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Clearing & Intermediary Oversight

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Clearing & Intermediary Oversight Budget and FTEs
  Budget FTEs
Total Budget $23,876,000 91
Total Change $2,263,000 6
Figure 23: Clearing & Intermediary Oversight Percentage of Total Budget Dollars
Program Activity Percentage
Clearing and Intermediary Oversight 15%
All Other Programs 85%
Figure 24: Clearing & Intermediary Oversight Percentage of Total Budget FTEs
Program Activity Percentage
Clearing and Intermediary Oversight 15%
All Other Programs 85%

Justification of the FY 2010 President’s Budget & Performance Plan

In FY 2010, the Clearing and Intermediary Oversight (DCIO) program requests 91 FTEs, an increase of six FTEs over the FY 2009 level. The three subprograms of Compliance and Registration, Clearing Policy and Risk Surveillance (formerly Clearing Policy and Review), and Audit and Financial Review, are requesting 13, 26, and 52 FTEs, respectively.

Compliance and Registration - The Compliance and Registration subprogram level of 13 FTEs represents one additional FTE for FY 2010. The FTE will be allocated to fill an attorney position needed to meet the Compliance and Registration’s subprogram responsibilities with respect to Part 30.

Compliance and Registration staff review petitions under Part 30 of the Commission’s regulations. Part 30 governs the offer and sale of foreign futures and options contracts to customers located in the United States, and it requires intermediaries seeking to engage in such activities to either register in the appropriate capacity with the Commission or seek exemption from registration requirements. The petition for exemption is typically filed by either a foreign governmental agency responsible for implementing and enforcing the foreign regulatory program, or by a foreign exchange on behalf of its members. In order to grant such petitions, the Commission must determine that compliance with the foreign jurisdiction’s regulatory program would offer protections comparable to those found under the U.S. regulatory scheme. In the past, most Part 30 petitions came from jurisdictions with which the Commission was familiar and had some working relationship. More recently, petitions have come from less familiar jurisdictions, and subprogram staff expects this trend to continue. Accordingly, additional staff is needed to review these incoming petitions, review the regulatory scheme of the home jurisdictions, meet with and evaluate the programs of foreign regulators and exchanges, and draft recommendations for Commission action. Additional staff also is needed to undertake a review of Part 30 program generally. The program has now existed for approximately 20 years during which time laws of the Part 30 jurisdictions have changed. Additional staff would be committed to reviewing the program to ensure that the past orders continue to reflect current realities.

It should be noted that Compliance and Registration staff is the primary point of contact for the public and industry with regard to the meaning, interpretation, and effect of many of the Commission’s regulations. Consequently, the subprogram staff is responsible for handling numerous inquiries, ranging from daily calls and e-mail inquiries to formal requests for interpretation or no-action relief. The staff also is responsible for drafting and amending many of the rules involving the registration and regulation of intermediaries. Given current trends, staff anticipates significantly more work in this area. However, no additional staff will be available to handle any increase in the volume of work with regard to these issues.

Clearing Policy and Risk Surveillance - The Clearing Policy and Risk Surveillance subprogram level of 26 FTEs represents two additional FTEs for FY 2010. The additional FTEs will be allocated to fill risk analyst positions to carry out Clearing Policy and Risk Surveillance subprogram responsibilities, particularly those related to the expanded and enhanced financial and risk surveillance functions. Additional risk analysts will enhance the ability of the risk surveillance group to analyze proactively and more comprehensively the risk profiles of traders, intermediaries, and clearinghouses in the continually growing markets. The FTEs also will be used to staff additional periodic reviews of DCOs to evaluate their compliance will the Act and Commission regulations, including CFTC Core Principles governing financial resources, risk management, default procedures, protection of customer funds, and system safeguards.

Audit and Financial Review - The Audit and Financial Review subprogram level of 52 FTEs represents three FTEs for FY 2010. The additional FTEs are requested to carry out Audit and Financial Review’s program responsibilities.

The Audit and Financial Review subprogram is primarily responsible for conducting oversight of the financial surveillance programs of SROs for compliance with the Act, Commission regulations, and interpretations. Such oversight includes reviews and assessments of the effectiveness of the programs adopted by the SROs (i.e., CME Group, Kansas City Board of Trade, and NFA) to examine their member FCMs’ compliance with the Commission’s minimum financial and related reporting requirements, customer funds protection requirements, and sales practice requirements. The Audit and Financial Review subprogram also reviews and assesses the effectiveness of NFA’s program for monitoring CPOs’ and CTAs’ compliance with relevant provisions of the Act and Commission regulations. The subprogram further assesses the effectiveness of NFA’s execution of certain functions and responsibilities that the Commission has delegated to NFA, including the registration function.

The Audit and Financial Review subprogram also conducts direct examinations of FCMs and CPOs. Such examinations may be conducted as part of the oversight of SROs, or they may be conducted on a “for cause” basis to assess whether the target of the examination is in compliance with the Act and Commission regulations. Furthermore, the Audit and Financial Review subprogram is responsible for responding to public inquiries regarding the application of the Commission’s capital rule, financial reporting rules, segregation rule, and certain financial and reporting rules governing CPOs.

Three additional FTEs will be allocated to the regional offices by assigning one FTE each to fill auditor positions in New York, Chicago, and Kansas City. The additional auditors will participate in the conduct of oversight examinations of the SROs which will allow the Audit and Financial Review subprogram to more effectively and more frequently monitor the financial surveillance programs of the SROs for compliance with the Act and Commission regulations. The FTE allocated to the New York Regional Office also will enable the subprogram staff to focus greater attention on the largest and most complex FCMs.

