission.

Resource Investment by Strategic Goal

In FY 2006, the Commission invested 39 percent of its resources

protecting market users and the public, and nearly

equal amounts of 30 percent each in economic vitality

and market integrity.

Performance Highlights

Net Cost by Strategic Goal

$33.4 MillionGoal One; Ensure theeconomic vitality ofthe commodity futuresand option markets.

32%

$30.2 MillionGoal Three: Ensure marketintegrity in order to fosteropen, competitive, andfinancially sound markets.

29%

$40.6 MillionGoal Two: Protect marketusers and the public.

39%

Full-time Equivalents by Strategic Goal

160 FTEsGoal One; Ensure theeconomic vitality ofthe commodity futuresand option markets.

32%

139 FTEsGoal Three: Ensure marketintegrity in order to fosteropen, competitive, andfinancially sound markets.

28%

196 FTEsGoal Two: Protect marketusers and the public.

40%

Goal One Summary

The focus of this goal is the marketplace. If U.S. commodity futures and option markets are protected from, and are

free of, abusive practices and influences, they will fulfill their vital role in the nations market economy and the global

economy, accurately reflecting the forces of supply and demand and serving market users by fulfilling an economic need.

Strategic Goal One

Ensure the economic vitality of the commodity futures and option markets.

Outcome 1.1 Markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of

disruptive activity.

Annual Performance Goal 1.1 No price manipulation or other disruptive activities that would cause loss of confidence or negatively

affect price discovery or risk shifting.

Performance Measures

1.1.1. Percentage growth in market volume.

1.1.2. Percentage of novel or innovative market proposals or requests for CFTC action addressed within six months to

accommodate new approaches to, or the expansion in, derivatives trading, enhance the price discovery process, or

increase available risk management tools.

1.1.3. Percentage increase in number of products traded.

1.1.4. Percentage of new exchange and clearinghouse organization applications completed within fast track review period.

1.1.5. Percentage of new contract certification reviews completed within three months to identify and correct deficiencies in

contract terms that make contracts susceptible to manipulation.

1.1.6. Percentage of rule certification reviews completed within three months, to identify and correct deficiencies in exchange

rules that make contracts susceptible to manipulation or trading abuses or result in violations of law.

Outcome 1.2 Markets are effectively and efficiently monitored so that the Commission receives early warning of potential problems

or issues that could adversely affect their economic vitality.

Annual Performance Goal 1.2 To have an effective and efficient market surveillance program.

Performance Measures

1.2.1 Percentage of derivative clearing organization applications demonstrating compliance with core principles.

1.2.2 Ratio of markets surveilled per economist.

1.2.3 Percentage of contract expirations without manipulation.

Strategic Goal One

Performance Trends for Goal One

Monitoring market activity represents one of the ways the Commission seeks to protect the economic functions of the

markets. Market surveillance is conducted to detect attempted manipulation and other abusive practices that could undermine

the capacity of these markets to perform their economic function. The Commission takes preventive measures

to ensure that market prices accurately reflect fundamental supply and demand conditions, including the routine daily

monitoring of large trader positions, futures and cash prices, price relationships, and supply and demand factors in

order to detect threats of price manipulation.

Market Volume

Contract trading volume peaked to over 2.4 billion in FY 2006, as shown in Figure two, Growth in Volume of Futures &

Option Contracts Traded & FTEs, on page eight, with increased demand realized for products traded on exchanges. The

actual FY 2006 number is driven by changes in economic fundamentals, success of newly launched products, new participants

using these markets, and other changes in the marketplace. As such, these factors may impact the precision of any

prediction of future trading volume.

Performance Measure 1.1.1

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage growth in market volume

24%

26%

20%

26%

New Products

Similar to the growth in volume, the actual percentage of new products offered on the exchanges in FY 2006 increased

above projections. These results are driven by customer demand for new products, exchange innovation, opportunities

made available by the increasing use of electronic trading, and other changes in the marketplace. As such, these factors

may impact the number of products introduced.

Performance Measure 1.1.3

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage increase in number of products traded

12%

43%

15%

25%

Performance Highlights for Goal One

The following are the highlights of Commission performance

for Goal One:

Market Surveillance

In FY 2006, the Commissions market surveillance activities

included collecting and analyzing approximately 44

million line items of data regarding large trader activity

and approximately 16,000 reports identifying large

traders. In the course of the year, economists prepared

approximately 1,500 weekly surveillance reports and compiled

23 special market reports.

Energy Markets

In FY 2006, Commission staff conducted daily surveillance

of 1,135 active futures and option contracts. In

particular, close monitoring was conducted on the energy

futures markets, which experienced periods of high prices

and high price volatility due to, among other things, low

stocks, tight production capacity, geopolitical tension in

the Middle East, strong world economic demand, and

natural disasters. In addition, prices and price volatility in

both the petroleum markets and the natural gas market

were substantially increased by damage inflicted by

Hurricanes Katrina and Rita to the Gulf Coast oil and gas

production, processing, and transportation infrastructure.

Surveillance staff closely monitored large trader positions

on a daily basis to detect large positions that could pose

a threat of price manipulation, and staff also conducted

several special analyses of intraday trading to determine

whether there was evidence of improper trading to affect

settlement prices of energy futures contracts.

New Contracts

During FY 2006, Commission staff completed reviews

of several innovative contracts filed under its certification

procedures. Those contracts include the Volatility

Index (VIX) and Dow Jones Industrial Average (DJIA)

VIX futures contracts on the CBOE Futures Exchange, the

South American Soybean Meal futures contract on the

CBOT, Snowfall Index contracts on the CME, the physically

delivered Euro Index on the NYBOT, the Reformulated

Gasoline Blendstock for Oxygen Blending (RBOB)

Unleaded Gasoline futures contract on the NYMEX, and

many geographically specific energy futures contracts on

NYMEX.

Intergovernmental Cooperation

The Commission worked to limit the impact of the liquidation

of Refco LLC one of the largest retail commodity

brokers in the world. Commission staff worked cooperatively

and successfully with SROs, industry participants,

government officials, and the U.S. Bankruptcy Court to

ensure that futures market positions of Refco customers

and more than $7 billion in customer funds were safely

and securely protected.

