By John Kemp
LONDON, June 7 Politics is brutal. Just how
brutal became apparent Wednesday when Wall Street teamed up with
Republican lawmakers in the U.S. House of Representatives to
emasculate the Commodity Futures Trading Commission (CFTC) by
slashing its budget while imposing new requirements for
cost-benefit analysis and rule-writing.
The aim is to stop the agency implementing the 2010
Dodd-Frank Wall Street Reform and Consumer Protection Act by
depriving it of resources needed to draft and oversee new
regulations, while erecting tougher barriers to writing new
The agriculture appropriations bill for fiscal 2013,
approved by a House Appropriations subcommittee on June 6 along
party lines, would cut the agency's funding next year by $25
million (12 percent) compared with fiscal 2012. This is a
massive $128 million (40 percent) less than the administration
requested in its budget proposals.
The CFTC has seen its allocation cut more than any other
agency funded in this appropriations bill. In total, the bill
provides $19.4 billion of discretionary funding, just $365
million below last year's level (a cut of 1.8 percent) and $1.7
billion less than the president requested (an overall reduction
of 8 percent).
While popular agencies and programmes, such as agriculture
research, rural development and food inspection, suffered only
small cuts, or had their requested budgets approved in full, the
CFTC's request has been savaged as legislators, lobbyists and
conservative legal scholars mount a coordinated effort to block
more regulation of commodity and swaps markets
WALL STREET'S PRIORITIES
The appropriations bill provides a fascinating insight into
the issues preoccupying Wall Street lobbyists and their
The bill provides total funding of $180,405,000 for the 12
months running from October 2012 to September 2013.
Of this total no more than $25,000 can be spent on expenses
for consultations and other meetings hosted by the commission
with foreign governmental and regulatory officials. For all the
emphasis financial services firms pay to the importance of
coordinating regulations between the United States, the EU and
other regulators, the bill severely restricts the amount of
money available for it.
More seriously, the bill earmarks $32 million for purchasing
information technology. Commissioner Scott O'Malia, who leads
the commission's technology advisory committee, has pushed for
more to be spent on upgrading the CFTC's antiquated computer
systems to cope with workload increases and improve market
surveillance in a world of increasingly automated and
But the practical impact of reserving money for IT upgrades
is that there is less money for everything else, including the
professional staff needed to write rules, undertake market
surveillance and take enforcement actions.
The subcommittee bill would also require the chairman of the
commission to report to Congress within 30 days with "a schedule
of implementation and sequencing of all rules, regulations, and
orders .. including all Commission cost benefit analyses and
studies relied upon in the formulation of any regulations" on
The authors seem particularly concerned about CFTC
rulemaking in three areas: swap dealers (Section 716 of
Dodd-Frank), position limits (Section 737), and the registration
of commodity trading advisors (Section 4m of the Commodity
Position limits are already being challenged in federal
court by the International Swaps and Derivatives Association
(ISDA) and the Securities Industry and Financial Markets
Association (SIFMA) on behalf of Goldman Sachs, JPMorgan,
Barclays, Morgan Stanley and other commodity traders.
Part of the challenge centres on whether the commission must
prove that limits are "necessary" to diminish, prevent or
eliminate excessive speculation. The challengers argue that the
commission has not conducted a proper quantitative analysis to
justify its decision to impose limits under the law.
Commissioner O'Malia has blasted his colleagues for not
conducting a proper quantitative cost-benefit studies before
writing and imposing new regulations required by Dodd-Frank; his
concerns are clearly shared by the bill's authors
ANALYSIS BUT NO RESOURCES
On May 31, O'Malia spoke to an industry conference on the
subject of "Smart regulatory reform and the perils of
"I have been very critical of the Commission's cost-benefit
analyses. The Commission previously minimized the role of
performing complete cost-benefit analyses by turning the process
into an administrative, check-the-box exercise," O'Malia said.
"(T)here are three critical areas where the Commission can
and must improve its cost-benefit analysis. First, the
Commission should develop a realistic and status quo ante
baseline. Second, the Commission should develop replicable
quantitative analysis, which will allow it to make informed
decisions about the market. Finally, the Commission should
develop a range of policy alternatives for consideration."
Outlining his approach for a more effective approach in
future, O'Malia advocated "smart regulatory reform."
"Smart regulatory reform consists of three key elements.
First smart regulatory reform is based on facts that are
uncovered through comprehensive research and robust and frequent
discussions with industry. Second ... thorough economic analysis
... The Commission cannot ignore the importance of its
cost-benefit analysis when prescribing regulations. Finally
smart regulatory reform should provide market participants and
others affected persons with legal certainty."
O'Malia's concerns about the quality of CFTC rulemaking echo
those expressed by the industry.
Unfortunately, the appropriations bill will make sure that
the CFTC does not have the resources to do any proper
The president's request asked for an extra $103 million of
funding in fiscal 2013, which would pay for the equivalent of
305 extra full-time employees, taking total staffing up to
The biggest budget and staff increases would have been for
data acquisition, analytics and surveillance (an extra 65
staff), examinations (72 staff), enforcement (50), economic and
legal analysis (24) and rule-writing (41).
But all these proposed increases have been denied funding.
It is hard to see how the commission can be expected to develop
highly detailed estimates for the costs and benefits of all its
rules when there are only 64 staff working on legal and economic
analysis and another 10 working on international policy
These numbers will come under further pressure as a result
of the proposed reduction in the commission's budget and the
decision to earmark a large chunk of funding for new computer
systems. The commission is now supposed to oversee the vast OTC
swaps market with fewer staff and less funding than it had when
it was only charged with policing exchange-based futures.
At yesterday's budget hearing, apparently without irony, the
House appropriations subcommittee chairman faulted CFTC
oversight of collapsed dealer MF Global, claiming "they were
asleep on the job," and saying the agency had been tardy in
implementing Dodd-Frank and slow in developing electronic
monitoring of markets.
Now the CFTC is meant to provide more vigorous oversight and
better rules with fewer staff.
It is hard not to see the industry's calls for smarter
regulation and more cost-benefit analysis, while pushing
lawmakers to cut the agency's funding, as deeply cynical.
For all the high-sounding calls for a better and more
thoughtful approach to crafting rules, in practice smarter
regulation appears to mean no or ineffective regulation.