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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:

• Analysis of the composition of speculative market participants;
  
  
• Analysis of the linkages between futures, option, swap, securities, and cash markets;
  
  
• Analysis of swap markets' and new participants' effects on existing exchanges and market structure; and
  
  
• Analysis of high frequency and algorithmic trading.

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.

• 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.  (12 FTE; $2.940 million)

In addition, the Commission is requesting an additional seven FTE to supplement the following activities: (7 FTE; $1.715 million)

• Litigation.  The Commission is called upon to support appellate litigation (including participation as amicus curiae) and certain trial-level cases (including bankruptcy cases involving futures industry professionals).  Following the implementation of the Dodd-Frank regulations, the CFTC could face rulemaking challenges, potentially beginning in the first quarter of FY 2012.  The actual number of challenges cannot be predicted; however, as evidenced by the recent challenge to the SEC’s proxy access rule (which reportedly took 2700 staff hours to defend in the D.C. Circuit), these cases are both time and resource intensive.  Further, because of the increased enforcement activity expected in FY 2012 and 2013, the CFTC anticipates an increase in the appellate litigation caseload.  The Commission believes that the cases that involve new enforcement authorities under the Dodd-Frank Act have a higher chance of being appealed.  The litigation program also encompasses personnel, labor, contract, and employment law matters.  The Commission will also likely see an increase in personnel-related litigation proportional to the growth in the workforce.  Attorneys supporting the CFTC litigation program also respond to subpoena requests and review enforcement matters for legal sufficiency and compliance with precedent; as noted, enforcement actions are also expected to increase in FY 2013.  In order to maintain the litigation program, the CFTC is requesting one additional legal counsel and additional contractor paralegal support.
  
  
• Legislation and Intergovernmental Affairs.  The Commission monitors, reviews, and comments on proposed legislation affecting the Commission or the derivatives industry, and prepares technical assistance regarding draft legislation as requested by members of Congress or their staff.  CFTC expects this workload to increase substantially in FY 2013 when Congress is expected to consider reauthorization legislation for the CEA and will likely undertake a thorough review of the substantial amendments that were enacted as part of the Dodd-Frank Act.  The CFTC also reviews and analyzes jurisdictional issues and liaisons with other Federal regulators as necessary to address specific matters implicating the regulatory interests of multiple agencies.  In FY 2012 and FY 2013, the CFTC will continue to support the activities of the Financial Stability Oversight Committee, and will require additional legal resources in areas such as banking and securities law, given the need for cross-disciplinary coordination and consistency to effectively implement the Dodd-Frank Act.   To support this increase in workload, the Commission requests an additional two FTE.
  
  
• General Law: The Commission is requesting three additional FTE in the area of General Law.  One of these FTE will support the Information Governance program and ensure compliance with CEA Section 8 confidentiality provisions.  Under the Dodd-Frank Act, the Commission will begin capturing, and have access to, substantial amounts of data related to swaps which will be protected under Section 8.  Having the appropriate staff to oversee the protection of the statutory confidentiality of this data will be critical.  Two additional FTE will also support the Commission in interpreting and applying the Administrative Procedure Act in regulatory actions taken to implement the Dodd-Frank Act, as well as the Regulatory Flexibility Act, and the Paperwork Reduction Act.  These FTE will also counsel the Commission to ensure compliance with the Sunshine Act and the Federal Advisory Committee Act. 
  
  
• Ethics.  The Commission maintains an active program with respect to all matters related to the Commission’s ethics standards and compliance with its Code of Conduct, as well as with government-wide ethics regulations promulgated by the Office of Government Ethics.  To maintain adequate response times for ethics issues and to process the required ethics forms as the CFTC and its new responsibilities grow pursuant to the Dodd-Frank Act, the Commission anticipates needing one additional FTE in FY 2013, bringing the total to three FTE.

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:

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