The Commission, jointly with the SEC, promulgated

final regulations to permit trading of futures contracts on

debt indexes and debt securities. The joint rulemaking was

necessitated by statutory obstacles making it difficult to

trade these products. The regulations provide a definition

for broad-based debt security indexes; as a result, futures

transactions on these indexes will be able to trade subject

to the sole jurisdiction of the CFTC. And, for the first time,

the regulations permit trading of security futures products

based on debt securities, subject to joint regulation by the

CFTC and SEC.

Electronic Markets

The Commission has worked cooperatively with the

United Kingdoms (U.K.) Financial Services Authority

(FSA) to obtain and share, on a bilateral basis, information

needed to address common surveillance issues arising

from the trading of economically linked futures contracts

in the U.K. and U.S. The Commission recognizes that, as

global markets continue to become linked electronically,

no one regulator will have all of the information needed

to carry out its customer and market protection mandate

and therefore each regulator must cooperate with its foreign

regulatory counterparts.

Goal Two Summary

While our country is the beneficiary of explosive growth in the futures industry, the risk of fraud and manipulation is

always present. The trend toward electronic trading platforms and the expanding complexity of trading instruments have

challenged the Commission to reconfigure its ability to identify, investigate, and take action against parties involved in

violating applicable laws and regulations. If evidence of criminal activity is found, matters are referred to state or Federal

authorities for prosecution under criminal statutes.

Over the years, the Commission has taken action in a number

of cases involving manipulation or attempted

manipulation

of commodity prices. A variety of administrative sanctions, such as bans on futures trading, civil monetary

penalties, and restitution orders, is available to the Commission. The Commission may also seek Federal court injunctions,

asset freezes, and orders to disgorge ill-gotten gains.

Strategic Goal Two

Protect market users and the public.

Outcome 2.1 Violations of Federal commodities laws are detected and prevented.

Annual Performance Goal 2.1 Violators have a strong probability of being detected and sanctioned.

Performance Measures

2.1.1. Number of enforcement investigations opened during the fiscal year.

2.1.2. Number of enforcement cases filed during the fiscal year.

2.1.3. Percentage of enforcement cases closed during the fiscal year in which the Commission obtained sanctions, e.g.,

civil monetary penalties, restitution and disgorgement, cease and desist orders, permanent injunctions, trading bans,

and registration restrictions.

2.1.4. Cases filed by other criminal and civil law enforcement authorities during the fiscal year that included cooperative assistance

from the Commission.

Outcome 2.2 Commodity professionals meet high standards.

Annual Performance Goal 2.2 No unregistered, untested, or unlicensed commodity professionals.

Performance Measures

2.2.1. Percentage of self-regulatory organizations that comply with core principles.

2.2.2. Percentage of derivative clearing organizations that comply with core principles.

2.2.3. Percentage of professionals compliant with standards regarding testing, licensing, and ethics training.

2.2.4. Percentage of self-regulatory organizations that comply with requirement to enforce their rules.

2.2.5. Percentage of total requests receiving CFTC responses for guidance and advice.

Outcome 2.3 Customer complaints against persons or firms registered under the Act are handled effectively and expeditiously.

Annual Performance Goal 2.3 Customer complaints are resolved within one year from the date filed and appeals are resolved

within six months.

Performance Measures

2.3.1. Percentage of filed complaints resolved within one year of the filing date.

2.3.2. Percentage of appeals resolved within six months.

Strategic Goal Two

Performance Trends for Goal Two

An ever larger segment of the population has money at

risk in the futures markets, either directly or indirectly

through pension funds or ownership of shares in publicly

held companies that participate in the markets.

The Enforcement program works to protect market

users and the public by promoting compliance with, and

deterring violations of, the CEA and Commission regulations.

The majority of the work in this area involves investigating

and prosecuting enforcement actions in matters

involving fraud and imposing sanctions against wrongdoers.

These actions send a message to industry professionals

about the kinds of conduct that will not be tolerated.

Enforcement Investigation and Litigation

During FY 2006, the Commission filed 38 enforcement

actions and its Enforcement program opened 123 investigations

of potential violations of the Act and Commission

regulations. The Commission obtained record

relief against enforcement action defendants monetary

penalties imposed in FY 2006, including restitution, in the

amount of $256,724,698 and civil monetary penalties, in

the amount of $189,232,437, exceeded any other year in

Commission history.

While the Commissions Enforcement program

continued to perform at a high level, current resource constraints

had an adverse impact. For example, the 38 cases

filed fell short of the Commissions performance target of

60 cases for FY 2006. Due to a hiring freeze over the last

two fiscal years, the Division of Enforcement (Enforcement)

lost 11 percent of its staff and was forced to operate

with fewer staff members. Coming at a time when the

Enforcement programs litigation docket and the complexity

of matters investigated, such as investigation of alleged

market manipulation, are at historical highs, the Commission

believes that the hiring freeze contributed to this performance

result. Moreover, the Commission believes that

these resource constraints have the possibility of adversely

affecting future performance as well.

Enforcement staff are operating at full capacity and

shifting resources from important investigations to ongoing

and future litigation demands limits the ability to

pursue new investigations as shown in the metrics below.

If the Enforcement program is unable to bring actions

because of insufficient resources, other authorities will not

be available to step in and fill the void. SROs can take action

only against their own members, and their sanctions

cannot affect conduct outside their jurisdiction or markets.

In addition, other Federal regulators and state regulators

have limited jurisdiction and expertise in handling futures-

related misconduct. Finally, while criminal prosecutions

by the Department of Justice (DOJ) are an important

adjunct to effective enforcement of the CEA, cooperative

enforcement still requires the active use of Commission

FTEs to assist DOJ in their criminal prosecutions.

Performance Measure 2.1.1

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Number of enforcement investigations opened during the

fiscal year

215

131

100

123

Performance Measure 2.1.2

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Number of enforcement cases filed during the fiscal year

Performance Measure 2.1.3

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage of enforcement cases closed during the fiscal

year in which the Commission obtained sanctions, e.g., civil

monetary penalties, restitution and disgorgement, cease and

desist orders, permanent injunctions, trading bans, and registration

restrictions

99%

100%

Performance Highlights for Goal Two

The following are the highlights of Commission performance

for Goal Two:

Foreign Currency Fraud Enforcement

During FY 2006, the Commission filed six enforcement

actions against firms and individuals selling illegal forex

futures and option contracts, bringing the total of such

actions to 93 since enactment of the CFMA in December

2000. To date, the Commission has obtained in these

enforcement actions approximate monetary sanctions of

$292 million in civil monetary penalties and $182 million

in restitution.

