The Office of Inspector General of the Commodity Futures Trading Commission said that the agency “lacks an institutional commitment to robust cost-benefit consideration” in roundly criticizing the Commission’s analysis of the potential costs and benefits of its final margin rule for over‑the-counter swaps issued in December 2015. OIG claimed that, although the CFTC indicated that the final rule would “reduce systemic risk,” it never evaluated this claim against “unintended consequences that might undercut the asserted systemic risk-mitigating effects of margin or increase the burdens on market participants.” Among specific factors the CFTC did not consider, claimed OIG, was the impact of the rule on possibly reducing market liquidity and diminishing efficient risk‑hedging by certain market users; the pro-cyclical impact of margin requirements to heighten systemic risk during a time of market stress; and the increase in systemic risk that might occur because of “an industry-wide homogenous approach toward risk‑modeling in consequence to the Margin Rule’s initial margin modeling specification.” In part, claimed OIG, the CFTC’s deficiency in adequately considering costs and benefits was attributable to its “inadequate” data infrastructure. OIG called on the Commission to prepare more “economically rigorous” cost‑benefit analyses going forward. (Click here for background on the CFTC’s December 2015 margin rules for uncleared swaps in the article, “Swap Dealers Given Initial Margin Requirement Break for Intra-Affiliate Transactions Under CFTC Final Margin Rule” in the December 20, 2015 edition of Bridging the Week.) OIG has previously criticized the CFTC for taking a more legalistic view of cost-benefit analysis than an economic view. (Click here to access OIG's April 2011 report entitled "An Investigation of Cost-Benefit Analyses Performed by the Commodity Futures Trading Commission in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act.")

Policy and Politics: In his recent defense of his proposed FY 2018 budget for the Commodity Futures Trading Commission before the US House Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies, Acting Chairman J. Christopher Giancarlo, argued that one of justifications for increased CFTC funding was to enhance the agency’s ability to “systematically analyze large volumes of trade data and improve our understanding of the markets.” Mr. Giancarlo acknowledged that “[t]he current staff dedicated to economic analysis is inadequate to meet appropriate standards for econometric analysis required by a regulatory agency with oversight of more than 35 percent of the global derivatives markets.” (Click here for background on Mr. Giancarlo’s testimony and his FY 2018 budget request for the CFTC in the article “Acting CFTC Chairman Explains Zero‑Based Budgeting Approach to Congressional Committee in Defending Request for Increased 2018 FY Funding” in the June 11, 2017 edition of Bridging the Week.)