Office of the Chief Economist

Chief Economist Budget and FTEs
	Budget	FTEs
Total Budget	$3,896,000	15
Total Change	$372,000	1

Figure 30: Chief Economist Percentage
of Total Budget Dollars
Program Activity	Percentage
Chief Economist	2%
All Other Programs	98%

Figure 31: Chief Economist Percentage
of Total Budget FTEs
Program Activity	Percentage
Chief Economist	2%
All Other Programs	98%

Justification of the FY 2010 President’s Budget & Performance Plan

Innovation in the futures and option markets continues to ramp up taxing the ability of OCE staff to conduct thorough market research in support of Commission goals. Innovations in trading technology and trading instruments create significant regulatory challenges that require economic research and analysis in the form of:

Participation in the development of flexible and effective regulatory responses to evolving market conditions;
Review and analysis of new market trading structures and new trading products;
Continuous support to the Commission’s Enforcement program in the form of economic and statistical analysis or expert testimony to promote compliance with and deter violations of commodity laws;
Development of educational materials on futures and option trading for dissemination to producers, market users, and the general public; and
Review and analysis of the futures industry’s financial safeguard system, including evaluation of risk management processes employed by DCOs and intermediaries, and evaluation of new clearing processes.

In FY 2010, the Office of the Chief Economist (OCE) program requests 15 FTEs; this is one additional FTE over the 14 FTE in the FY 2009 base.

The growth in the number of markets that trade and clear a widening array of complex derivative products requires analysis and research to determine the appropriate regulatory approach to these markets and products. In FY 2010, staff of the OCE will be required to monitor a larger and more diverse array of markets, including new energy products, new types of "event-related" markets, such as corporate actions, derivatives on economic statistics, derivatives on credit events, derivatives on weather and derivatives on exchange-traded commodity funds. The Commission anticipates that a large number of these contracts will be listed for trading, both on futures and securities exchanges. In addition, management and parsing of the huge amounts of trading data, both transaction data and order book data, as a result of the continued expansion of electronic trading and the noted increase in products traded requires involvement of OCE staff as principal users of such data.

With the requested level of resources, analysis to enhance understanding of the markets will keep pace with, but will, in very few cases, anticipate, the growth in new types of exchanges and the initiation of trading in new products. Moreover, at the requested level, the staff will be able to monitor most but not all developments in derivatives trading and market innovations. In this regard, innovations in technology and derivative instruments and trading methods in futures markets create many challenging economic and regulatory issues. The performance of derivative markets has a potentially large impact on the stability of international and domestic financial markets. Market research and effective monitoring of these developments help ensure that the Commission has in place sound regulatory policies to reduce systemic risk in financial markets and protect the economic function of the markets without undermining innovation and the development of new approaches to risk management.

Consequence of Not Receiving Requested Level of Resources

If the OCE does not receive the requested level of resources, it will not be able to conduct market research and analysis commensurate with the growth in new types of exchanges, new trading execution methods in futures markets, and the initiation of trading in the array of new products noted above. Moreover at a lower level of resources, staff monitoring developments in derivatives trading and market innovation will be less effective. This will undermine the ability of the Commission to keep its regulatory policies in line with new developments in the industry, which could impede innovation, lead to systemic risk in financial markets, and adversely affect the economic function of the markets.

Such research is integral to OCE’s ability to provide timely and effective support to the Chairman’s office in its response to information and analysis requests from the Congress and from other regulatory organizations. Stresses brought on both by difficulties in the financial markets as well as questions raised by innovative institutional arrangements show no signs of abating. Problems with sub-prime debt have elevated credit risk problems which can be expected to be an ongoing source of challenges. Very significant questions are being raised with regard to the appropriate levels for speculative activity as well as the institutional arrangements through which speculative activities are channeled.

The development of new technology brought about by electronic trading is existing yet growing markets and in new markets generate huge amounts of trading data. This requires additional management of the data and, importantly, the ability to effectively analyze the data. Without the additional resources, the OCE will be unable to keep pace with this growth, meet its established and developing responsibilities, stay abreast of market developments, and would be unable to adequately provide effective and timely support to the other divisions within the Commission. Also, the lack of additional resources will undermine the ability of OCE to monitor and analyze the large and diverse array of markets, including new energy products, new types of "event-related" markets, such as corporate actions, derivatives on economic statistics, and derivatives on exchange-traded commodity funds.

Without the requested level of resources OCE will be unable to provide effective economic and statistical analysis to the enforcement and surveillance programs, and review the financial safeguard system. This may result in substantial time delays in critical market research, which may adversely affect the economic function of the markets and may lead to systemic risk across the broader financial market system.

Table 30: Office of the Chief Economist Request
*($ in thousands)*
	Budget Request	FTE	Budget Request	FTE	Budget Request	FTE
	FY 2009		FY 2010		Change
Chief Economist	$3,524	14.00	$3,896	15.00	$372	1.00
Total	$3,524	14.00	$3,896	15.00	$372	1.00

Table 31: Office of the Chief Economist Request by Goal
*($ in thousands)*
Outcomes	FY 2009		FY 2010		Change
Outcomes	Budget Request	FTE	Budget Request	FTE	Budget Request	FTE
GOAL ONE: Protect the economic functions of the commodity futures and option markets.
1.1 Futures and option markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity.	$2,406	9.56	$2,166	8.35	‑$240	‑1.21
1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality.	1,118	4.44	1,730	6.65	612	2.21
Subtotal Goal One	$3,524	14.00	$3,896	15.00	$372	1.00
GOAL TWO: Protect market users and the public.
None.
GOAL THREE: Foster open, competitive, and financially sound markets.
None.
Total	$3,524	14.00	$3,896	15.00	$372	1.00

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Last Updated: September 23, 2009