In March 2006, Commissioner Michael V. Dunn was

appointed to head the Commissions forex task force.

This task force seeks to alert and educate members of the

general public about the growing epidemic of fraudulent

solicitations and sales of forex to retail customers. The task

force has two goals: 1) to raise consumer awareness regarding

forex fraud through direct educational efforts; and

2) to encourage state, local and Federal authorities, as well

as consumer advocacy groups and industry organizations,

to assist the Commissions efforts in fighting forex fraud.

Manipulation, Attempted Manipulation, and False

Reporting Enforcement

On June 28, 2006, the Commission filed a civil injunctive

enforcement action against BP Products North America,

Inc. (BP), a wholly-owned subsidiary of BP plc, alleging

that BP manipulated the price of February 2004 TET physical

propane by, among other things, cornering the market

for February 2004 TET physical propane. (The term TET

propane refers to propane that is deliverable at the TEPPCO

storage facility in Mont Belvieu, Texas, or anywhere

within the TEPPCO system. TEPPCO is an acronym for

Texas Eastern Products Pipeline Co, LLC.)

The Commission also charged BP with attempting to

manipulate the price of April 2003 TET physical propane

by attempting to corner the April 2003 TET physical

propane market. According to the lawsuit, TET propane

is the primary propane used for residential and commercial

heating in the Northeast U.S., particularly in rural

areas that are not served by natural gas pipelines, and the

price of TET propane at Mont Belvieu affects the price of

propane paid by consumers. Furthermore, prices of TET

propane affect the price of the NYMEX futures contract

for propane, in part because the NYMEX propane contract

provides for delivery of propane at TEPPCO. CFTC v. BP

Products North America, Inc., No. 06C 3503 (N.D.Ill. filed

June 28, 2006).

With the filing of the BP enforcement action, the

Commission has, since December 2002, filed a total of 35

enforcement actions charging a total of 55 respondents/

defendants (31 companies and 24 individuals) with alleged

wrongdoing in the energy markets. The Commission

has settled 27 of these enforcement actions and obtained

$302,863,500 in civil monetary penalties. Eight Commission

energy market-related enforcement actions remain

pending. The Commissions Division of Enforcement is

currently investigating approximately 70 individuals and

companies for alleged violations in the energy sector.

Enforcement Actions Against Commodity Pool

Operators and Commodity Trading Advisors

Customers may be harmed by unscrupulous CPOs and

CTAs, including those operating hedge funds. These

enforcement actions typically involve investments in commodity

pools, including self-styled hedge funds, in which

the customers funds were misappropriated or misused,

or where customers were victimized by solicitation fraud

involving misrepresentations of assets under management

and/or profitability. The majority of the Commissions

pool fraud cases are brought against unregistered CPOs

and/or CTAs. These cases tend to involve Ponzi schemes or

outright misappropriation, as opposed to legitimate hedge

fund operations. During FY 2006, the Commission filed

11 enforcement actions against commodity pools, hedge

funds and CPOs, bringing the total number of actions

filed in this program area to 53 over the past six fiscal

years. The Commissions Division of Enforcement currently

has 55 pending investigations of commodity pools,

hedge funds, CPOs, and CTAs.

Quick-Strike Enforcement Actions

The Commission is committed to responding quickly to

enforcement investigations that uncover ongoing fraud.

Quick-strike cases are civil injunctive actions that generally

are filed in Federal district courts within days or weeks of

the discovery of the illegal activity, enabling the Commission

to stop fraud at an early stage and to attempt to

preserve customer funds. During FY 2006, the Commission

prosecuted five quick-strike cases, which were all filed

within four months of opening the related investigation.

Consumer Advisory

In FY 2006, the Commission issued a Consumer Advisory,

Beware Of Promises of Easy Profits from Commodity Trading

Based on Seasonal Demand and Other Well-Known Public

Information. The Advisory warns consumers to watch out

for possibly fraudulent claims that profits on commodity

futures or option trading can be made as a result of

changes in the prices of physical commodities based on

seasonal weather patterns or other well-known events. All

of the Commissions Consumer Advisories are available

on its Web site at http://www.cftc.gov/cftc/cftccustomer.htm

Overall FY 2006 Enforcement Results

During FY 2006, the Commissions Division of Enforcement

filed a total of 38 enforcement actions in the following

program areas: Manipulation, Attempted Manipulation

and False Reporting; Commodity Pools, Hedge

Funds, CPOs, CTAs, Managed Accounts, and Trading

Systems; FCMs, IBs and their APs; Foreign Currency Cases;

Other Illegal Off-Exchange Cases; Trade Practices; Financial,

Supervision, Compliance and Recordkeeping; and

Statutory Disqualification. During FY 2006, Enforcement

also obtained sanctions in Commission enforcement actions

that included orders to pay a total of $257 million

in restitution and approximately $189 million in civil

monetary penalties.

Goal Three Summary

The Commission focuses on issues of market integrity, seeking to protect: 1) the economic integrity of the markets so

that they may operate free from manipulation; 2) the financial integrity of the markets so that the insolvency of a single

participant does not become a systemic problem affecting other market participants; and 3) the operational integrity

of the markets so that transactions are executed fairly and proper disclosures to existing and prospective customers are

made.

Strategic Goal Three

Ensure market integrity in order to foster open, competitive, and financially sound markets.

Outcome 3.1 Clearing organizations and firms holding customer funds have sound financial practices.

Annual Performance Goal 3.1 No loss of customer funds as a result of firms failure to adhere to regulations. No customers

prevented from transferring funds from failing firms to sound firms.

Performance Measures

3.1.1. Lost funds:

a) Percentage decrease in number of customers who lose funds.

b) Amount of funds lost.

3.1.2. Number of rulemakings to ensure market integrity and financially sound markets.

3.1.3. Percentage of clearing organizations that comply with requirement to enforce their rules.

Outcome 3.2 Commodity futures and option markets are effectively self-regulated.

Annual Performance Goal 3.2 No loss of funds resulting from failure of self-regulated organizations to ensure compliance

with their rules.

