House Appropriations Hearing on the CFTC Budget
House Appropriations Subcommittee on Agriculture
Budget Hearing – Commodity Futures Trading Commission
Wednesday, February 11, 2015
Key Topics & Takeaways
- Cross-Border: CFTC Chair Massad explained that his agency has delayed some aspects of its cross-border staff guidance and that they will be rethinking it “piece-by-piece.”
- Margin for Uncleared Swaps: Massad said the CFTC’s proposal for margin on uncleared swaps is “pretty close” to those put out by other jurisdictions and that the CFTC is “committed to narrowing the differences” with other jurisdictions and is “prepared to change some of the aspects of our rule so that we land in the same place as Europe and Japan.”
- SEFs: Bishop said that swap execution facilities have “enormous power” to determine how market participants must execute swaps without any approval of the CFTC and asked if the CFTC should have more involvement in the MAT determination process. Massad said that it will take time to work out issues and improve the MAT process, but stressed that he wants to create a framework that attracts market participants.
- Swap Dealer De Minimis Threshold: Massad said the CFTC would have to conduct a rulemaking to prevent the automatic lowering of the threshold that would include a cost benefit analysis. He added that he does not have any preconceived notions about any ultimate decision.
Witness
- Tim Massad, Chairman of the Commodity Futures Trading Commission
Opening Statements
Chairman Robert Aderholt (R-Ala.) stated in his opening remarks that the budget allocations of all the agencies under the Committee’s jurisdiction will “likely remain the same” and said he is concerned that the Administration is “catering to political extremes” with its agency funding requests. He said that the Commodity Futures Trading Commission (CFTC) should “show where an increase in money would reduce marketplace risk,” saying that the agency lacks “concrete justification’ for its budget request.
Aderholt also highlighted the swap dealer de minimis threshold as being a “policy issue” that needs to be addressed, explaining that the current rule will automatically lower the threshold to from $8 billion to $3 billion without a vote by the Commission.
Ranking Member Sam Farr (D-Calif.) said the CFTC has been a “hero” in being the first responder in the derivatives markets and has protected investors from fraud on a “very small budget.” He stressed that the cost of fully funding the CFTC is minor compared to the “enormous” cost that would result from underfunding the agency. He suggested that the CFTC be able to keep some of the fines it collects from its enforcement actions or implement a fee for the services it provides.
Witness Testimony
Tim Massad, Chairman of the CFTC, stated in his testimony that the CFTC’s budget increase in 2015 was “essential” to carry out its mission but that funding “has not kept pace” with the agency’s responsibilities. He explained that of the $322 million being requested, $79 million will be used for information technology (IT) spending.
Massad said the funding level requested will enable the CFTC to expand its staff of economists by 50 percent, which will help the agency in cost benefit analysis, and stressed that budget constraints have prevented the CFTC from investigating many enforcement cases.
He concluded by saying that if the U.S. “want[s] to continue to have the best markets in the world” then the Congress “need[s] to make the investment” in the CFTC.
Question and Answer
Measuring the Derivatives Market
Aderholt began the discussion by asking if the notional value of the swaps market, cited as being between $600-700 trillion, is a useful measure when considering the risks in the marketplace. He said that CFTC registered entities have only increased by 10 percent, the size of the futures market has decreased, and customer funds have increased by only about 10 percent. He asked if gross credit exposure would be a better measure to focus on.
Massad said he “couldn’t agree more” that notional value is not the best way to measure the markets, but said it is the “only one we have.” He said the CFTC needs more funding to be able to analyze the data it receives and be able to figure out the level of exposure in the marketplace.
IT Budget
Aderholt asked why the CFTC has not been able to build out its IT capabilities despite $205 million being directed toward it since Dodd-Frank. Massad replied that the CFTC has made “a lot of progress” and is “getting there,” noting that it is a “big build” considering the large amount of data it needs to process.
