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The Commission’s new responsibilities under Dodd-Frank significantly increase its workload. By the end of Fiscal Year 2011, if under a year-long Continuing Resolution, the Commission will use approximately 667 FTEs, which is 78 below the 745 FTE required to carry out our pre-Dodd-Frank authorities. To fully implement the Dodd-Frank reforms, the Commission will require an additional 238 FTE in FY 2012 and 160 FTE in FY 2013.

The 398 FTE will permit the Commission to implement reforms that, among other changes, require: 1) swap dealers and major swap participants to register and come under comprehensive regulation ─ including capital and margin requirements, business conduct standards and record-keeping and reporting requirements; 2) ensure that dealers and major swap participants bring their clearable swaps into central clearinghouses; 3) require dealers and major swap participants to use transparent trading venues for their clearable swaps; and 4) provide the CFTC with authority to impose position limits in the swaps markets.

Establishing and Staffing a New Swap Dealer and Intermediary Oversight Program. The Dodd-Frank Act creates two new categories of registrants: “swap dealer” and “major swap participant.” Staff will be needed to register these entities as well as regulate them for capital and margin requirements, robust business conduct standards and record-keeping and reporting requirements. To effectively oversee swap dealers and major swap participants, the CFTC will create a new oversight program for these registrants and all other intermediaries that are currently required to be registered with the CFTC. These include FCMs, introducing brokers (IBs), retail foreign exchange dealers (RFEDs), commodity pool operators (CPOs), commodity trading advisors (CTAs) and their associated persons (APs).

Initial estimates are that there could be approximately 300 entities – compared to 127 FCMs that are currently registered with the Commission (though other intermediaries are registered with the Commission, such as CTAs and CPOs, the Commission only reviews FCMs due to resource constraints) – that will seek to register as swap dealers, FCMs or RFEDs. This includes:

• Approximately 80 global and regional banks currently known to offer swaps in the United States. Of the International Swaps and Derivatives Association’s 830 members, 209 are “Primary Members.” Though many of the dealers in emerging markets may not seek to register in the United States, it is likely that most, if not all, of the global and international members would along with many of their existing swap dealing affiliates;
• Approximately 60 affiliates of existing swap dealers based upon the Dodd-Frank Act’s Section 716 requirement that banks push out much of their commodity, equity and credit default swaps desks to affiliates;
• Approximately 40 non-bank swap dealers currently offering commodity and other swaps;
• Approximately 20 potential new market makers that wish to become swap dealers;
• Approximately 75 entities that will register as FCMs; and
• Approximately 25 entities that will register as RFEDs.

A total increase of 60 FTE is requested for the new Swap Dealer and Intermediary Oversight Program, consisting of increases of 30 FTE in FY 2012 and 30 FTE in FY 2013. When fully staffed in FY 2013, the Commission will have 142 FTE allocated for this oversight program. The requested FTE resources will be essential to fulfill significant responsibilities related to registrants.

• As of September 30, 2010, the Commission has 77 FTE allocated to overseeing 127 FCMs, or one FTE per 1.6 FCMs.
• As a result of the provisions of the Dodd-Frank Act, it is estimated that some 300 entities will be registered with the Commission.
• Using our current ratio of one (1) FTE per 1.6 registrants, the CFTC would require 182.3 FTE.
• The FY 2013 budget request combined with the FY 2012 request includes an increase of 60 FTE to oversee 300 new registrants. That is a ratio of one (1) FTE per five (5) new registrants. With a planned 142 total FTE overseeing 427 registrants, the overall ratio would be one (1) FTE per three (3) registrants. This is growing from the current 1.6 registrants per FTE as:
  • It is not anticipated that all new registrants will register immediately after we stand up the dealer oversight program. Instead, a phased approach is anticipated.
  • Not all new registrants will be of the same size or complexity.

Clearing of Standardized Swaps through CFTC registered Derivatives Clearing Organizations. The Dodd-Frank Act requires that standardized swaps be cleared through CFTC registered DCOs. Clearing has lowered risk in the futures marketplace since the 1890s. A total increase of 70 FTE is requested for clearing oversight and risk surveillance, consisting of increases of 30 FTE in FY 2012 and 40 FTE in FY 2013. When fully staffed in FY 2013, the Commission will have 110 FTE allocated to the Clearing Policy and Risk Surveillance subprogram, including overseeing the clearing of standardized swaps through registered DCOs. As of September 30, 2010, the Commission has 48 FTE allocated to clearing oversight and the risk surveillance. The requested FTE resources will be essential to fulfill responsibilities related to clearing.

