The CFTC is charged with a significant responsibility to ensure the fair, open and efficient functioning of futures markets. The CFTC has exclusive jurisdiction over the regulatory oversight of all exchanges, clearing organizations, and intermediaries in the U.S. futures industry. The Commission’s duty is to protect market participants and the American public from fraud, manipulation and other abuses and to promote open, competitive and financially sound futures markets.
The Commission faces growing and significant challenges. We must be adequately prepared to meet them. This requires additional resources to fulfill staffing and technology needs.
Market Transparency and Technology Modernization. Existing Commission surveillance systems annually process more than one billion transactions to capture mission-critical data. Recent Commission initiatives to promote transparency of market data reveal the need for a substantial investment in systems development. The timely reporting of quality and meaningful market information is not possible with current legacy systems. Integration of two legacy systems, one with position data and one with trade data, is vital to building necessary functionality to capture more detailed data by trader, account ownership, inter-day transactions and intra-day transactions across all markets. New staff competencies and skill sets are also critical. Market transparency is crucial to public trust and confidence in the vital price discovery and risk management functions of the futures and option markets. The 21st century marketplace, now largely electronic, demands 21st century systems, applications and analytics.
For many years, the CFTC has been limited to only minimum maintenance on existing technology infrastructure. The FY 2010 and 2011 investments will target the building of mission-essential systems responsive to the need to oversee an increasingly large, diverse and complex industry. This budget reflects a $34 million technology program.
Ensure Robust Enforcement of the Law. The recent financial downturn revealed, and continues to reveal, Ponzi-type schemes that could only stay afloat during periods of rising asset values. The types of investigations being handled by the Enforcement Division have become increasingly more complex. The Division must devote significantly more resources to the activities of multiple markets and market participants. This is true for fraud and Ponzi schemes, as well as staff-intensive manipulation and trade practice investigations. Enforcement staff is operating at full capacity and is forced to balance resources from important investigations to ongoing and future litigation demands, which limits the Division’s ability to pursue new investigations.
Review of New Products and Rule Changes/Significant Price Discovery Contracts. The 2008 Farm Bill requires staff to annually review all contracts listed on ECMs to determine if they are SPDCs. Approximately 50 contracts have been identified as possible SPDCs to date. If they are determined to be SPDCs, then any ECM listing such a contract must be reviewed to determine compliance with a stringent set of CFTC Core Principles. Commission staff must also conduct day-to-day surveillance and general market oversight of all the contracts deemed to be SPDCs, a significant undertaking that cannot be fully accomplished without additional staff and technology investments. Conducting timely reviews of all new products and rule change filings has lagged due to staffing shortfalls in the face of the growth of products listed by the exchanges and the increasing complexity of many of the new markets. This delay in monitoring the marketplace and its products jeopardizes the oversight of products listed on the regulated futures exchanges.
Review and Audit of Registrants. More frequent, regular direct audits of CFTC registrants are essential to enhance effective self-regulation and ensure that exchanges rigorously enforce compliance with their rules. Currently, the CFTC is limited to conducting reviews, on average, every three years, thereby diluting their intended effect. The Commission needs additional staff to perform regular and direct reviews of all exchanges and intermediaries and to assess their compliance with the Commodity Exchange Act (CEA). The CFTC should no longer rely on the DSROs for these reviews. The Commission especially requires staff with expertise in trading. Commission staff should have the resources to build knowledge of how exchanges’ various electronic trading platforms operate and how violations may occur on and across electronically traded markets. In the absence of expert oversight, there is a risk that an ineffective self-regulatory program may go undetected or a systemic risk may not be identified. Adequate resources must exist to fully discharge the Commission’s statutory responsibility to ensure financial integrity in the marketplace through annual reviews of every DSRO and derivatives clearing organization (DCO), as well as annual examinations of commodity pool operators (CPOs), commodity trading advisors (CTAs) and Futures Commission Merchants (FCMs).
Position Limits. The Commission has begun to consider carefully whether to adopt Federal speculative limits on energy commodities, including crude oil, heating oil, natural gas, gasoline and other energy products. Additional staff and expertise are critical to analyze whether position limits, consistently applied across all physically delivered commodities, would enhance market integrity and efficiency. If limits are adopted, the Commission will require additional investments in staff and technology to establish the limits, oversee traders’ compliance with the limits and consider appropriate exemptions from the limits.