User Fee
Farr expressed concern that the Subcommittee “leap[s] before we look” and has already decided the budget it wants for the CFTC before the hearing even occurred. He also said he worried about limiting enforcement action due to lack of funding and asked if the CFTC can be funded like other financial regulators.
Massad explained that other regulators have user fees to fund themselves with money from the industries they regulate, such as the National Futures Association (NFA). He said this approach is “practical,” adding that the CFTC would want to implement such a fee in a way that does not negatively impact the market or disrupt liquidity. He also clarified that a user fee is “much different” than a transaction fee, saying a user fee would raise a much smaller amount of money.
Rep. Kevin Yoder (R-Kans.) first pointed out that the CFTC has seen consistent increases in its budget since the financial crisis. He then stated that he has concerns with the CFTC’s rules as they apply to cross-border swaps, saying the goal of the agency should be to create certainty, predictability, and stability and avoid overregulation that would reduce liquidity. He also noted there has been litigation over a staff level guidance related to the CFTC’s cross border rules that a DC court determined to be “non-binding” and that market participants are “free to ignore” it. He asked if issuing guidance instead of a rule was the best approach and if the Commission is considering re-opening the topic, taking into consideration impact in foreign jurisdictions and jobs moving out of the U.S.
Massad said that cross-border impacts are “extremely important” and that the CFTC wants to harmonize rules with other jurisdictions “as much as we can.” He noted that he had meetings with regulators in Europe and Asia, which were “very focused on this.” He highlighted that the CFTC is focused on issues with clearing houses as well as trading rules.
Massad explained that the CFTC has delayed some aspects of the staff guidance and that the CFTC will be rethinking the guidance “piece-by-piece.” He said the proposal for margin on uncleared swaps is “pretty close” to those put out by other jurisdictions and that the CFTC is “committed to narrowing the differences” and is “prepared to change some of the aspects of our rule so that we land in the same place as Europe and Japan,” also noting that the CFTC has been working with U.S. banking regulators and the Securities and Exchange Commission (SEC).
Position Limits/Bona Fide Hedge
Rep. Sanford Bishop (D-Ga.) noted that over-the-counter (OTC) derivatives have no position limits, but that participants are served well by limits in the agriculture futures markets. He then said there is concern among agricultural market participants that the interpretation of “bona fide” hedge is too restrictive and that many participants feel the CFTC should provide a mechanism for flexibility and exemptions. He asked Massad for an update on the rule’s status and the rationale for proposing it.
Massad said the CFTC is “very focused on this” and that it is taking time to review industry comments and make sure that commercial end-users can hedge risk. He highlighted that the Commission is seeking to find a balance of addressing “excessive speculation” as required in the statute and the need to engage in bona fide hedging.
SEFs
Bishop noted that swap execution facilities (SEFs) have the discretion to require all market participants to trade certain swaps on their platforms by self-certifying a “made available to trade” (MAT) determination. He said the SEFs have “enormous power” to determine how market participants must execute swaps without any approval of the CFTC. He asked if the CFTC should have more involvement in the MAT determination process.
Massad noted that Congress directed the CFTC to implement rules that would facilitate trading on these platforms and that the agency set its framework to balance innovation with policy objectives. He agreed that the current MAT process invites industry participants to make proposals, but noted that some in the industry want the CFTC to make these decisions. He stated that the process “is all new” and that it will take time to work out issues and improve the process. He stressed that he wants to create a framework that attracts market participants. He noted that since the CFTC acted first, some trading has moved to Europe where the rules are not expected to be finalized until 2017.
Margin
Rep. David Valadao (R-Calif.) asked if the CFTC will increase margin exemptions for small agriculture producers and if itthinks that large businesses and small ones should be regulated in the same way.
Massad said it is important for businesses of all sizes to use the markets efficiently while posting collateral when using futures. He then noted that the CFTC adjusted their rule to stop the automatic acceleration of the timeframe for posting margin.