Performance Measures

3.2.1. Percentage of intermediaries who meet risk-based capital requirements.

3.2.2. Percentage of self-regulatory organizations that comply with requirement to enforce their rules.

Outcome 3.3 Markets are free of trade practice abuses.

Annual Performance Goal 3.3 Minimize trade practice abuses.

Performance Measures

3.3.1. Percentage of exchanges deemed to have adequate systems for detecting trade practice abuses.

3.3.2. Percentage of exchanges that comply with requirement to enforce their rules.

Outcome 3.4 Regulatory environment is flexible and responsive to evolving market conditions.

Annual Performance Goal 3.4 Rulemakings issued and requests responded to reflect the evolution of the markets and protect

the interests of the public.

Performance Measures

3.4.1. Percentage of CFMA Section 126(b) objectives addressed.

3.4.2. Number of rulemakings, studies, interpretations, and guidances to ensure market integrity and exchanges compliance

with regulatory requirements.

3.4.3. Percentage of requests for no-action or other relief completed within six months related to novel market or trading

practices and issues to facilitate innovation.

3.4.4. Percentage of total requests receiving CFTC responses for guidance and advice.

Strategic Goal Three

Performance Trends for Goal Three

In fostering open, competitive, and financially sound markets, the Commissions two main priorities are to avoid

disruptions to the system for clearing and settling contract obligations and to protect the funds that customers entrust

to FCMs. Clearing organizations and FCMs are the backbone of the exchange system; together, they protect against the

possibility that the financial difficulties of one trader may become a systemic problem for other traders.

The Commission also works with the exchanges and NFA to monitor closely the financial condition of the FCMs

themselves, who must provide the Commission, exchanges, and NFA with various monthly, quarterly, and annual

financial reports. The exchanges and NFA also conduct audits and daily financial surveillance of their respective member

FCMs. Part of this financial surveillance involves looking at each FCMs exposure to losses from large customer positions

that it carries. As an oversight regulator, the Commission reviews the audit and financial surveillance work of the

exchanges and NFA but also monitors the health of FCMs directly, as appropriate. The Commission also periodically

reviews clearing organization procedures for monitoring risks and protecting customer funds.

Protecting Customer Funds

Commission staff closely monitor the operations of registrants in possession of customer funds. There were no losses

of regulated customer funds as a result of firm failures or the inability of customers to transfer their funds from a failing

firm to a sound firm in 2005 or 2006.

Performance Measure 3.1.1

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Lost funds:

a) Percentage decrease in number of

customers who lose funds

b) Amount of funds lost

Self-Regulatory Organization Compliance

During FY 2006, the Division of Clearing and Intermediary Oversight (DCIO) completed a review of the NFAs program

for the oversight of CPOs and CTAs, and initiated a review of the financial and sales practice program of the CBOT.

These reviews included assessments of the disciplinary programs of the NFA and CBOT, respectively. DCIO presented a

report to the Commission stating that NFA was complying with the CEA and its delegated responsibilities. The review of

the CBOT is still in progress at this time, but no material deviations from CEA core principles have been observed.

Performance Measure 3.1.3

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage of clearing organizations that comply with requirement

to enforce rules

100%

Performance Measure 3.2.2

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage of self-regulatory organizations that comply with

requirement to enforce their rules

100%

Performance Measure 3.3.2

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Percentage of exchanges that comply with requirement to

enforce their rules

100%

Performance Highlights for Goal Three

The following are the highlights of Commission performance

for Goal Three:

Capital Computation and Risk Models

The Commission adopted amendments to its regulations

that recognize the growing use by FCMs of internally

developed mathematical models for value-at-risk (VaR),

especially in light of SEC regulations that permit well-capitalized

broker-dealers to incorporate VaR measurements

in the market risk and credit risk capital deductions that

are required for their proprietary trading assets. FCM/broker-

dealers who are registered with both the Commission

and the SEC, and who have received SEC approval for

their VaR-based market risk and credit risk deductions,

are permitted to use the same deductions when calculating

their capital under amended Commission Regulation

1.17. When compared to the capital deductions that

Commission Regulation 1.17 (or similar SEC regulations)

otherwise would require, capital deductions based on VaR

measurements are aligned more specifically to the risk

characteristics of the firms trading portfolio. FCMs using

such market risk and credit risk capital deductions are required

to provide to the Commission, on a periodic basis,

information related to their VaR models.

SRO Acceptable Practices

Recognizing that increased competition and changing

ownership models are dramatically transforming the

futures markets, the Commission proposed acceptable

practices for complying with Core Principle 15 relating

to exchange governance and conflicts of interest. The

acceptable practices call: 1) for each exchanges board to

be composed of at least 50 percent non-member public

directors; 2) for each exchange to establish a board-level

Regulatory Oversight Committee composed of only non-

member public directors; and 3) for exchange disciplinary

panels to include at least one public participant and not to

be dominated by any group or class of exchange members.

The proposal also offers guidance on the definition of

public director.

Foreign Currency

In FY 2006, the Commission approved numerous rules

submitted by NFA that were intended to address ongoing

problems in the off-exchange retail forex market

by, among other things: requiring higher net capital for

certain FCMs and forex option dealers; clarifying that enhanced

supervisory requirements applicable to other NFA

members also apply to forex dealer members, including

requiring the recording of conversations with customers

if specified percentages of APs had been previously

employed by disciplined firms, i.e., firms permanently

barred from the industry as a result of deceptive telemarketing

practices or promotional material; requiring NFA

Forex Dealer Members to file weekly reports; and requiring

additional disclosure on the bankruptcy consequences of

forex trading.

Foreign Board of Trade Access to U.S. Traders

The Commission continued its policy of issuing no-action

letters in response to requests by foreign boards of trade to

permit placement of electronic terminals in the U.S. without

requiring contract market designation for those boards

of trade. In FY 2006, the Commission issued no-action letters

to two additional foreign exchanges to permit them to

make their electronic trading and order matching systems

available to their respective members in the U.S. without

obtaining contract market designation or registration as a

derivatives transaction execution facility.

