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Division Summary: Market Oversight

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The DMO program fosters markets that accurately reflect the forces of supply and demand for the underlying commodities and are free of disruptive activity.  To achieve this goal, program staff oversee trade execution facilities; performs market and trade practice surveillance; review new exchange applications and examine existing exchanges to ensure their compliance with the applicable core principles; evaluate new products to ensure they are not susceptible to manipulation;  review exchange rules and actions to ensure compliance with the CEA and CFTC regulations; and carry out the mandates of the Dodd-Frank Act related to oversight of swaps trading, including real time and regulatory reporting and compliance with the trade execution requirements.

Budget Overview by Mission Activity

Market Oversight Request
($ in thousands)
  FY 2011
FY 2012
FY 2013
Budget Positions FTE Budget FTE Budget FTE
Market Oversight $26,658 118 118 $28,812 123 $49,147 206

Market Oversight Request by Mission Activity
($ in thousands)
Mission Activity FY 2012
FY 2013
Budget FTE Budget FTE Budget FTE
Market Oversight $28,812 123 $49,147 206 $20,335 83
Registration and Registration Compliance   $1,960 8
Review of Products and Rules of Operation   $5,635 23
Data  Acquisition, Analytics, and Surveillance   $6,370 26
Examinations   $5,145 21
Economic and Legal Analysis   $1,225 5

Registration and Registration Compliance

Registration of Swap Execution Facilities and Designated Contract Markets.  The Commission anticipates that, beginning in the second quarter of FY 2012 through FY 2013, four DCMs will file for registration and another 26 SEFs will file for temporary registration.  The Commission is under a statutory mandate of 180 days to complete an application of a DCM.  In addition, the Commission is mindful of the competitive nature of the derivatives market and the advantages a registered SEF could garner over one operating under a temporary registration.  Given these constraints, the Commission sees the need to complete the full application reviews of both DCMs and SEFs as expeditiously as possible.  To that end, the Commission will dedicate four review teams of six FTE each to review applications. In order to address the significant staffing needs that will be engendered by such a surge of applications, the Commission will temporarily re-allocate resources from across the organization.  In this regard, the Commission will re-allocate staff conducting examinations in the Division of Market Oversight and will reassign attorneys from enforcement activities. While even a short-term diminution of the examination and enforcement program is not ideal, this approach should enable the CFTC to process the initial surge of applications in FY 2012 and the first half of 2013 by newly established entities in a timely manner without seriously compromising its ability to carry out other key responsibilities.

Concurrently with registering new entities, the Commission will need to evaluate all existing DCMs to ensure that the exchanges are in compliance with the expanded core principles and Commission regulations implementing such core principles, and that the public is appropriately protected. On-going resources will also be needed to support the additional volume of work for compliance reviews for the three-fold expansion in registrants.  While there are currently 14 FTE to support the DCM registration and compliance review effort, the Commission seeks an additional four FTE to support the on-going expanded workload.

Registration of Swap Data Repositories. The Commission assumes that five to eight swap data repositories will submit registration applications in FY 2012 and 2013.  The activities necessary to ensure timely review of the applications for compliance with core principles and regulations are comparable to those for DCM and SEF applications.  The Commission will use the provisional registration approach, which requires under its rules that the swap data repository show operability and compliance with regulations.  Resources will continue to be needed to support on-going compliance-based reviews, including annual Chief Compliance Officer and financial reports.  The Commission anticipates needing a single team of six FTE to perform swap data repository registration and reviews in FY 2012, which will also support swap product reviews on a capacity-available basis, redeploying resources from the Division of Enforcement and other divisions as necessary. On an on-going basis, the Commission anticipates a significant effort in registration, review and policy development in support of these new entities and requests one dedicated FTE to support SDR registrants.

