Introduction
T his document presents the CFTC’s Strategic Plan for the period FY 2011 through FY 2015. It is prepared in accordance with the requirements of the Government Performance and Results Act (GPRA) and presents the CFTC’s long-term strategic goals and objectives as well as near-term strategies for meeting its commitments under the CEA.
Congress created the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The Commission’s mandate was renewed and/or expanded in 1978, 1982, 1986, 1992, 1995, 2000, 2008, and 2010. The Dodd-Frank Act significantly broadened the CFTC’s regulatory authority to include the OTC derivatives, or “swaps”, markets. The CFTC’s short and long-term goals include significant rule-writing and implementation in the swaps marketplace.
The CFTC was established to assure the economic utility of the futures markets by encouraging competitiveness and efficiency; protecting market participants against fraud, manipulation, and abusive trading practices; and ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk. The CFTC will spend the next year bringing similar protections to the OTC derivatives marketplace.
Derivatives have been around the United States since the Civil War, when grain merchants came together to hedge the risk of changes in the price of corn, wheat, and other grains on a central exchange. These derivatives are called futures. Nearly 60 years and a financial crisis—the Great Depression—after they first traded, Congress brought Federal regulation to the markets. It wasn’t until the 1930s that the CEA, which created the CFTC’s predecessor, became law. At the time the CFTC was established in 1974, the vast majority of futures trading took place on commodities in the agricultural sector.
Over the years, the futures industry has become increasingly diversified. While agricultural interests continue to use the futures markets to lock in prices for their crops and livestock, highly complex financial contracts based on interest rates, foreign currencies, Treasury bonds, securities indexes, and other products far exceed agricultural contracts in trading volume. In fact, only about eight percent of on-exchange commodity futures and options trading activity occur in the agricultural sector, while financial commodity futures and option contracts make up approximately 79 percent of trading activity on futures exchanges. Other contracts, such as those on metals and energy products, make up about 13 percent.
The increase in trading activity, number of participants, and complexity and number of contracts available for trading has transformed the futures marketplace into a $40 trillion industry. The rapid evolution in trading technologies, cross-border activities, product innovation, and competition has made the futures markets an integral and significant part of the global economy. In addition to the rapid growth of the futures marketplace, the global economy has also seen the development of a new derivatives market—the OTC swaps market. The first OTC derivative transaction took place in 1981. Since then, the swaps market has grown to $300 trillion notional amount in the United States. The emergence of this new marketplace has brought new challenges to the financial regulatory system. The Dodd-Frank Act authorizes the CFTC to bring regulation to the OTC marketplace. Implementing that legislation will remain a significant goal of the Commission in the next few years. The Commission must remain vigilant in its transformation management and deployment of technology to ensure it is well positioned, organized, and aligned with the capacity and capability to accomplish the implementation of the Dodd-Frank Act and achieve success in all aspects of its expanded mission.
In summary, the CFTC regulates a futures and options industry that increased from 580 million contracts in 2000 to more than 3.1 billion contracts in 2010. The value of customer funds held in Futures Commission Merchants Accounts, during the same period, increased from $56.7 billion to more than $170.1 billion, and the value of these contracts is notionally estimated at $40 trillion. As noted, with the passage of the Dodd-Frank Act, the CFTC is tasked with regulating the swaps markets with an estimated notional value of approximately $300 trillion—roughly eight times the size of the regulated futures markets.
To address the scope of the swaps marketplace and ensure that the CFTC is well-situated to fulfill its expanded mission of overseeing swaps markets, the CFTC will need to reorganize. The Commission is committed to implementing the reorganization in the near term to better implement the Dodd-Frank Act. While the details remain to be worked out, some aspects of this reorganization are already clear. First, the CFTC will create a new group for oversight of swap dealers and intermediaries. This group will report to the Chairman’s office, and will facilitate standing up the new regulatory regime for the swaps marketplace by creating a group whose primary focus is on the regulation and oversight of swap dealers. It will also provide consolidated oversight of other regulated intermediaries, as well. Exact details on the transfer of responsibilities from existing divisions and offices remain to be worked out.
Second, as outlined in the Strategic Plan, technology will play a critical role in leveraging financial and human resources as the CFTC executes its expanded oversight and surveillance responsibilities over both the futures and swaps markets pursuant to the Dodd-Frank Act. Accordingly, the Commission will reorganize its technology programs by establishing a new group reporting to the Chairman’s office for the collection, management, and some analysis of data. This group will be staffed by personnel drawn from multiple disciplines and existing divisions and offices, and will facilitate the improved oversight and enforcement of the derivatives markets through the use of technology and data. It will also serve as the primary interface for market participants in adapting to the new data standards and reporting requirements for market data required under the Dodd-Frank Act. Exact details on the transfer of responsibilities from existing divisions and offices remain to be worked out.
The CFTC’s current funding is far less than what is required to properly fulfill its significantly expanded role. The CFTC has requested additional funds, and without the requested resources the Commission may not be able to meet its strategic goals, nor its statutory and regulatory obligations. Simply stated, the degree of success the CFTC will have in achieving the goals and objectives in this Strategic Plan depends upon its ability to secure funding necessary to support its expanded mission and necessary transformation.