Fines/Enforcement
Valadao then asked how fines and penalties are calculated. Massad said that the size of fines is determined by the CFTC’s statutory authority according to the type of violation. He also said they can be determined by the courts or through settlement negotiations.
Rep. Rosa DeLauro (D-Conn.) asked if there will be more fraud in the marketplace if the CFTC does not receive an increase in funding. Massad said “certainly the risk are greater” if the CFTC does not have enough of an enforcement budget. He then highlighted the need to focus on risks in critical infrastructure of the market such as clearing houses and exchanges and noted that the cost of surveillance of high frequency trading (HFT) requires much more sophisticated technology than before.
DeLauro also asked how much the CFTC could expect to receive in fines if its enforcement division was fully funded. Massad replied that the CFTC does “not think about it that way” and those cases are pursued based on their egregiousness. He added that fully funding enforcement would send a deterrent message to the market.
Retail FX
In response to a question from DeLauro on retail foreign exchange manipulation, Massad said that the CFTC is looking at its rules in this area after the dramatic movement in the Swiss Franc. He said that many firms are taking risk at their foreign affiliates and that foreign affiliates are “not subject to the same standards” as U.S. institutions are. He added “we are looking at whether we can do something about that.”
Leasing Practices
Rep. David Young (R-Iowa) expressed concern with wasteful spending in leased space at the CFTC’s Kansas office and asked what Massad will do about it. Massad said that the CFTC does not have the authority to sublet its extra office space in this location but that it has moved employees to one floor and is trying to reduce rent with the landlord.
Leveraging SROs
Rep. Andy Harris (R-Md.) said that the futures market has two layers of regulation, the CFTC and the NFA. He said the CFTC can “double its force” if it leverages the NFA and “farms out” cybersecurity oversight to this self-regulatory organization (SRO), allowing the industry to “self-police.”
Massad said the CFTC is working closely with the NFA to expand what they do and that having the industry invest in its own cybersecurity is “the way we want to go about” improving protections.
Volcker Covered Funds
Harris said he is concerned about the Volcker Rule’s impact on market participants in markets for securitizations, covered bonds, and certain exchange traded products and how these firms will determine the “covered fund” status of products for which their firms are market makers. He asked, in light of an upcoming July deadline, if Massad has a view on how or when the relevant regulators will respond.
Massad said the CFTC is coordinating with the other regulators and it “doesn’t make sense to go out on our own” He said that he would get back to the Congressman on the question with more a sense on the progress, and added that he recognizes the importance of market makers in the market.
Bitcoin
Bishop asked if the CFTC is monitoring the use and growth of Bitcoin. Massad replied that the CFTC is only focused in this area to the extent that derivatives referencing Bitcoins are submitted for approval, but noted that the virtual currency raises issues for a lot of other regulators as well.
TPP
Bishop said that Congress has a great interest in the Trans-Pacific Partnership (TPP) and whether it will include provisions to prevent currency manipulation. He asked what role the CFTC will play in these negations as it relates to currency.
Massad said that the CFTC has not been involved in these negotiations as they have not included the regulation of derivatives.
CFTC Employee Pay
Young asked how much the CFTC paid in bonuses and performance pay in 2015. Massad said that the CFTC does not pay bonuses and that the agency sets its compensation to be competitive with other regulatory agencies to be able to attract talent.
Aderholt highlighted that the government’s omnibus appropriations bill contained a directive to require that the CFTC hold a full vote on the swap dealer de minimis threshold before the level automatically drops. He asked if the CFTC will comply with this directive.
Massad said that he wants all decisions to be data driven and noted that the CFTC is conducting a study on the de minimis threshold. He said he would weigh the costs and benefits of making a change. When asked if there would be any issues with removing the automatic trigger, Massad said the CFTC would have to conduct a rulemaking to prevent the automatic lowering of the threshold that would include a cost benefit analysis. He added that he does not have any preconceived notions about any ultimate decision.
For more information on this hearing and to view a webcast, please click here.
