House Appropriations Subcommittee on Agriculture Hearing on CFTC FY2015 Budget
AT TODAY’S HOUSE APPROPRIATIONS Subcommittee
on Agriculture, Rural Development, FDA, and Related Agencies hearing, Mark
Wetjen, Acting Chairman of the Commodity Futures Trading Commission (CFTC),
discussed his agency’s FY 2015 budget.
Opening Remarks
In his opening remarks, Chairman Robert
Aderholt (R-Ala.) noted that unlike many agencies, the CFTC’s budget has
increased for seven consecutive years, and said he was happy to see the budget
request for 2015 decrease to $280 million.
He noted that the CFTC has finished the
majority of rulemaking required by the Dodd-Frank Act, and said it should be
able to implement regulations without further funding increases.
In his opening remarks, Ranking Member Sam
Farr (D-Calif.) said increasing funding for technology is wise, but with
regards to the CFTC’s enforcement programs, you cannot replace “cops” with
technology.
Witness
Testimony
In
his testimony,
Wetjen said that the CFTC’s job is to monitor the derivatives markets and
enable these markets to help create jobs and grow the economy. He claimed that,
“when not overseen properly, irregularities in
these markets, or failures of firms intermediating in them, can severely and
negatively impact the economy as a whole and cause dramatic losses for
individual participants.”
Wetjen then added that “the unfortunate reality is that, at
current funding levels, the Commission is unable to adequately fulfill the mission
given it by Congress.”
While acknowledging that the CFTC has seen budget increases
the last several years, Wetjen said they have not kept pace with the growth of
the Commission’s responsibilities.
Effective oversight of the futures and swaps market, Wetjen
continued, requires additional resources in both personnel and information
technology.
Question
& Answer
Aderholt
noted that the CFTC has seen a 91% increase in funding since 2008, yet
continues to report that it is “just getting by.” Given these past increases,
and the amount of progress already achieved, he asked why the CFTC would need
an additional 30% more funding.
Wetjen
replied that the scale of the markets regulated by the CFTC has grown
significantly, and the number of entities either directly or indirectly
overseen totals over 68,000. In addition to these increased responsibilities,
he added, there is regular, organic growth in the marketplace as well.
Aderholt
then asked for Wetjen’s rationale for the president’s decreased budget request
for 2015.
In
response, Wetjen said that the CFTC’s budget request focuses on the agency’s
three core functions of examination, surveillance of the marketplace, and
enforcement. The important question to ask, he said, was whether the CFTC was
adding enough staff to satisfy those three areas. Wetjen said the 2015 budget
request will put the agency on a strong footing while taking into account
Congress’s budget resolution.
Farr
then asked for a percentage change in increased responsibilities and noted that
the CFTC has just 40 more employees than it had twenty years ago, despite
Congress having passed Dodd-Frank, which has given the agency far more
responsibility.
Wetjen
said that the number of entities registered with the CFTC that it oversees and
regulates has grown by 40 percent. The amount of customer funds held by
clearinghouses has also increased, he said, and added that these customer funds
must be kept safe.
Farr
continued by asking whether the CFTC has put enough money into its enforcement
functions.
Wetjen
answered that with the agency’s added responsibilities, growth in the
enforcement division hasn’t grown as quickly as it should have. The budget
proposal, he said, would get the CFTC to the minimum level of staff needed to
execute it three core responsibilities.
Rep.
Alan Nunnelee (R-Miss.) asked if the CFTC, because of decreased funding, would
supplement their funding with any types of user fees.
The president’s request references the possibility, Wetjen said, and if Congress is
willing to entertain the idea then the CFTC would like to be part of the
discussion. He added that he was open to considering anything to make sure the
agency has the technology and capital it needs.
Nunnelee
next asked about high-frequency trading and the CFTC’s actions to oversee and
regulate it.
The
use of computers and algorithms to increase the speed of training creates new
risk, Wetjen said. The CFTC put out a letter to the market asking whether
sufficient controls are in place and what could be done to limit risk from this
practice, he added.
