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The FY 2012 Budget is for $56,553,000 and 182 FTE, of which $19,496,000 and 60 FTE relate to Dodd Frank. The 60 FTE increase are allocated to the following subprograms: Clearing Policy and Risk Surveillance (30), Compliance and Registration (4), and Audit and Financial Review (26).

For the first time, regulation of the swaps market was mandated with the passage of the Dodd-Frank Act. Among other things, the Dodd-Frank Act granted Commission authority to regulate swaps, including mandatory clearing of swaps, the registration of new categories of CFTC registrants such as swap dealers and major swap participants, and the imposition of various prudential, segregation and business conduct standards upon these entities.

The Dodd-Frank Act requires the Commission to undertake extensive rulemaking (and/or joint rulemaking with SEC and others) in the following areas:

• Rules governing persons to be registered as DCOs for swaps;
• Rules giving effect to the 18 statutory Core Principles for DCOs;
• Rules containing risk management standards for those DCOs that are determined to be systemically important by the Financial Stability Oversight Council;
• Rules providing for the registration of swap dealers and major swap participants;
• Rules imposing capital and margin requirements on non-bank swap dealers and major swap participants;
• Rules governing reporting and record-keeping for swap dealers and major swap participants;
• Rules governing daily trading records for swap dealers and major swap participants;
• Rules governing business conduct standards for swap dealers and major swap participants (i.e., fraud, supervision, position limits, etc.);
• Rules governing back office standards for swap dealers and major swap participants;
• Rules requiring that futures commission merchants and introducing brokers implement conflict-of-interest systems and procedures;
• Rules addressing the mandatory clearing of swaps, including the determination of which types of swaps must be cleared; and
• Rules requiring the reporting of financial data and investment portfolio information by advisors to private funds that are dully registered with the SEC and CFTC, and certain CPOs and CTAs.

While much of the rulemaking is required to be completed in FY 2011, the implementation of the rules is expected to demand significant additional resources in FY 2012. For example,

• The imposition of financial requirements will require the development and implementation of a routine financial surveillance function, which will include the periodic examination of swap dealers and major swap participants, and the review of interim and annual financial reports submitted by swap dealers and major swap participants.
• The registration of new DCOs engaged in the clearing of swaps will require the examination of new entrants for compliance with core principles as well as the routine inspection of such DCOs once registered. DCIO staff will need to review a wide range of OTC swaps and other derivatives instruments to determine their suitability for clearing.
• Pursuant to Title VIII, the Commission will be required to prescribe regulations containing risk management standards for designated clearing entities and financial institutions engaged in designated activities for which the Commission is the Supervisory Agency. The Commission will also be required to review all proposed changes to the rules, procedures or operations of designated financial market utilities for which it is the Supervisory Agency and conduct, at a minimum, annual examinations of each such utility.

Finally, given the program’s responsibility for the bulk of new rules, significant time will be devoted to providing interpretations and guidance, drafting follow-up rules as issues with implementation emerge, and responding to industry and public inquires regarding the meaning, scope, and effect of the new rules.

Swap Dealer and Intermediary Oversight. The Compliance and Registration and Audit and Financial Review sub-programs (i.e., Swap Dealer and Intermediary Oversight), are responsible for oversight of FCMs, IBs, CPOs, CTAs and SROs, and they have between them 77 FTE as of September 30, 2010. With approximately 127 FCMs, this works out to an oversight ratio of one FTE for 1.6 registrants.

With the new authorities provided for by the Dodd-Frank Act, it is estimated that some 200 entities will register as swap dealers. This includes global and regional banks currently known to offer swaps in the United States. Of the 830 members of the International Swaps and Derivatives Association’s (ISDA), 209 are “Primary Members.” Under ISDA’s bylaws, a firm is only eligible for primary member status if it deals in derivatives for purposes other than “risk hedging or asset or liability management.” Though many of the dealers in emerging markets may not seek to register in the U.S., it is likely that most, if not all, global and international members would and it is estimated that some 80 would register as swap dealers. Many affiliates of these global banks that will be set up to comply with the Dodd-Frank Act’s Section 716 provision requiring banks to push out their commodities, equities and much of their credit default swap business. It is estimated that some 60 of these entities would register as swap dealers. Numerous nonbank swap dealers currently offering commodity and other swaps would be required to register and it is estimated that some 40 would register as swap dealers. Finally, potential new market makers may wish to make markets in cleared swaps that have to be listed on either a CFTC DCM or registered SEF and it is estimated that some 20 would register as swap dealers.

