CFTC Commissioners dissent from 2011 annual performance review and 2013 budget

Apparently CFTC is not as homogeneous as one might think. Two of its Commissioners, Commissioner Jill E. Sommers and Commissioner Scott D. O’Malia, are publishing a dissent from CFTC's 2011 annual performance report saying that it focused on Dodd-Frank much more than it should have while missing many other goals. CFTC indeed was obsessed with Dodd-Frank for majority of 2011 which may have been a political decision rather than a purely regulatory one.

O'Malia (a long time dissident and probably one of the only few sane people in the Commission) also dissented from the proposed 2013 Fiscal Year 2013 Budget Submission for the Commission stating that a 43% requested increase in staff members at the cost of additional $103 million is unrealistic in this economy.

The full 2011 Annual Performance Report is found here.

We respectfully dissent from the fiscal year 2011 Annual Performance Report (the “Report”). While we don’t disagree with the stated performance criteria goals, we must protest the fact that funds and priorities have been withdrawn from critical futures market oversight and rule enforcement reviews to focus on the Dodd-Frank rules. This document is filled with statements that make it clear that Dodd-Frank rulemaking is a priority and will be pursued at the expense of other critical goals and priorities. We hope the Commission will work to rebalance its funding and focus from those areas that have exceeded expectations and goals to those that are critically underfunded, in particular the Division of Market Oversight and the Office of Data and Technology.

Despite claims in this Report with regard to the Dodd-Frank rulemakings, that, “With all the rules, the CFTC has taken and will take a thoughtful and balanced approach – the clock will not be the driver,”1 the budget and staffing priorities embodied in this document and the evidence in the FY’2012 spending plan (that will be submitted to Congress separately) clearly imply otherwise.

Without a doubt, the Dodd-Frank rulemakings have been a top priority of this Commission, and, as a result, the Commission has missed 43 percent of its stated priorities. Some of the most notable goals which have been missed are in the areas of technology and critical rule enforcement reviews conducted by the Division of Market Oversight in the futures market. For example, the Commission was only able to achieve 70 percent of goal 1.1.1.2, which is to implement automated surveillance alerts.2 Goal 1.1.1.3, achieved only 20 percent of the Commission’s objectives with the development of only one of five proposed automated trade violation alerts.3 Goals 1.1.2.1 and 1.1.3.1 both targeted the Automation Automation Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime Read this Term of forms to enhance data integrity and automation and reduce the staff requirement to re-enter market data. Each only achieved 50 percent of their goals.4 Technology, especially through automated surveillance, offers the greatest opportunity to expand the Commission’s oversight with the fewest number of staff. Due to the massive growth in the speed and volume of trades the Commission must embrace technology or risk being unable to effectively monitor futures, options and Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term markets.

In light of the MF Global insolvency, the Commission must remain vigilant in its oversight of the futures markets for both systemic and operational risks. Unfortunately, resources have been redirected to Dodd-Frank-related rulemakings and reduced the Commission’s capacity to appropriately oversee these markets. Two performance measures that deserve special attention and concern are 1.2.1.1 and 1.2.1.2. Both performance measures focus on the essential rule enforcement reviews of core principles of major designated contract markets (“DCMs”) (1.2.1.1) and non-major DCMs (1.2.1.2). Respectively the Commission only achieved a 40 percent and 20 percent of successful completion of these Commission-set priorities.5 The report states that, “If major exchanges are not reviewed annually, it is difficult to provide any assurance to the public or other regulators of the exchanges’ ongoing core principle compliance.”6 The report notes that three major exchanges were not reviewed, including CME, CBT and ICE Futures U.S. The report goes on to justify the 40 percent success rate of goal 1.2.1.1 by stating that, “As the Commission remains determined to complete its Dodd-Frank Act rulemaking during the upcoming FY 2012, Division and Offices can expect to face similar challenges and a prolonged environment of budget and human resource constraints.”7 With regard to goal 1.3.1.1, the report noted that while “non-major exchanges do not pose the same systemic risks as major exchanges, there are serious consequences of not performing reviews at least every two or three years.”8 However the report explains that, “Due to insufficient staff resources, none these reviews were completed during 2011 fiscal year.”