Statement of Dissent by Commissioner Scott D. O’Malia, Fiscal Year 2015 President’s Budget & Performance Plan

March 5, 2014

I respectfully dissent from the Fiscal Year (“FY”) 2015 budget request¹ because the Commission continues to make improbable funding requests and still continues to significantly under fund technology. I had hoped that the Commission would have completed by now a strategic plan that includes a technology and workforce investment program and sets out the Commission’s mission priorities. However, the Commission has failed to develop such a strategic plan and missed the statutory deadline² for submitting the plan to the Administration and Congress. As a result, the Commission makes an unrealistic request for new staff and funding in this budget request without a firm understanding of its mission priorities, specific goals, and corresponding personnel and technology needs.

It is of note that the Commission’s FY 2015 budget request submitted to the Office of Management and Budget in November 2013 requested $318 million. The final budget request scales back the $318 million (a 47.9 percent increase from the FY 2014 spending plan) number to $280 million (a 30.2 percent increase from the FY 2014 spending plan).³ While slightly more measured than the November request, this budget request perpetuates the futile strategy of hiring more staff to oversee a vastly complex, high-speed and technology-driven market. The lack of mission priorities makes these wide-ranging budget requests seem somewhat random and ill-defined – only because they are.

CFTC FY 2015 President’s Budget Request

The Commission has proposed to allocate funding in the FY 2015 budget request as follows:

Once Again, Technology Finishes Last

Among the mission-driven divisions (i.e., non-administrative), the Commission allocated the smallest percentage increase to technology in the FY 2015 budget request. Funding for the Office of Data and Technology has grown only 6.8 percent from FY 2011 to FY 2014, while the Commission’s overall funding has grown 11.7 percent during this same period.⁴ Even more startling, the Commission only allocated $50.0 million for non-full-time-equivalent (“FTE”) technology investments in the FY 2015 budget request, which is less than the $51.1 million funding level in FY 2012 when the Commission’s overall budget was $205.3 million ($74.7 million less than this budget request of $280 million).⁵

While the $50.0 million for non-FTE technology investments is an unacceptable level of funding, it is also unacceptable that of this amount, the Commission dedicates only $10.5 million⁶ for cutting edge tools that are essential to the Commission’s long-term regulatory mission. The Commission proposes to spend $12.5 million⁷ to support ongoing technology investments, such as litigation support and existing surveillance tools. The Commission dedicates the remaining $27.0 million⁸ to back office support, such as desktops, mobile devices, and software. Federal staffing adds an additional $21.1 million to information technology expenses.⁹ As a result, of the $71.1 million in total information technology funding,¹⁰ the Commission uses only 1/7 of the funding to deploy critical technology tools.

Given this funding plan, the Commission will waste another year without deploying critical technology, such as an order message data collection and analysis system, a key tool for surveillance. Without this investment, the Commission will not have access to the millions of order messages that flood the exchanges on a minute-by-minute basis in order to conduct complete market surveillance for abusive trading practices. Instead, the Commission will continue to rely on transaction data that is submitted to us by registered entities, which represents only 8 percent of the millions of order messages.¹¹ Thus, the Commission will continue to have an incomplete picture of overall market activity.

Additionally, this funding plan will hamper the Commission’s ability to improve the quality of its swaps data and build the necessary tools to utilize this data for critical risk analysis and surveillance. The Commission must also develop a database to link the futures, swaps, and options markets to perform cross-market analysis and surveillance. This database currently does not exist, and the Commission has not funded one in this budget request.

Without funding the key investments described above, the Commission will struggle to meet its mission objectives of ensuring market integrity and protecting market participants and the public from fraud, manipulation, abusive practices, and systemic risk.

Technology Should Not Be Complicated

The Commission should not make technology any more complicated than necessary. As noted above, the Commission must make technology investments in the following three areas:

1. Improving swaps data quality. The Commission must clean and organize its data in a format that can be easily aggregated, readily usable by various divisions within the Commission, and shared, as appropriate, with other regulators (domestic and foreign). The Commission must implement a strategy to integrate swaps, futures, and options data for risk analysis and surveillance.

2. Developing additional automated surveillance tools. The Commission must deploy cross-market analytical tools and implement an order message data collection and analysis system. These surveillance tools are the foundation for an effective enforcement program.

3. Developing automated risk analytics. Developing automated risk capabilities within the Office of the Chief Economist, Division of Clearing and Risk (“DCR”), and Division of Swap Dealer and Intermediary Oversight (“DSIO”) will enable the Commission to efficiently oversee the highest risk firms, saving both time and money.

