The CFTC regulates a futures and options industry that increased from 250 million contracts in 2001 to more than 2.5 billion contracts in 2011. The value of customer funds held in Futures Commission Merchants Accounts, during the same period, increased from $56.7 billion to more than $203.7 billion, and the value of these contracts is notionally estimated at $40 trillion. With the passage of the Dodd-Frank Act, the CFTC is tasked with regulating the swaps markets with an estimated notional value of approximately $300 trillion – roughly eight times the size of the regulated futures markets.
The Commission made significant progress in implementing its new mandate under the Dodd-Frank Act in FY 2011. During the year, 59 proposed rules were published and 15 rules were finalized; an estimated 45 rules are to be finalized in the upcoming year. The timeline for finalizing the regulatory framework necessary to provide the protections offered by Dodd-Frank has been delayed from the twelve months laid out in the Act. This delay has afforded the Commission the opportunity to more fully engage with industry, the U.S. Securities and Exchange Commission and other federal stakeholders, and the international community in bringing transparency to, and reducing the uncertainty in, the global swaps market.
Implementation of the new Dodd-Frank rules began in FY 2011, with the Commission receiving data on cleared swaps. The pace of implementation will accelerate in FY 2012, with provisional and full registration of new entities in the swaps market. And, in FY 2013, the Commission’s focus will shift to the full implementation of the swaps market regulation. The budget request presented in this document represents the Commission’s best judgment on the scope of final regulation, the span of regulated entities, and the resources required to fulfill the Commission’s statutory and regulatory mandate.
This budget request builds on four main elements:
The Commission has undertaken a series of internal realignments of its management structure and business processes to improve its efficiency and effectiveness in delivering its mission. Two new offices have been created to provide dedicated focus on the swaps market and data analytics. To address the scope of the swaps marketplace and ensure that the CFTC is well-situated to fulfill its expanded mission of overseeing swaps markets, the CFTC created a new division for oversight of swap dealers and intermediaries. This group will report to the Chairman’s office, and will facilitate standing up the new regulatory regime for the swaps marketplace by creating a group whose primary focus is on the regulation and oversight of swap dealers. It will also provide consolidated oversight over other regulated intermediaries.
Second, technology will play a critical role in leveraging financial and human resources as the CFTC executes its expanded oversight and surveillance responsibilities over both the futures and swaps markets pursuant to the Dodd-Frank Act. Accordingly, the Commission has reorganized its technology programs by establishing a new group reporting to the Chairman’s office for the collection, management and analysis of data. This group is staffed by personnel drawn from multiple disciplines and existing divisions and offices and will facilitate the improved oversight and enforcement of the derivatives markets by providing tools and analytics to support the individuals charged with those responsibilities. It will also serve as the primary interface for market participants in adapting to the new data standards and reporting requirements for market data required under the Dodd-Frank Act.
The Commission has also undertaken significant efforts to build flexibility into its business processes. The most significant example of this is the changes the Division of Enforcement has introduced to promote efficiency, the effective use of resources, and take better advantage of the considerable expertise of its staff. The Division implemented four changes to accomplish these goals:
Likewise, the Commission has undertaken steps to improve its recruitment processes, on-boarding over 100 new employees in FY 2011. The ability to develop position descriptions, recruit, hire and on-board employees is a critical area of focus for the Office of the Executive Director to support the expanded needs of the Commission. In FY 2012, the Office will expand its focus to developing a more robust resource planning and execution process, as demanded by the expanded mission-driven requirements and the greater complexity in the operation of the Commission’s business.
These internal changes, as well as others across the CFTC, will position the Commission to deliver on its expanded authorities within the current operating constraints, and prepare it to absorb the additional workload outlined in this request in FY 2013.
Implementation of the Dodd-Frank regulations will begin in earnest for CFTC in FY 2012. In its internal planning, the Commission must anticipate resources below the President’s FY 2012 Budget of $308 million and 1,015 FTE, while still fulfilling its mandate. The Commission must be prepared for a surge of registration applications; requests from the National Futures Association seeking to process registration applications; requests for reviews of products and rules of operation by exchanges, clearing organizations, and self-regulatory organizations; requests from international bodies for standardization and harmonization; as well as efforts to develop examination programs for previously unregulated entities. While enforcement efforts for Dodd-Frank registrants will lag somewhat, the Commission continues its efforts to enforce the registration requirements of the retail foreign exchange dealers mandated by the 2008 Farm Bill and 2010 implementing regulations.
