|Clearing & Intermediary Oversight||16%|
|All Other Programs||84%|
|Clearing & Intermediary Oversight||16%|
|All Other Programs||84%|
In FY 2011, the Clearing and Intermediary Oversight (DCIO) program requests 120 FTEs, an increase of seven FTEs over the FY 2010 level. The three subprograms of Compliance and Registration, Clearing Policy and Risk Surveillance, and Audit and Financial Review, are requesting 16, 38, and 66 FTEs, respectively.
Compliance and Registration. The Compliance and Registration subprogram level of 16 FTEs represents one additional FTE for FY 2011. The FTE will be allocated to fill an attorney-advisor position needed to meet the Compliance and Registration’s subprogram responsibilities.
Compliance and Registration staff attorneys 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.
Compliance and Registration staff attorneys are 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. In this regard, staff is currently engaged in drafting rules that will, for the first time, impose registration requirements and Commission oversight upon intermediaries engaged in the offer and sale of over-the-counter foreign currency contracts (forex) to retail customers. Given current trends, staff anticipate significantly more work in this area, including the drafting of final and follow up regulations and the provision of guidance to the public and industry regarding the effect of the rules.
Compliance and Registration staff have engaged in efforts to identify areas where CFTC and SEC regulations can be harmonized. There are significant differences between CFTC and SEC requirements concerning, for example, the registration and oversight of investment advisers and the recognition of foreign intermediaries.
The additional FTE requested would contribute in each of these areas. Finally, the Compliance and Registration subprogram request of additional staff does not take into consideration prospective responsibilities in its allocation of staff. In this regard, attorneys will be needed to implement legislative reforms currently being considered by Congress. These proposals will require Commission staff to prepare numerous rulemakings as more market participants are required to be registered.
Clearing Policy and Risk Surveillance. The Clearing Policy and Risk Surveillance subprogram level of 38 FTEs represents three additional FTEs for FY 2010. The three additional FTEs will be allocated to fill risk analyst positions.
The Clearing Policy and Risk Surveillance subprogram’s primary objective is to ensure that DCOs and market intermediaries avoid creating systemic risk. The Clearing Policy and Risk Surveillance subprogram’s major functional responsibilities in support of this objective are to: review DCO applications and rule submissions and make recommendations to the Commission; assess DCO compliance with the Act and Commission regulations, including core principles relating to financial resources, risk management, default procedures, customer funds protection, and automatic system safeguards; prepare proposed regulations, orders, guidelines, and other regulatory approaches on issues pertaining to DCOs; provide support to Commission staff in the review of DCM applications and rules submissions relating to clearing and customer funds protection; conduct risk assessment and financial surveillance through the use automated systems to gather and analyze financial information from clearing FCMs to ascertain, on a continuous basis, whether any such FCM shows a material financial weakness; provide advice and guidance regarding clearing to the Commission, other Commission staff, futures professionals, and general public; and review DCO and FCM requests for no-action, exemptive, or interpretive letters relating to the Act or Commission regulations.
The additional FTEs are needed to carry out Clearing Policy and Risk Surveillance subprogram responsibilities of an increasing workload, 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 Core Principles governing financial resources, risk management, default procedures, protection of customer funds, and system safeguards.
Daily risk surveillance is a central element of the Clearing Policy and Risk Surveillance subprogram. Staff receives and reviews reports that detail positions in all futures markets. Staff calculates margin requirements, conducts stress tests and compares potential losses to available resources such as FCM capital and the DCO guarantee fund. Staff contacts DCOs, FCMs, and large market participants regularly, on a proactive basis, to discuss risk posed by large positions and the measures in place to mitigate those risks. Increasing the number of risk analysts will enable individual staff members to focus more on particular markets and market participants and conduct more frequent and more in-depth analyses. For example, there are two risk analysts assigned to the energy complex which has over 200 separate contracts. Additional staff resources would allow the energy complex to be divided among more analysts.
Staff conducts periodic reviews of DCOs to evaluate their compliance with the Act and Commission regulations, including core principles governing financial resources, risk management, default procedures, protection of customer funds, and system safeguards. Currently, the scope and frequency of these reviews are determined based on staff’s assessment of risk. A formal review is not conducted of each DCO each year. The number of DCOs, the volume of positions cleared by DCOs, and the complexity of positions are all growing. Increasing the number of risk analysts will enable the program to conduct an on-site risk review of each DCO every year.
Clearing Policy and Risk Surveillance staff are currently engaged in efforts to identify areas where CFTC and SEC regulations can be harmonized. There are significant differences between CFTC and SEC requirements concerning, for example, clearing organization rule approvals and margining methodologies for exchange listed derivative products. Additional staff would be committed to working on the harmonization efforts.
Finally, the Clearing Policy and Risk Surveillance subprogram request of additional staff does not take into consideration prospective responsibilities into its allocation of staff discussed previously. In this regard, attorneys will be needed to implement legislative reforms currently being considered by Congress. These proposals will require that Commission staff prepare numerous rulemakings as more over-the-counter products are required to be cleared. Likewise, additional resources will be needed to process new applications to become a DCO, and to carry out ongoing oversight of DCOs and to carry out daily risk surveillance.
Audit and Financial Review. The Audit and Financial Review subprogram level of 66 FTEs represents three additional FTEs for FY 2011. The additional FTEs will provide the Audit and Financial Review subprogram with additional resources to better ensure the financial integrity of the futures markets and the protection of customer funds. One staff auditor will be allocated to each of the three regional offices.
