Econintersect: Acting Chairman of the CFTC (U.S. Commodity Futures Trading Commission) testified before the U.S. Senate Appropriations Subcommittee on Financial Services And General Government 14 May 2014. He summarized how the futures and derivatives markets are essential for the efficient production and distribution of goods and services ranging from agricultural production and mining to manufacturing and global trade. He also reviewed areas of improved efficiency in regulation but highlighted the ever growing risks the CTFC sees to the economy from serious underfunding compared to the challenges the agency faces.
Mark P. Wetjen
Here is an excerpt of the statements about problems as Wetjen sees them:
In 2002, when the Commission was responsible for the futures and options markets alone, the Division of Enforcement had approximately 154 people. Today, the agency's responsibilities have substantially increased. The CFTC now also has anti-fraud and anti-manipulation authority over the vast swaps market and the host of new market participants the agency now oversees. In addition, the agency is now responsible for pursuing cases under our enhanced Dodd-Frank authority that prohibits the reckless use of manipulative or deceptive schemes. Notwithstanding these additional responsibilities, however, total enforcement staff has shrunk - there are currently only 147 members of the enforcement staff. The President's budget request would bring this number to 200. More cops on the beat means the public is better assured that the rules of the road are being followed.
Wetjen concluded his testimony:
Effective oversight of the futures and swaps markets requires additional resources for the Commission. This means investing in both personnel and information technology. We need staff to analyze the vast amounts of data we are receiving on the swaps and futures markets. We need staff to regularly examine firms, clearinghouses, trade repositories, and trading platforms. We need staff to bring enforcement actions against perpetrators of fraud and manipulation. The agency's ability to appropriately oversee the marketplace hinges on securing additional resources.
The CFTC is an agency which has strong opponents in Congress. This was described by GEI contributor Shah Gilani on his own blog (Wall Street Insights & Indictments) last year:
The CFTC is responsible for a lot of regulation. It now regulates the largest, most opaque market on the planet, the $400 trillion-plus swaps derivatives market.
And while $400 trillion is a big deal, so is catching LIBOR manipulating crooks, and commodity pooling Ponzi-schemers, and Jon Corzine, and determining whether banks (I'm not going to name names, Goldman Sachs) that own commodity warehouses that control metals are manipulating prices.
All of the market-related things the CFTC regulates and is responsible for are, depending on who's being screwed, relatively equal in importance.
But the CFTC has to prioritize because the tiny agency with a staff of only 700 (155 of whom are actually enforcement officials with a tiny budget of $195 million) doesn't have the resources to do all the jobs it's tasked with doing. That includes writing 62 new laws as part of the 2010 Dodd-Frank Act, implementing them, and enforcing them.
President Obama wanted to hike the CFTC's budget to $315 million in 2014, but that's been shot down by Republicans who claim the CFTC overreaches.
Just for comparison purposes, the SEC's proposed budget for 2014 is $1.67 billion, and it has staff of approximately 3500.
So, how come the CFTC has such a tiny budget? And how come the CFTC was the only regulatory agency shut down when the U.S. deficit financing Spruce Goose slowed down to just a hair faster than stall speed?
Oh, that would be because the usual powers that be all, see all, and manipulate all the things that the CFTC is trying to make fair, orderly, and transparent want to kill it, period.
Gilani suggests turning the CFTC into a "profit center" (Econintersect words, not Gilani) that would convert it to a self-funding agency. That way the better job they do the more money they make and the more they can expand their activities. Gilani says that if they are successful the presence of crooks and criminal activities in markets will be greatly reduced. Econintersect would note that this would be exactly the opposite of what opponents of the CFTC want since they think the agency already overreaches. If opponents are able to cripple the agency they are very likely to be able to prevent the strengthening that Gilani suggests even though it would reduce federal budget expenditures. In this case it is not the cost of government that is of concern but interference with private sector activities that CFTC opponents feel are better self-regulated in a free market.
The arguments above extend to other federal agencies, not just in the financial sector (like the SEC and the FDIC) but also the EPA, OSHA and others. The debate is between those who feel a greater need for society to have protections and those who feel a greater need for preservation of individual rights. Effective laws can result when the two sides discuss the center ground. Damage can result when the two sides turn their backs on each other.
How do the exchanges feel about the CFTC?
On 13 May 2014 Terrence C. Duffy, CEO of the CME, the world's largest and most diverse derivatives marketplace testified before the U.S. Senate Committee on Agriculture, Nutrition and Forestry. In the answers to questions Mr. Duffy said (at 1:13:46 on the video of the hearing):
"I don't believe the CME has a credible business if we don't have a credible regulator. So I want to make sure that they are the envy of the world as far as regulation goes."
Click on the following page image to view entire transcript of the testimony:
- Press release, U.S. Commodity Futures Trading Commission, 14 May 2014
- Why Congress is Trying to Kill the CFTC (Shah Gilani, Wall Street Insights & Indictments, 04 November 2013)
- High Frequency and Automated Trading in Futures Markets (U.S. Senate Committee on Agriculture, Nutrition and Forestry, 13 May 2014)