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Thursday, April 23, 2015

CFTC Asks Congress For The Right To Self Fund By Charging Fees

Last week leaders at the Commodity Futures Trading Commission (CFTC) were invited to provide testimony before Congress on the reauthorization of the CFTC. At the heart of the issue as to whether or not reauthorization should occur is funding, but the backdrop is political. Advocates of the Dodd-Frank bill and other financial regulatory measures herald the CFTC for the work it's doing, while others, those that oppose financial regulation would rather see it defunct.

CFTC Commissioner Sharon Y. Bowen was among those that provided testimony and she gave no illusions about her views on the subject. She believes the CFTC is indispensable as a financial regulatory leg and believes the current mandate, while critical to the markets, is not doable.

"First," Bowen starts out, "I would like to express my gratitude to our extremely hard-working staff. Despite suffering from significant funding and resource constraints and the massive new mission of regulating and policing the swaps market, their performance has been exemplary. I remain impressed with their invaluable expertise and professional commitment to fulfilling our vastly increased Congressional mandate."

"Second," Bowen continues, "that while our staff can accomplish a great deal with limited resources, the agency desperately needs additional funding and staff to carry out our mission of regulating and protecting the swaps and futures markets."

In a nutshell, Bowen's argument is that Congress has increased the responsibilities of the CFTC without increasing the budget proportionately.
While some of us may disagree about the state of systemic risks to the swaps and futures markets or the wisdom of particular Dodd-Frank requirements, I hope we can all agree on this: the Commodity Futures Trading Commission should be reauthorized. Its role in overseeing the derivatives market is critical to protecting global financial stability and the U.S. economy and thus assuring the American people that their voices and interests are being heard.
What Bowen is up against isn't doubt that the agencies staff is "the best". She's up against a political machine that can only be for or against financial regulation, which puts the CFTC in a difficult position. What Bowen and the rest of the Committee must do is pick away at the two primary arguments against financial regulation: 1) it impedes capital formation 2) it costs too much for a nation in debt.
 
In terms of capital formation, Bowen makes it clear what the CFTC has accomplished. She also reminds the audience that it was Congress that gave the CFTC increased power due to the Great Recession. In fact, the last time Congress reauthorized the CFTC was in August 2008, just 9 months into the recession. In other words, the nation, at least in part, blamed the recession on the lack of regulatory oversight in the derivatives market.

Bowen then offers the following self-funding solution as a way to get around the associated need to request additional funding from Congress:
Much has been said about the topic of funding of course, but I believe a little more discussion is needed. Frankly, I believe it would be prudent to establish some kind of mechanism that allows the Commission to self-fund. We are grateful for the $35 million increase in appropriations we received in last December’s legislation to fund the government, which raised our annual budget from $215 million in fiscal year 2014 to $250 million for fiscal year 2015. However, that $35 million is a drop in the bucket considering the scope of our mission to regulate the swaps and futures markets.
Who can argue with self-funded, but where will the funds come from. The answer to this was less apparent.
...if there was some way in this reauthorization to allow the CFTC to set fees on registrants or a de minimis fee on some trades, as the SEC is empowered to do, that would be extremely helpful.
She goes on to say,
Allowing the CFTC to fund itself via the collection of extremely small fees from industry would effectively be allowing the industry to pay a de minimis amount of money to receive substantially faster service. Such a funding rubric would have the added benefit of no longer asking American taxpayers to directly foot the bill of setting regulations on the swaps and futures markets. I know that bills have been introduced during the last few Congresses that grant us some kind of fee-setting authority, and I think the Wall Street Accountability Through Sustainable Funding Act introduced by Reps. DeLauro, Welch, and Courtney last Congress is the best one I’ve seen to date.
What Bowen is suggesting is the authority to set a fee, which has evidently already made its way into several bills, on all trades, or only fees on trades with higher risks, or even annual fees for registrants.

In 2015, the CFTC budget is $250 million, an increase of $104 million since 2009. That's $250 million to regulate a $430 trillion market. "To use the language of finance," Bowen says, "the government is currently making an investment that is leveraging one dollar of regulatory funding for every $1,720,000 of the swaps and futures markets."

In May 2009, the CFTC had 500 people; in 2014 it had 647, an increase of 29%; despite a 6% cut in staffing levels over the past two years. Over the same time period the Commission brought in more than $6 billion in fees and penalties. It would seem an easy answer to the self-funding mechanism is to simply take a larger percentage of every order/judgement made in-house instead of taking a fee from the entire industry -- let the violators pay for the service.
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