Technology to ease CFTC budget concerns

A greater reliance on technology in the Commodity Futures Trading Commission’s market oversight function will be critical in helping the regulator meet its mandate, a former Commission chief economist has said, as the process of expanding the Commission’s budget formally begins.

A greater reliance on technology in the Commodity Futures Trading Commission’s (CFTC) market oversight function will be critical in helping the regulator meet its mandate, a former Commission chief economist has said, as the process of expanding the Commission’s budget formally begins.

The Obama Administration has sought to grant the CFTC a rise in its annual operational budget to US$280 million, from its current level of US$215 million, in a submission to Congress this week that was described by one commissioner as inadequate.

Critical reforms to the derivatives industry within the Dodd-Frank Act has expanded the CFTC’s coverage to include OTC derivatives – a US$630 trillion market currently adapting to trading on exchange-like platforms and central clearing. In addition to other Dodd-Frank reforms, commissioner Bart Chilton said this had increased the CFTC’s oversight work 40-fold.

Jim Overdahl, partner at consultancy Delta Strategy Group and former chief economist of the CFTC, said despite the strain on the Commission, the ability to use technology to police markets could reduce the overall costs and resources needed to oversee electronic markets.

“One important aspect to this debate is the use of technology by the CFTC as it now has a greater ability to monitor markets electronically,” Overdahl told theTRADEnews.com.

“The entire trade lifecycle can be monitored electronically, giving the CFTC the ability to drill down into a specific period of time if it is alerted to suspicious behaviour,” he said.

Overdahl said President Obama’s budget submission was the first step in what could be a long road towards a final CFTC budget that is approved by Congress.

“There is a strong feeling in the industry that the CFTC should have adequate funds to fulfill its market oversight and policing function, but it’s a difficult task to identify a precise dollar figure for this.”

The CFTC’s Chilton said the president’s request for US$280 million, which was a US$35 million reduction from last year’s request, would be insufficient.

“The CFTC was given a large swath of the swaps market oversight and regulation – tens of trillions of dollars in formerly dark market trading,” he said. “But we have not received a commensurate increase in funding to bring needed light to these markets, despite being assigned the authority to do so by Congress. We have the mandate, but not the money, to do the job.”

In the president’s budget outline, the Securities and Exchange Commission (SEC) would receive an increase in its operational budget to US$1.7 billion, up slightly from current level of US$1.35 billion.

The Republican-controlled House of Representatives is expected to put forward a reduced figure for both the CFTC and SEC budgets, although the Democrat-controlled Senate has said it will not pass a budget this year. Under a deal agreed in December between both houses, funding for the CFTC and SEC is set at current levels for 2014 and 2014.

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