Foreign Board Of Trade Hearing

On June 27, 2006, the Commission held an open hearing

to obtain the views of interested parties on the issue of

what constitutes a board of trade, exchange, or market

located outside the U.S., its territories, or possessions as

that phrase is used in Section 4(a) of the CEA. The hearing

was undertaken in connection with the Commissions

ongoing review of its policy, initiated in 1999, of having

staff issue no-action letters in response to requests by

foreign boards of trade to permit placement of electronic

terminals in the U.S. without requiring contract market

designation for those boards of trade. Participants at the

June 27th hearing included representatives of DCMs, foreign

boards of trade, foreign regulators, market professionals

and commercial users of futures products. In addition

to views expressed at the hearing, the Commission also

solicited views on the same topic through a concurrent

public comment period.

Forward Looking

Future Effects and Performance

Challenges

The above performance metrics and the industry indicators

shown on pages eight through 13 reflect a dynamic

industry full of growth and potential. However, where

there is growth, change is ever present.

Possible future effects and challenges include:

Technology

Technology continues to make it possible for market

participants to trade globally 24 hours a day. This

presents a challenge to the Commission to maintain a

robust, yet flexible, regulatory framework as market participants

have an increasing number of choices available

to them as to how and where to trade.

The expansion of electronic trading will require an increase

in Commission staff trained to carry out oversight

of more technologically driven markets and self-regulatory

systems.

As electronic trading of futures and options on Commision-

regulated exchanges becomes the norm the

Commission must upgrade its own technology and

infrastructure so that it may effectively discharge its

statutory mandate of deterring and preventing price

manipulation and any other disruptions to the integrity

of the markets the Commission regulates.

Globalization

The increasing globalization of the futures and option

markets requires new staff competencies, including

knowledge of how individual overseas markets operate

and are regulated, how cross-border trading and clearing

systems operate, and what law, especially bankruptcy

law, applies in cross-border transactions.

The possibility of market disruptions caused by economic

changes, terrorism, epidemics, natural disasters

or political developments could trigger global market

concerns. In such an integrated global environment, no

one regulator will have all of the information or jurisdiction

over markets, firms and persons, that is needed

to ensure customer and market protections. Thus, our

challenge will be to work with and coordinate regulation

globally.

Marketplace

Development and growth of renewable energy sources

(i.e., biofuels) could impact existing energy markets.

Disruption of oil exports to the U.S. may disrupt energy

markets.

A significant portion of the power grids may be disabled

for an extended period of time, crippling markets.

Changes in the structure of the futures and options

industry, such as the conversion of exchanges from

member-owned entities to publicly-listed corporations,

exchange mergers, and the introduction of new and

novel contracts will mean that the Commission will require

more staff to review novel or increasingly complex

legal and regulatory issues.

Government

Congress could pass new legislation that may impact

the futures markets.

Congress may require an investigation of certain markets.

Congress may not appropriate adequate funds for the

Commission to effectively discharge its mission-critical

functions

Management

Competition to hire and retain staff is intense in a job

market where scarce mission-critical skills command

premium compensation levels. Even at pay parity

salaries, cost of living increases make recruitment and

retention of a talented and qualified workforce difficult.

Financial Summary

2006

2005

(As Restated)

Condensed Balance Sheet Data

Fund Balance with Treasury

$ 20,055,508

$ 23,464,887

Property, Equipment, and Software, Net

3,674,493

1,919,650

Accounts Receivable

63,855

185,927

Prepayments

461,038

Other (Custodial)

5,756,605

28,663,845

Total Assets

$ 30,011,499

$ 54,234,309

FECA Liabilities

$ 311,285

$ 629,800

Payroll, Benefits and Annual Leave

9,182,837

8,082,514

Contingent & Deposit Fund Liabilities

59,088

20,094

Other Deferred Lease Liabilities

2,837,403

2,166,518

Accounts Payable

2,574,535

1,692,411

Custodial Liabilities

5,756,605

28,663,845

Total Liabilities

$ 20,721,753

$ 41,255,182

Cumulative Results of Operations

$ (4,568,800)

$ (6,106,083)

Unexpended Appropriations

13,858,546

19,085,210

Total Net Position

9,289,746

12,979,127

Total Liabilities and Net Position

$ 30,011,499

$ 54,234,309

Condensed Statements of Net Cost

Total Cost

$ 104,256,065

$ $100,132,194

Net Revenue

(23,150)

(114,705)

Total Net Cost of Operations

$ 104,232,915

$ 100,017,489

Net Cost by Strategic Goal

Goal One - Economic Utility

$ 33,354,533

$ 34,005,946

Goal Two - Market User and Public

40,650,837

40,006,996

Goal Three - Industry

30,227,545

26,004,547

$ 104,232,915

$ 100,017,489

Financial Highlights

Financial Discussion and Analysis

The CFTC prepares annual financial statements in accordance

with GAAP for Federal government entities and

subjects the statements to an independent audit to ensure

their integrity and reliability in assessing performance.

Management recognizes the need for performance and

accountability reporting, and fully supports assessments of

risk factors that can have an impact on its ability to do so.

Improved reporting enables managers to be accountable

and supports the concepts of the Government Performance

and Results Act (GPRA), which require the Commission to:

1) establish a strategic plan with programmatic goals and

objectives; 2) develop appropriate measurement indicators;

and 3) measure performance in achieving those goals.

The financial summary as shown on page 26 highlights

changes in financial position between September 30, 2005

and September 30, 2006. This overview is supplemented

with brief descriptions of the nature of each required

financial statement and its relevance. Certain significant balances

or conditions featured in the graphic presentation are

explained in these sections to help clarify their relationship

to Commission operations. Readers are encouraged to gain

a deeper understanding by reviewing Commission financial

statements and notes, and the accompanying audit report

presented in the Financial Section of this report.

Understanding the Financial Statements

The CFTC presents financial statements and notes in the

format required for the current year by OMB Circular

A-136, Financial Reporting Requirements, which is revised

annually by the OMB in coordination with the U.S. Chief

Financial Officers Council. CFTC current year and prior

year financial statements and notes are presented in a

comparative format.

Balance Sheet

The balance sheet presents, as of a specific point in time,

the economic value of assets and liabilities retained or

managed by the Commission. The difference between

assets and liabilities represents the net position of the

Commission.

