The Commodity Futures Trading Commission-a regulator entrusted with new powers under the Dodd-Frank Act-is arguing that it simply does not have the money to do its job. Chairman Gary Genlser routinely makes the pitch for more cash. He told an audience last week that "the CFTC is a good investment for the American public." He explained, "It's a good investment to ensure the country has transparent and well-functioning markets." That investment pitch sounds compelling, but-as with all requests for money-it merits a closer look.
The CFTC's fiscal year 2013 budget is approximately $200 million. The President has asked for a more than 50 percent increase to bring the agency to $315 million for fiscal year 2014. In assessing this number, it's important to remember that the CFTC gets substantial help from its frontline regulatory partner, the National Futures Association, which regulates participants in the futures and swaps markets. The mandatory membership association's responsibilities-on which it spent more than $48 million in 2012-include registration of market participants, compliance monitoring, and enforcement. The CFTC is also assisted in its oversight efforts by regulated exchanges and other entities with self-regulatory mandates.
Chairman Gensler has cited enforcement as an area in which more money is needed. His concerns for that program's budget were echoed by former enforcement director David Meister as he left the agency last week. He told the Wall Street Journal that because the agency had limited resources, it had to pass on certain cases, including not charging two of the traders involved in the JPMorgan London Whale debacle. Leaving aside the propriety of a CFTC staffer hinting that the two ought to have been charged (a decision that rests with the CFTC commissioners), not pursuing cases against two people who have already been charged by the Department of Justice and the Securities and Exchange Commission does not seem like a big loss. To the contrary, spending the money to go after them would have been a waste of CFTC resources.
The chairman has also cited the need for "surveillance staff to actually swim in the new data pouring into the data repositories." A staff awash in data without the tools to analyze them has been a perpetual problem at the CFTC. As Commissioner Scott O'Malia has repeatedly emphasized, the agency needs to employ "automated surveillance [as] the foundation of its oversight and compliance program." Without the right technology, CFTC swimmers might find themselves swimming in the wrong lane. The chairman's emphasis on adding new employees without first addressing the agency's technology deficiencies is misplaced.
The budget request itself asks for an approximately 50 percent increase in the international policy coordination staff. That increase is likely driven in part by the CFTC's repeated clashes with foreign regulators over who is entitled to set rules for foreign markets. The CFTC believes that it is best suited for the task. Foreign regulators have regulatory plans of their own. In September, the European Commission's Michael Barnier sent another installment in the series of letters from foreign regulators. This one asked the CFTC to delay its swap execution facility rules, which could adversely affect global markets. If the CFTC had worked harder to craft a reasonable way to rely on the efforts of foreign regulators, it would have been able to spare its own regulatory resources for domestic use.
Another way the CFTC could economize is to make more informed decisions. The CFTC has repeatedly rushed into rulemakings without the necessary economic analysis to guide its choices. The predictable result is lawsuits and unintended consequences as rules roll out. The CFTC's decision last week not to proceed with its appeal of a court's rejection of its position limits rule was a step in the right direction, but was paired with the uninformed reproposal of the rule. When the original rule was adopted, one of the commissioners voting for it worried about the lack of economic analysis in support of the rule and expressed his "fear ... that position limits are, at best, a cure for a disease that does not exist or a placebo for one that does. At worst, position limits may harm the very markets they are intended to protect." Yesterday, the CFTC proposed a replacement for the rule the court had thrown out, but once again did so without the necessary data and analysis to ensure that it would not harm the markets.
Limited budgets force agencies to make choices and set their regulatory, compliance, and enforcement priorities carefully. CFTC employees have worked very hard over the past five years. Unfortunately, much of their time and effort was devoted to matters that should not have been undertaken or should have been undergirded with better data and rigorous analysis. A budget that is smaller than the CFTC desires might help the agency to think about its priorities more carefully than it has in recent years.