House Appropriations on CFTC Budget
House
Appropriations Subcommittee on Agriculture
Budget
Hearing – Commodity Futures Trading Commission
Wednesday,
February 10, 2016
Key
Topics & Takeaways:
-
Resources for Sensible Regulation: Chairman
Massad of the Commodity Futures Trading Commission (CFTC) argued that the
Agency’s work is “more important than ever” in order to enforce “important, sensible
regulation to the derivatives market.” He further argued that “sensible
regulation requires adequate resources,” and that the Agency’s budget is “not
proportionate to the responsibilities [the Agency] face[s]” post financial
crisis.
-
IT Funding: Chairman Aderholt
claimed that it was “disappointing” to see that the President’s budget request
did not set aside money for the CFTC to invest in information technology.
-
User Fee: Massad said he
thinks the CFTC “can certainly” be funded by a fee, if it is implemented
practically and is phased-in.
Witness:
-
Timothy Massad, Chairman, Commodity Futures Trading
Commission
Opening Remarks
Rep. Robert Aderholt (R-Ala.), Subcommittee
Chair
Chairman
Aderholt opened by explaining that the White House called for increasing the
CFTC’s budget by 32 percent to $330 million in fiscal year 2017 (FY2017), and
proposed to double the Agency’s budget by 2021. Aderholt explained that
the Agency already received a “significant” increase of more than 123 percent
since financial crisis, and that it has more than “doubled in size” in the past
few years. Further, Aderholt maintained that the Administration’s budget request
“ignores” the nation’s “crippling 19 trillion dollar debt,” and he argued that
the “continued pattern of submitting excessive budget requests” seems to be a
political move. He explained that the Administration’s current budget request
for the Agency is the eighth consecutive double digit budget increase that has
been requested since 2008.
Aderholt
claimed that it was “disappointing” to see that the President’s budget request
did not set aside money for the CFTC to invest in information technology.
He also noted that the CFTC’s personnel expenditures have increased since the
Dodd-Frank Act was enacted into law, and that the Agency’s annual leasing costs
increased by a “staggering” amount.
Aderholt
stated that he believes that “sensible regulation” is important, and argued
that any budget appropriation should focus on outcomes, help keep America
“vibrant,” support American farmers, ranchers and producers, and help protect
the environment and natural resources.
Rep. Sam Farr (D-Calif.), Ranking Member
Farr
called on the Committee to not “cut, squeeze and trim” the CFTC’s budget but
instead appropriate sufficient funds to support the CFTC’s mission. While
he recognized the Agency’s recent bookkeeping issues, Farr said he believed
that the CFTC had been “forthright” about those accounting and procedural
errors, and further recognized that the Government Accountability Office (GAO)
did not find the errors for 22 years, which means they “failed to be an
effective watchdog.”
Farr
also recognized that the Agency’s funding request reflects the rulemakings and
enforcement mandates that came out of the Dodd-Frank Act. He also
acknowledged that the Administration’s increased budget requests have not been
“honored” by the Committee, rather Congress has “whittled away” at the CFTC’s
budget every year.
Witness Testimony
Tim
Massad, Chairman of the CFTC, opened
by explaining that the CFTC requested $330 million for FY2017, an $80 million
increase over FY2016. Massad argued that the CFTC’s work is “more
important than ever” in order to enforce “important, sensible regulation to the
derivatives market,” while ensuring that commercial end users are not unfairly
burdened by the rules and can continue to use derivatives markets to hedge
risks. Massad highlighted several of the CFTC’s current priorities,
including strengthening protections against cyber threats and harmonizing
regulations with international regulators.
He
further argued that “sensible regulation requires adequate resources,” and that
the Agency’s budget is “not proportionate to the responsibilities [the CFTC]
face[s]” post financial crisis. Massad explained that the traditional
markets overseen by the CFTC have grown substantially in size and technical
complexity in last few years, and claimed successful markets require effective
oversight.