Not Having a Clear Strategy Makes Technology Complicated

Last year, when I testified before the House Committee on Appropriations, Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies, I proposed that the Commission develop a technology plan as part of its strategic plan.¹² By statute, the Commission must develop a strategic plan outlining its goals by February 2014.¹³ The Commission has failed to meet the statutory deadline.

It is my hope that the Commission develops a strategic plan in the near future that incorporates its mission priorities and goals and includes a clear strategy for deploying new and innovative tools that automates its surveillance and oversight mission. Without such a strategy, I fail to see how the Commission can fulfill its vastly increased responsibilities mandated by the Dodd-Frank Act. The Commission must also outline a workforce strategy that identifies key skills required for staff so that the Commission can achieve its goals. Once the Commission develops a strategic plan that includes specific budgets and timetables, and holds the Commission accountable, the Commission can appropriately set forth its technology and personnel needs. In addition, Congress and the Administration can measure the Commission's progress in executing its mission priorities.

Duplicating the Efforts of the National Futures Association

As I noted in my dissent to the Commission’s FY 2014 Spending Plan,¹⁴ I do not support expending scarce taxpayer resources to duplicate mission responsibilities. I am concerned that the Commission has proposed a 57.9 percent increase for DSIO in the budget request,¹⁵ in light of the fact that the National Futures Association (“NFA”) already has delegated responsibility to register, examine, and oversee the 98 registered Swap Dealers (“SDs”) and 2 Major Swap Participants.

By July 2014, the NFA expects to have 100 staff dedicated to the SD oversight compliance mission, and by July 2016, that number will grow to 130 staff. If the FY 2015 budget request is fully funded, DSIO (113 staff) and the NFA (100 staff) will have at least 213 combined staff overseeing the registration and compliance of Commission registrants. This combined staff will be larger than the proposed level of staff contained in the FY 2014 Spending Plan for the Division of Enforcement (152 staff) and DCR (60 staff) combined.

It is unclear from the Commission’s budget request how it will avoid mission duplication and the waste of resources in the SD oversight program, resources that the Commission could otherwise use to improve data quality and to deploy critical technology. I am frustrated that DSIO’s primary focus is on ensuring that SDs provide all necessary compliance forms and not on improving the data quality of the swap data repositories and the clearing houses to identify SD risk. A primary objective of swap data reporting is to provide the Commission with an independent view into the activities of SDs. Rather than replicating the work that the NFA is already performing and sifting through the nearly two hundred thousand pages of compliance forms, DSIO should make SD risk its primary focus.

Conclusion

I hope that Congress will take the opportunity to refocus the Commission’s resources in the three technology areas discussed above.

In addition, if the Commission fails to deliver a strategic plan that includes essential priorities, goals, and technology investments with specific cost and schedule estimates, Congress should insist on a report that identifies the costs, timetables, and mission requirements to achieve the priorities I described above.

Finally, I am grateful that Congress has directed, by statute, that the Commission meet a minimum technology spending level. However, due to the Commission’s continued lack of commitment to technology investment and apparent indifference to transforming the Commission into a twenty-first century regulatory authority, I encourage Congress to continue to provide for higher levels of technology funding in separate statutory language. This will prevent further erosion in the Commission’s technology investments.

Note: See Appendix A under Related Links.

¹ This dissent only applies to the Commission’s budget request of $280 million, and does not apply to any proposals by the President, such as user fees.

² 5 U.S.C. § 306. The statutory deadline was February 3, 2014.

³ See Appendix A.

⁴ Id.

⁵ Id.

⁶ This number is estimated based on draft technology numbers prepared by the Office of Data and Technology.

⁷ Id.

⁸ Id.

⁹ See Appendix A.

¹⁰ $50 million for non-FTE technology investments + $21.1 million for staff = $71.1 million. See Appendix A.

¹¹ According to the Commission’s surveillance group, approximately 8 percent of the order messages result in an executed futures transaction on the Chicago Mercantile Exchange.

¹² Testimony of CFTC Commissioner Scott D. O’Malia Before the U.S. House Committee on Appropriations, Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-23.

¹³ 5 U.S.C. § 306. The statutory deadline was February 3, 2014.

¹⁴ Statement of Dissent by Commissioner Scott D. O’Malia, Fiscal Year 2014 Spending Plan, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement022714.

¹⁵ See Appendix A.

Last Updated: March 5, 2014