• All DCOs that clear swaps must submit the contracts to the CFTC, who must then make a decision as to whether the swaps are subject to the Dodd-Frank Act’s clearing requirement. The CFTC has 90 days after the submission, including a 30-day comment period, to make such determinations. Though we do not yet know the total number of contracts that will be submitted for clearing, and the Commission may be able to group many by class, the largest swaps clearinghouse currently clears nearly one million unique contracts. There currently is no requirement for the CFTC to make similar determinations in the futures market.
• The Dodd-Frank Act creates a new category of systemically important DCOs. These entities will have to comply with heightened risk management and other prudential standards. The Commission will be required to examine systemically important DCOs at least yearly. We also have to ensure that all DCOs comply and bring their rules up to the new Dodd-Frank Act Core Principles. The Commission likely will see an increase in the number of DCOs seeking registration, including entities that are located outside the United States, from 14 to at least 20.
• The additional clearinghouses that will register as DCOs likely will clear many more products that will require analysis. Further, the risk profile of these cleared products will be more complex than traditional futures and options on futures. As such, the clearing oversight program’s risk surveillance function will have to grow so that the CFTC can continue to effectively discharge its statutory duty to reduce systemic risk.

Oversight of Swap Execution Facilities and Swaps Trading on Designated Contract Markets. The Commission will need additional staff to implement many new provisions related to the oversight of swaps trading activity. These include procedures for the review and oversight of an entirely new regulated market category, SEFs. Staff in the Market and Product Review and Market Compliance units must establish and implement procedures for the review of new SEF applications and for the annual examination of the operations of SEFs. The Commission is requesting a total of 62 FTE to fulfill its pre- Dodd-Frank responsibilities. A total of 56 FTE are requested to implement new Dodd-Frank Authorities. This includes an additional 38 FTE for FY 2012 and an additional 18 FTE for FY 2013.

• The Commission currently oversees 16 DCMs. Based on industry comments, there could be at least 30-40 entities will apply to become SEFs. This estimate is based on the number of exempt commercial markets (ECMs), exempt boards of trade (EBOTs), interdealer brokers, information service providers and swap dealers who have formally or informally expressed an interest in registering as SEFs. Furthermore, some DCMs that in the past only listed futures will start listing swaps.
• Each SEF must be thoroughly evaluated by staff before making determinations whether they should be approved. Those that are approved also must be regularly examined for ongoing compliance.
• The Commission currently dedicates on average approximately 4.7 FTE from the Market and Product Review and Market Compliance Units to each DCM. By comparison, the Commission total requested 56 FTE increase for Dodd-Frank implementation would represent approximately 1.6 FTE per SEF.

Market Surveillance, Position Limits and Swap Data Repositories. The Dodd-Frank Act substantially expanded the responsibilities of the CFTC’s Market Surveillance Unit in a number of critical ways. The Commission requests a total increase of 49 FTE to implement these new authorities. This includes an increase of 42 FTE in FY 2012 and seven (7) FTE in FY 2013. The Commission is also requesting 105 FTE to carry out its pre- Dodd-Frank authorities in the areas of market surveillance, trade practice surveillance, and data management and analysis responsibilities.

• The Market Surveillance Unit currently administers a Commission-set position limit regime for a total of nine (9) DCM-listed agricultural futures contracts. Under the Dodd-Frank Act, resources must be dedicated to implementing and enforcing new aggregate position limits that are expected to be adopted that for the first time, will cover not only the futures market, but also some portion of the swaps market. These limits would apply to more than 30 agricultural and exempt commodities.
• The Commission must establish and implement new procedures and monitoring mechanisms to ensure that swaps data is appropriately reported to SDRs. Such data must be properly monitored, maintained and made available to the Commission and other regulators. Initial estimates are that the Commission will receive at least five (5) SDR applications upon the general effective date of the Dodd-Frank Act – one for each major asset class of swaps─ and maybe as many as 10, if some international SDRs seek to register as well. That number could grow significantly to the extent that any DCMs, SEFs or DCOs seek to establish in-house SDRs to facilitate their swap business.