Massad
explained that, of the $80 million increase in funding levels, 36 percent would
be dedicated to information technology (IT) infrastructure and supervision
capabilities to keep pace with an industry that is “changing and innovating at
the speed of light.” The remaining 64 percent, he explained, would
support “an increase in staffing [. . .] with a particular focus on highly
critical areas such as surveillance, enforcement and examinations”.
Further, he claimed that the funding increase would enhance the Commission’s
ability to go after “bad actors” and preserve the integrity of markets.
Finally,
Massad explained that the budget request is a “fraction” of the amount that the
CFTC has given to the U.S. Treasury as a result of its enforcement
efforts. For instance, he claimed that “in FY 2015 alone, the amount
collected was over 12 times the enacted budget,” and as such he argued that the
budget request is a “good investment” to ensure that “derivatives markets
continue to work.”
Question and Answer
CFTC
Funding
Aderholt
noted that the CFTC’s budget is at the highest level it has ever been and said
that previous years’ requests have been a moving target, where it is hard to
“separate reality from politics.” Massad said that lawmakers should look at the
big picture and the “dramatic increase” in responsibilities that were given to
the CFTC. He said Congress will need to decide whether they want the U.S. to
continue to have the best derivatives market in the world, and if so, decide to
invest in sensible regulations.
Farr
asked what exams cannot be conducted due to lack of funding. Massad said that
the CFTC limits the scope of its exams on entities such as central clearing
counterparties (CCPs) because it does not have enough staff.
Swap
De Minimis
Rep.
Kevin Yoder (R-Kan.) noted that the omnibus appropriations bill directed the
CFTC to keep the swap dealer de minimis threshold at $8 billion, while the
effects of a change are studied. He asked Massad if the CFTC intends to comply
with this directive, so that markets will not be subject to uncertainty and an
arbitrary drop in the threshold. Massad said the CFTC takes this issue
seriously and that a final study will be completed before the level
automatically drops to $3 billion, at which point the Commission will decide
whether to take action, and what kind of action to take.
Rep. Andy Harris (R-Md.) asked if the de minimis threshold change would have
any retroactivity, to which Massad said he could not foresee a circumstance
where that would happen.
CCP
Equivalence
Yoder
asked if U.S. clearinghouses will be able to do business with European
counterparties now that a “Common
Approach” agreement has been reached with the European Commission (EC).
Massad said yes, and that the agreement sets forth a process by which Europe
will deem U.S. regulations equivalent as well as how the CFTC will adopt
substituted compliance determinations, so that CCPs on both sides of the
Atlantic can serve their clients. He also noted that the EC has assured him
that the agreement will be implemented in a timely fashion.
Rep.
Chellie Pingree (D-Maine) asked what risks were addressed in the agreement.
Massad noted that U.S. banks are very active in European clearing houses and
that if something goes wrong overseas, it will impact the U.S., stressing the
need to strong regulatory requirements. He said the CFTC wants to remove
opportunities for regulatory arbitrage and that, with the agreement in place,
action can be taken to harmonize rules with additional jurisdictions.
User Fee
Rep.
Rosa DeLauro (D-Conn.) asked Massad if imposing a small user fee on CFTC
regulated entities to fund the agency would impose “any real burden” on market
participants. Massad said he thinks the CFTC “can certainly” be funded by a
fee, if it is implemented practically and is phased-in. He noted that this is
done by every other financial regulator and that it provides the advantage of
having market participants assume the costs of the regulator rather than the
general tax payer.
CFTC
Accounting Issue
Rep.
Steven Palazzo (R-Miss) asked about CFTC accounting misstatements and the level
of internal controls at the CFTC. Massad said this is something the agency
takes very seriously. Massad noted that the Government Accountability
Office (GAO) had some concerns with how the CFTC accounted for leased space,
specifically how the agency accounted and obligated future lease payments in
their financials. Massad explained the GAO concluded that the agency should
have obligated the entire amount of future payments in the first year and
accounted for it in the financial statement itself. He noted that the CFTC is
working with the GAO and the Office of Management and Budget (OMB) to come into
compliance.
