CFTC Chair Massad Urges Senate Appropriations Committee to Approve FY 2017 Budget Request (with Delta Strategy Group Summary)
Commentary by Bob Zwirb and Steven Lofchie
In light of what he called "dramatically expanded responsibilities," CFTC Chair Timothy G. Massad urged the Senate Committee on Appropriations to approve President Obama's fiscal year 2017 budget request for the CFTC.
Chair Massad called on the Committee to approve $330 million and 897 full-time equivalents ("FTEs"), an increase of $80 million and 183 FTEs over the level enacted in FY 2016. He itemized the CFTC's priorities under the following categories:
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Data and Technology. The CFTC requested $61.1 million and 60 FTEs for enterprise-wide data and technology support activities, an increase of $17.1 million and 11 FTEs above the FY 2016-enacted level, in order to expand its information technology systems and safeguard registrant data. Chair Massad noted that the CFTC currently is developing a more efficient system for collecting and analyzing swaps market data.
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Surveillance. The CFTC requested $62.8 million and 160 FTEs for surveillance, an increase of $25.7 million and 56 FTEs over the FY 2016-enacted level, in order to invest in technology and personnel, and to develop CFTC-automated surveillance and data visualization tools. Chair Massad stressed that "falling short" of this request would "severely limit" the CFTC's ability to detect fraud and manipulation, market abuses, firms in trouble and various kinds of improper behavior.
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Enforcement. The CFTC requested $68.7 million and 212 FTEs for enforcement activities, an increase of $15.5 million and 51 FTEs over the FY 2016-enacted level, in order to "maintain market integrity and protect consumers." Chair Massad stressed that enforcement actions will only increase in the wake of growing market complexity and globalization. He also noted that the CFTC has collected fines and penalties that total approximately four times its cumulative budget during the past five years.
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Examinations. The CFTC requested $34.2 million and 128 FTEs for examinations, an increase of $3.4 million and 13 FTEs over the FY 2016-enacted level. Chair Massad explained that the CFTC considers examinations of clearinghouses, exchanges, swap execution facilities, swap data repositories and intermediaries to be extremely important.
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Registration and Compliance. The CFTC requested $18.0 million and 62 FTEs for registration and compliance activities, an increase of $3.5 million and 10 FTEs over the FY 2016-enacted level. Chair Massad argued that even though the CFTC has delegated more of its responsibilities to the NFA, it still has insufficient resources that, if not augmented, will result in delays, inadequate customer protection, regulatory uncertainty, and higher legal and compliance costs for registrants.
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End User Concerns. Chair Massad listed the CFTC's efforts to reduce recordkeeping obligations and address commercial end users' concerns about trade options, peaking supply contracts and contracts with volumetric optionality. He emphasized that CFTC staff also implemented congressional changes related to "central treasury units," and excluded end users from margin requirements for uncleared swaps.
Chair Massad delivered his testimony at a hearing held at the U.S. Senate Committee on Appropriations, Subcommittee on Financial Services and General Government in Washington, D.C.
Commentary
In the multiple requests for more money and personnel that pepper his testimony, Chair Massad uses the word "resources" twenty-four times. He elaborates on why additional resources are needed - e.g., to monitor risk, to make a "massive information technology investment," to analyze market data, to pursue more enforcement - but is silent with respect to offering any analysis of the relative benefits or costs of its various initiatives. He also refrains from discussing how to allocate resources more efficiently.
If the CFTC lacks sufficient resources to fulfill its mission, then perhaps it should prioritize competing tasks and goals. For example, when the CFTC's own advisory committee on energy matters concludes that (i) "little to no evidence" confirms that position limits are "necessary," (ii) what little evidence actually exists of excessive speculation in the energy sector is slender to the point of being virtually "undetectable," and (iii) since any limit-imposing rule would be unlikely to pass a cost-benefit test, it would make sense to shift the resources from the proposed position limits rulemaking to something more productive, such as examining systemically important clearinghouses. According to Chair Massad, there currently are not enough resources to conduct such in-depth examinations on an annual basis.
Another candidate for funds redirection is the proposed Regulation AT; subjecting it to Occam's razor reveals it to be primarily an exercise in imposing existing industry best practices requirements with the CFTC's imprimatur. In an environment in which resources are scarce, shouldn't the need for that rule merit budgetary scrutiny?
Commentary
No market participant should be comforted by the CFTC's implicit promise that it will turn funding allocations into enforcement revenues. This becomes particularly apparent when the CFTC stretches the limits of credibility on the enforcement side (when it asserts, for example, that the Flash Crash was caused by a single spoofer).
Additionally, the CFTC's promise that it will use its funding to decrease "regulatory uncertainty" is hollow. Does it really cost that much to write clear rules? The unfortunate reality is that the CFTC has a record of drafting rules that are unclear as a matter of regulatory policy. That is why it litanizes the assertion that the meaning of a rule depends on "facts and circumstances" without ever offering explanations of what facts or which circumstances matter.
Chair Massad deserves credit for making the case for more funding. There is no doubt that it will require more resources to fulfill the mission imposed on it by Congress (however ill-advised that mission might be). That said, the agency must do its part to refine its powers in ways that are consistent with the limits of the federal budget.
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CFTC Chair Timothy Massad criticized the failure of the 2016 budget agreement to provide "even a small increase" for the CFTC's "critical work" in a market with a budget of $1.1 trillion.