The balance sheet reflects total assets of $30 million,

an almost 45 percent decrease from FY 2005. This decrease

is attributable to custodial fines and interest receivables

from the Civil Monetary Sanctions Program. The CFTC

litigates against defendants for alleged violations of the

CEA, as amended. Violators may be subject to a variety

of sanctions including fines, injunctive orders, bars or

suspensions, rescissions of illegal contracts, disgorgement,

and restitution to customers. When collectable custodial

receivables (non-entity assets) are high, these fines and

penalties that have been assessed and levied against businesses

for violation of law dominate the balance sheet.

In FY 2005, the majority of approximately $28.7

million in net custodial receivables can be attributed

to two debts totaling approximately $24 million. The

energy company El Paso owed $10.3 million as the second

installment of a $20 million dollar judgment, paid March

2006, and DBS Capital, Inc. and Douglas Stevens owed

$14.1 million pursuant to a June 2005 order. The latter

receivable was maintained after allowances on the FY

2005 financials because almost one million dollars in

frozen funds had been collected, and staff were pursuing

other funds in a foreign bank. With the passage of time,

the Commission determined the chances of collecting

the remaining funds had diminished and a full allowance

for the DBS Capital, Inc. and Douglas Stevens receivable

was taken. Of the remaining 15 receivables for FY 2005,

seven were paid in full; one was partially paid; two others

remain as net receivables because payment is not yet

due; one was written off; and allowances were taken on

the remaining four. For FY 2006, the majority of the $5.7

million net receivables can be attributed to a $4.2 million

debt imposed on Dominion Resources in the last days of

the fiscal year, and collected in early October 2006.

As should be expected from a small regulatory agency,

payroll, benefits, and annual leave make up the majority

of CFTC liabilities. Several factors influenced the change

in the Commissions net position during FY 2006. This, as

noted above, includes the timing of prior year write-offs of

old debt, and the overall case management and analysis of

debt by the Division of Enforcement.

Statement of Net Cost

The statement of net cost is designed to present the components

of the net cost of the Commission. Net cost is the gross

cost incurred less any revenues earned from Commission

activities. The statement of net cost is categorized by the

Commissions strategic goals. The Commission experienced

a four percent increase in the total net cost of operations

during FY 2006. This is consistent with the increase in our

appropriation.

of operations during FY 2006. This is consistent with the

increase in our appropriation.

Goal One, which tracks activities related to market

oversight continues to require a significant share of Commission

resources, experienced a one percent decrease in

net cost in operations, in FY 2006, decreasing to $33.4

million.

Goal Two is representative of efforts to protect market

users and the public. In FY 2006, the Goal Two net cost of

operations rose to $40.7 million, a two percent increase.

These added funding permitted to Commission to pursue

a number of highly complex cases, many which are ongoing.

The impact of this work has yet to be reflected on the

balance sheet.

The net cost of operations for Goal Three, ensuring

market integrity, was $30.2 million, in FY 2006. The decision

to allocate an increase of 16 percent to this goal was

made by the Commission, in FY 2006, in response to market

concerns when futures brokerage Refco LLC collapsed

amid an accounting fraud. Moreover, as futures markets

generally become more global in nature, the Commission

is increasingly called upon to register overseas clearinghouses

and futures firms, to approve complex cross-border

trading and clearing linkages, and to perform effective

ongoing supervision. This requires the Commission to

invest resources in developing and maintaining effective

relationships with foreign regulatory authorities.

Statement of Budgetary Resources

This statement provides information about the provision

of budgetary resources and their status as of the end of the

reporting period. Information in this statement is consistent

with budget execution information and the information

reported in the Budget of the U.S. Government.

The variances in this statement are mainly due to the

increase in the appropriations received in FY 2006. The

increase was used to maintain a steady state and funded

benefits and compensation, lease expenses, printing, and

services to support systems users, telecommunications,

operations, and maintenance of technology equipment.

Gross outlays increases are mainly due to the increase in

the disbursements for payroll and benefits, netted by a

decrease in the disbursements in a no-year appropriation

and expired-year appropriations.

Statement of Financing

This statement demonstrates the relationship between an

entitys proprietary and budgetary accounting information.

It links the net cost of operations (proprietary) with

net obligations (budgetary) by identifying key differences

between the two statements. This statement is structured

to identify total resources used during the fiscal year, and

makes adjustments based on whether the resources were

used to finance the net obligations or net cost.

For FY 2006, this statement identifies the major

components of the net cost of operations as $99.6 million

of resources used to finance activities, and $3.8 million of

resources used to finance items not part of the net cost of

operations. As noted earlier, the total net cost of operations

for FY 2006 is a little over $104 million.

Statement of Custodial Activity

This statement provides information about the sources

and disposition of non-exchange revenues. Non-exchange

revenue at the CFTC is primarily represented by fines,

penalties, and forfeitures assessed and levied against businesses

and individuals for violations of the CEA. Other

non-exchange revenue includes registration, and filing and

appeal fees, as well as general receipts. The statement of

custodial activity reflects total non-exchange revenue collected

(cash collections) of $13.6 million and a transfer of

the collections to the Treasury in the same amount.

Historical experience has indicated that a high percentage

of custodial receivables proves uncollectible. The

methodology used to estimate the allowance for uncollectible

amounts related to custodial accounts is that custodial

receivables are considered 100 percent uncollectible unless

otherwise noted in the judgment. An allowance for uncollectible

accounts has been established and included in

accounts receivable on the balance sheet. The allowance

is based on past experience in the collection of accounts

receivable and analysis of outstanding balances. Accounts

are re-estimated quarterly based on account reviews and

determination that changes to the net realizable value

are needed. The re-estimate can cause wide swings in the

statement line that reports Changes in Accounts Receivable.

Future Business Trends and Events

Almost everything in the futures industry has fundamentally

changed over the last 20 years from the products

that are trading to the platforms on which they are traded.

As the Commission looks ahead, we expect technology,

globalization, and innovation will continue to drive

growth in the markets we regulate.

During this time of rapid change, the Commission

expects to lose most of its experienced career staff, primarily

through retirement. During FY 2006, the Commission

experienced its first large wave of these retirements.

From a performance perspective, the Commission has

struggled to operate at the level needed to ensure that it

has the tools and resources necessary to do the job expected

of it by the Congress, the Administration, and the

American people. The Commission must make difficult

choices about how it will use its limited resources.

It is anticipated that Commission efforts will be

scaled back to the extent increased productivity cannot

offset anticipated resource reductions. As noted in the

discussion of the net cost of operations, the Commission

attempts to balance its investment in three strategic goals,

each focusing on a vital area of regulatory responsibility.