As a result of the provisions of the Dodd-Frank Act, it is estimated that some 200 entities will register as swap dealers. It if further estimated that an additional 75 entities will register as FCMs while another 25 entities will register as RFEDs. The total of new estimated registrants is 300. If the same ratio of one FTE for 1.6 registrants is used, this will mean an additional 182.9 FTE. However, The CFTC is requesting only 30 FTE for this program in FY 2012 and it is critical that this request be granted. With 112 FTE to oversee 427 registrants, the ratio of registrants per FTE would be 3.8, instead of one FTE for 1.6 registrants. However, the reason the CFTC is asking for this level of FTE resource is that the swap dealer and major swap participant program is new and it is not anticipated that all estimated registrants will have to register on the effective date of the Dodd-Frank Act. A phased approach is anticipated, and not all new registrants will be of the same size or complexity and the CFTC can be efficient in its oversight.

It is therefore essential that the Compliance and Registration and Audit and Financial Review sub-programs receive the FTE allocations requested so that the CFTC may discharge its responsibilities effectively.

The Swap Dealer and Intermediary Oversight program is also responsible for reviewing petitions under Part 30 of the Commission’s regulations, and monitor compliance under existing Part 30 orders. Part 30 governs the offer and sale of foreign futures and options contracts to customers located in the United States, and it requires intermediaries seeking to engage in such activities to either register in the appropriate capacity with the Commission or seek exemption from registration requirements. The petition for exemption is typically filed by either a foreign governmental agency responsible for implementing and enforcing the foreign regulatory program, or by a foreign exchange on behalf of its members. In order to grant such petitions, the Commission must determine that compliance with the foreign jurisdiction’s regulatory program would offer protections comparable to those found under the U.S. regulatory scheme. In the past, most Part 30 petitions came from jurisdictions with which the Commission was familiar and had some working relationship. More recently, petitions have come from less familiar jurisdictions, and subprogram staff expects this trend to continue. Accordingly, sufficient staff is needed to review these incoming petitions, review the regulatory scheme of the home jurisdictions, meet with and evaluate the programs of foreign regulators and exchanges, and draft recommendations for Commission action. Staff also is needed to undertake a review of Part 30 program generally. The program has now existed for approximately 20 years during which time laws of the Part 30 jurisdictions have changed.

Program staff is the primary point of contact for the public and industry with regard to the meaning, interpretation, and effect of many of the Commission’s regulations. Consequently, staff is responsible for handling numerous inquiries, ranging from daily calls and email inquiries to formal requests for interpretation or no-action relief. The staff also is responsible for drafting and amending many of the rules involving the registration and regulation of intermediaries. In this regard, staff finalized rules that, for the first time, impose registration requirements and Commission oversight upon intermediaries engaged in the offer and sale of OTC foreign currency contracts to retail customers. Given current trends, staff anticipates significantly more work in this area, including the drafting of follow up regulations and the provision of guidance to the public and industry regarding the effect of the rules.

Program staff is also responsible for ensuring that market intermediaries comply with applicable financial and customer protection requirements set forth in the CEA and Commission regulation. This is currently done by conducting oversight of the financial surveillance programs of the SROs for compliance with the CEA, Commission regulations, and interpretations. Such oversight includes reviews and assessments of the effectiveness of the programs adopted by the SROs (i.e., the CME Group, KCBT, MGE, and NFA) to examine their member FCMs’ compliance with the Commission’s minimum financial and related reporting requirements, customer funds protection requirements and sales practice requirements. The staff also reviews and assesses the effectiveness of NFA’s program for monitoring CPOs’ and CTAs’ compliance with relevant provisions of the CEA and Commission regulations. The staff further assesses the effectiveness of NFA’s execution of certain functions and responsibilities that the Commission has delegated to NFA to perform on behalf of the Commission, including the registration function and the review of CPO and CTA disclosure documents.

The staff performs routine, daily financial surveillance of FCMs, including reviews of monthly financial statements submitted by FCMs to assess compliance with financial and customer funds protection requirements and to identify possible adverse financial trends. Staff reviews and performs necessary follow up on all regulatory notices filed by FCMs, SROs, and DCOs pursuant to Commission regulations (e.g., FCMs that are under-capitalized, under-segregated, or have triggered early warning reporting requirements, etc.).

The staff conducts direct examinations of FCMs and CPOs. Such examinations may be conducted as an integral part of the oversight of the SROs’ financial surveillance program, or they may be conducted on a “for cause” basis to assess whether the target of the examination is in compliance with the CEA and Commission regulations. Staff also oversees CPO’s provision of financial data and related reporting requirements. Furthermore, the subprogram is responsible for responding to public inquiries regarding the application of the Commission’s capital rules, financial reporting rules, segregation rules, and certain financial and reporting rules governing CPOs.