Regulating Foreign Boards of Trade. Currently, the Chief Counsel’s Office in the Commission’s Division of Market Oversight has a single FTE dedicated to the processing of no-action requests from foreign boards of trade (FBOTs) seeking to permit direct access to their trading platforms by members based in the United States. The Dodd-Frank Act’s establishment of the new category of registered FBOTs requires an increase of four (4) FTE dedicated to FBOT matters to raise the total FTE to five (5) FTE. This includes an increase of two (2) FTE in FY 2012 and two (2) FTE in FY 2013. The Dodd-Frank Act’s creation of a new registered FBOT category will obviate the need for the current FBOT no-action letter program, but the substantive requirements that will be imposed on Registered FBOTs will likely be more robust than the requirements imposed under the no-action regime. Currently, 20 FBOTs operate in the United States based upon no-action letters dating back to 1999. The Commission expects at least that number of FBOTs will apply to register upon the implementation of the Registered FBOT regulations, plus an additional six (6) to 10 FBOTs who have recently expressed an interest in becoming registered.

Enhanced Enforcement Authority. The Commission’s Enforcement program is operating with a projected FTE count of 167 for the fiscal year ending September 30, 2011. This is 99 FTE less than the 266 positions required to fully and effectively implement the Commission’s Dodd-Frank enforcement authorities and 33 fewer than needed to optimally execute mission-critical, pre-Dodd Frank enforcement activities. As indicated earlier in this summary, the reforms of the Dodd-Frank Act significantly enhance and expand the Commission’s powers and responsibility to police the markets for fraud, manipulation and other abuses, and will result in a substantial increase in the Commission’s workload. Of the 99 additional FTE required by the Enforcement program in order to meet pre-Dodd Frank performance goals as well as implement the new authorities of the Dodd-Frank Act, the Commission is requesting 68 FTE in FY 2012, and will defer its request for the 31 FTE balance until FY 2013.

• The Commission estimates that approximately 85 FTE are required in FY 2012 for pre-Dodd-Frank authorities to investigate and prosecute violations of the CEA involving fraud. An additional 29 FTE will be required by the Dodd-Frank Act including 14 FTE for FY 2012 and an additional 15 FTE for FY 2013. This requested increase is based on the following factors:
  • The Dodd-Frank Act provides the Commission with clarified jurisdiction with respect to certain retail, off-exchange transactions, including transactions in precious metals.
  • The Dodd-Frank Act establishes the Commission’s anti-fraud jurisdiction with respect to the swaps market, including prohibiting entering into a swap with knowledge that the swap will be used by the counterparty in furtherance of a fraudulent scheme.
  • The Dodd-Frank Act creates a new whistleblower protection program for whistleblowers who provide original information leading to a successful enforcement action.
• The Commission estimates that approximately 83 FTE are required in FY 2012 for pre-Dodd Frank authorities to investigate and prosecute manipulation, attempted manipulation and false reporting violations. An additional 25 FTE will be required to implement the Dodd-Frank Act, which creates new prohibitions against reporting false information to the marketplace and supplements the Commission’s existing “price-based” anti-manipulation authority by adding a “fraud-based” manipulation provision. The total increase of 25 FTE includes 13 additional FTE for FY 2012 and 12 additional FTE for FY 2013.
• The Commission estimates that approximately 25 FTE are required in FY 2012 to carry out our pre-Dodd-Frank Authorities to investigate and prosecute financial, record-keeping, reporting and trade practice violations. An additional seven (7) FTE will be required by the Dodd-Frank Act including three (3) FTE in FY 2012 and four (4) FTE increase in FY 2013 based on the following factors:
  • The Enforcement Program polices 127 FCMs currently registered with the Commission. The Commission estimates that under the Dodd-Frank Act, approximately 300 new entities will register. While the number of registrants is expected to increase approximately two-fold, the Commission has only requested a 14 percent increase for FY 2013 for this program goal.
  • The Dodd-Frank Act also prohibits insider trading in futures, options or swaps by Federal employees with access to non-public information and establishes new prohibitions on disruptive trading practices to ensure that regulated markets are fair and orderly.
• The Commission will establish and operate an Enforcement Program Intelligence Unit consisting of 12 FTE in FY 2012. The Unit will consist of seven (7) positions reallocated from our pre-Dodd-Frank base of 200 and an additional five (5) FTE to implement the Dodd-Frank Act. No increase is requested for FY 2013. The new Intelligence Unit will fulfill the following functions:
  • The Commission receives thousands of tips, complaints and referrals from many sources including the public, regulated entities, state and federal agencies, and self-regulatory organizations (SROs). The Intelligence Unit will analyze tips, complaints and referrals to proactively identify market practices and activities that pose risks to investors and assess how to best address those practices and activities.
  • Under Section 748 of the Dodd-Frank, the Commission will be required to establish and staff a Whistleblower Office. The Whistleblower Office will have responsibility for: handling tips from whistleblowers; managing the award process, including making award determinations.

