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The performance target was not met for FY 2012. Title VIII of the Dodd-Frank Act created a new category of DCOs. The new category is defined as designated clearing entities (DCEs) and these entities could be DCOs that are considered to be systemically important to the marketplace where the failure of or disruption to the functioning of the DCE could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions and thereby threatening the stability of the financial system of the United States. These entities are required to comply with heightened risk management and prudential standards concerning payment, clearing, and settlement activities and the supervision of those activities, and provide advance notice of changes to their rules, procedures, or operations. The Commission is required to review annually, evaluate, and make a determination as to whether or not a SIDCO is in compliance with these heightened standards, as well as with the CEA and Commission regulations.

In July 2012, the Financial Stability Oversight Council (FSOC) designated three CFTC-registered DCOs as DCEs. The CFTC was assigned as primary regulator for two of the three DCEs; ICE Clear Credit LLC and Chicago Mercantile Exchange, Inc. The Commission will execute and perform examinations where the CFTC has been declared as the supervisory agency on an annual basis as required under Title VIII.

Title VIII of the Dodd-Frank Act mandated that the primary regulator shall consult with the Board of Governors of the Federal Reserve System (FRB) regarding the scope and methodology of all examinations for DCEs. FRB may, in its discretion, participate in any examination led by a supervisory agency. FRB has communicated to CFTC staff and to staff of the DCEs of its intention to participate on all examinations.

The CFTC did complete an examination for one of the two entities that have been designated as a DCE and of which the CFTC is the primary regulator. Eight core principles were selected for this review. The core principles selected were based on a risk evaluation and consisted of financial resources, participant and product eligibility, risk management, settlement procedures, treatment of funds, default rules and procedures, systems safeguards, and reporting. This was the first review of this entity and the core principles selected are those that are most important to the clearing operation and the risk management of that operation. During this examination two other Federal agencies participated and the CFTC led the efforts to coordinate fieldwork and post-fieldwork activities.

The Commission did not complete an examination for the second entity because FRB requested a delay in starting the examination until after designation occurred. The CFTC consented to this request and has completed plans for the first Title VIII examination. In August 2012, a risk assessment was performed to determine the core principles to be evaluated during the examination. Commission staff coordinated with FRB and completed the consultation regarding the scope and methodology of the examination in September 2012.

Due to the delay in designation of DCEs, Commission staff participated in quarterly meetings with DCOs that the Commission considered to be systemically important. Those meetings covered topics such as clearing activity highlights, clearing member surveillance, corporate governance, margin model changes, model governance, and overall liquidity of the DCO. These meetings highlighted changes at the DCO and allowed staff the opportunity to continue to monitor the DCOs.

The CFTC has also completed building systems tools to aid examiners when performing their work. Staff members were involved in the writing of the business requirements, the building of the tools, and the user acceptance testing of the tools. The tools help measure liquidity risk and credit risks.

DCEs are complex organizations that require annual examinations and adequate staffing resources to complete examinations in a comprehensive and efficient manner. Staff must meet the statutory mandate beginning October 2012 to review all DCEs on an annual basis if the CFTC has been designated as the primary regulator. Current staffing levels make achieving this goal difficult. In order to meet the statutory mandate, the Commission will primarily perform examinations of only DCEs. Examinations of DCOs that have not been declared systemically important will not be completed unless time permits.

The outlook for FY 2013 remains uncertain, as budgetary constraints and workforce continue. New tools delivered in FY 2012 will support an improvement in efficiency and effectiveness. The core principles require staff to undertake complex analysis and make assessments as to whether or not the DCO’s procedures are adequate to identify areas of risk. Staff should be supported with proper equipment and configuration to connect to CFTC programs in a fast and efficient manner and have the appropriate software to aid in the analysis. From the management perspective, computer hardware and software are also essential for improved collaboration, a requirement to efficiently completing fieldwork.

