Following on from the recent high profile discussions within the US regulatory community about challenges facing the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) regarding funding over the last few weeks, president Barack Obama has this week proposed to include user fees in next year’s budget for the regulators. The fees will result in additional costs being imposed on the industry to support the introduction of the new legislation under the Dodd Frank Act, which if CFTC commissioner Scott O’Malia has his way, could include the establishment of a new division of market data collection and analysis.
The new fees would be for firms under supervision by the CFTC, ergo those active in the OTC derivatives markets will be hit hardest. They were first suggested last month by a number of CFTC commissioners including Bart Chilton, who commented this week: “There is no question in my mind that if the choice is between user fees or inadequate resources to fund oversight and enforcement, then we need to pull the trigger on user fees. Those who suggest that we can do the job of regulating hundreds of trillions in additional trading on our current budget are either misinformed, uniformed, or they look at inadequate funding as a way to starve the agency in the hope that regulatory reforms will be delayed or derailed. My message is simple: we needed the reform bill and now we need resources to make it work. We can’t make these needed regulatory changes with spare change.”
SEC chairman Mary Schapiro added: ““These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies. By law, the 2012 funding is entirely offset by transaction fees such that the SEC budget will not add to the deficit.”
Certainly, Chilton and Schapiro have a point in terms of resources and their impact on the regulators being able to carry out their duties. Last month, commissioner O’Malia highlighted the seriousness of the funding issue by indicating that the CFTC is likely to reach data storage breaking point by October, when it will run out of space to store data received from the industry for oversight purposes.
All of this is the result of the fact that the CFTC and the SEC are both facing a freeze in funding this year at 2010 levels due to a shortfall in government resources. The regulators have therefore been forced to prioritise their investments and thus far, chairman Gary Gensler has focused on hiring staff rather than new technology; a decision that has not gone down well with O’Malia.
However, user fees are also not likely to prove popular with the industry, which is already facing a barrage of new regulatory requirements and related costs. Kenneth Bentsen, executive vice president of public policy and advocacy at industry association Sifma, for example, this week raised that very point: “We’re a little concerned given that the industry and market participants are already going to have to absorb additional costs related to the new rules under Dodd Frank.”
It would also mean the imposition of additional fees on top of those that will be introduced next year to support the running of the US Treasury’s new Office of Financial Research (OFR) and its reference data collection utility.
On this note, in terms of what the additional fees will enable the regulators to invest in, O’Malia has continued to bang the drum for investment in technology and a new market data utility to support the work of the CFTC. He has frequently publically criticised Gensler’s choice to throw people at the problem over the last few months and this week again reiterated smart technology investment as an alternative to increasing the number of full time staff at the regulator.
He noted that the CFTC has new responsibilities under Dodd Frank to oversee both the swaps and futures markets and to create an integrated surveillance programme, which requires investment in technology. “Individuals are simply not equipped to identify trading aberrations or manipulative schemes in futures (and swaps) markets dominated by algorithmic and high frequency traders that are able to execute trades in milliseconds. The Commission must redirect itself and rely on the sophistication of automated surveillance systems if we are to keep pace with the markets we oversee,” he contended.
“I support the reorganisation of the Commission to establish a new division of market data collection and analysis. The new office will be grounded in surveillance and database technology, which will support the mission needs and the needs of all of the other divisions in order to promote market integrity and mitigate systemic risk. This budget request does not contemplate this type of reorganisation, nor does it break out funding for new surveillance capabilities from the standard operations-based technology needs of the Commission for hardware such as laptops, copiers, and telephones,” he added. This CFTC utility would be in addition to the OFR, although if both were realised, one would hope that they would work in concert with each other.
O’Malia has therefore sent out a plea to Obama and his fellow regulators to rethink the hiring of an additional 316 new staff and 218 new contract staff as requested in the president’s budget. Instead, he indicated the CFTC should first look to implement an “aggressive technology investment strategy”, with a data utility as a key first agenda item.