Direct examination of market intermediaries is a key component of the oversight program. The expertise and proficiency acquired by audit staff during direct examinations are vital tools when assessing the effectiveness and thoroughness of an SRO’s financial surveillance program. Direct examinations also provide independent verification of audit work completed by SROs’ staffs. The expertise and proficiency acquired by audit staff during direct examinations also are critical in instances where immediate Commission action is necessary to assess the compliance of a FCM or CPO with the Commission’s financial requirements in order to protect customers and ensure orderly markets.

Clearing Policy and Risk Surveillance. The Dodd-Frank Act mandates the clearing of standardized swaps by CFTC registered derivatives clearing organizations (DCOs). It is estimated that the number of DCOs registered with the Commission will grow from 14 to 20. The Dodd-Frank Act also creates a new category of systemically important DCOs and requires them to comply with heightened risk management and other prudential standards. The CFTC is also required by the Dodd-Frank Act to examine all systemically important DCOs at least once a year. The Dodd-Frank Act requires the CFTC to make determinations as to whether certain types or categories of swaps must be cleared. This requires the CFTC to analyze numerous swaps against factors listed in the statute to make such a determination. It is anticipated that there will be more DCOs which will clear more products and that the risk profile of these cleared products will be more complex than traditional futures and options on futures. As such, the risk surveillance function will have to grow so that the CFTC can continue to effectively discharge its statutory duty to avoid systemic risk. As such, it is critical that the CFTC receive the FTE requested for this program in FY 2012.

The Clearing Policy and Risk Surveillance subprogram’s primary objective is to ensure that DCOs and market intermediaries avoid creating systemic risk. The Clearing Policy and Risk Surveillance subprogram’s major functional responsibilities in support of this objective are to: review DCO applications and rule submissions and make recommendations to the Commission; make recommendations as to which types of swaps should be cleared; to assess DCO compliance with the CEA and Commission regulations through examinations; to examine systemically important DCOs at least once a year; prepare proposed regulations, orders, guidelines, and other regulatory approaches on issues pertaining to DCOs; and conduct risk assessment and financial surveillance through the use automated systems to gather and analyze financial information from clearing FCMs to ascertain, on a continuous basis, whether any such FCM shows a material financial weakness.

The Clearing Policy and Risk Surveillance staff conducts periodic reviews of DCOs to evaluate their compliance with the CEA and Commission regulations, including Core Principles governing financial resources, risk management, default procedures, protection of customer funds, and system safeguards. Currently, the scope and frequency of these reviews are determined based on staff’s assessment of risk. A formal review is not conducted of each DCO each year due to resource constraints. The CFTC will be required by the Dodd-Frank Act to review each systemically important DCO at least once a year. With the clearing mandate imposed by the Dodd-Frank Act, it is anticipated that the number of DCOs and the volume of positions cleared by such DCOs will grow exponentially. Furthermore, the risk profile of these positions will be much more complex and it is therefore imperative that the sub-program be staffed to perform effective oversight. To discharge the Commission’s statutory responsibility to ensure the financial integrity of all transactions and avoid systemic risk, the Clearing Policy and Risk Surveillance staff also undertakes daily risk surveillance across all markets that are subject to CFTC jurisdiction by reviewing the risk profiles of DCOs, clearing firms and market participants with large positions. To discharge this responsibility, staff receives and reviews reports that detail positions in all futures markets. Staff calculates margin requirements, conducts stress tests and compares potential losses to available resources such as FCM capital and the DCO guarantee fund. Staff contacts DCOs, FCMs, and large market participants regularly, on a proactive basis, to discuss risk posed by large positions and the measures in place to mitigate those risks. With the anticipated exponential increase in swaps being cleared and the attendant increased risk at all DCOs, as a result of the clearing mandate of the Dodd-Frank Act, more FTE will be needed by the subprogram to monitor the increased risk.

The Clearing, Swap Dealer and Intermediary Oversight program must at all times maintain an effective and robust supervisory system that is responsive to technological development, business changes, increasing globalization, increasing trading volume, and other evolutionary changes in the clearing, swaps dealing, and customer intermediation process.

Without the requested level of resources, the Clearing, Swap Dealer and Intermediary Oversight program will not be able to meet its current level of responsibilities, much less the responsibilities assigned to it by the Dodd-Frank Act.

The Dodd-Frank Act creates transparency and accountability for the swaps markets. It closes regulatory gaps by giving the CFTC the authority to regulate swap dealers and major swap participants, mandates clearing and exchange trading for swaps, improves market transparency through exchange trading and data collection, adds financial safeguards by ensuring swap dealers and major swap participants have adequate financial resources, and establishes a higher standard of conduct for all registered swap dealers and major swap participants.