Registration of Foreign Boards of Trade.  The Commission is anticipating that 21 FBOTs will seek registration; most of these will come from those currently operating with no-action relief letters.  A significant effort will be necessary up-front to standardize the comparability review of foreign regulatory regimes of the home countries under which the FBOTs operate. As with registration of other new entities, the Commission will seek to use a phased approach to application review beginning in FY 2012.  During FY 2012, the current two FTE dedicated to review FBOTs, along with additional personnel drawn from other areas of the Commission on an as-needed basis, will be assigned to two-person teams to handle each registration.  After disposing of the expected initial surge of applications, the staff will, on an ongoing basis, maintain relationships with FBOTs for the purpose of reviewing required supplemental filings, assessing changes to the FBOT rules and regulatory regimes, and ensuring compliance with any conditions imposed, including position limits and position transparency requirements for contracts linked to DCM contracts.  With the increased volume of work in moving from operating under no-action relief letters to a more standardized and stringent regulatory framework, the Commission anticipates a need for three additional FTE to implement the FBOT registration program.

Review of Products and Rules of Operation

Products and rules introduced by designated contract markets, swap execution facilities and swap data repositories.  As indicated above, the Commission anticipates a surge in requests for new product approvals with the expansion of authority under the Dodd-Frank Act.  An estimated 26 FTE are required to support the increased volume of work associated with new product approval requests and certifications implementing the Core Principle 9 provisions, and reviewing novel products raising SEC and CFTC jurisdictional issues.  Staff also will be deployed to evaluate block trade threshold levels in addition to "made available for trade" determinations for swaps. 

Furthermore, consistent with its current experience, the Commission anticipates numerous rule filings from registered entities that must be reviewed.  Under the Dodd-Frank Act, the rule review process will be more resource-intensive due to the more rigorous 10/90-day review track for rule submission, the increased number of registered entities, and the new or amended core principles.  Reviews to evaluate the effectiveness of rules adopted and consider whether any modifications are warranted will be on-going. Staff increases will support product reviews, reviews of new rules and rule amendments, event contracts, quarterly reports on financial resources, and rule effectiveness. Moreover, the Commission expects to evaluate event contracts under a special review process to determine if they involve prohibited activities and other DCM contracts to determine whether a sufficient proportion of trades occur on the centralized marketplace in compliance with the Core Principle 9 requirement that the price discovery process of listed contract be protected. 

Data Acquisition, Analytics, and Surveillance

Swap data acquisition and analytics for oversight and surveillance.  This activity, coupled with any follow-on enforcement actions, represents the core of the Commission’s expanded mandate.  The Commission has identified a need for 25 FTE to oversee the recordkeeping and reporting requirements applied to swap market participants and the management and analysis of swaps data that would be reported to swap data repositories.  These staff will conduct information analysis; use economic analysis to develop requirements and data rules; develop and maintain CFTC summaries and aggregation of swap repository data; report on findings; define business data and process requirements; audit data submission quality; and assess reporting compliance.  They will also review and update data reporting standards; govern information policies and standards; manage data taxonomies, dictionaries and inventories; manage information quality and confidentiality; direct external information requests and data rulemaking; steward master data and reference data; manage Commission dashboards and views of swap repository data; and provide data mining and analysis support.  And they will deploy and maintain data systems and data analytics tools; implement and maintain direct access, data transfer, and data loading between the Commission and data repositories; and deploy information quality and confidentiality controls.

It is anticipated that the Commission will leverage existing repositories wherever possible. The standardized data sets that will be submitted to CFTC are expected to represent only the subset of data required for internal analysis and aggregation purposes. In FY 2012, the Commission will be implementing direct access to external swap data repositories for the purposes of market oversight activities, but to also further define data submission requirements for standardized data feeds. The Commission anticipates defining the data standards across multiple data categories including: position data, transaction data, and reference data. Once defined, the Commission will work with industry participants on the application and testing of those standards to their data submission processes. Similarly, the Commission will be developing software to load swaps data into a Commission data warehouse for use by CFTC staff for market surveillance, risk monitoring, enforcement, and economic analysis. The Commission anticipates that it will conduct data analysis, working with industry to define data standards, and develop data loading software to support Commission systems for swaps data.