The additional FTEs also will allow the Audit and Financial Review subprogram to engage in more frequent direct examination of FCMs and CPOs. Direct examinations provide an opportunity for the audit staff to conduct independent verification of the effectiveness and thoroughness of an SRO’s examinations. Direct examinations also provide opportunities for staff to become more proficient in the examination and review of the back-office operations and books and records of FCMs and CPOs. Such proficiency is critical in instances where immediate Commission action is necessary to assess the compliance of a FCM or CPO with the Commission’s financial requirements in order to protect customers and ensure orderly markets.

Consequences of Not Receiving Requested Level of Resources

The DCIO program must at all times maintain an effective supervisory system that is responsive to technological development, business changes, increasing globalization, increasing trading volume, and other evolutionary changes in the markets and the clearing process.

Without the requested resources, the DCIO program will not meet its established and evolving responsibilities. The increased level of resources requested is necessary for the DCIO program to meet the responsibilities assigned to it by Congress through the CFMA and further changes to the CEA resulting from the CRA, and to help keep pace with the rapid growth in futures and option trading volume and the profound changes resulting from global competition, innovations in derivative contracts, innovations in clearing practices, new clearing organizations, advances in technology, and new market practices. The increasing volume and the retail, non-intermediated nature of off-exchange trading in futures contracts based on forex has brought increased attention to this area. Additional resources will be needed as a result of reauthorization legislation that expands the Commission’s regulatory authority and jurisdiction over off-exchange retail foreign currency transactions. Specifically, DCIO will need additional resources to implement the Commission’s forex regulations, including developing oversight measures that will assure the effective monitoring of forex activity and the safeguarding of retail customers’ funds. Similarly, DCIO expects to devote significant resources to respond to futures industry and public inquiries regarding the effect of these regulations.

DCIO also will require additional resources to maintain effective oversight programs of the operations and financial condition of the large FCMs, which also are registered with the Securities and Exchange Commission as securities brokers-dealers. These large and diverse financial institutions are increasingly engaging in complex financial transactions that may have a significant potential impact on their financial condition and their ability to meet obligations to the futures clearing system and to the protection of customer funds.

One consequence of not receiving the DCIO program’s requested level of resources is that the Clearing and Intermediary Oversight program will not be able to timely and adequately fulfill its oversight and review functions over DCOs, SROs, FCMs, IBs, CPOs, and CTAs. Without the requested resources, the DCIO program staff will not be able to conduct as many oversight examinations of SROs, DCOs, and other registrants, including large and financially diverse FCMs, or to review compliance and proper operation of SRO and DCO regulatory programs, thereby increasing the possibility of misappropriation or insolvency that could harm customers and consumers, compromise the integrity of the futures markets, and create systemic instability.

Moreover, even at the requested level of resources, program areas such as foreign futures and options, as well as other compliance and investigative support activities performed by staff to maintain the integrity of the marketplace, may be subject to delay or postponement from time to time because a lack of available staff will make timely completion of work impossible. In addition, this constraint may affect the DCIO program’s ability to provide necessary and complete guidance as promptly and effectively as possible to industry professionals, customers, and other market users regarding compliance with an increasingly changing business and regulatory environment.

Table 26: Clearing & Intermediary Oversight Request by Subprogram
($ in thousands)
Subprogram FY 2009 FY 2010 Change
FTE Budget
FTE Budget
Clearing Policy & Review $6,073 24.00 $6,791 26.00 $718 2.00
Compliance & Registration 2,976 12.00 3,331 13.00 355 1.00
Audit & Financial Review 12,564 49.00 13,754 52.00 1,190 3.00
Total $21,613 85.00 $23,876 91.00 $2,263 6.00
Figure 25: Clearing & Intermediary Oversight FY 2010 Budget by Subprogram
Subprogram Percentage
Clearing Policy & Review 28%
Compliance & Registration 14%
Audit & Financial Review 58%
Table 27: Clearing & Intermediary Oversight Request by Goal
($ in thousands)
Outcomes FY 2009 FY 2010 Change
FTE Budget
FTE Budget
GOAL ONE: Protect the economic functions of the commodity futures and option markets.
1.1 Futures and option markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity. $762 3.00 $787 3.00 $25 0.00
1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality. 762 3.00 787 3.00 25 0.00
Subtotal Goal One $1,524 6.00 $1,574 6.00 $50 0.00
GOAL TWO: Protect market users and the public.
2.1 Violations of Federal commodities laws are detected and prevented. $1,659 6.50 $1,712 6.50 $53 0.00
2.2 Commodities professionals meet high standards. 5,182 20.50 5,738 22.00 556 1.50
2.3 Customer complaints against persons or firms falling within the jurisdiction of the Commodity Exchange Act are handled effectively. 256 1.00 265 1.00 9 0.00
Subtotal Goal Two $7,097 28.00 $7,715 29.50 $618 1.50
GOAL THREE: Foster open, competitive, and financially sound markets.
3.1 Clearing organizations and firms holding customer funds have sound financial practices. $4,960 19.50 $5,379 20.50 $419 1.00
3.2 Commodity futures and option markets are effectively self-regulated. 5,891 23.00 6,870 26.00 979 3.00
3.4 Regulatory environment responsive to evolving market conditions. 2,141 8.50 2,338 9.00 197 0.50
Subtotal Goal Three $12,992 51.00 $14,587 55.50 $1,595 4.50
Total $21,613 85.00 $23,876 91.00 $2,263 6.00
Figure 26: Clearing & Intermediary Oversight FY 2010 Budget by Goal
Goal Percentage
Goal One 7%
Goal Two 32%
Goal Three 61%
Last Updated: September 23, 2009