To achieve these purposes, the level of resources requested is necessary for the Clearing, Swap Dealer and Intermediary Oversight program to implement various provisions of the Dodd-Frank Act in a timely and effective manner. Among other things, the program’s responsibilities will be significantly increased and expanded to address the registration of new categories of registrants such as swap dealers, major swap participants, the continuing oversight of FCMs, IBs, RFEDs and DCOs; the examination of swap dealers and major swap participants for assessing compliance with Commission regulations on business conduct standards, record-keeping, reporting, capital and margin requirements; the risk surveillance and examination of DCOs for swaps and assessing compliance with Core Principles; and the review and assessment of swaps and to determine their suitability for clearing. Without the requested level of resources, the Clearing, Swap Dealer and Intermediary Oversight program will not be able to meet its oversight responsibilities, and the purposes of the comprehensive financial reform may not be achieved to the extent as intended.

The increasing volume of retail, non-intermediated, off-exchange trading in contracts based on forex has brought increased attention to this area. Specifically, the program must commit resources to implement the Commission’s forex regulations, including developing oversight measures that will assure the effective monitoring of forex activity and the safeguarding of retail customers’ funds. Similarly, the program expects to devote significant resources to respond to futures industry and public inquiries regarding the effect of these regulations as it is estimated that some 25 entities will register as RFEDs.

Another consequence of not receiving the program’s requested level of resources is that it will not be able to timely and adequately fulfill its oversight and review functions over DCOs, SROs, FCMs, IBs, CPOs, CTAs, swap dealers, major swap participants and RFEDs as it will not be able to conduct as many oversight examinations of such entities, thereby increasing the possibility of misappropriation or insolvency that could harm customers and consumers, compromise the integrity of the futures markets, and create systemic instability.

To summarize, the Clearing, Swap Dealer and Intermediary Oversight program will be severely hampered in its ability to implement current and the newly expanded Congressional mandates in a timely fashion without the requested level of resources.

The primary responsibility of the Clearing, Swap Dealer and Intermediary Oversight program is to foster financially sound markets and clearing systems and to protect customer funds. The level of funding requested in FY 2012 of 122 FTE is for existing authorities exclusive of Dodd-Frank, and the funding level is needed in order for the Clearing, Swap Dealer and Intermediary Oversight program to fulfill its regulatory responsibilities executed by the Compliance and Registration (16 FTE), Audit and Financial Review (66 FTE), and Clearing Policy and Risk Surveillance (40 FTE) subprograms.

The Compliance and Registration staff develops regulations, orders, and guidelines applicable to market intermediaries including matters such as registration and fitness, sales practices, managed funds, disclosure, record-keeping, and reporting, and foreign futures and options. Compliance and Registration staff are the primary point of contact for the public and industry with regard to the meaning, interpretation, and effect of many of the Commission’s regulations. Consequently, the subprogram staff is responsible for handling numerous inquiries, ranging from daily calls and email inquiries to formal requests for interpretation or no-action relief. The staff also is responsible for drafting and amending many of the rules involving the registration and regulation of intermediaries. In this regard, staff has recently finalized rules that, for the first time, impose registration requirements and Commission oversight upon intermediaries engaged in the offer and sale of OTC foreign currency contracts to retail customers.

The Clearing Policy and Risk Surveillance subprogram’s major functional responsibilities are to review DCO applications and rule submissions and make recommendations to the Commission; assess DCO compliance with the CEA and Commission regulations, including Core Principles; prepare proposed regulations, orders, guidelines, and other regulatory approaches on issues pertaining to DCOs; provide support to Commission staff in the review of DCM applications and rules submissions relating to clearing and customer funds protection; and review DCO and FCM requests for no-action, exemptive, or interpretive letters relating to the CEA or Commission regulations. The staff also conducts risk assessment and financial surveillance through the use automated systems to gather and analyze financial information from clearing FCMs to ascertain, on a continuous basis, whether any such FCM shows a material financial weakness.

