The Office of Inspector General (OIG) conducts and supervises audits and investigations of programs and operations of the CFTC and recommends policies to promote economy, efficiency and effectiveness in CFTC programs and operations and to prevent and detect fraud and abuse. The OIG conducted a FY 2011 Assessment addressing the Commission's Most Serious Management Issues. The OIG's Assessment is located in the Other Accompanying Information section of the FY 2011 Agency Financial Report (AFR) and on the agency website at http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/oigmgmtchall2011.pdf.
In FY 2011, three external evaluations and one testimony relating to the mission of the CFTC were conducted by the U.S. Government Accountability Office (GAO); however, none of the studies resulted in CFTC-specific recommendations:
Proprietary Trading: Regulators Will Need More Comprehensive Information to Fully Monitor Compliance with New Restrictions When Implemented, GAO-11-529, July 13, 2011.
In addition to trading on behalf of customers, banks and their affiliates have conducted proprietary trading, using their own funds to profit from short-term price changes in asset markets. To restrain risk-taking and reduce the potential for federal support for banking entities, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) prohibits banking entities from engaging in certain proprietary trading. It also restricts investments in hedge funds, which actively trade in securities and other financial contracts, and private equity funds, which use debt financing to invest in companies or other less liquid assets. Regulators must implement these restrictions by October 2011.
In order to improve their ability to track and effectively implement the new restrictions on proprietary trading and hedge fund and private equity fund investments, the Chairperson of FSOC should direct the Office of Financial Research, or work with the staffs of the Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC), or both, to collect and review more comprehensive information on the nature and volume of activities that could potentially be covered by the act.
Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse, GAO-11-750, September 20, 2011.
Recently, concerns have arisen about the use of certain financial derivatives to avoid or evade tax obligations. As requested, this report (1) identifies and evaluates how financial derivatives can be used to avoid or evade tax liability or achieve differing tax results in economically similar situations, (2) evaluates Internal Revenue Service (IRS) actions to address the tax effects of investments in financial derivatives through guidance, and (3) evaluates IRS actions to identify financial derivative products and trends through information from other agencies.
Through their oversight roles for financial derivative markets, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) may have information on financial derivatives that is relevant to IRS. Although IRS communicates with SEC and CFTC on derivatives, it does not do so systematically or regularly. Strengthening partnerships would increase opportunities for IRS to gain information on new financial derivative products and uses. Studies of interagency coordination suggest that agencies should look for opportunities to enhance collaboration in order to achieve results that would not be available if they were to work separately, and a number of best practices exist to help agencies meet this goal.
To better ensure that economically similar outcomes are taxed similarly and minimize opportunities for abuse, the Secretary of the Treasury should undertake a study that compares the current approach to alternative approaches for the taxation of financial derivatives. To determine if changes would be beneficial, such a study should weigh the tradeoffs to IRS and taxpayers that each alternative presents, including simplicity, administrability, and economic efficiency.
Federal Chief Information Officers: Opportunities Exist to Improve Role in Information Technology Management, GAO-11-634, September 15, 2011.
The federal government invests billions in information technology (IT) each year to help agencies accomplish their missions. Federal law, particularly the Clinger-Cohen Act of 1996, has defined the role of Chief Information Officer (CIO) as the focal point for IT management within agencies. Given the longstanding challenges the government faces in managing IT and the continued importance of the CIO, GAO was asked to (1) determine the current roles and responsibilities of CIOs, (2) determine what potential modifications to the Clinger-Cohen Act and related laws could be made to enhance CIOs' authority and effectiveness, and (3) identify key lessons learned by CIOs in managing IT.
To ensure that CIOs are better able to carry out their statutory role as key leaders in managing IT, the Director of OMB should issue guidance to agencies requiring that CIOs' authorities and responsibilities, as defined by law and by OMB, are fully implemented, taking into account the issues raised in this report.
Dodd-Frank Act: Eleven Agencies' Estimates of Resources for Implementing Regulatory Reform, GAO-11-808T, July 14, 2011.
Before the Subcommittee on Oversight and Investigations, Committee on Financial Services, and House of Representatives, Nicole Clowers, Director of Financial Markets and Community Investment, made a statement for the record focusing on (1) the agencies' funding estimates and the sources of funds associated with implementing the Dodd-Frank Act, (2) agencies' estimates of the number of new entities that will be created and the full-time equivalents (FTEs) they anticipate needing to carry out new responsibilities, and (3) challenges that the agencies faced in developing these estimates. The testimony did not contain any recommendations.