Data
Storage
Palazzo
asked how the CFTC intends to store the large amounts of swap data it receives
and if it will rent out space from other government agencies. Massad said the
CFTC is looking for the most efficient way to achieve its objectives while
being able to store the large amount of message data from swap transactions.
Whistleblower
Fund
Harris
noted that the CFTC’s whistleblower reward fund is $268 million, which is
larger than the agency’s entire budget. He asked why the CFTC is not using this
money to do the things they listed in their budget request. Massad said he
would be happy to work with Congress to be allowed to do so, but that these
funds cannot currently be used for other purposes.
Cybersecurity
Rep.
David Young (R-Iowa) asked how the CFTC coordinates cybersecurity efforts with
other regulators and if the agency has been victim to an attack. Massad noted
that the U.S. financial regulatory agencies coordinate and share information
about cybersecurity through the Treasury Department and said that the CFTC has
not been hacked.
Position
Limits
Yoder
said that there are concerns from the grain and feed industry that the CFTC’s
range for bona fide hedges in its position limits proposal is too narrow and
that this would increase costs and decrease efficiency. He asked what the CFTC
is doing to address these concerns. Massad said that the CFTC takes these
concerns “very seriously” and is conscious of the “importance of getting this
right.” He noted that the CFTC is working to allow non-enumerated hedges to be
reviewed by exchanges who deal with market participants more
directly.
Reg AT
Yoder
expressed concern with Regulation Automated Trading (Reg AT), saying that it
gives the CFTC and the Department of Justice “unfettered” access to information
and intellectual property on trading algorithms “for any reason.” He added that
the CFTC currently needs a subpoena to get this information and asked why
broader access is necessary. Massad said there has been a lot of confusion
around this topic and that the CFTC is willing to work with market participants
to address their concerns. He said the CFTC is only looking to require that
firms preserve their source code, so that if something goes wrong, the CFTC can
look at the code to determine what caused the problem.
More
information about this event can be accessed here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:CFTC,Publish Year:2016
House
Appropriations Subcommittee on Agriculture
Budget
Hearing – Commodity Futures Trading Commission
Wednesday,
February 10, 2016
Key
Topics & Takeaways:
-
Resources for Sensible Regulation: Chairman
Massad of the Commodity Futures Trading Commission (CFTC) argued that the
Agency’s work is “more important than ever” in order to enforce “important, sensible
regulation to the derivatives market.” He further argued that “sensible
regulation requires adequate resources,” and that the Agency’s budget is “not
proportionate to the responsibilities [the Agency] face[s]” post financial
crisis. -
IT Funding: Chairman Aderholt
claimed that it was “disappointing” to see that the President’s budget request
did not set aside money for the CFTC to invest in information technology. -
User Fee: Massad said he
thinks the CFTC “can certainly” be funded by a fee, if it is implemented
practically and is phased-in.
Witness:
-
Timothy Massad, Chairman, Commodity Futures Trading
Commission
Opening Remarks
Rep. Robert Aderholt (R-Ala.), Subcommittee
Chair
Chairman
Aderholt opened by explaining that the White House called for increasing the
CFTC’s budget by 32 percent to $330 million in fiscal year 2017 (FY2017), and
proposed to double the Agency’s budget by 2021. Aderholt explained that
the Agency already received a “significant” increase of more than 123 percent
since financial crisis, and that it has more than “doubled in size” in the past
few years. Further, Aderholt maintained that the Administration’s budget request
“ignores” the nation’s “crippling 19 trillion dollar debt,” and he argued that
the “continued pattern of submitting excessive budget requests” seems to be a
political move. He explained that the Administration’s current budget request
for the Agency is the eighth consecutive double digit budget increase that has
been requested since 2008.
Aderholt
claimed that it was “disappointing” to see that the President’s budget request
did not set aside money for the CFTC to invest in information technology.
He also noted that the CFTC’s personnel expenditures have increased since the
Dodd-Frank Act was enacted into law, and that the Agency’s annual leasing costs
increased by a “staggering” amount.