The performance target was not met for FY 2012. During this performance cycle, the team responsible for DCO reviews had only 14 staff to review 13 DCOs plus two DCEs. Not having enough staff to perform the reviews required the team to make a risk assessment of all 13 DCOs, and based on the results of the assessment, decided to review only a subset of the entire DCO community. It was determined that three DCOs would not be considered for an examination as they were inactive and had not cleared a trade in 2011 or 2012. Of the remaining 10 DCOs, three were selected for a review.

During FY 2012, eight core principles were selected for review purposes. The core principles selected were based on a risk evaluation and consisted of financial resources, participant and product eligibility, risk management, settlement procedures, treatment of funds, default rules and procedures, reporting, and record-keeping. This approach allowed staff to compare policies and procedures consistently across all DCOs that were examined.

The Commission implemented regulations that further defined the requirements DCOs must adhere to in order to be deemed in compliance with the core principles. As a result, staff updated existing procedures to meet the new requirements and developed new procedures for nine of the core principles. The Commission was also charged with the responsibility of assessing compliance with Regulation 39.11 regarding DCOs' financial resources. Under Regulation 39.11 all DCOs must submit quarterly filings to demonstrate compliance with the regulation. This regulation was effective May 7, 2012.

Staff members performing the reviews have continued to identify tools needed to complete examinations and have submitted such a list to ODT. While ODT has been able to dedicate some resources to develop two tools during FY 2012, others remain as outstanding. ODT continues to maintain these outstanding requests and assess the capacity to build some of them during FY 2013. Participants contribute throughout the software development life cycle, including user acceptance testing of each new tool. These tools help measure liquidity and credit risk.

The performance target was not met for FY 2012. The Commission issued orders in response to seven requests from DCOs during the fiscal year. These include orders vacating the DCO registration of CME Clearing Europe, NYMEX, and CBOT; orders amending cross-margining programs for OCC and NYPC; and 4(d) orders permitting ICE Clear Europe to commingle swaps and foreign futures, and futures and foreign futures. Of four requests that were filed and remain pending, two are for 4d orders to permit ICE Clear Credit and ICE Clear Europe, respectively, to commingle security-based swaps and swaps (these requests require coordination with the SEC); one is for a Regulation 39.14(b) order permitting the Natural Gas Exchange to use the accrual method of accounting for daily money settlement, for which an extension for compliance has been issued; and one is a request from certain independent system operators and regional transmission organizations for a 4(c) order exempting certain transactions that are authorized by a tariff or protocol approved by the Federal Energy Commission or the Public Utility Commission of Texas, for which a proposed order was published in August 2012.

Due to staff limitations and the resulting ongoing need to prioritize tasks based on their importance to the financial markets and/or their time sensitivity, it is anticipated that the CFTC will continue to be limited in its ability to process requests for orders (processing includes analyzing relevant legal and risk management issues, preparing a memorandum that documents the staff's analysis, preparing the final order, and briefing Commissioners regarding DCR's analysis and recommendations).

The performance target was not applicable for FY 2012. The only DCM application reviewed by the Commission during FY 2012 was the Eris Exchange, LLC. The exempt board of trade received an approved designation on October 28, 2011. Since the majority of this application review took place in the prior fiscal year, it was included in the FY 2011 APR and thus is not being recorded in this year's report. There were no other DCM applications during the performance cycle.

The performance target was met for FY 2012. The Commission received 24 notifications and reviewed all of them within the targeted time of one business day. As appropriate, a follow up was performed with the filers to ensure that the fiscal integrity of the markets was maintained. As segregated and secured funds are integral to maintain the fiscal integrity of the marketplace for customers, and key to providing customer financial protection, the ability to meet this target is vital to the CFTC's financial oversight program.

The performance target was not met for FY 2012. Although the Commission had planned to conduct limited-scope, risk-based examinations comparable in number to what was performed in FY 2011, only 17 FCMs or retail foreign exchange dealers (RFEDs) were examined during this performance period because of the need to divert staff resources to major examination and compliance requirements generated by several distressed FCMs. However, of the 17 examinations performed during FY 2012, all deficiencies identified were corrected within the specified time period.

