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The FY 2012 Budget for the Office of the Chief Economist is $5,965,000 and 20 FTE, of which $975,000 and three (3) FTE relate to Dodd-Frank.

The Dodd-Frank Act, in effect:

• Requires the Office of the Chief Economist to assist the Commission staff responsible for developing regulations mandated by legislation with the appropriate economic analysis of the perceived costs and benefits. Moreover, the proposed regulations may induce unintended market consequences which must also be analyzed.
• Requires that OCE possesses sufficient expertise needed to fulfill the regulatory responsibilities granted by the Dodd-Frank Act, including expert knowledge in areas such as the trading and clearing of complex derivative instruments.
• Requires that OCE possesses sufficient expertise in the area of perspective data standards, requirements, and formats for both cleared and uncleared complex derivative instruments. This expertise is important for the implementation of sound data standards.
• Requires that OCE possesses sufficient expertise in the area of market structure of the trading platforms on which complex derivative contracts will be traded.

Without the requested level of resources, the Office of the Chief Economist:

• Would not be able to conduct economic analysis on the unintended consequences of the proposed regulations under the Dodd-Frank authorities.
• Would not be able to provide adequate expertise in the areas of new data standards, the market structure of new trading platforms, and the economic analysis of clearing-related issues, which would arise under the Dodd-Frank authorities.

The growth in the number of markets that trade and clear a widening array of derivative products requires the maintenance of a quantitative research program to inform regulatory, surveillance, and enforcement activities in these markets and products. The quantitative research program includes, but is not limited to:

• Analysis of algorithmic and high frequency trading in electronic markets.
• Analysis of the composition of markets participants and the trading activity of such traders as managed money funds, exchange traded funds, and commodity index funds in futures and options markets.
• Analysis of the linkages between the futures and options markets and the underlying cash markets for energy, agricultural, and other commodities.
• Provision of greater market transparency initiatives and development of educational materials on futures and options trading for dissemination to market participants, regulators, and the general public.
• Development of analytical tools and methods in support of the Commission’s Enforcement program, including economic and statistical analysis or expert testimony to promote compliance with and deter violations of commodity laws.
• Development of analytical tools and methods in support of the Commission’s automated surveillance initiatives.
• Review and analysis of the futures industry’s financial safeguard system, including evaluation of risk management processes employed by DCOs and intermediaries, and evaluation of new clearing processes.
• Review and analysis of new market trading structures and new trading products.
• Participation in the development of flexible and effective regulatory responses to evolving market conditions.
• Examination of the linkages between the futures and securities markets.
• Assessment of systemic risk issues in the futures and options markets.

In FY 2012, the Office of the Chief Economist requests 20 FTEs, an increase of six FTEs over the FY 2011 level. This increase would support the maintenance of an ongoing quantitative research program, as innovations in trading technology and trading instruments in the futures and options markets create significant regulatory, surveillance, and enforcement challenges.

Specifically, in FY 2012, OCE staff will continue to analyze a diverse range of markets and trading activity of a broad range of market participants, including algorithmic and high frequency traders. This analysis is extremely data intensive as it is based on the processing of a massive amount of trade register data.

With the requested level of resources, analysis to enhance the understanding of the markets and market participants will keep pace and anticipate growth in new types of exchanges and the initiation of trading in new products. Moreover, at the requested level, the staff will be able to monitor key developments in derivatives trading and market innovations.

The performance of derivative markets has a potentially large impact on the stability of domestic and international financial markets. Market research and effective monitoring of these developments help ensure that the Commission has in place sound regulatory policies to reduce systemic risk in financial markets and to protect the economic function of the markets without undermining innovation and the development of new approaches to risk management.

Without the requested level of resources, the Office of the Chief Economist:

• Would not be able to conduct market research and analysis commensurate with the growth in new types of exchanges, new trading execution methods in futures and options markets, and the review of new products. This would undermine the ability of the Commission to keep its regulatory policies in line with new developments in the markets, which could impede innovation and may adversely affect the economic function of these markets.
• Would not be able to provide effective economic and statistical analysis to the enforcement and surveillance programs, and to review the financial safeguard system. This may result in substantial time delays in critical market research, which may adversely affect the economic function of the markets and may lead to systemic risk across the broader financial market system.
• Would not be able to devote significant resources to new initiatives to enhance market transparency and to develop effective materials to educate market participants, regulators, and the general public about the functioning of these markets.

Office of the Chief Economist Request
($ in thousands)

Subprogram	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
Chief Economist	$3,243	14.00	$5,965	20.00	$2,722	6.00
TOTAL	$3,243	14.00	$5,965	20.00	$2,722	6.00

Dodd-Frank Included Above in Chief Economist Request
($ in thousands)

Program Activity	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
Dodd-Frank	$0	0.00	$975	3.00	$975	3.00
TOTAL	$0	0.00	$975	3.00	$975	3.00

Office of the Chief Economist Request by Goal
($ in thousands)

Outcomes	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
GOAL ONE: Protect the economic functions of the commodity futures, options and swaps markets.
1.1 Futures, options and swaps markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity.	$3,243	14.00	$5,965	20.00	$2,722	6.00
1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality.	0	0	0	0	0	0
Subtotal Goal One	$3,243	14.00	$5,965	20.00	$2,722	6.00
GOAL TWO: Protect market users and the public.
None
GOAL THREE: Foster open, competitive, and financially sound markets.
None
TOTAL	$3,243	14.00	$5,965	20.00	$2,722	6.00

 

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