Timothy Massad, Chairman of the Commodity Futures Trading Commission, appeared before members of the House of Representatives last week and advocated for a 28% increase in funding levels for the agency from fiscal year 2015 to 2016.
Chairman Massad requested an overall funding level of US $322 million, up from US $250 million for fiscal year 2015, that would fund, among other things, an increase in authorized staffing from 746 persons currently to 895 full-time equivalents next year.
He claimed the increase was necessary in order for the CFTC to fulfill both its traditional responsibilities in connection with the oversight of futures and options trading, but also its increased obligations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to Chairman Massad regarding the CFTC’s historical obligations,
the markets the Commission has traditionally overseen have grown in scale, technological sophistication, and complexity. The number of actively traded futures and options contracts has doubled since 2010 and increased 6 times over the last ten years. Trading is increasingly conducted in an automated, electronic fashion, and cybersecurity has become a major new threat to the integrity and smooth functioning of the critical market infrastructure that the Commission regulates. While these developments, among others, have brought new responsibilities and challenges to the Commission, its capabilities have not kept pace. Our resources continue to be stretched far too thinly over many important responsibilities.
Chairman Massad told the House members that of the requested US $72 million increase, US $28 million would be allocated to technology, while the remainder would be spent on personnel in “critical areas” such as enforcement, surveillance, examinations, registration and compliance.
Chairman Massad requested additional resources before the US House Appropriations Committee, Subcommittee on Agriculture, Rural Development, Food and Drug Administration and Related Agencies on February 11. Public reports reflect that the Chairman of the Committee, Rep. Robert Aderholt (R-Ala), was less than enthusiastic in responding to Chairman Massad’s requests. (Click here for sample article, “Republican: Obama ‘caving to political extremes’ with budget request” in the February 11, 2015 edition of The Hill.)
The following day, February 12, Chairman Massad was more explicit in telling members of the House Committee on Agriculture what the CFTC would be limited in doing if it did not obtain more resources. Among other matters, he claimed the CFTC would be unable to (1) review and approve in a timely manner new registration applications from new swap dealers and swap execution facilities, in addition to new clearinghouses, domestic exchanges, foreign boards of trade and other market participants; (2) thoroughly exam “critical infrastructures” such as clearinghouses and exchanges; (3) “engage proactively” in addressing new risks such as cybersecurity; (4) respond timely to requests for industry registration for clarification of interpretation of CFTC requirements; or (5) engage in the “necessary level” of risk oversight of market activities or the financial integrity of participants in the clearing process.
In addressing the risk of cybersecurity specifically, Mr. Massad said,
[c]ybersecurity is perhaps the single most important new risk to market integrity and financial stability. The need to protect our financial markets against cyber attacks is clear. These attacks threaten privacy, information security, and business continuity, all vital elements of a well-working market. … there is much more we would like to do in this area. However, our capacity to carry out more frequent examinations and to address cybersecurity more broadly is significantly constrained by our current budget. Some of our major financial institutions are reportedly spending more on cybersecurity each year than our agency’s entire budget.
During his testimony before the House Committee on Agriculture, Chairman Massad also expressed concern about the Basel III leverage ratio and the disincentive it may impose on banks to clear trades through clearinghouses. According to a quote attributable to the chairman included in a summary provided by the Managed Futures Association to its members, “[i]t becomes more expensive for firms to engage in clearing. The concern is that it would require firms that wish to clear derivatives to hold more capital in respect of money that they can’t really use anyway to leverage up their business.” (Click here for details regarding this issue in the article, “Industry Organizations Request Basel Committee Reconsider Proposed Treatment of Segregated Customer Margin” in the November 17 to 21 and 24, 2014 edition of Bridging the Week.)
My View: Chairman Massad provided strong advocacy for a CFTC budget increase last week, but it may have been for naught because of the simple political reality that the party that passed Dodd-Frank is no longer the party that controls Congress. However, Congress should listen to the exhortation of the Managed Futures Association in response to the chairman’s testimony: “[t]he Commission is tasked with overseeing market activity and participants, mitigating future systemic risks, and protecting the sensitive data it collects. It must also safeguard against regulations that could stifle the ability of companies to use derivatives to manage their risks and create jobs. To fulfill that mandate, the CFTC needs the appropriate funding to hire expert personnel and employ cutting-edge technology. Congress has an important responsibility to exercise vigorous, ongoing oversight of the agency while ensuring the necessary resources are available.” What is the proper amount of these resources is open to debate. But it seems likely that the amount is more than what is allocated to the CFTC currently. Credit to MFA for speaking out on this important topic.