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House Appropriations Subcommittee on Agriculture
Budget Hearing – Commodity Futures Trading Commission
Wednesday, February 11, 2015
Key Topics & Takeaways
- Cross-Border: CFTC Chair Massad explained that his agency has delayed some aspects of its cross-border staff guidance and that they will be rethinking it “piece-by-piece.”
- Margin for Uncleared Swaps: Massad said the CFTC’s proposal for margin on uncleared swaps is “pretty close” to those put out by other jurisdictions and that the CFTC is “committed to narrowing the differences” with other jurisdictions and is “prepared to change some of the aspects of our rule so that we land in the same place as Europe and Japan.”
- SEFs: Bishop said that swap execution facilities have “enormous power” to determine how market participants must execute swaps without any approval of the CFTC and asked if the CFTC should have more involvement in the MAT determination process. Massad said that it will take time to work out issues and improve the MAT process, but stressed that he wants to create a framework that attracts market participants.
- Swap Dealer De Minimis Threshold: Massad said the CFTC would have to conduct a rulemaking to prevent the automatic lowering of the threshold that would include a cost benefit analysis. He added that he does not have any preconceived notions about any ultimate decision.
Witness
- Tim Massad, Chairman of the Commodity Futures Trading Commission
Opening Statements
Chairman Robert Aderholt (R-Ala.) stated in his opening remarks that the budget allocations of all the agencies under the Committee’s jurisdiction will “likely remain the same” and said he is concerned that the Administration is “catering to political extremes” with its agency funding requests. He said that the Commodity Futures Trading Commission (CFTC) should “show where an increase in money would reduce marketplace risk,” saying that the agency lacks “concrete justification’ for its budget request.
Aderholt also highlighted the swap dealer de minimis threshold as being a “policy issue” that needs to be addressed, explaining that the current rule will automatically lower the threshold to from $8 billion to $3 billion without a vote by the Commission.
Ranking Member Sam Farr (D-Calif.) said the CFTC has been a “hero” in being the first responder in the derivatives markets and has protected investors from fraud on a “very small budget.” He stressed that the cost of fully funding the CFTC is minor compared to the “enormous” cost that would result from underfunding the agency. He suggested that the CFTC be able to keep some of the fines it collects from its enforcement actions or implement a fee for the services it provides.
Witness Testimony
Tim Massad, Chairman of the CFTC, stated in his testimony that the CFTC’s budget increase in 2015 was “essential” to carry out its mission but that funding “has not kept pace” with the agency’s responsibilities. He explained that of the $322 million being requested, $79 million will be used for information technology (IT) spending.
Massad said the funding level requested will enable the CFTC to expand its staff of economists by 50 percent, which will help the agency in cost benefit analysis, and stressed that budget constraints have prevented the CFTC from investigating many enforcement cases.
He concluded by saying that if the U.S. “want[s] to continue to have the best markets in the world” then the Congress “need[s] to make the investment” in the CFTC.
Question and Answer
Measuring the Derivatives Market
Aderholt began the discussion by asking if the notional value of the swaps market, cited as being between $600-700 trillion, is a useful measure when considering the risks in the marketplace. He said that CFTC registered entities have only increased by 10 percent, the size of the futures market has decreased, and customer funds have increased by only about 10 percent. He asked if gross credit exposure would be a better measure to focus on.
Massad said he “couldn’t agree more” that notional value is not the best way to measure the markets, but said it is the “only one we have.” He said the CFTC needs more funding to be able to analyze the data it receives and be able to figure out the level of exposure in the marketplace.
IT Budget
Aderholt asked why the CFTC has not been able to build out its IT capabilities despite $205 million being directed toward it since Dodd-Frank. Massad replied that the CFTC has made “a lot of progress” and is “getting there,” noting that it is a “big build” considering the large amount of data it needs to process.
