CFTC Commissioner O'Malia Issues Statement of Dissent on FY 2015 Budget Request (with Lofchie Comment)
CFTC Commissioner Scott O'Malia issued a statement of dissent which criticized both the CFTC's FY 2015 budget request and the agency itself for making "improbable funding requests" and underfunding technology.
According to O'Malia, the CFTC failed to develop a strategic plan which included a technology and workforce investment program, thereby missing the statutory deadline for submitting the plan to the Obama Administration and Congress. O'Malia stated that the CFTC made "an unrealistic request for new staff and funding in this budget request without a firm understanding of its mission priorities, specific goals, and corresponding personnel and technology needs."
The Commissioner went on to criticize the CFTC for allocating the smallest percentage increase to technology in the FY 2015 budget request, with only a 6.8 percent increase from FY 2011 to FY 2014, when the CFTC's overall funding has grown 11.7 percent during the same period. According to O'Malia, given the CFTC's funding plan, the agency "will waste another year without deploying critical technology" and be forced to rely on transaction data that is submitted by registered entities, thus being unable to form a complete picture of overall market activity.
O'Malia stated that the CFTC "should not make technology any more complicated than necessary," and noted three areas in which it must make technology investments:
- improving swaps data quality;
- developing additional automated surveillance tools; and
- developing automated risk analytics.
Additionally, O'Malia noted that he does not support "expending scarce taxpayer resources to duplicate mission responsibilities," stating that he is concerned with the CFTC's budget proposal of a 57.9 percent increase for the Division of Swap Dealer and Intermediary Oversight ("DSIO") in light of the fact that the National Futures Association ("NFA") has already delegated responsibility to register, examine, and oversee the 98 registered swap dealers ("SDs") and two major swap participants. O'Malia suggested that, rather than replicate the work that the NFA is already performing, the DSIO should make SDs' risk its primary focus.
Lofchie Comment:The Commissioner raises a number of important issues. First, is it really possible for the CFTC to analyze the risk of U.S. banks that are swap dealers, much less foreign banks? There really is no practical way for bank risk as it relates to swaps to be analyzed apart from their other business risks (e.g., lending). Dodd-Frank makes a fundamental error in attempting to split the risk management of banks between the banking regulators and the CFTC in this manner.Second, Commissioner O'Malia assumes that the NFA should act as an agent of the CFTC. While the NFA may function largely in this manner, the authority of the CFTC to direct the NFA is much less than, for example, the authority of the SEC to direct the conduct of FINRA.Third, to pick up a theme that Commissioner O'Malia emphasized, the CFTC's ability to use the data that it now requires is far more limited than its former Chairman boasted when the CFTC's recordkeeping rules were adopted. This means that the incoming CFTC administration should focus on determining whether it can actually use the data that it now requires before imposing any new requirements in this area.
See: Commissioner O'Malia's Statement of Dissent. Related news: CFTC Commissioner Chilton Criticizes the President's FY 2015 Budget Funding the CFTC (with Lofchie Comment) (March 4, 2014).