The Commission focuses on issues of market integrity, seeking to protect: 1) the economic integrity of the markets so that markets may operate free from manipulation; 2) the financial integrity of the markets so that the insolvency of a single participant does not become a systemic problem affecting other market participants; and 3) the operational integrity of the markets so that transactions are executed fairly and proper disclosures to existing and prospective customers are made.
Performance Results for Goal Three
In fostering open, competitive, and financially sound markets, the Commission’s two main priorities are to avoid disruptions to the system for clearing and settling contract obligations and to protect the funds that customers entrust to FCMs. Clearing organizations and FCMs are the backbone of the clearing and settlement system; together, they protect against the possibility that the financial difficulties of one trader may become a systemic problem for other traders.
Commission staff members also work with the SROs and NFA to monitor closely the financial condition of FCMs through review of various monthly and annual financial reports and notices of reportable events. The SROs and NFA also conduct audits and daily financial surveillance of their respective member FCMs, reviewing and assessing each FCM’s exposure to losses from large customer positions that it carries. As an oversight regulator, the Commission not only reviews the audit and financial surveillance work of the SROs and NFA, but also monitors the financial strength of FCMs directly, as appropriate. In addition, the Commission periodically reviews clearing organization procedures for monitoring risks and protecting customer funds.
Protecting Customer Funds
Staff members monitor the operations of registrants in possession of customer funds through a number of financial oversight and risk surveillance activities. One of the oversight activities involves the review of regulatory notices that FCMs are required to file with the Commission. These notices disclose predefined reportable events that may indicate a financial issue with the firm (e.g., under-segregation or undercapitalization), which warrant further staff analysis. Staff also review monthly financial reports submitted by FCMs, review annual reports of FCMs certified by independent public accountants, and conduct on-site examinations of FCMs. In FY 2009, staff processed monthly and annual financial reports filed by approximately 140 FCMs, and performed examinations and on-site reviews of several FCMs to assess their compliance with the Commission’s financial requirements, including the Commission’s minimum capital and customer fund protection requirements.
The financial and risk surveillance activities performed by staff continue to take on greater importance due to the ongoing market volatility and its impact on market intermediaries and the clearing system. During FY 2009, staff engaged in frequent contact with traders, firms, and clearinghouses to monitor the potential for, and instances of, market volatility, market disruptions, or emergencies that had the potential to impact: 1) the proper capitalization of firms; 2) the proper segregation of customer funds; and 3) the ability of financial intermediaries to make payments to a DCO in a timely manner. Staff also evaluated systemic risk.
As a result of these and other ongoing financial oversight and risk surveillance activities in FY 2009, there were no losses of regulated customer funds as a result of an FCM failure or the inability of customers to transfer their funds from a failing FCM to a financially sound FCM. The performance result indicates that the program’s objectives of ensuring sound financial practices of clearing organizations and firms holding customer funds, and the protection of customer funds are being met.
Oversight of SROs and DCOs
As a key aspect of assuring effective self-regulation, the Commission oversees futures industry SROs, which include exchanges and NFA, to ensure that they fulfill their responsibilities for monitoring and ensuring the financial integrity of market intermediaries and for protecting customer funds. Commission staff oversee, review and report to the Commission on SRO and DCO programs for monitoring and enforcing compliance with applicable provisions of the Act and Commission regulations, including the CFTC Core Principles, and with the SRO’s or DCO’s rules. The Commission employs a risk-based approach to its examination cycles of SROs and DCOs, i.e., both the scheduling and scope of the risk-based reviews are based on an analysis of the underlying risks to which an institution is exposed and the controls that it has in place to address those risks.
In FY 2009, the agency committed substantial staff resources to the examination of selected SROs. Division of Clearing and Intermediary Oversight (DCIO) staff completed two reviews to assess the financial surveillance programs of SROs and a review to assess an SRO’s arbitration program. In one examination DCIO staff focused on an SRO’s staffing levels, including the appropriate training of SRO staff, and the SRO’s review of FCM financial statements and regulatory notices filed by FCMs. The second examination focused on the SRO’s staffing levels, review of financial statements and regulatory notices, and FCM examination program. The staff’s review of the arbitration program focused on the SRO’s program for the resolution of disputes involving commodity futures and option contracts among public customers and market intermediaries. Staff are in the process of conducting a third review of an SRO’s financial surveillance program that will not be completed until FY 2010 and are finalizing a review of an SRO’s registration program that also will be completed in FY 2010.
In addition to reviews of SROs, DCIO staff completed three reviews of DCOs, one of them a joint review with the Division of Market Oversight (DMO), to assess the DCOs’ programs for compliance with certain CFTC Core Principles. Based on its reviews, staff determined that the SROs’ and DCOs’ programs were meeting the applicable requirements of the Act and Commission regulations. The performance results indicate that the Commission’s oversight program objectives of ensuring the financial integrity of market intermediaries and the protection of customer funds are being met.
The following table summarizes the FY 2009 investment and overall performance results for Strategic Goal Three. In addition, FY 2009 performance results are compared against the FY 2009 targets and FY 2008 actual results.
Strategic Goal Three
Ensure market integrity in order to foster open, competitive, and financially sound markets.
Annual Performance Goal Three
No loss of customer funds as a result of firms’ failure to adhere to regulations.
No customers prevented from transferring funds from failing firms to sound firms.
PERFORMANCE HIGHLIGHTS
Budget Authority
Performance Results
Percentage
$33,665
million
Met/Exceeded
100%
Not Met
N/A
Not met but improved over prior years
N/A
Results not demonstrated
N/A
2009 Performance Results
by Outcome Objectives and Performance Measure
Outcome Objectives and Performance Measures
Met/Not Met
Change (+/-) from
2009 Target
Change (+/-) from
2008 Actual
3.1 Clearing organizations and firms holding customer funds have sound financial practices.
3.1.1.a. Lost funds: Number of customers who lost funds.
Met
0
0
3.1.1.b. Lost funds: Amount of funds lost.
Met
$0
$0
3.1.2. Number of rulemakings to ensure market integrity and financially sound markets.
Exceeded
+1
+4
3.1.3. Percentage of clearing organizations that comply with requirement to enforce their rules.
Met
0%
0%
3.2 Commodity futures and option markets are effectively self-regulated.
3.2.1. Percentage of intermediaries who meet risk-based capital requirements.
Met
0%
0%
3.2.2. Percentage of self-regulatory organizations that comply with requirement to enforce their rules.
Met
0%
0%
3.3 Markets are free of trade practice abuses.
3.3.1. Percentage of exchanges deemed to have adequate systems for detecting trade practice abuses.
Met
0%
0%
3.3.2. Percentage of exchanges that comply with requirement to enforce their rules.
Met
0%
0%
3.4 Regulatory environment is flexible and responsive to evolving market conditions.
3.4.1. Percentage of CFMA Section 126(b) objectives addressed.
Met
0%
0%
3.4.2. Number of rulemakings, studies, interpretations, and statements of guidance to ensure market integrity and exchanges’ compliance with regulatory requirements.
Exceeded
+27
+22
3.4.3. Percentage of requests for no-action or other relief completed within six months related to novel market or trading practices and issues to facilitate innovation.
Met
0%
0%
3.4.4. Percentage of total requests for guidance and advice receiving CFTC response.