The Audit and Financial Review subprogram is primarily responsible for ensuring that market intermediaries comply with applicable financial and customer protection requirements set forth in the Act and Commission regulation. The Audit and Financial Review subprogram addresses its responsibilities by conducting oversight of the financial surveillance programs of the 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., the CME Group, Kansas City Board of Trade, Minneapolis Grain Exchange, 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 to perform on behalf of the Commission, including the registration function and the review of CPO and CTA disclosure documents.
The Audit and Financial Review subprogram also performs routine, daily financial surveillance of FCMs. Audit and Financial Review subprogram staff reviews monthly financial statements submitted by FCMs to assess compliance with financial and customer funds protection requirements and to identify possible adverse financial trends. Audit and Financial Review subprogram staff also reviews and performs any necessary follow up on all regulatory notices filed by FCMs, SROs, and DCOs pursuant to Commission regulations (e.g., FCMs that are under-capitalized, under-segregated, or have triggered early warning reporting requirements, etc.).
The Audit and Financial Review subprogram also conducts direct examinations of FCMs and CPOs. Such examinations may be conducted as an integral part of the oversight of the SROs’ financial surveillance program, 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. The Audit and Financial Review subprogram also may assist with financial reviews of DCOs and periodically provides assistance/expertise on Division of Enforcement investigations/cases. Furthermore, the Audit and Financial Review subprogram is responsible for responding to public inquiries regarding the application of the Commission’s capital rules, financial reporting rules, segregation rules, and certain financial and reporting rules governing CPOs.
Direct examination of market intermediaries is a key component of the Audit and Financial Review subprogram. The expertise and proficiency obtained by audit staff during direct examinations are vital tools when assessing the effectiveness and thoroughness of an SRO’s financial surveillance program. Direct examinations also provide independent verification of audit work completed by SROs’ staffs. The expertise and proficiency obtain by audit staff during direct examinations also are 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.
The additional FTEs will provide added resources to the Audit and Financial Review subprogram, which will enhance the subprogram’s efforts to conduct frequent and comprehensive assessments of the effectiveness of the SROs’ financial surveillance programs. Historically, SRO oversight reviews have not been conducted pursuant to established schedules, or on a routine basis. Recently, the Audit and Financial Review subprogram has conducted an average of approximately two major SRO reviews each fiscal year. These reviews required significant staff resources (i.e., approximately 11,000 staff hours per year). The addition of three audit staff members will provide the Audit and Financial Review subprogram with added resources to conduct ongoing comprehensive assessments of the two major SROs (i.e., CME Group and NFA currently have DSRO responsibility for the overwhelming majority of FCMs) on a routine basis (i.e., yearly), and the remaining SROs on a more limited basis, while allowing Audit and Financial Review staff to continue to conduct its regulatory responsibilities detailed above at current levels.
Finally, the Audit and Financial Review subprogram request of additional staff does not take into consideration prospective responsibilities into its allocation of staff discussed previously. In this regard, attorneys will be needed to implement legislative reforms currently being considered by Congress. These proposals will require that Commission staff prepare numerous rulemakings as more over-the-counter products are required to be cleared and more market participants are required to be registered. Likewise, additional resources will be needed to directly examine more market intermediaries and to prepared minimum regulatory capital requirements for new categories of registrants.
The DCIO program must at all times maintain an effective and robust 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 of retail, non-intermediated, off-exchange trading in 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. Moreover, DCIO expects that efforts to harmonize CFTC and SEC regulations will require increased staff levels. Without additional resources, Clearing and Intermediary Oversight program will be severely hampered in its ability to implement expanded Congressional mandates in a timely fashion. Finally, various pending legislative proposals would bring numerous products and market participants within Commission jurisdiction and could impose significant new responsibilities on DCIO. Given the uncertain nature of the final legislation, DCIO has not factored prospective responsibilities into the allocation of staff discussed above. Nevertheless, it is likely that in order to effectuate the provisions of any legislation that does pass, DCIO staff will be required to engage in extensive rule writing, further stretching the Division’s resources.
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.
Another 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.
|Subprogram||FY 2010||FY 2011||Change|
|Clearing Policy & Review||$9,130||35.00||$11,047||38.00||$1,917||3.00|
|Compliance & Registration||4,119||15.00||4,881||16.00||762||1.00|
|Audit & Financial Review||15,856||63.00||18,546||66.00||2,690||3.00|
|Clearing Policy & Review||32%|
|Compliance & Registration||14%|
|Audit & Financial Review||54%|
|Outcomes||FY 2010||FY 2011||Change|
|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.||$773||3.00||$1,007||3.50||$234||0.50|
|1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality.||774||3.00||1,008||3.50||234||0.50|
|Subtotal Goal One||$1,547||6.00||$2,015||7.00||$468||1.00|
|GOAL TWO: Protect market users and the public.|
|2.1 Violations of Federal commodities laws are detected and prevented.||$1,908||7.50||$2,410||8.50||$502||1.00|
|2.2 Commodities professionals meet high standards.||6,673||25.50||7,877||27.00||1,204||1.50|
|2.3 Customer complaints against persons or firms falling within the jurisdiction of the Commodity Exchange Act are handled effectively.||252||1.00||281||1.00||29||0.00|
|Subtotal Goal Two||$8,833||34.00||$10,568||36.50||$1,735||2.50|
|GOAL THREE: Foster open, competitive, and financially sound markets.|
|3.1 Clearing organizations and firms holding customer funds have sound financial practices.||$7,356||28.50||$8,493||29.50||$1,137||1.00|
|3.2 Commodity futures and option markets are effectively self-regulated.||8,072||32.00||9,293||33.00||1,221||1.00|
|3.4 Regulatory environment responsive to evolving market conditions.||3,297||12.50||4,105||14.00||808||1.50|
|Subtotal Goal Three||$18,725||73.00||$21,891||76.50||$3,166||3.50|