To continue to be an effective regulator, the Commission

will need to place greater reliance on risk management

approaches to supervision. It will also continue to

leverage needed systems and data maintained by other

Federal agencies and, wherever possible, data repositories

maintained by self-regulatory organizations. Moving

forward the Commission will be required to confront the

jurisdictional challenges created by innovation and the

worldwide creation and expansion of futures and option

markets. This, coupled with a wide array of new surveillance

issues, is expected to significantly change the way the

Commission consumes and allocates resources across its

performance goals. From an operational perspective, the

Commission will continue to allocate and deploy its resources

in less traditional ways as described below. As this

process accelerates, the Commission seeks to transform

itself along the following dimensions.

Institutional Transformation

The Commission will concentrate on the costs of identifying

and controlling institutional risks, specifically, the risk

of impairment to the Commissions operations model,

reputation, and financial condition from failure to fully

comply with laws and regulations, internal controls, and

taxpayer expectations. This could lead to dramatic changes

in its workforce composition and geographical distribution.

Technology Transformation

Technology improvements will continue to empower the

Commission in the future by increasing the availability of

our most critical resource time. Through these improvements,

executive management may spend additional time

on policy analysis and decision-making rather than on the

processing and compiling of key data. The Commission

will increasingly leverage business processes, services, and

systems of larger agencies for internal operations, while

externally relying more on exchange databases when conducting

reviews and investigations.

Human Capital Transformation

Human capital management planning will emphasize

dedicating staff resources to core business lines, while

meeting support requirements through the use of leveraged

resources and competitive sources of service.

Management Overview

The CFTC is committed to management excellence and

recognizes the importance of strong financial systems and

internal controls to ensure accountability, integrity, and

reliability. This operating philosophy has permitted the

Commission to make significant progress documenting

and testing its internal controls over financial reporting

next year, as prescribed in OMB Circular A-123, Managements

Responsibility for Internal Control. The graph below

depicts all five components of the internal control process

that must be present in an organization to ensure an effective

internal control process.

Control Environment fosters the highest level of

integrity and personal and professional standards and

promotes internal control through leadership philosophy

and operating style.

Risk Assessment is the identification and analysis

of risks associated with business processes, financial

reporting, technology systems, and controls and legal

compliance in the pursuit of agency goals and objectives.

Control Activities are the actions supported by management

policies and procedures to address risk, e.g.,

performance reviews, status of funds reporting, and

asset management reviews.

Monitoring is the assessment of internal control performance

to ensure the internal control processes are

properly executed and effective.

Information and Communication ensures the agencys

control environment, risks, control activities, and performance

are communicated throughout the agency.

Management Challenges

Internal Control Process

MonitoringControl ActivitiesRisk AssessmentControl EnvironmentInformation

& CommunicationInformation

Communication

The Commission relies on its performance management

and internal control framework to:

ensure that its divisions and mission support offices

achieve their intended results efficiently and effectively;

and

ensure the maintenance and use of reliable, complete,

and timely data for decision-making at all levels.

The Commission strongly believes that the rapid

implementation of audit recommendations is essential to

improving its operations. Integration of Commission strategic,

budget, and performance data permits management

to make individual assurance statements with confidence.

Moreover, data-driven reporting provides the foundation

for Commission staff to monitor and improve its control

environment.

Management Assurances

The Statement of Assurance is required by the Federal

Managers Financial Integrity Act (FMFIA) and OMB Circular

A-123, Managements Responsibility for Internal Control.

The assurance is for internal controls over operational

effectiveness (we do the right things to accomplish our

mission) and operational efficiency (we do things right).

Statement of Assurance

CFTC management is responsible for establishing and

maintaining effective internal control and financial management

systems that meet the objectives of the Federal Managers

Financial Integrity Act (FMFIA). During the past fiscal year,

CFTC conducted its assessment of the effectiveness of internal

control over financial reporting, which includes safeguarding

of assets, and compliance with applicable laws and regulations,

in accordance with the requirements of OMB Circular A-123.

The Commission assessment is in agreement with the detailed

exceptions provided in the independent auditors report as of

September 30, 2006. Therefore, other than the exceptions

noted in Exhibit I of their audit report, Commission internal

controls were operating effectively, and no other material weaknesses

were found in the design or operation of the internal

control over financial reporting. In addition, the CFTC is able

to provide a qualified statement of assurance that the internal

controls and financial management systems meet the objectives

of FMFIA.

Reuben Jeffery III

Chairman

During FY 2006, in accordance with the FMFIA,

and using the guidelines of the OMB, the Commission

reviewed key components of its management and internal

control system.

The objectives of the Commissions internal controls

are to provide reasonable assurance that:

Obligations and costs are in compliance with applicable

laws;

Assets are safeguarded against waste, loss, unauthorized

use, or misappropriation;

Revenues and expenditures applicable to Commission

operations are properly recorded and accounted for to

permit the preparation of accounts and reliable financial

and statistical reports and to maintain accountability

over the assets; and

All programs are efficiently and effectively carried out

in accordance with applicable laws and management

policy.

The efficiency of the Commissions operations is

continually evaluated using information obtained from

reviews conducted by the Government Accountability

Office (GAO) and the Office of Inspector General (OIG),

specifically requested studies, or observations of daily

operations.

These reviews ensure that the Commissions systems

and controls comply with the standards established by

FMFIA. Moreover, managers throughout the Commission

are responsible for ensuring that effective controls are

implemented in their areas of responsibility. Individual

assurance statements from division and office heads serve

as a primary basis for the Chairmans assurance that management

controls are adequate. The assurance statements

are based upon each offices evaluation of progress made

in correcting any previously reported problems, as well

as new problems identified by the OIG, the GAO, other

management reports, and the management environment

within each office.

Commission organizations that have material weaknesses

are required to submit plans for correcting those

weaknesses. The plans, combined with the individual assurance

statements, provide the framework for continually

monitoring and improving the Commissions management

and internal controls. The items presented below

are illustrative of the work performed during FY 2005 and

2006:

Implemented analyses and initiatives that address challenges

identified by the OIG in FY 2005 concerning

strategic management of human capital;

Assessed gaps in compliance with the pay and benefits

provisions called for in Section 10702 of Public Law

107-171, Farm Security and Rural Investment Act of

2002;

Improved financial performance and expanded participation

in electronic government initiatives sponsored

by the OMB;

Took steps to become fully compliant with the Federal

Information Security Reform Act; and

Took action to correct reportable conditions and disclosed

noncompliance with laws and regulations identified

in the FY 2005 and FY 2006 independent auditors

report of the agencys financial statements and related

internal controls.