User Fee
Farr expressed concern that the Subcommittee “leap[s] before we look” and has already decided the budget it wants for the CFTC before the hearing even occurred. He also said he worried about limiting enforcement action due to lack of funding and asked if the CFTC can be funded like other financial regulators.
Massad explained that other regulators have user fees to fund themselves with money from the industries they regulate, such as the National Futures Association (NFA). He said this approach is “practical,” adding that the CFTC would want to implement such a fee in a way that does not negatively impact the market or disrupt liquidity. He also clarified that a user fee is “much different” than a transaction fee, saying a user fee would raise a much smaller amount of money.
Rep. Kevin Yoder (R-Kans.) first pointed out that the CFTC has seen consistent increases in its budget since the financial crisis. He then stated that he has concerns with the CFTC’s rules as they apply to cross-border swaps, saying the goal of the agency should be to create certainty, predictability, and stability and avoid overregulation that would reduce liquidity. He also noted there has been litigation over a staff level guidance related to the CFTC’s cross border rules that a DC court determined to be “non-binding” and that market participants are “free to ignore” it. He asked if issuing guidance instead of a rule was the best approach and if the Commission is considering re-opening the topic, taking into consideration impact in foreign jurisdictions and jobs moving out of the U.S.
Massad said that cross-border impacts are “extremely important” and that the CFTC wants to harmonize rules with other jurisdictions “as much as we can.” He noted that he had meetings with regulators in Europe and Asia, which were “very focused on this.” He highlighted that the CFTC is focused on issues with clearing houses as well as trading rules.
Massad explained that the CFTC has delayed some aspects of the staff guidance and that the CFTC will be rethinking the guidance “piece-by-piece.” He said the proposal for margin on uncleared swaps is “pretty close” to those put out by other jurisdictions and that the CFTC is “committed to narrowing the differences” and is “prepared to change some of the aspects of our rule so that we land in the same place as Europe and Japan,” also noting that the CFTC has been working with U.S. banking regulators and the Securities and Exchange Commission (SEC).
Position Limits/Bona Fide Hedge
Rep. Sanford Bishop (D-Ga.) noted that over-the-counter (OTC) derivatives have no position limits, but that participants are served well by limits in the agriculture futures markets. He then said there is concern among agricultural market participants that the interpretation of “bona fide” hedge is too restrictive and that many participants feel the CFTC should provide a mechanism for flexibility and exemptions. He asked Massad for an update on the rule’s status and the rationale for proposing it.
Massad said the CFTC is “very focused on this” and that it is taking time to review industry comments and make sure that commercial end-users can hedge risk. He highlighted that the Commission is seeking to find a balance of addressing “excessive speculation” as required in the statute and the need to engage in bona fide hedging.
SEFs
Bishop noted that swap execution facilities (SEFs) have the discretion to require all market participants to trade certain swaps on their platforms by self-certifying a “made available to trade” (MAT) determination. He said the SEFs have “enormous power” to determine how market participants must execute swaps without any approval of the CFTC. He asked if the CFTC should have more involvement in the MAT determination process.
Massad noted that Congress directed the CFTC to implement rules that would facilitate trading on these platforms and that the agency set its framework to balance innovation with policy objectives. He agreed that the current MAT process invites industry participants to make proposals, but noted that some in the industry want the CFTC to make these decisions. He stated that the process “is all new” and that it will take time to work out issues and improve the process. He stressed that he wants to create a framework that attracts market participants. He noted that since the CFTC acted first, some trading has moved to Europe where the rules are not expected to be finalized until 2017.
Margin
Rep. David Valadao (R-Calif.) asked if the CFTC will increase margin exemptions for small agriculture producers and if itthinks that large businesses and small ones should be regulated in the same way.
Massad said it is important for businesses of all sizes to use the markets efficiently while posting collateral when using futures. He then noted that the CFTC adjusted their rule to stop the automatic acceleration of the timeframe for posting margin.
