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From Securities Regulation Daily, February 11, 2015

Chairman Massad defends CFTC budget request to House Appropriations subcommittee

By Lene Powell, J.D.

During a hearing of House Appropriations Agriculture Subcommittee, CFTC Chairman Timothy Massad made his case for the agency’s 2016 budget request of $322 million, an increase of $72 million over the fiscal year 2015 enacted level. The increase would let the regulator add 149 employees and modernize technological capabilities, boost market surveillance, and carry out examinations of critical infrastructure, said Massad.

Massad found a strong supporter in Subcommittee Ranking Member Sam Farr (D-Cal), who noted that Dodd-Frank expanded the CFTC’s oversight from the $37 trillion futures markets to include the $400 trillion swaps markets. He said it was important to adequately fund the CFTC to prevent a repeat of the 2008 financial crisis and the loss of 8 million jobs. “The cost of funding the CFTC is minor. The cost of underfunding CFTC is enormous,” said Farr.

Subcommittee Chairman Robert Aderholt (R-Ala), however, said that the CFTC has received budget increases of 123 percent since the financial crisis, and ventured to guess that this was more than any other federal government agency. He said that nearly every agency within the Agriculture Subcommittee’s purview could make a case that they were worthy of an increase, but the overall funding allocation across the committee would likely remain the same this year.

Expanded oversight. Regarding the Dodd-Frank mandates that expanded CFTC oversight to include the swaps markets, several representatives mentioned a $400 trillion notional value of the derivatives markets. Chairman Aderholt said that some had estimated the notional value as high as $700 trillion, but disagreed that the number was necessarily relevant, saying notional value was a very flawed measure of risk. Massad, smiling, agreed that notional value is not a good measure of risk, but it’s the only measure we have until the CFTC can build the data systems it needs to better analyze risk in the swaps markets. And to do that, the CFTC needs funds.

Information technology. Of the requested increase, $28 million would be spent on information technology investments, bringing the total for the data and technology budget to $108 million. The agency currently receives over 300 million records per day, and data needs including intake and storage are increasing annually by 35 percent. Data must be aggregated across many disparate market participants and the increasing complexity, volume, and interrelations of the data set requires significantly more powerful hardware, such as high performance computing systems, to support business analytics.

As an example of the volume of transactions the CFTC must survey, on an average day there might be 750,000 transactions in Treasury futures, and more than 700,000 in just the E-mini S&P 500 contract, which is the most active equity index future.  This does not include the approximately 7 million open swaps reported to swap data repositories. There are over 4000 actively traded futures and options contracts, and thousands more subject to CFTC oversight when all tenors and associated options are included, said Massad.

Cybersecurity is an increasing concern. Massad said he does not want to be a “cyber cop,” or attempt to solve cybersecurity for the industry, but the CFTC does have to make sure that market participants are adequately addressing cybersecurity challenges. The agency needs to conduct more frequent and more in-depth examinations to assess readiness and respond quickly as threats arise to better understand and mitigate such threats.

Other areas. The remaining $44 million of the increase would go to hiring 149 new employees for mission-activity support including surveillance, enforcement, examinations, registration, and compliance.

Nothing is more important to maintaining market integrity and protecting customers than a robust enforcement program, said Massad. One big case, involving fraud at former futures commission merchant Peregrine Financial Group, took more than two years and 4800 hours of staff time. During fiscal year 2014, the CFTC filed 67 new enforcement actions, opened more than 240 new investigations, and obtained $3.27 billion in sanctions, including $1.8 billion in civil monetary penalties and more than $1.4 billion in restitution and disgorgement.  To adequately fund enforcement efforts, the CFTC is requesting about $70 million and 212 employees for enforcement activities, an increase of $20.7 million and 48 employees over the FY 2015 enacted level.

Massad said that for each case the CFTC initiates, there are many more it can’t investigate because of budget constraints. He observed that there is a $100 million fund set aside for whistleblower rewards — but without the resources to investigate tips, it’s the equivalent of setting out a suggestion box without having the staff necessary to read or act on the suggestions.

Paying for it all. A number of Republicans quizzed Massad about a report of the inspector general last June finding that the CFTC had unused office space in Kansas City, with 25 employees working in space that would hold 80. According to Chairman Aderholt, this resulted in projected waste of $64 million over the life of the lease. Massad said he was not sure how the $64 million figure was determined since the Kansas City lease budget was under $1 million. The CFTC has consolidated staff on a single floor, but is waiting to hear from the landlord as to whether it can get out of the lease. Agency-wide, the CFTC will be at 95 percent occupancy if its budget request is approved.

Several Democrats asked whether a user fee would help to fund the CFTC. Massad said that many presidents including Ronald Reagan have proposed user fees and the agency has looked at it and found it would be practical to do it. It would obviously be important to do it in a way that wouldn’t affect liquidity, as a transaction tax might. His priority, however, is getting the budget the agency needs — however Congress decides to do that.

MainStory: TopStory CFTCNews CommodityFutures Swaps Derivatives

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