The CFTC has looked for efficiencies in carrying out its surveillance obligations. In that regard, the market surveillance (monitoring of positions) and trade practice surveillance (monitoring of trading activity) have been consolidated into a single branch.  Combining these functions will achieve synergies that will make the CFTC’s surveillance efforts more effective with available staff. Staff will be better able to address violations that blur the distinction between market and trade practice surveillance and staff can readily be shifted to evaluation of emerging issues, to work on reviews of potential violations, and to work with enforcement staff in the prosecution of violations.

Additional capabilities will also be required to support swaps position and transaction surveillance, enhancing surveillance systems to collect and incorporate that data into analyses covering both swaps and futures markets. The Commission anticipates developing automated surveillance capabilities by building new models to generate alerts, thereby facilitating market and financial surveillance. The Commission also anticipates needing to modify its large trader reporting and financial and risk surveillance systems to support new swaps data analysis, internal reporting requirements, and transparency reporting on the website.

Aggregate Position Limits. The Commission is requesting additional staffing to monitor aggregate position limits adopted by the Commission; manage the hedge exemption process and evaluate the effectiveness of limits adopted and consider whether any modifications are warranted.  The Commission will begin collecting commodity swap positions in future equivalent standards in FY 2012.  Once data is collected, modifications will need to be made to the existing surveillance reports and new or modified surveillance processes will need to be developed.  In addition, alerts will be written to notify staff when position limits have been violated and incorporated into the business process for surveillance.  The CFTC will seek to acquire or develop a system that will support the analysis and monitoring of position limits and hedge exemptions, aggregating futures positions with enumerated commodity swap positions, and develop surveillance processes that combine swaps, futures and options for intra-day and end-of-day position limits surveillance. (12 FTE, $5.138 million)


Designated Contract Markets, Swap Execution Facilities, and Swap Data Repositories. The Examinations staff performs direct oversight of self-regulation at all DCMs to help ensure market integrity, customer protection, and compliance with the CEA and Commission regulations.  The cornerstone of the work is the rule enforcement reviews (RERs), which consist of detailed examinations assessing DCMs' compliance with applicable "core principles" under the CEA.  Different aspects of DCMs' self-regulatory programs are reviewed, including:  audit trail creation and retention; trade practice surveillance; market surveillance; disciplinary proceedings; system safeguards (e.g., information security, business continuity, physical security and environmental controls); and dispute resolution mechanisms.  RER results for each DCM are documented in comprehensive public reports, including specific recommendations to remedy any deficiencies identified by Examinations staff.  In the future, the Commission will be required to conduct comparable RERs of SEFs and swap data repositories, swap-market entities brought under the Commission's jurisdiction by the Dodd-Frank Act. 

Examinations staff will begin to establish a program for routine examinations (RERs) of new registered entities (SEFs and swap data repositories), while continuing our focus on reviews of the DCMs. These reviews are necessary to ensure compliance with statutory and regulatory requirements, including those applicable to market continuity. The additional resources requested are based upon the assumption that there will be a total of approximately 57 registered DCMs, SEFs and swap data repositories.  The Commission plans to begin conducting RERs to ensure compliance with any one of the six core principles.  Large exchanges will be examined annually and smaller entities every two to three years.  Currently these examinations are being conducted infrequently or not at all with respect to specific core principles.  Without these examinations, RERs lose their value as a Commission tool for promoting effective self-regulation and market integrity, and ensuring compliance with the CEA and Commission regulations.  The Examinations section has attempted to use its limited resources in the most efficient manner possible, and has focused its RER program on the areas of highest need and risk.  In the future, however, the number of regulated entities subject to RERs is expected to increase from the current 16 DCMs to a projected 50 or more DCMs, SEFs and swap data repositories.  The Commission estimates that the level of effort for examinations of large exchanges is one FTE for each review, while medium to small exchanges that about one-half of an FTE per review.  General market continuity examinations take approximately one FTE for each review.  In general, the Commission is staffed at just over 0.6 staff years for each registered exchange. A meaningful injection of new staff resources is vital for examinations to meet even minimum expectations for effective oversight of both futures and swaps market platforms in FY 2013 and beyond.  While the Commission seeks to move towards annual examination of the major entities1, while scheduling reviews of non-major entities less frequently, the current request of 21 FTE will provide for just under 0.6 staff years per registered entity.  While reducing the overall focus on examinations, this increase will ensure that the Commission can conduct for-cause examinations and a limited number of routine examinations of exchanges as resources become available. 