The Commission will redeploy resources internally to process the surge of Dodd-Frank registrations and reviews during FY 2012. Staff will be reassigned from examinations and enforcement as necessary to support registration and reviews. The Commission acknowledges that this realignment creates risks in its critical oversight roles. CFTC has identified robust and systematic examination programs as essential to early identification of weaknesses in customer and market protections. Likewise, visible and public enforcement actions are one factor in deterring retail fraud and ensuring redress for consumers. Nonetheless, the overarching concerns of bringing transparency and certainty to the $300 trillion swaps market must take precedence. As such, the Commission will make a series of tactical decisions over the course of the year (beyond those specifically identified) to balance the risk of operating under constrained resources.
The FY 2013 budget as presented here assumes that personnel hired to support the initial surge in Dodd-Frank activity will be redeployed in future years to examinations. The Commission has been unable to muster the resources necessary to conduct annual examinations on major entities in prior years – even biennial reviews have been foregone in some instances.
The budget request presented here attempts to strike a balance between investments in technology and human capital. It is clear that the Commission is facing an enormous technical challenge under the Dodd-Frank regulatory framework. Prior to the Dodd-Frank Act, the Commission processed over 5 billion records per month for market surveillance, financial and risk surveillance, and business analytics applications. The Commission anticipates a tripling in the number of exchanges and/or trading platforms under its purview between FY 2011 and FY 2013 and many new significant data streams will be added. FY 2013 estimates for increased Commission infrastructure capacity are based on current rates of growth, project related estimates to launch Dodd-Frank projects based on experience with prior projects, and anticipated technology industry reductions in cost per unit of storage, processing, and communication bandwidth. Given the uncertainty over the actual volume and growth rate of volume of trading on these new platforms as well as the size of the subset of information stored at SDRs that will need to be ingested by the CFTC, we have planned for roughly doubling the capacity of our infrastructure related to market surveillance. More important, the capacity can be scaled when needed based on sustained demand.
In conjunction with managing the increased flow of data, the Commission will have an increased need for analytics. In order to understand the behavior of the derivatives market and its participants, to identify circumstances and behaviors that increase the risk to investors and the overall marketplace, this vast quantity of data has to be organized, processed, and analyzed to identify significant events. This requirement depends on high-performance computing hardware and software; the creation, testing, and refinement of models to identify risk; the development of the analytical alerts to "push" findings to individuals for evaluation; and the ability to evolve as the Commission's experience base as expertise grows. Surveillance and enforcement focused technology investments will rise to almost 55 percent of the information technology portfolio in FY 2012, an increase of $23 million based upon current planning estimates).
At the same time, the Commission requires subject matter experts and managers to perform the full-scope of regulatory and support activities. These individuals require on-the-job training in many cases, as those with industry knowledge need grounding in the CFTC's regulatory framework, while those with a regulatory background need to understand the specifics of the industry the Commission regulates. In addition, many of the activities require incremental travel funding, expert support and other day-to-day operational expenses. The Commission has endeavored to reflect the true cost of maintaining a highly-skilled workforce in its request, while realizing that offsets within its base programs can be realigned to support new priorities.
By presenting a budget request that integrates the technology requirements into the discussion of the mission-requirements, the CFTC hopes to present a picture of how investments in technology and staff provide unique yet necessary and complementary resources to fulfill the Commission's mission.
The FY 2013 budget as presented here has been restructured to articulate resource requirements in support of specific mission activities. By examining the activities that the Commission performs and how the scope and complexity of those activities have expanded with the new statutory and regulatory mandates, requested increases can be tied directly to the expanded mission. This allows the reader deeper insight into the how the CFTC conducts its work and the commensurate resources required.
Despite delays in finalization of Dodd-Frank rules necessitated by the notice and comment process, the Commission is aggressively positioning itself for full implementation in FY 2013. To that end, the Commission requires an increase of $102.7 million and 305 FTE over FY 2012, for a total request of $308 million and 1,015 FTE.