Rep.
Sanford Bishop, Jr. (D-Ga.) asked about the CFTC’s international reach and
cross-border guidance, and whether the CFTC works with the Securities and
Exchanges (SEC) regarding the rule-making process.
Wetjen
said that his agency finalized its cross-border guidance last summer after a
long process that included soliciting comments from the marketplace. He said
the SEC is still working on their rules and that there has been much discussion
between the two agencies.
Rep.
David Valadao (R-Calif.) said financial regulators should recognize that the
use of computers to increase trading frequency makes it impossible for humans
to keep track of risk, so more technology at the CFTC is needed. Given this, he
asked why the CFTC’s surveillance and enforcement is not more cyber-based, and
why the budget request doesn’t include more increases in technology.
Wetjen
replied that the CFTC needs more staff and budgeting in general to fulfill its
three core responsibilities. He agreed that more investment in technology is
needed for new initiatives.
Rep.
Rosa DeLauro (D-Conn.) asked what areas are left out due to CFTC priorities and
what the agency could accomplish with more money.
Wetjen
said the CFTC’s enforcement division hasn’t grown, and that with fewer staff
there will be fewer enforcement matters that the division can take up. He
added that in order to respond to every referral that comes in to the
enforcement program, the agency has to have money.
DeLauro
followed up by asking if the CFTC could bring in more revenue with this added
money.
Wetjen
answered that the more matters that are brought, the more revenue there should
be.
Rep.
Kevin Yoder (R-Kan.) asked Wetjen for a status report on the staff advisory
that was put out in November, related to the CFTC’s cross-border guidance.
Wetjen
stated that the comments submitted would be reviewed in order to see how the
industry thinks the problems in the advisory should be addressed. He noted that
the CFTC could “consider other things” and would be “open to considering
different ways” to handle the guidance but that they want to make a decision before
the no action release expires in September.
Yoder
then asked if the CFTC has enough authority to gather the information needed to
protect markets from fraud and manipulation.
“I
believe so,” said Wetjen. He continued that the agency is able to get any
information they need to pursue enforcement action if manipulation is taking
place.
Rep.
Jeff Fortenberry (R-Neb.) asked if Wetjen thought the derivatives markets are
broken or whether they function well.
Wetjen
replied that he did not believe they are broken and said while they function
reasonably well, there will be some adjustment as the market structure changes
during implementation of swaps regulations.
Fortenberry
went on to say that the purpose of the derivatives market is to hedge risk and
volatility, but that speculation in the market itself is undermining the
purpose of the market to decrease volatility and hedge risk.
Wetjen
replied that there has been an increase in volatility for several reasons,
including high-frequency trading.
Second
Round – Question and Answer
In
the second round of questions Aderholt asked why the CFTC needed a 30% budget
increase after their budget over the years had increased by 91%, when the
highest metric Wetjen had given in regards to trading volume for futures was a
40% increase in registered entities.
Wetjen
answered that the number of staff the CFTC has is currently insufficient, and
that the agency needs more people to keep entities honest and capable of
reasonable spot checks of registered entities. He added that based on the
numbers they have today, they are unable to do this. “We have tremendous
demands placed on the agency for clarifications, petitions, guidance, and
interpretation,” Wetjen added. He went on to say that there are a number
of demands on the international front.
Farr
followed up by asking what U.S. entities and companies want better regulation.
Wetjen
answered that most of the participants in the derivatives market think
confidence is built when there is sufficient oversight of the market.
Nunnelee
asked how the CFTC was going to regulate an increased number of firms if it is
requesting fewer resources.
Wetjen
replied that the requested funding level would be a “substantial increase”
above what they have now.
Bishop
said he is concerned that the agriculture markets will “get the short end of
the stick” due to the agency being underfunded.