Aderholt
stated that he believes that “sensible regulation” is important, and argued
that any budget appropriation should focus on outcomes, help keep America
“vibrant,” support American farmers, ranchers and producers, and help protect
the environment and natural resources.
Rep. Sam Farr (D-Calif.), Ranking Member
Farr
called on the Committee to not “cut, squeeze and trim” the CFTC’s budget but
instead appropriate sufficient funds to support the CFTC’s mission. While
he recognized the Agency’s recent bookkeeping issues, Farr said he believed
that the CFTC had been “forthright” about those accounting and procedural
errors, and further recognized that the Government Accountability Office (GAO)
did not find the errors for 22 years, which means they “failed to be an
effective watchdog.”
Farr
also recognized that the Agency’s funding request reflects the rulemakings and
enforcement mandates that came out of the Dodd-Frank Act. He also
acknowledged that the Administration’s increased budget requests have not been
“honored” by the Committee, rather Congress has “whittled away” at the CFTC’s
budget every year.
Witness Testimony
Tim
Massad, Chairman of the CFTC, opened
by explaining that the CFTC requested $330 million for FY2017, an $80 million
increase over FY2016. Massad argued that the CFTC’s work is “more
important than ever” in order to enforce “important, sensible regulation to the
derivatives market,” while ensuring that commercial end users are not unfairly
burdened by the rules and can continue to use derivatives markets to hedge
risks. Massad highlighted several of the CFTC’s current priorities,
including strengthening protections against cyber threats and harmonizing
regulations with international regulators.
He
further argued that “sensible regulation requires adequate resources,” and that
the Agency’s budget is “not proportionate to the responsibilities [the CFTC]
face[s]” post financial crisis. Massad explained that the traditional
markets overseen by the CFTC have grown substantially in size and technical
complexity in last few years, and claimed successful markets require effective
oversight.
Massad
explained that, of the $80 million increase in funding levels, 36 percent would
be dedicated to information technology (IT) infrastructure and supervision
capabilities to keep pace with an industry that is “changing and innovating at
the speed of light.” The remaining 64 percent, he explained, would
support “an increase in staffing [. . .] with a particular focus on highly
critical areas such as surveillance, enforcement and examinations”.
Further, he claimed that the funding increase would enhance the Commission’s
ability to go after “bad actors” and preserve the integrity of markets.
Finally,
Massad explained that the budget request is a “fraction” of the amount that the
CFTC has given to the U.S. Treasury as a result of its enforcement
efforts. For instance, he claimed that “in FY 2015 alone, the amount
collected was over 12 times the enacted budget,” and as such he argued that the
budget request is a “good investment” to ensure that “derivatives markets
continue to work.”
Question and Answer
CFTC
Funding
Aderholt
noted that the CFTC’s budget is at the highest level it has ever been and said
that previous years’ requests have been a moving target, where it is hard to
“separate reality from politics.” Massad said that lawmakers should look at the
big picture and the “dramatic increase” in responsibilities that were given to
the CFTC. He said Congress will need to decide whether they want the U.S. to
continue to have the best derivatives market in the world, and if so, decide to
invest in sensible regulations.
Farr
asked what exams cannot be conducted due to lack of funding. Massad said that
the CFTC limits the scope of its exams on entities such as central clearing
counterparties (CCPs) because it does not have enough staff.
Swap
De Minimis
Rep.
Kevin Yoder (R-Kan.) noted that the omnibus appropriations bill directed the
CFTC to keep the swap dealer de minimis threshold at $8 billion, while the
effects of a change are studied. He asked Massad if the CFTC intends to comply
with this directive, so that markets will not be subject to uncertainty and an
arbitrary drop in the threshold. Massad said the CFTC takes this issue
seriously and that a final study will be completed before the level
automatically drops to $3 billion, at which point the Commission will decide
whether to take action, and what kind of action to take.
