Dissent of Commissioner Scott D. O’Malia To Fiscal Year 2012 President’s Budget & Performance Plan
Commissioner O’Malia
February 11, 2011
I respectfully dissent from signing the fiscal year 2012 budget request for the Commodity Futures Trading Commission. The budget request of $308 million provides for a 82-percent increase in federal spending from FY’11 levels.1 This request provides for the hiring of 316 additional Full Time Equivalent (FTE) employees in FY’12 and an additional 218 contractors. This budget fails to outline a specific strategy for implementation of the Dodd-Frank Act that utilizes technology as a means to leverage budgetary and staff resources in fulfilling the Commission’s oversight and surveillance responsibilities. Recognizing the budget deficit challenges facing this nation, I believe this proposal ignores the likelihood of multiyear budgetary constraints and recommends a funding request and hiring strategy that is unsustainable over the long term. This is especially so given that increasing staff without providing the technological resources to permit them to effectively do their jobs will most certainly cost taxpayers more. I believe the Commission must commit to a more focused technology-based strategy, like those which have determined the evolution and success of the futures markets for the past two decades.
Staffing Growth: An Outdated Response to New Challenges
The FY’12 budget proposes to hire 316 additional staff above the current level of 667 FTEs, for a total of 983 FTEs. This represents a 47-percent increase over current FY’11 levels. Increased staffing has already proven to be a challenge for the Commission to manage. For example, in FY’10, the Commission increased staff levels from 605 FTEs to 680 FTEs (a 12-percent increase) as of January 2011, including hiring new staff during a Continuing Resolution (CR) and bringing additional staff on board during the CR based on commitments made when the prospect of the October 2011 CR was clearly imminent. The additional hires and pay increases have forced baseline salary and benefit costs to increase by an additional $15 million from FY’10 to FY’11. Office lease spending also increased by $800,000 over FY’10 levels to accommodate staff increases. To offset the increased staffing costs, the Commission’s technology budget has been cut from $31 million in FY’10 to $20 million in FY’11. This represents a 36-percent decrease in technology spending. As a result, the Commission will not make any investments in new technology to support the Dodd-Frank Act mandates and will be forced to delay deployment of critical automated surveillance tools needed to oversee the futures markets.
Alternatives to Increasing FTEs
The Commission appears to be projecting its staffing growth based entirely on early estimates of the impact of the yet-to-be completed Dodd-Frank Act rulemaking process. I recommend that the Commission take a more measured approach in its analysis of how the new regulatory framework will affect the markets by conducting cost-benefit analyses that dig deeper into technological capabilities and human capital needs. In addition, the Commission should consider relying more heavily on Self Regulatory Organizations (SROs) such as exchanges, and clearing houses. Also, the National Futures Association (NFA) can be called upon to execute defined regulatory functions necessitated by the Dodd-Frank Act. The NFA and SROs, in addition to enforcing their own rules, should be given the responsibility for registration, oversight of business conduct standards, and policing the markets for disruptive trade practices. Commission staff began discussions with the NFA early in the rulemaking process regarding its potential to expand its oversight to include the swaps markets, and NFA appears poised to take on the responsibility. This is a positive step toward placing greater compliance responsibility on the markets while simultaneously reducing the cost to taxpayers of hiring new federal employees.
Finally, the Commission currently relies heavily on a contractor workforce, especially and appropriately so, in the area of technology. Consequently, I believe that the FY’12 budget should provide greater transparency into the overall cost and headcount of contractors used by the Commission. This request proposes increasing the number of contractors from 93 to 311, an increase of 234 percent over FY’11 levels, without providing the fidelity needed to determine what each contractor does and how much each contractor costs the Commission. In FY’09 and FY’10, the Commission supported 107 and 144 contractors, respectively.
Using Technology to Leverage Resources
There is a common thread woven through each of the Commission’s proposed Dodd-Frank rules: technology. The Commission has new responsibilities to oversee both the swaps and futures markets and to create an integrated surveillance program. Without substantial investment in technology, this will not occur. Individuals are simply not equipped to identify trading aberrations or manipulative schemes in futures (and swaps) markets dominated by algorithmic and high frequency traders that are able to execute trades in milliseconds. The Commission must redirect itself and rely on the sophistication of automated surveillance systems if we are to keep pace with the markets we oversee.
I support the reorganization of the Commission to establish a new Division of Market Data Collection and Analysis. The new office will be grounded in surveillance and database technology, which will support the mission needs and the needs of all of the other divisions in order to promote market integrity and mitigate systemic risk. This budget request does not contemplate this type of reorganization, nor does it break out funding for new surveillance capabilities from the standard operations-based technology needs of the Commission for hardware such as laptops, copiers, and telephones.
Staggered Implementation of Dodd-Frank Rules
The proposed budget fails to recognize the necessity of implementing the Dodd-Frank Act rulemakings over a period of time. The reality is that many of the challenges we now face will take time to implement not only due to necessary restructuring and investment, but because we need to cooperate on a national and international level with our fellow regulators on several key issues such as exchange trading requirements and the establishment of universal counterparty identifiers. I believe that a delayed and staggered implementation process is a practical solution that allows both the Commission and the markets to make the necessary changes and investments required by the Dodd-Frank Act. I would note that the President’s budget does propose to provide the CFTC with two-year spending authority. This is a clear acknowledgement that the Commission cannot possibly hire 316 new FTEs within a year. I support this two-year authority because it will dissuade the Commission from taking a “use it or lose it” approach to spending appropriated funds and will enable the Commission to establish a more measured implementation strategy.
Customer Protection
The Dodd-Frank Act creates a new whistleblower protection program to encourage the reporting of violations of the Commodity Exchange Act, while also directing the Commission to implement customer education initiatives designed to help customers protect themselves against fraud and other violations of the Act. Both of these initiatives support programmatic missions and goals of protecting the markets and the public from fraud and abuse. Instead of specifically addressing these new mandates, the proposal recommends ramping up enforcement efforts with 85 additional FTEs to investigate fraud. Not a single FTE is slotted for the purpose of engaging in fraud prevention through customer education and outreach in FY’12. It is difficult to argue from a financial and public policy perspective that is it more beneficial to permit individuals to be swindled and then pursue the perpetrators—who in practice often spend all of the customer funds prior to any enforcement action—as opposed to educating individuals so that they do not become victims in the first place. This kind of planning completely undermines the purpose of the statutory provisions and should not be encouraged in this budgetary environment.
Transaction Tax
I strongly oppose a transaction tax of $117 million. The President’s budget seeks to impose a “user fee” on market participants. This “user fee” is a currently unauthorized and uncollectable tax to offset $117 million in new spending. That means it creates a hole in the budget that the House and Senate Appropriations Committees must backfill in order to meet the needs of the Commission. This is a disingenuous effort that only puts us further behind the requested funding level and will continue to add to the federal deficit.
Conclusion
I cannot support a budget request of $308 million, and I do not believe the Commission should hire an additional 316 new staff and 218 new contract staff as requested in the President’s budget. In this budget deficit environment, I do not believe the Commission will be able to sustain this level of funding. Instead, we should first look to implementing an aggressive technology investment strategy before committing to expanding our federal workforce, not the other way around as proposed in the President’s fiscal year 2012 budget request.
1 Public Law No. 111-322, Continuing Appropriations and Surface Transportation Extensions Act, 2011.
Last Updated: February 18, 2011