The performance target was not met for FY 2012. Eight DCOs submitted all swaps being cleared as of February 1, 2012, to the Commission for review in FY 2012. These submissions include those swaps cleared prior to the enactment of the Dodd-Frank Act. The CFTC reviewed these submissions and recommended that certain classes of interest rate swaps and CDSs be required to be cleared. On August 7, 2012, the Commission issued a notice of proposed rulemaking based on this recommendation. The CFTC reviewed the comments received on the proposal and prepared a final clearing determination that implements the clearing requirement for certain classes of interest rate swaps and CDSs. In addition, the Commission finalized a compliance schedule for implementing the clearing requirement that provides additional time for market participants to come into compliance with mandatory clearing. The Commission continues to review DCO submissions related to other classes of swaps, including commodity swaps, and will prepare recommendations for the Commission as reviews are completed. Given budget and resource limitations, these reviews could take longer than expected.

The performance target was met for FY 2012. CFTC staff review every DCO rule submission for compliance with the CEA and Commission regulations. Rules include not only provisions contained in a DCO's rulebook, but also issuances such as interpretations, policies, and clearing member advisories. During this performance period, 237 DCO rules were filed as self-certifications under Regulation 40.6, five rules were filed for approval under Regulation 40.5, and one rule was filed under Regulation 40.10, which requires that a SIDCO provide notice to the Commission not less than 60 days in advance of any proposed change to its rules, procedures, or operations that could materially affect the nature or level of risks presented by the SIDCO.

The number of rules filed and reviewed increased significantly—by 120 percent—from 110 in FY 2011 to 242 in FY 2012. This increase is largely due to DCOs adopting rules to facilitate compliance with the Dodd-Frank Act and the Commission's implementing regulations.

The performance target was met for FY 2012. The Commission's risk analysis and stress testing responsibilities are divided among commodity futures groups in the Risk Surveillance Section of the DCR. Staff members conduct daily stress tests of energy, interest rate, equities, agricultural, soft agricultural, and metals account and firm positions. Stress tests are performed at a variety of levels (e.g., all time move and 150 percent of product margin requirements) and results are compared to a variety of metrics (e.g., excess net capital and margin on deposit). Stress tests are also performed across multiple commodity groups.

The CFTC conducted a wide variety of risk analysis on large trader and clearing member positions, relying primarily on the Integrated Surveillance System (ISS) and SPARK databases in conjunction with SPAN® software. In addition, staff conducted financial analysis of clearing members using RSR Express. Through the use of these and other systems Commission staff members identify traders with the greatest overall market risk and those that pose a material risk to their clearing members.

The CFTC continued to be challenged with the establishment and integration of a program to analyze the risks associated with the clearing of CDSs and interest rate swaps. Interest rate swaps and CDS analysis is challenging because staff cannot rely on the current tools used in the analysis of futures and options. Interest rate swaps analysis requires new methods of data collection and risk analysis. The Commission currently receives daily approximately 50,000 firm level index and single name credit default positions. In FY 2012, staff explored multiple possibilities to obtain analytics to be able to stress test and margin CDSs and interest rate swaps. Currently, there are insufficient financial resources to obtain any of the necessary analytical support.

The Commission however, did successfully complete all futures related performance goals. Staff conducted all of the futures planned stress tests and risk analysis. In addition, staff identified the traders holding the greatest risk on an absolute basis and relative basis (relative to the clearing member). Obtaining CDS and interest rate swap stress testing goals for future years remains an uncertainty.

FY 2012 saw a high level of market volatility in agricultural products. Staff performed heightened surveillance during the periods of increased market volatility. Many enhancements to the risk surveillance program have been made during the performance cycle. These enhancements developed better analysis to evaluate risk across multiple DCOs and evaluate clearing members' ability to pay unusually large variation payments. The CFTC also established a margin model team. The team is responsible for evaluating DCO margin models and developing a key metric in determining margin adequacy compliance.

