Testimony of Chairperson Brooksley Born on the CFTC's Budget and Annual Performance Plan, Before the U.S. House of Representatives, Committee on Agriculture Subcommittee on Risk Management and Speciality Crops on October 8, 1

TESTIMONY OF
BROOKSLEY BORN, CHAIRPERSON
COMMODITY FUTURES TRADING COMMISSION
ON THE CFTC'S BUDGET AND ANNUAL PERFORMANCE PLAN

BEFORE THE U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON AGRICULTURE
SUBCOMMITTEE ON RISK MANAGEMENT AND SPECIALTY CROPS

OCTOBER 8, 1998

Mr. Chairman and Members of the Subcommittee:

I am pleased to represent the Commodity Futures Trading Commission before this Subcommittee today to discuss the CFTC's FY 2000 OMB Budget Estimate and Annual Performance Plan and to report on the Commission's efforts fully to comply with the Government Performance and Result's Act of 1993 (GPRA or the Act.). Before I begin, I should note two points regarding the budget figures. First, the FY 2000 Budget represents the Commission's Budget Estimate for OMB and may change before the President's Budget is submitted to Congress in February 1999. Second, the increase requested for FY 2000 is an increase to the FY 1999 President's Budget instead of the FY 1999 appropriation. The Commission's FY 1999 appropriation is undetermined as of this date. However, the FY 1999 Agriculture Appropriations Bill, recently approved by the House and Senate Conference Committee, includes $61 million for the CFTC, or $2.4 million less than the President's Budget request.

The Commission's FY 2000 OMB Budget Estimate requests $67.7 million which represents an increase of $4.3 million, or seven percent, over the FY 1999 President's Budget. Approximately $2.9 million of the increase is necessary for the Commission to maintain its current level of services and operations. The remaining $1.4 million would support the addition of 21 full-time equivalents (FTE) -- a four percent increase in staff. The $4.3 million increase, when distributed by agency goal, represents a seven percent increase in Goal One: Protect the economic functions of the commodity futures and option markets; a five percent increase in Goal Two: Protect the market users and the public; and a seven percent increase in Goal Three: Foster open, competitively and financially sound markets. The requested increase will strengthen the Commission and increase its ability to oversee the growing vital futures and option markets that are critical to our nation's economy. The growth and expansion of the Commission's oversight and regulatory responsibility have been caused by increased contract trading volume, growth in over-the-counter derivatives and managed funds, expansion of Congressionally mandated responsibilities, increased internationalization of the markets and growth in market innovations and technological innovations.

As I stated last year at this subcommittee's GPRA hearing, the Commission strongly endorses the goals of the GPRA and believes that activities required by the Act can help agency officials plan and administer programs more effectively. GPRA also should enable us to allocate federal resources more efficiently and effectively.

As you know, last year the Commission unanimously adopted, as part of the GPRA process, a Mission Statement that incorporates the fundamental principles embodied in our statutory mandate. The mission of the Commodity Futures Trading Commission is:

to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and option markets.

The Commission also adopted the three agency goals that I mentioned earlier. Our mission statement and these three agency goals continue to provide the basis for the Commission's Strategic Plan and the Annual Performance Plan and remain unchanged from last year.

However, we have made other changes designed to strengthen our Plan, to make it more meaningful, and to increase its utility. As I indicated to this subcommittee last year, the Commission views strategic planning and annual performance planning as an ongoing, evolving process.

Let me outline briefly the changes we have made. First, a substantial effort has been made to rewrite the detailed narrative that supports each of the three agency goals. We sought to make it clearer and more concise. The narrative we developed last year reflected some strains we encountered in our first attempt to develop an Annual Performance Plan. It was a challenge for us to focus on agency goals rather than program goals since for years our staff have budgeted and conducted evaluations by program, but I am pleased to say that the Commission has made great strides in this effort and is now taking a broader view. We think the FY 2000 narrative summary of accomplishments by goal reflects a higher level of agency comfort with this goal-based approach to planning for the agency. This is a subtle change, but an important milestone for us in our effort to adopt the principles of the GPRA.