Economic and Legal Analysis

Interpretation and Guidance. Market participants will have requests for clarification and guidance once the new regulations are adopted and during the implementation period.  Further, rules that have been proposed jointly by the CFTC and SEC would establish a formal process to address inquiries regarding the treatment of products as swaps or security-based swaps and the applicable regulation of mixed swaps.  Staff will be required to review and develop proposed interpretations, policies, and possibly regulations for all aspects of the DFA changes.    Based on experience over the years with the implementation of other new registration schemes (e.g., for commodity pool operators and commodity trading advisors, for introducing brokers, and for retail foreign exchange dealers), there are bound to be questions arising that need a response – whether informally, by way of email or telephonic inquiry, or formally, by way of a staff-issued interpretative, no-action or exemptive letter or a Commission-issued order or regulation (or amendment thereto).  Because of the tremendous consequences of not providing adequate support for new regulated entities, the Commission is requesting resources to ensure prompt, well-reasoned and accurate responses.  Also, because many of these issues will be questions of first impression, the time taken to provide responses to the issues will be longer than it is today.  The Commission also anticipates the need to be actively involved in the preparation of interpretations relating to jurisdictional issues arising under the Dodd-Frank Act amendments to the CEA.  Timeliness is key to minimizing disruption to the orderly workings of the marketplace.

Management and Administrative Support

The Commission’s expanded statutory mandate and accompanying resources requires a related expansion in critical planning and resource management functions.  In FY 2012, the Commission will re-engineer its financial management processes to enhance funds control, increase the planning and predictability of its spending, and facilitate priority-driven resource allocation.  Based on the outcome of these planned activities and its increased resources, the Commission requests one additional FTE with budget and resource management skills. 

Top FY 2011 Accomplishments

Completed proposed and final rulemakings related to the Dodd-Frank Act:

Completed proposed rulemakings related to the Dodd-Frank Act:

Completed reviews of 57 new product certifications, 9 exempt market filings, 317 rule filings and one FBOT no-action request.

Chief or contributing drafter for two important IOSCO reports -- the Report on OTC Derivatives Data Reporting and Aggregation Requirements and the Report on Trading of OTC Derivatives – in fulfillment of a charge from the Financial Stability Board.

Created three new alerts and three new reports as well as enhanced four trade practice alerts in production for more effective market and trade surveillance.

Top FY 2012 Planned Outcomes

Completion of remaining Dodd-Frank rulemakings:

Begin new swap data repository and SEF registration applications.

Implement swap data reporting to swap data repositories.

Implement swap block trade provisions.

Top FY 2013 President's Budget & Performance Planned Outcomes

Continued registration of new applicants: Swap data repositories, SEFs, FBOTs, and DCMs.

Swaps surveillance program:

Implement Federal speculative limits for physical commodities.

Start examinations of SEFs and swap data repositories.

Determine which swaps that are subject to mandatory clearing are "made available for trading."


1A major designated contract market or swap execution facility will be defined as the largest entities that contribute to at least 75 percent of observed volumes in the overall futures and swaps markets. (back to text)


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