The Audit and Financial Review subprogram addresses its responsibilities by conducting oversight of the financial surveillance programs of the SROs for compliance with the CEA, Commission regulations, and interpretations. Such oversight includes reviews and assessments of the effectiveness of the programs adopted by the SROs (i.e., the CME Group, KCBT, MGE, and NFA) to examine their member FCMs’ compliance with the Commission’s minimum financial and related reporting requirements, customer funds protection requirements and sales practice requirements. The Audit and Financial Review subprogram also reviews and assesses the effectiveness of NFA’s program for monitoring CPOs’ and CTAs’ compliance with relevant provisions of the CEA and Commission regulations. The Audit and Financial Review subprogram conducts direct examinations of FCMs and CPOs that serve as an integral part of the oversight of the SROs’ financial surveillance program, or that they may be conducted on a “for cause” basis to assess whether the target of the examination is in compliance with the CEA and Commission regulations. The Audit and Financial Review subprogram performs routine, daily financial surveillance of FCMs, including reviews of monthly financial statements submitted by FCMs to assess compliance with financial and customer funds protection requirements and to identify possible adverse financial trends. Audit and Financial Review subprogram staff also reviews and performs any necessary follow up on all regulatory notices filed by FCMs, SROs, and DCOs pursuant to Commission regulations (e.g., FCMs that are under-capitalized, under-segregated, or have triggered early warning reporting requirements, etc.).

The level of resources requested is necessary for the program to meet its responsibilities and to help keep pace with the rapid growth in futures and option trading volume and the profound changes resulting from global competition, innovations in derivative contracts, innovations in clearing practices, new clearing organizations, advances in technology, and new market practices.

A major consequence of not receiving the program’s requested level of resources is that program staff will not be able to timely and adequately fulfill oversight and review functions over DCOs, SROs, FCMs, IBs, CPOs, CTAs, and RFEDs. Without the requested resources, the program staff will not be able to conduct as many oversight examinations of SROs, DCOs, and other registrants, including large and financially diverse FCMs, or to review compliance and proper operation of SRO and DCO regulatory programs, thereby increasing the possibility of misappropriation or insolvency that could harm customers and consumers, compromise the integrity of the futures markets, and create systemic instability.

Clearing, Swap Dealer & Intermediary Oversight Request by Subprogram
($ in thousands)

Subprogram	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
Clearing Policy & Risk Surveillance	$11,412	45.00	$21,939	70.00	$10,527	25.00
Compliance & Registration	3,443	14.00	6,163	20.00	2,720	6.00
Audit & Financial Review	15,605	63.00	28,451	92.00	12,846	29.00
Total	$30,460	122.00	$56,553	182.00	$26,093	60.00

Dodd-Frank Included Above in Clearing, Swap Dealer & Intermediary Oversight Request
($ in thousands)

Program Activity	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
Dodd-Frank	$0	0.00	$19,496	60.00	$19,496	60.00
TOTAL	$0	0.00	$19,496	60.00	$19,496	60.00

Clearing, Swap Dealer & Intermediary Oversight FY 2012 Budget by Subprogram

Subprogram	Percentage
Clearing Policy & Risk Surveillance	39%
Compliance & Registration	11%
Audit & Financial Review	50%

Clearing, Swap Dealer & Intermediary Oversight Request by Goal
($ in thousands)

Outcomes	FY 2011		FY 2012		Change
	Budget	FTE	Budget Request	FTE	Budget	FTE
GOAL ONE: Protect the economic functions of the commodity futures, options and swaps markets.
1.1 Futures, options and swaps markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity.	$1,008	4.00	$2,029	6.50	$1,021	2.50
1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality.	1,009	4.00	2,029	6.50	1,020	2.50
Subtotal Goal One	$2,017	8.00	$4,058	13.00	$2,041	5.00
GOAL TWO: Protect market users and the public.
2.1 Violations of Federal commodities and swaps laws are detected and prevented.	$1,862	7.50	$3,251	10.50	$1,389	3.00
2.2 Commodity professionals meet high standards.	7,117	28.50	14,309	46.00	7,192	17.50
2.3 Customer complaints against persons or firms falling within the jurisdiction of the Commodity Exchange Act are handled effectively.	248	1.00	309	1.00	61	0.00
Subtotal Goal Two	$9,227	37.00	$17,869	57.50	$8,642	20.50
GOAL THREE: Foster open, competitive, and financially sound markets.
3.1 Clearing organizations and firms holding customer funds have sound financial practices.	$7,161	28.50	$15,116	48.50	$7,955	20.00
3.2 Commodity futures, options and swaps markets are effectively regulated.	8,446	34.00	13,314	43.00	4,868	9.00
3.4 Regulatory environment responsive to evolving market conditions.	3,609	14.50	6,196	20.00	2,587	5.50
Subtotal Goal Three	$19,216	77.00	$34,626	111.50	$15,410	34.50
TOTAL	$30,460	122.00	$56,553	182.00	$26,093	60.00

Clearing, Swap Dealer & Intermediary Oversight FY 2012 Budget by Goal

Goal	Percentage
Goal One	7%
Goal Two	32%
Goal Three	61%

 

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