Modernization of Information Technology. The Commission’s $66 million budget request allocates $25 million for Dodd-Frank implementation. This request builds upon the FY 2011 appropriation of $20 million for information technology; no funds were provided for Dodd-Frank implementation in the FY 2011 Continuing Resolution appropriation. For pre-Dodd-Frank information technology requirements, the Commission’s FY 2012 information technology budget request includes a $21 million increase, from $20 million in FY 2011 to $41 million in FY 2012. This increase allows the Commission to continue its focus on enhancing the Commission’s technology to keep pace with the futures marketplace by implementing:

• Automated surveillance of the futures markets through the development of trade practice and market surveillance alerts,
• The capability to create ownership and control linkages between trading activity and aggregated positions,
• Computer forensics capability in support of enforcement investigations,
• Security controls to ensure continued compliance with National Institute of Standards and Technology (NIST) and Federal Information Security Management Act (FISMA) requirements, and
• Human resources systems to improve upon our antiquated systems that have been unable to effectively support recent FTE growth.

The Dodd-Frank Act for the first time sets up a new registration category for SDRs. The bill requires registrants─ including swap dealers, major swap participants, SEF and DCMs─ to have robust record-keeping and reporting, including an audit trail, for swaps. The CFTC anticipates rules in this area to require SDRs to perform their core function of collecting and maintaining swaps data and making it directly and electronically available to regulators. The resources requested will ensure that the Commission is able to integrate its systems with swap repositories that are being established in the United States and internationally. The Commission’s capacity to study and respond to ordinary trading practices or technological trading innovations will be greatly enhanced. Specific technological objectives include:

• Adapting existing automated surveillance and comprehensive analysis solutions to maximize the utility of the data residing in swap repositories;
• Establishing a robust technology infrastructure for systems that provide reliable intelligence about our markets and that assist the Commission in monitoring voluminous transaction processing;
• Standardizing the collection of order data for disruptive trade practice analysis;
• Advancing computing platforms for high-frequency and algorithmic trading surveillance and enforcement;
• Expanding data transparency through enhancements to the CFTC.gov Web site; and Implementing enhanced market and risk surveillance technology to oversee positions across swaps, options and futures markets.

To meet these needs, the agency is requesting an increase of 37 information technology FTE, which is an increase of 31 FTE in FY 2012 and six (6) FTE in FY 2013.

The CFTC, for the first time in its history, will need the technological capability to aggregate position and trading data across swaps and futures markets. The Commission also will need to be able to aggregate the position, trading, and other information stored in SDRs as there may be more than one SDR per asset class. The Dodd-Frank Act does not mandate any registered repository or data warehouse for such data aggregation purposes. However, the CFTC and other regulators will need a comprehensive view of the entire derivatives market, including combined futures and swaps data, to execute their mission. These aggregate capabilities include the ability to collect, store, readily access and analyze data for market surveillance, risk surveillance, enforcement, and position limit purposes.