The performance target was not met for FY 2012. The CFTC conducted risk reviews of a variety of market participants, including traders (hedgers/speculators), FCMs, commodity pool operators (CPOs), and commodity trading advisors (CTAs). The risk reviews were conducted both on-site and telephonically. Staff managed to carry out all their reviews on a voluntary basis, targeting traders with large overall risk positions with a special emphasis on sellers of option premium. Through its internal analysis, staff members were able to target several risk reviews of large traders that suffered material losses during the periods of extreme market volatility.

The Commission conducted trader risk reviews on a large variety of market participants. Most notably, staff met with several firms to discuss CDS risk surveillance procedures. The meetings were very instructive for the risk surveillance group, particularly in understanding the limitations of analyzing only the cleared portion of a CDS portfolio. The CDS risk surveillance team also spent a considerable amount of time with SDRs to better understand bilateral positions.

While mostly successful in scheduling reviews with traders and clearing members on a voluntary basis, resource constraints restricted the execution of some risk reviews at year end.

The performance target was not met for FY 2012. Though the examination work of our review of the NFA was completed, the completion of the report had to be deferred as a consequence of insufficient staff resources and the need to divert staff resources to major examination and compliance requirements generated by several distressed FCMs.

The performance target was not met for FY 2012. Resource constraints and the need to divert staff resources to major examination and compliance requirements generated by several distressed FCMs impacted the Commission's ability to make RFA determinations filed by the NFA on a timely basis.

The performance target was not met for FY 2012. The Commission chose not to review any non-FCM intermediaries. Rather, CFTC relied on NFA to perform such reviews due to staff limitations and the ongoing need to prioritize tasks based on importance to the financial markets and/or time sensitivity. The Commission allocated scarce resources to FCM intermediaries because such are the principal repository for funds used to margin commodity trading and are a primary focal point for maintaining the financial integrity of the marketplace.

Due to current staff constraints and the ongoing need to prioritize tasks based on importance to the financial markets and/or time sensitivity, it is anticipated that the CFTC will continue to be limited in its ability to review intermediaries. With the registration of swap dealers commencing, there will be even a greater need to balance and prioritize the allocation of staff resources moving forward.

The performance target was nearly met for FY 2012. While the relevant reviews for this performance measure were completed in a thorough and timely manner, and any significant issues were communicated to the SROs (CME, NFA, Minneapolis Grain Exchange, and the Kansas City Board of Trade) in a timely manner, completion of the final report was deferred as a consequence of insufficient staff resources and the need to divert staff resources to major examination and compliance requirements generated by several distressed FCMs.

Due to constraints on hiring additional staff, it is anticipated that the CFTC will continue to need to prioritize tasks based on their importance to the financial markets and/or their time sensitivity resulting in instances where certain important goals are compromised.

The performance target was not met for FY 2012. Although the Commission had planned to conduct a series of limited-scope (directed or "for cause") SRO audits comparable in number to what was performed in FY 2011, only nine such audits were conducted during this performance period because of the need to divert staff resources to major examination and compliance requirements generated by several distressed FCMs.

Due to limitations on hiring additional staff, it is anticipated that the CFTC will continue to need to prioritize tasks based on their importance to the financial markets and/or their time sensitivity resulting in instances where certain important goals are compromised. A majority of the reviews that did not occur were of FCMs—entities which function as the principal repository for funds used to margin commodity trading by both customers and proprietary accounts and are a primary focal point for maintaining the financial integrity of the marketplace.

The performance target was not met for FY 2012. The Commission conducts risk surveillance activities through the use of automated financial and risk surveillance systems and applications such as RSR Express and SPARK. Staff members use RSR Express to receive and review monthly FCM financial statements, and SPARK to identify volatile markets, firms that have positions on the losing side of the market, and customers at the identified firms. Large trader positions are downloaded into an application that allows for the margining and stress testing of positions. Both RSR Express and SPARK applications were developed in-house.

During FY 2012, an enhancement related to the evaluation was made. The enhancement gives the user a large amount of flexibility in creating/designing risk surveillance reports. The necessary programming regarding the receipt and review of Part 39 data was not completed because of lack of resources. Part 39 data includes extensive daily DCO variation, margin, and position reporting.

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