Rep. Andy Harris (R-Md.) asked if the de minimis threshold change would have
any retroactivity, to which Massad said he could not foresee a circumstance
where that would happen.
CCP
Equivalence
Yoder
asked if U.S. clearinghouses will be able to do business with European
counterparties now that a “Common
Approach” agreement has been reached with the European Commission (EC).
Massad said yes, and that the agreement sets forth a process by which Europe
will deem U.S. regulations equivalent as well as how the CFTC will adopt
substituted compliance determinations, so that CCPs on both sides of the
Atlantic can serve their clients. He also noted that the EC has assured him
that the agreement will be implemented in a timely fashion.
Rep.
Chellie Pingree (D-Maine) asked what risks were addressed in the agreement.
Massad noted that U.S. banks are very active in European clearing houses and
that if something goes wrong overseas, it will impact the U.S., stressing the
need to strong regulatory requirements. He said the CFTC wants to remove
opportunities for regulatory arbitrage and that, with the agreement in place,
action can be taken to harmonize rules with additional jurisdictions.
User Fee
Rep.
Rosa DeLauro (D-Conn.) asked Massad if imposing a small user fee on CFTC
regulated entities to fund the agency would impose “any real burden” on market
participants. Massad said he thinks the CFTC “can certainly” be funded by a
fee, if it is implemented practically and is phased-in. He noted that this is
done by every other financial regulator and that it provides the advantage of
having market participants assume the costs of the regulator rather than the
general tax payer.
CFTC
Accounting Issue
Rep.
Steven Palazzo (R-Miss) asked about CFTC accounting misstatements and the level
of internal controls at the CFTC. Massad said this is something the agency
takes very seriously. Massad noted that the Government Accountability
Office (GAO) had some concerns with how the CFTC accounted for leased space,
specifically how the agency accounted and obligated future lease payments in
their financials. Massad explained the GAO concluded that the agency should
have obligated the entire amount of future payments in the first year and
accounted for it in the financial statement itself. He noted that the CFTC is
working with the GAO and the Office of Management and Budget (OMB) to come into
compliance.
Data
Storage
Palazzo
asked how the CFTC intends to store the large amounts of swap data it receives
and if it will rent out space from other government agencies. Massad said the
CFTC is looking for the most efficient way to achieve its objectives while
being able to store the large amount of message data from swap transactions.
Whistleblower
Fund
Harris
noted that the CFTC’s whistleblower reward fund is $268 million, which is
larger than the agency’s entire budget. He asked why the CFTC is not using this
money to do the things they listed in their budget request. Massad said he
would be happy to work with Congress to be allowed to do so, but that these
funds cannot currently be used for other purposes.
Cybersecurity
Rep.
David Young (R-Iowa) asked how the CFTC coordinates cybersecurity efforts with
other regulators and if the agency has been victim to an attack. Massad noted
that the U.S. financial regulatory agencies coordinate and share information
about cybersecurity through the Treasury Department and said that the CFTC has
not been hacked.
Position
Limits
Yoder
said that there are concerns from the grain and feed industry that the CFTC’s
range for bona fide hedges in its position limits proposal is too narrow and
that this would increase costs and decrease efficiency. He asked what the CFTC
is doing to address these concerns. Massad said that the CFTC takes these
concerns “very seriously” and is conscious of the “importance of getting this
right.” He noted that the CFTC is working to allow non-enumerated hedges to be
reviewed by exchanges who deal with market participants more
directly.
Reg AT
Yoder
expressed concern with Regulation Automated Trading (Reg AT), saying that it
gives the CFTC and the Department of Justice “unfettered” access to information
and intellectual property on trading algorithms “for any reason.” He added that
the CFTC currently needs a subpoena to get this information and asked why
broader access is necessary. Massad said there has been a lot of confusion
around this topic and that the CFTC is willing to work with market participants
to address their concerns. He said the CFTC is only looking to require that
firms preserve their source code, so that if something goes wrong, the CFTC can
look at the code to determine what caused the problem.
More
information about this event can be accessed here.