Current Authorities. The FY 2011 President’s Budget of $216,000,000 and 745 FTE proposes an increase of $47.2 million. Just over half of the increase is needed to maintain the FY 2010 level of operations, including funding increases for 650 FTE and on-going IT modernization into FY 2011. The balance would fund an additional 95 FTE for a total of 745 FTE in FY 2011. These funds are required to hire and equip additional staff in areas of critical need throughout the Commission.
The Commission faces a serious staffing shortfall. When the Commission received its FY 2009 appropriation in March, 2009, staff levels were below 500. That is the same level as the Commission’s first year of operation 34 years ago. Six months after the Commission received its FY 2009 appropriation, the Commission hired more than 90 permanent staff. For FY 2010 and for FY 2011, staffing areas of critical need will remain a top priority.
The Commission requests an additional 95 FTEs, over estimated FY 2010 levels, allocated as follows:
Enforcement. Earlier this fiscal year, the Commission’s Enforcement program reached its lowest level since 1984. Enforcement staff is anticipated to reach nearly 145 by the beginning of FY 2010. This is still below the agency’s peak of 167 and well below what is needed to address the current challenges brought by the recent financial turmoil. The goal of the Commission for FY 2011 is to have an Enforcement staff of 200, including strategic plans to double the Enforcement staff in the Kansas City office. Additionally, more professional staff comprised of attorneys, investigators, economists and paralegals are required to pursue resource-intensive investigations and litigation involving manipulation.
Market Oversight. The Division of Market Oversight requires more highly skilled economists, investigators, attorneys and statisticians so that: 1) position data may be analyzed quickly and thoroughly; 2) exchange applications and rule changes may be reviewed efficiently and comprehensively to ensure compliance with all CFTC Core Principles and CFTC policies; and 3) exchange self-regulatory programs may be examined on an on-going and routine basis with regard to trade practices, market surveillance and compliance with disciplinary, audit trail and record-keeping regulations.
Agency Direction. The Offices of the Chairman and the Commissioners require professional, legal, and economic expertise as they undertake a number of high priority programmatic initiatives, including: 1) regulation of derivatives markets and regulatory changes to protect the U.S. public from systemic financial risks; 2) regulatory coordination with other agencies such as the SEC and FERC; 3) market transparency; 4) transparency of the Commission’s Web site; 5) regulation of energy markets -- especially with regard to position limits and SPDCs; 6) frequency of reviews and audits of Commission registrants; and 7) technology modernization, resource justification and program performance.
Clearing and Intermediary Oversight. The Division of Clearing and Intermediary Oversight requires auditors and attorneys to ensure effective clearing systems to protect against the financial problems of a single market becoming a systemic risk. Adequate staff will protect investors’ funds from misuse or exposure to inappropriate risks of loss and protect customers from abusive sales practices that undermine market integrity.
Chief Economist. The Office of the Chief Economist (OCE) needs additional economists to review and analyze new market structures and off-exchange derivative instruments. OCE also needs additional resources to review and analyze risk management models supportive of the Commission’s enforcement and surveillance programs.
International Affairs. The Office of International Affairs needs additional professional staff to address the increasing global reach of the futures markets. The Commission has a growing responsibility to coordinate with international markets authorities for supervisory and enforcement purposes. Additional resources are required to address the intense regulatory development work by the G20 and the International Organization of Securities Commissions (stemming from the global financial crisis) and to keep pace with global market integration and the deed to take forward recommendations for enhance commodity market transparency.
Enterprise Risk Management. A new Enterprise Risk Management subprogram is proposed to focus on proactively developing and employing methods and processes to manage risks that may be obstacles to the discharge of the Commission’s responsibilities and goal achievement. The staff will identify plausible risks posed by current and future events or circumstances that may affect the Commission’s ability to respond effectively. Risks will be assessed in terms of the likelihood and magnitude of impact, determining an appropriate response strategy, and monitoring outcomes.
Commission Planning. The Office of the Executive Director requires staff to establish a small Commission strategic and operational planning and evaluation function, the first such permanent resource. It is imperative that program measurement and evaluation methodologies are developed and implemented. Additional staff will assist the Commission’s programs in establishing metrics to track, monitor and evaluate program results, outcomes, and goal achievement to ensure the effective and efficient allocation of resources. Staff is required for a comprehensive records management program being designed to leverage technology to protect these assets. Expertise is needed to ensure a sufficient level of human capital expertise focusing on employee development, leadership, management training and employee relations.
