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Ivy Schmerken
Ivy Schmerken
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CFTC Budget Crunch: Can it Oversee Swaps Market?

Commissioner Scott O' Malia said CFTC has made no investment in market surveillance systems, despite increased Dodd-Frank supervisory role.

While Congress has pushed for derivatives reform under the Dodd-Frank legislation, the Commodity Futures Trading Commission (CFTC) lacks the budget to invest in automated market surveillance systems and other technology necessary to oversee a complex swaps market.

I learned this while listening to CFTC Commissioner Scott O’Malia who delivered a speech at TabbForum’s OTC derivatives conference yesterday in New York City. The event drew 500 attendees from the buy and sell side who left their day jobs yesterday to pack into a Times Square conference hall.

So let me get this straight: The CFTC, the primary regulator charged with monitoring the swaps markets under the Dodd-Frank financial reform Act, along with the Securities and Exchange Commission (SEC), doesn’t have the money to implement automated market surveillance systems. Yet the purpose of Dodd-Frank is to bring transparency into the opaque swaps markets to prevent another financial crisis that led to the 2008 collapse of Bear Stearns and the bankruptcy of Lehman Brothers.

So while big brokers — such as Barclays, Goldman Sachs and UBS— and big asset managers like Blackrock and D.E. Shaw—represented on the conference panels— are spending hundreds of millions of dollars on technology for connectivity to clearing houses and swap execution facilities (SEFs) to be in compliance with Dodd-Frank, their regulator is not going to have the risk management tools to watch over their trading.

What’s the point of doing anything?

Yet, O’ Malia, a Republican, who has reconvened the CFTC’s dormant Technology advisory Committee, recognizes the importance of technology.

“Technology is going to be the cornerstone of the new market structure and I’m happy to lead the ground breaking,” he said in his speech. “It’s an opportunity for the CFTC to make a huge leap and carry out the surveillance of the Dodd Frank Act,” he said.

Some leap!

Instead, the agency cut $11 million from its technology budget and is making no investment in technology despite increased surveillance and supervisory responsibilities.

“Drastic cutbacks” have led the agency to “slowdown automation of trade surveillance and automation of forms. “ In addition, O’ Malia said the CFTC would run out of data storage room by October.

The agency’s budget is set at $168.8 million. According to Bloomberg News, CFTC Chairman Gary Gensler has requested that Congress increase the agency’s budget from $169 million to $261 million for the current fiscal year to help implement Dodd-Frank rules.

However, the CFTC did spend $15 million hiring people to staff the agency, leaving one to doubt whether this decision should have been balanced with technology.

“Putting people ahead of technology will not ensure our compliance with Dodd-Frank, and it will certainly not ensure that we do so in the most cost-effective manner,” said O’ Malia.

Yesterday U.S. Representative Barney Frank, a Massachusetts Democrat, warned that derivatives regulations required by Dodd-Frank face a “potential undoing” because of Republican proposals to cut spending for the CFTC and SEC, as reported by Bloomberg News.

However, O’Malia told the Wall Street crowd that the CFTC was not being treated unfairly. “We made some hiring decisions that put technology as a secondary decision. We’re going to present this budget and it’s weak in technology,” he continued.

“I’m very concerned that we didn’t’ put enough investment in technology,” said O’ Malia. "They are going to have some say in how we prioritize that funding,” he added, referring to Congress.

Meanwhile, Republicans are not convinced that throwing more money at the regulatory agencies will necessarily improve oversight. House Financial Services Committee Chairman Spencer Bachus is examining the SEC’s budgetary request to look for “wasteful, inefficient and outdated regulatory programs,” according to a statement released late yesterday, noted in the Bloomberg article. Bachus was quoted by Bloomberg as saying that past experience has shown that "a few investigative reporters" are as good as employees of the SEC at finding financial wrongdoing.

Stay tuned. This issue seems to be heating up at the same time that the CFTC and SEC are engaged in writing hundreds of rules necessary to implement the Dodd-Frank financial reform act. So far the CFTC has published about 732 pages in the Federal Register and is halfway through the rule making, said O’Malia.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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