GAO's findings and conclusion are available on its website at http://www.gao.gov.
In FY 2011, two reports relating to the mission of the CFTC were produced by the CFTC Office of Inspector General (OIG), each focusing on the cost-benefit aspects of rulemaking pursuant to the Dodd-Frank Act:
An Investigation Regarding Cost-Benefit Analyses Performed by the Commodity Futures Trading Commission in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act, CFTC OIG, April 15, 2011.
The Office of the Inspector General for the Commodity Futures Trading Commission investigated the formulation of cost benefit analyses for four separate rulemakings recently published by the Commodity Futures Trading Commission:
- Further Defining "Swap Dealer", "Security-based Swap Dealer", "Major Swap Participant", "Major Security-based Swap Participant", and "Eligible Contract Participant", 75 FR 80174 (December 21, 2010) (Joint proposed rule; proposed interpretations);
- Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and Major Swap Participants, 75 FR 81519 (December 28, 2010) (Notice of proposed rulemaking);
- Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010) (Notice of proposed rulemaking); and
- Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 (November 23, 2010) (Notice of proposed rulemaking).
Following enactment of the Dodd-Frank Act, the Chairman and Division Directors created 30 rulemaking teams. Because section 15(a) of the Commodity Exchange Act (the Act) required the consideration of a cost-benefit analysis for each rulemaking, the Office of General Counsel and Office of Chief Economist created a uniform methodology for cost-benefit analysis for use Agency-wide. That methodology, contained in a September 2010 memo signed by the General Counsel and the Chief Economist, set out in some detail the types of qualitative considerations that might inform a cost-benefit analysis, encouraged the use of both qualitative and quantitative data, and included a template for everyone to follow.
As a result, the Commission has initiated a review and revision of the cost-benefit analysis methodology, including the role of the Office of Chief Economist, for use in final rulemakings.
A Review Of Cost-Benefit Analyses Performed by the Commodity Futures Trading Commission in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act, CFTC OIG, June 13, 2011.
The Office of the Inspector General for the Commodity Futures Trading Commission reviewed the formulation of cost benefit analyses for four notices of proposed rulemakings recently published by the Commodity Futures Trading Commission:
- Protection of Cleared Swaps, Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, April 27, 2011, 76 FR 33818 (June 9, 2011) (segregation/bankruptcy rule);
- Risk Management Requirements for Derivatives Clearing Organizations, 76 FR 3698 (Jan 20, 2011) (DCO risk management rule);
- Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 76 FR 6715 (Feb. 8, 2011) (swap trading relationship documentation rule); and
- Core Principles and Other Requirements for Swap Execution Facilities, 76 FR 1214 (Jan. 7, 2011) (SEF core principles rule).
Following enactment of the Dodd-Frank Act, the Chairman and Division Directors created 30 rulemaking teams. Because section 15(a) of the Commodity Exchange Act (the Act) required the consideration of a cost-benefit analysis for each rulemaking, the Office of General Counsel (OGC) and Office of Chief Economist (OCE) created a uniform methodology for cost-benefit analysis for use Agency-wide. That methodology, contained in a September 2010 memo signed by the General Counsel and the Chief Economist, set out in some detail the types of qualitative considerations that might inform a cost-benefit analysis, encouraged the use of both qualitative and quantitative data, and included a template for everyone to follow.
Earlier this year the Chairman initiated a review and revision of the earlier cost-benefit analysis methodology crafted by the OGC and OCE in September 2010. The two offices issued new cost-benefit analysis guidance in May 2011. By its terms the updated guidance is applicable only to final rulemakings; however, it does clarify the role of the Office of Chief Economist, stating that the Office of Chief Economist:
"…will have a staff person on each rulemaking team, who will provide quantitative and qualitative input with respect to the costs and benefits of the final rulemaking, who should employ price theory economics or similar methodology to assess the costs and benefits of a rulemaking, and who will review each draft cost-benefit discussion."
CFTC OIG reports are available on the CFTC website at http://www.cftc.gov/About/OfficeoftheInspectorGeneral/index.htm.