Proceedings. The Office of Proceeding requires one additional position to cover the current staff requirement for this office, which is responsible for providing an inexpensive, impartial, and expeditious forum for handling customer complaints against persons or firms registered under the CEA. The one position will cover the recently filled, long-vacant, office director position.
The FY 2011 President’s Budget proposes an additional $45,000,000 and 119 FTE to support FY 2011 implementation of the Administration’s comprehensive proposal for financial regulatory reform. The FY 2011 budget estimate of $45,000,000 includes a substantial investment of $18,000,000 in information technology and $27,000,000 for an additional 119 FTE and related operating expenses.
Information Technology. Approximately $18,000,000 is needed to provide for additional critical Information Technology capacity, principally for new systems development, capital equipment and mission support. For example, substantial additional IT resources will be critical for implementing the automated surveillance and comprehensive analysis solutions that are essential to meet the transparency objectives of the new authorities. The CFTC anticipates major systems development to address voluminous transaction processing, data storage, and data analysis requirements, and new IT systems development projects will require extensive business and industry analysis. The complexity, diversity, and volume of instruments proposed for regulation will also demand extensive data analysis. Newly developed systems will be more complex than current systems and will require thorough integration with current systems, leading to an increase in solutions development not only for new systems but also for existing systems. New sources of commercially-developed information will be assessed and may be acquired as part of the strategy to support CFTC resources in rule adoption and implementation. Supporting new program requirements will require substantial increases in all facets of CFTC infrastructure, including communications circuits, circuit capacity, cabling and connection, switches, routers, the server processer farm, and data storage and backup. Given the increased volume and frequency of data submitted, CFTC may have to supplement current data storage area network (SAN) infrastructure with large scale data warehousing and analytical appliances.
Human Capital. The balance of $27,000,000 would fund an additional 119 FTE in FY 2011. These funds are required to hire and equip additional staff in areas affected by the proposed new authorities. The Commission’s requests an additional 119 FTE are allocated as follows:
The 119 FTE requested will permit the Commission to implement reforms that, among others changes, require: 1) swap dealers and major swap participants to register and come under comprehensive regulation ? including capital standards, margin requirements, business conduct standards and recordkeeping and reporting requirements; 2) ensure that dealers and major swap participants bring their clearable swaps into central clearinghouses; 3) require dealers and major swap participants to use transparent trading venues for their clearable swaps; and 4) provide the CFTC with authority to impose position limits in the Dodd-Frank Act markets.
Financial markets are complex, global and interconnected. The Commission needs the resources to ensure the integrity of the U.S. futures and option markets, which is a critical component of this broader marketplace. The future of the American and global economy depends on effective oversight by the Commission. The agency needs to grow — by the end of FY 2011 — to a staffing level of nearly 1,000 to perform its present duties. This need has not diminished.
The Commission looks forward to working with the Congress and the Administration to address the challenges outlined here and to secure the necessary funding to strengthen market integrity, lower risks, protect investors, promote transparency and continue to restore health to the economy.
|FY 2010 President’s Budget (BASE)||$168.8 M||650 FTE|
|Requested for FY 2011:|
|To provide for current services increases:|
|Personnel Compensations (Pay Adjustment)||5.2|
|Personnel Benefits (Pay Adjustment)||1.6|
|Pay Parity with FIRREA Agencies||0.3|
|Leases, Communications and Utilities (Including -$0.3 for IT)||4.8|
|Other Services (Including $6.8 M for IT)||7.5|
|Equipment (Including $2.8 M for IT)||3.5|
|Building and Fixed Equipment||1.4|
|To provide for program increases:|
|New Staff Compensation and Benefits||20.1||95 FTE|
|New Staff Operating Expenses||1.1|
|Information Technology (included above)||(9.3)||(0 FTE)|
|FY 2011 President Budget||$216.0 M||745 FTE|
|FY 2010 President’s Budget (Current Authority Base)||$216.0 M||745 FTE|
|Requested for FY 2011:|
|Personnel Compensation and Benefits||21.8||119 FTE|
|Operating Expenses (Office Space, Equipment, Communications, Travel)||5.2|
|Information Technology Expenses (Systems Development and Analysis, Technology Mission Support, and Capital Equipment)||18.0|
|FY 2012 President Budget (Current and Proposed Authority)||$261.0 M||864 FTE|