FMFIA Section 2, Management Control

The Commission has one declared material weakness

under FMFIA for FY 2006 in the area of financial reporting

that hinders preparation of timely and accurate financial

statements. The major impediments facing the Commission

and the actions its taking to resolve them fall across

the following areas:

Establishing the custodial fines and interest receivable

balance as well as estimating the allowance for loss on

each receivable. Over the next year the Commission will

rely on its new accounting system, and enhancements

to its case tracking processes and systems to correct this

impediment.

Accounting for leases and knowledge of accounting

principles. CFTC now recognizes lease expense, for rental

of its various office spaces, on a straight-line basis, as

required under U.S. generally accepted accounting principles.

CFTC restated its FY 2005 financial statements.

Improvements are needed in recording accruals and

preparing financial statements.CFTC did not properly

record the accounts payable, operating leases, subsequent

cash disbursements, and undelivered orders.

Over all these areas, 16 out of 95 transactions tested

were either inappropriately included or excluded from

accounts payable as of September 30, 2006. CFTC needs

to validate and improve its process to properly record its

accruals. It will evaluate the adequacy of the prior year

accrual by comparing subsequent payments received

after year-end against the accrual. It will consider making

changes to the accrual methodology based on the

results of the analysis.

The Commission did not declare any material weaknesses

in FY 2005.

FMFIA Section 4, Financial Management Systems

The Commission declared no systems nonconformance

under FMFIA during FY 2005. The independent auditors

report for FY 2005 disclosed one instance of noncompliance

that was required to be reported under Government

Audit Standards and OMB Bulletin 06-03, Audit Standards

for Federal Financial Statements. The auditors disclosed

noncompliance with the Federal Information Security

Management Act (FISMA), noting continued improvements

were required with entity-wide security and contingency

planning programs, access controls, segregation of

duties, and service continuity to fully meet guidelines of

the E-Government Act of 2002 and OMB Circular A-130,

Management of Federal Information Resources. The Commission

took corrective actions between June 30, 2005 and

June 30, 2006 that addressed the majority of the concerns

leading to the audit disclosure in particular with continuity

of operations. However, the independent auditors

report for FY 2006 continued to disclose noncompliance

with these two regulations. The agency will continue corrective

actions in FY 2007 to address these matters.

Inspector Generals FY 2006 Assessment

CFTC

Management Addresses Inspector

Generals FY 2005 Assessment

In the FY 2005 Performance and Accountability Report,

the Inspector General identified two serious management

challenges facing the Commission: 1) Human Resource

Planning, and 2) Challenges in the Marketplace.

The following is the Inspector Generals FY 2005 assessment

for each challenge and the Commissions actions

taken in FY 2006 to address these challenges.

Challenge #1, Human Resource Planning

FY 2005 IG Assessment:

Last year, we highlighted the forthcoming human resource

challenge likely to be faced by the agency in FY 2006. This year

that challenge is ever more apparent. By March 2006, current

estimates are that over 20 percent of CFTC staff including

28 percent of the agencys leadership positions will be eligible

for retirement. Consequently, based on these factors, this is a

significant challenge faced by a relatively small Federal agency

which will necessitate careful planning by management. The

OIG is heartened by the agencys decision to establish a Human

Capital Team to catalogue current skills of existing employees

and propose possible pathways for meeting this potential deficit

that is likely to occur in the next six months. We look forward

to the agency successfully accommodating the approaching

wave of employee retirements without materially disrupting the

performance of the agency.

FY 2006 Actions Taken or Actions in Progress:

To assure high-level attention to human capital planning

issues on an ongoing basis, agency leadership

directed the formation of the Pay Parity Governance

Committee (PPGC), in March 2006. The PPGC is a

permanent body with rotating membership from all offices,

divisions, and regions and is charged with identifying,

studying, and recommending solutions to agency

human resources challenges, particularly those that may

be positively affected by pay parity. It focuses on effective

use of the agencys authority to seek total compensation

parity with the other Federal financial regulators,

as provided by the 2002 amendments to the CEA, in

support of attracting, retaining, and developing agency

talent. The Office of Human Resources (OHR) provides

two technical representatives to support committee

research and communications. By meeting weekly since

March of 2006, the PPGC has made significant progress

by completing its initial project to prepare a compensation

philosophy that will guide future pay parity

program choices and to update the agency performance

management system so it can support the move to a

modern pay-for-performance system. These initiatives

will provide the requisite foundation of an improved

ability to account for and reward results, which will in

turn support effective implementation of programs to

strategically manage agency human capital assets.

Based on the successful launch of the Strategic Workforce

Planning Survey system in 2005, OHR has worked

with managers to help them act on that objective and

provided quantitative data that details the areas and

timeframes in which they stand to lose specific types

and levels of mission critical employee job competencies

through retirements or other attrition. By providing

assistance in the use of the online Talent Management

Action Plan template, OHR has encouraged planning

and responsive action by managers to close the potential

talent gaps in their units, since the tool facilitates

creation of targeted, prioritized human capital plans

down to the level of individual work units. At the same

time, OHR and the Office of Information and Technology

Services (OITS) have met regularly during the year

to enhance the reporting capability of the Strategic

Workforce Planning Survey system, so that managers

will continue to receive data on competencies at risk of

loss. Finally, OHR and OITS supported the first annual

update by employees of their online self-assessment

surveys, so that the inventory of employee job competencies

available to meet the agency mission remains up

to date.

In addition to aiding individual offices and divisions

and their subunits to create specific action plans, OHR

has acted to address human resource challenges that apply

across the agency. Armed with data on trends such

as the potential of 40 percent of CFTC supervisory and

managerial personnel to retire by 2009, OHR has rolled

out a customized suite of online managerial courses

from Harvard Business School Publishing and prepared,

during FY 2006, to provide all employees with the Skillsoft

online training facility. By funding these initiatives,

agency management