Second, in the past year the Commission's Strategic Planning Task Force met to consider improvements to the "Summary of Annual Performance Targets" table in the Annual Performance Plan. This table provides for each activity the performance goals, indicators and annual targets required to meet each outcome objective. We identified two majors challenges: 1) the need to reexamine the 50 work activities that directly support the agency's mission in order more precisely to state the activity performed and to eliminate possible duplication and 2) the need to reexamine the performance goals and indicators to identify more clearly what we are hoping to achieve by performing these activities. This past year, the Task Force examined the work activities, modifying and consolidating several of them and reducing the total number from 50 to 44. In the coming year, it will focus on strengthening performance goals and indicators by addressing such questions as: What is the "added value" of performing these activities? To what extent are the goals and indicators helpful in assessing whether program activities are achieving their intended purposes?

Third, the agency is in the process of adapting its established Quarterly Objectives review to conform with the Annual Performance Plan. The goal here is to use the performance data in the Quarterly Objectives review to evaluate whether we are meeting performance targets in our Annual Performance Plan. The Task Force has developed a draft template for linking these two processes. Once we test the validity of the template, we will synchronize the reports, a process that should begin this fiscal year.

Fourth, the Commission is working to improve its capacity to account for budgetary resources by activity, outcome objective, and goal. The Commission's financial reporting system currently has the capability of attributing staff hours to hundreds of Commission projects and activities. This capability has enabled us to provide budget data in both program-based and goal-based formats. Now we will attempt to link the activities in the current financial reporting system with the 44 activities in the Annual Performance Plan to streamline and to automate the process of accounting for staff resources by activity. We plan to test this linkage during the current fiscal year and, if the test is a success, to use it to formulate the FY 2001 Budget and Annual Performance Plan.

Finally, the agency continues to recognize that the successful implementation of our Strategic and Annual Performance Plans requires input from persons and entities potentially affected by, or interested in, our regulatory activities. It also requires that we balance competing interests in a manner consistent with our statutory mandate and agency mission. One of the ways the Commission obtains input is through regular meetings of the Commission's advisory committees. This input is reflected in actions taken by the Commission to be responsive to the competitive challenges facing the US futures industry and its customers, while at the same time preserving important customer protections and market safeguards. In this regard, during the past year, the Commission has been engaged in a comprehensive regulatory reform effort to update, modernize, and streamline regulations to improve market integrity and to protect market participants. These efforts include:

Implementing fast-track procedures for expedited processing and approval of new contract market designations and exchange rule changes. In FY 1998, the Commission used its fast-track review procedures for 38 of the 58 applications for new futures and option contracts. Of the 38 approved, 19 were approved on a 10-day fast-track and 19 on a 45-day fast-track. These procedures reduced the burden on exchanges and streamlined the processing of new designation applications and certain rule changes.

Implementing substantive reforms through modifying, eliminating, or enhancing current rules, such as: 1) approval of new rules that will allow exchanges to permit futures-style margining of options contracts; 2) approval of new rules to permit post-execution allocation of bunched orders of sophisticated customers of a commodity trading advisor or investment advisor; and 3) amendment of the net capital rule to eliminate the "short option value charge" against the capital of a futures commission merchant.

Implementing a pilot program to permit the trading of agricultural trade options, thereby responding to the increasing need of the agricultural community for risk management tools.

Permitting the use of electronic media technology when adequate measures exist to safeguard the public interest. For example, proposing amendments to recordkeeping requirements that expand the opportunities for registrants to use micrographic and electronic storage media for recordkeeping and eliminate the current requirement that paper records be maintained for two years.

Reducing the regulatory burden on futures commission merchants and introducing brokers by eliminating, for certain defined categories of financially sophisticated customers, risk disclosure previously required at the time these customers open an account.

Improving the fairness and efficiency of the administrative process: 1) by proposing new rules to establish a specific procedure for filing requests for no-action, exemptive, and interpretative letters to give structure to the process, to provide greater guidance to requesters, and to make the process more transparent to all interested parties and 2) by proposing amendments to CFTC Part 10 rules, which update procedures in administrative enforcement actions brought under the Commodity Exchange Act.

These are several of the reforms the agency has undertaken in response to concerns raised by regulated entities and persons.

Mr. Chairman, I would like to conclude by once again thanking you for your interest in these matters. I would also like to assure all members of this Subcommittee that we remain committed both to GPRA and to improving our planning and self-evaluation. We welcome the opportunity to work with Congress, the Office of Management and Budget, the General Accounting Office, other financial agencies, the regulated industry, users of the futures markets, and interested members of the public in refining our Strategic and the Annual Performance Plans.