Administrative Management and Support. The Commission is acting to enhance and restructure its management, planning and operational support to effectively service a substantially larger workforce with a broader mission. The CFTC is dedicated to improving Commission management through process standardization and optimization, which is currently underway throughout the agency. To meet these needs, the agency is requesting an increase of 31 non-technology administrative and support staff, an increase of nine (9) FTE in FY 2012 and 22 FTE in FY 2013. Although this is an increase, it represents a shrinking percentage of the agency total workforce. In FY 2010, non-IT administrative support represented 10.6 percent of FTE. The 73 administrative staff members requested for FY 2012 represents only 7.4 percent of the total workforce. The administrative support resources request responds to several needs:

• Agency staff will grow substantially with the FY 2012 and FY 2013 budget requests. A number of services, such as compensation, space management and hiring must expand to keep up with that growth.
• The Dodd-Frank Act places a number of new requirements on the agency. Additional FTE are needed to ensure that the agency can meet those requirements, for example, by training staff in new areas.
• Some areas of administration and management support have been either not staffed or understaffed in previous years as the agency chose to apply its limited resources to program rather than administrative functions. With the expected growth of the agency, a number of those areas, such as planning and business management, must now catch up.
• The lower ratio of administration and management support to total FTE will be pursued through efficiencies derived from standardization and business process improvements.

Enhancing Legal Analysis. As novel and complex legal and economic issues arise in the development and application of rules to implement the Dodd-Frank Act, the Office of General Counsel will need 20 additional FTE for legal expertise in FY 2012 to support all of its programs. No increase is requested for FY 2013 over an FY 2012 level of 70.

• The Commission will require legal staff to support the review of registration applications submitted by swap dealers, major swap participants, SEFs, DCOs and SDRs.
• The Commission will require legal support for all its new responsibilities under the Dodd-Frank Act, including the review of swaps to determine whether they should be subject to mandatory clearing, determinations of which swaps perform a significant price discovery function for purposes of aggregate position limits, legal sufficiency review of proceedings filed pursuant to the Commission’s new and expanded enforcement authorities, publication of data consistent with confidentiality protections in the CEA, and evaluation of new categories of registrants for compliance with rules and core principles.

Ensuring U.S. Interests in the Global Marketplace. The Office of International Affairs needs six (6) additional professional staff to address the increasing global reach of the futures and swaps markets. The Dodd-Frank Act specifically mandates that the Commission consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation of swaps and futures. Of the six (6) positions four (4) positions are requested for FY 2012 and two (2) for FY 2013.

Broadening Economic Analyses. Swaps vary substantially in terms of economic structure and will require expanded economic analyses. Commission staff will be challenged to meet those demands while continuing to maintain current oversight responsibilities. The Office of the Chief Economist requires seven (7) additional staff to expand the use of econometric and analytic techniques to the swaps marketplace to gauge the effects of market activities and the regulation of those activities. Of the seven (7) positions, six (6) are requested for FY 2012 and one (1) for FY 2013.

Inspector General. The Office of the Inspector General will require one (1) additional investigatory FTE in FY 2013 as a result of the increase in jurisdiction and staffing resulting from the enactment the Dodd-Frank Act. No increase is requested for FY 2012.

Continuing Current Service Level. The CFTC requires additional resources to provide a continuation of the FY 2011 service levels into FY 2012 for pre-Dodd-Frank authorities, which include:

• Overseeing trade execution facilities, performing market surveillance, market compliance, and market and product review functions;
• Overseeing the compliance activities of DCOs, intermediaries, and the futures industry SROs, which include the U.S. commodity exchanges and National Futures Association (NFA);
• Investigating and prosecuting alleged violations of the CEA and Commission regulations which may involve commodity futures or option trading on U.S. futures exchanges, or the improper marketing and sales of commodity futures products to the general public;
• Ensuring that U.S. interests are served abroad by representing the Commission at the International Organization of Securities Commissions (IOSCO); coordinating Commission policy as it relates to Treasury global initiatives; and providing technical assistance to foreign market authorities;
• Conducting economic research on policy issues facing the agency and providing education and training for Commission staff;
• Representing the Commission in appellate litigation and certain trial-level cases, including bankruptcy proceeding involving futures industry professionals, and advising the Commission on the application and interpretation of the CEA and other administrative functions;
• Handling customer complaints and resolving disputes between futures customers and commodity futures trading professionals;
• Ensuring effective and efficient management of human capital, technology and financial resources and facilities management; and
• Providing for the annual merit based compensation adjustments for staff, lease of office space, utilities and communications, printing, supplies, services, capital equipment and fixed equipment.

 

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