The Commission’s economic analysis framework stems from an analytical research program focused on answering some of the most complex issues facing derivatives markets. The ever-evolving changes in trading technology, trading instruments, and types of market participants present a great challenge to financial regulators and emphasize the need to thoroughly understand such developments. With the implementation of DFA rules and jurisdiction over swap markets, research in these areas will involve an added level of complexity. Specifically, the Commission focuses its quantitative research program to analyze the following four broad areas:
The analysis of the composition of speculative market participants allows the Commission to make informed policy decisions to address potential impact of these traders in markets. Such analyses include identifying certain categories of traders and whether their individual or collective positions or trading activity impact price, volatility, or liquidity in markets. Accordingly, the Commission will use the results from these analyses to determine whether tools or regulations should be implemented in order to correct any potential unwarranted impact.
The analysis of the linkages between various markets helps the Commission to assess the correlations of markets and whether an event in one market can trigger similar events in related markets. Strong market linkages between derivatives markets and securities and cash markets may present systemic risk concerns. Understanding these linkages will aid the Commission in implementing sound policies to mitigate cross-market effects.
After the implementation of DFA rules, the Commission will be responsible for assessing how swap markets and swap participants affect existing exchanges and market structure. Analyzing these effects allows the Commission to determine whether regulations are successful or have adverse economic consequences. Further, economic analysis will serve as the basis for many studies mandated after the DFA regulations are in effect.
The performance of new and existing derivatives markets has a potentially large impact on the stability of domestic and international financial markets. Therefore, analytical market research helps to ensure that the Commission has in place sound regulatory policies to reduce systemic risk across financial markets. Economic analysis is also an essential component for protecting the economic function of these markets without undermining innovation and the development of new approaches to risk management.
High frequency and algorithmic trading analysis allows the Commission to analyze and detect market anomalies caused by high-frequency algorithmic traders who execute large numbers of transactions in a very short period of time. The effort will provide tools to help the Commission’s surveillance and enforcement divisions to detect disruptive trading patterns and participants who unfairly manipulate markets.
Valuation of complex swaps will support comparative and economic analysis and modeling of valuation methods, especially for complex swaps. This will be necessary to fully understand both counterparty and clearing risk and provide insight into how the over-the-counter swap market affects the overall economic environment. Phased implementation will begin in FY 2012 and continue into FY 2013. (5 FTE $2.185 million)
Research, analysis, and the initial development for these areas will identify methods and tools that will be operationalized for ongoing enforcement, surveillance, and clearing activities. This process will require services for planning, architecting, and performing the integration of the tools and methods with Commission systems. Processing and storage intensive infrastructure will also be required.
FY 2013 will be the first full year under DFA rules. The complexity and scope of the Commission’s regulatory framework, pursuant to its new statutory mandate, will meet with the day-to-day reality of a significantly expanded and global marketplace, including fundamental changes to historically regulated entities as well as to participants in the previously unregulated swap markets.
In addition, the Commission is requesting an additional seven FTE to supplement the following activities: (7 FTE; $1.715 million)
In addition, eLaw, which has been integrated with FOIA Express to support the Commission FOIA program, extended to support the Commission rulemaking process, and extended to support case and document management for certain functions within the General Counsel’s Office, will also continue to be enhanced for Commission-Wide legal analysis and support activities. These costs are captured in the requested increase under Enforcement, above.
Organizationally, the Commission’s examinations-related increases will support the Commission-wide requirements through six program areas:
|Clearing and Risk||1.00||245||0||0||245|
|Swap Dealer and Intermediary Oversight||5.00||1,225||0||0||1,225|
|Clearing and Risk||3%|
|Swap Dealer and Intermediary Oversight||18%|