Fines/Enforcement
Valadao then asked how fines and penalties are calculated. Massad said that the size of fines is determined by the CFTC’s statutory authority according to the type of violation. He also said they can be determined by the courts or through settlement negotiations.
Rep. Rosa DeLauro (D-Conn.) asked if there will be more fraud in the marketplace if the CFTC does not receive an increase in funding. Massad said “certainly the risk are greater” if the CFTC does not have enough of an enforcement budget. He then highlighted the need to focus on risks in critical infrastructure of the market such as clearing houses and exchanges and noted that the cost of surveillance of high frequency trading (HFT) requires much more sophisticated technology than before.
DeLauro also asked how much the CFTC could expect to receive in fines if its enforcement division was fully funded. Massad replied that the CFTC does “not think about it that way” and those cases are pursued based on their egregiousness. He added that fully funding enforcement would send a deterrent message to the market.
Retail FX
In response to a question from DeLauro on retail foreign exchange manipulation, Massad said that the CFTC is looking at its rules in this area after the dramatic movement in the Swiss Franc. He said that many firms are taking risk at their foreign affiliates and that foreign affiliates are “not subject to the same standards” as U.S. institutions are. He added “we are looking at whether we can do something about that.”
Leasing Practices
Rep. David Young (R-Iowa) expressed concern with wasteful spending in leased space at the CFTC’s Kansas office and asked what Massad will do about it. Massad said that the CFTC does not have the authority to sublet its extra office space in this location but that it has moved employees to one floor and is trying to reduce rent with the landlord.
Leveraging SROs
Rep. Andy Harris (R-Md.) said that the futures market has two layers of regulation, the CFTC and the NFA. He said the CFTC can “double its force” if it leverages the NFA and “farms out” cybersecurity oversight to this self-regulatory organization (SRO), allowing the industry to “self-police.”
Massad said the CFTC is working closely with the NFA to expand what they do and that having the industry invest in its own cybersecurity is “the way we want to go about” improving protections.
Volcker Covered Funds
Harris said he is concerned about the Volcker Rule’s impact on market participants in markets for securitizations, covered bonds, and certain exchange traded products and how these firms will determine the “covered fund” status of products for which their firms are market makers. He asked, in light of an upcoming July deadline, if Massad has a view on how or when the relevant regulators will respond.
Massad said the CFTC is coordinating with the other regulators and it “doesn’t make sense to go out on our own” He said that he would get back to the Congressman on the question with more a sense on the progress, and added that he recognizes the importance of market makers in the market.
Bitcoin
Bishop asked if the CFTC is monitoring the use and growth of Bitcoin. Massad replied that the CFTC is only focused in this area to the extent that derivatives referencing Bitcoins are submitted for approval, but noted that the virtual currency raises issues for a lot of other regulators as well.
TPP
Bishop said that Congress has a great interest in the Trans-Pacific Partnership (TPP) and whether it will include provisions to prevent currency manipulation. He asked what role the CFTC will play in these negations as it relates to currency.
Massad said that the CFTC has not been involved in these negotiations as they have not included the regulation of derivatives.
CFTC Employee Pay
Young asked how much the CFTC paid in bonuses and performance pay in 2015. Massad said that the CFTC does not pay bonuses and that the agency sets its compensation to be competitive with other regulatory agencies to be able to attract talent.
Aderholt highlighted that the government’s omnibus appropriations bill contained a directive to require that the CFTC hold a full vote on the swap dealer de minimis threshold before the level automatically drops. He asked if the CFTC will comply with this directive.
Massad said that he wants all decisions to be data driven and noted that the CFTC is conducting a study on the de minimis threshold. He said he would weigh the costs and benefits of making a change. When asked if there would be any issues with removing the automatic trigger, Massad said the CFTC would have to conduct a rulemaking to prevent the automatic lowering of the threshold that would include a cost benefit analysis. He added that he does not have any preconceived notions about any ultimate decision.
For more information on this hearing and to view a webcast, please click here.