Wetjen
agreed that agriculture markets have played a special role in the history of
the CFTC and the markets in general. He said that the agency is trying to be
mindful of special needs and issues that can materialize in the agriculture
asset class.
Bishop
continued that transparency in risk management has led to increased costs for
farmers and ranchers in the futures and swaps markets, and asked if the CFTC
was aware of the cost impact on them and whether the agency would be able to
provide relief to them.
Wetjen
replied that when crafting Dodd-Frank, Congress was focused on market
participants and activity that may be fraudulent, and said farmers don’t
usually come to mind with that. He added that the agency is in
“fact-finding mode,” and that they will hold a roundtable to discuss
rule-makings as they apply to the agriculture industry.
Yoder
then asked Wetjen to assure the Committee that he would help increase the transparency
of the Financial Stability Oversight Council (FSOC).
Wetjen
agreed that transparency is important, and that the FSOC has many
responsibilities under Dodd-Frank. He stated there has to be a balance
between the need for transparency and the need to keep information discussed
confidential.
DeLauro
asked about the agency’s investigations backlog, and whether there would be
another MF Global situation due to shortchanging resources.
Wetjen
answered that it is conceivable, as regular, thorough examinations are needed
in order to prevent another MF Global. He added that to do an able job,
expert witnesses are needed, but without proper resources, the agency would not
be able to access them.
Farr
concluded the questions by asking what the worst case scenario would be if
something slipped by the agency’s surveillance, examinations, or lack of
enforcement.
Wetjen
replied that when major participants in the derivates marketplace fail, there
is a reverberating effect throughout the financial industry.
For
more information on this hearing and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:House Appropriations Committee,Publish Year:2014
AT TODAY’S HOUSE APPROPRIATIONS Subcommittee
on Agriculture, Rural Development, FDA, and Related Agencies hearing, Mark
Wetjen, Acting Chairman of the Commodity Futures Trading Commission (CFTC),
discussed his agency’s FY 2015 budget.
Opening Remarks
In his opening remarks, Chairman Robert
Aderholt (R-Ala.) noted that unlike many agencies, the CFTC’s budget has
increased for seven consecutive years, and said he was happy to see the budget
request for 2015 decrease to $280 million.
He noted that the CFTC has finished the
majority of rulemaking required by the Dodd-Frank Act, and said it should be
able to implement regulations without further funding increases.
In his opening remarks, Ranking Member Sam
Farr (D-Calif.) said increasing funding for technology is wise, but with
regards to the CFTC’s enforcement programs, you cannot replace “cops” with
technology.
Witness
Testimony
In
his testimony,
Wetjen said that the CFTC’s job is to monitor the derivatives markets and
enable these markets to help create jobs and grow the economy. He claimed that,
“when not overseen properly, irregularities in
these markets, or failures of firms intermediating in them, can severely and
negatively impact the economy as a whole and cause dramatic losses for
individual participants.”
Wetjen then added that “the unfortunate reality is that, at
current funding levels, the Commission is unable to adequately fulfill the mission
given it by Congress.”
While acknowledging that the CFTC has seen budget increases
the last several years, Wetjen said they have not kept pace with the growth of
the Commission’s responsibilities.
Effective oversight of the futures and swaps market, Wetjen
continued, requires additional resources in both personnel and information
technology.
Question
& Answer
Aderholt
noted that the CFTC has seen a 91% increase in funding since 2008, yet
continues to report that it is “just getting by.” Given these past increases,
and the amount of progress already achieved, he asked why the CFTC would need
an additional 30% more funding.
Wetjen
replied that the scale of the markets regulated by the CFTC has grown
significantly, and the number of entities either directly or indirectly
overseen totals over 68,000. In addition to these increased responsibilities,
he added, there is regular, organic growth in the marketplace as well.
Aderholt
then asked for Wetjen’s rationale for the president’s decreased budget request
for 2015.
In
response, Wetjen said that the CFTC’s budget request focuses on the agency’s
three core functions of examination, surveillance of the marketplace, and
enforcement. The important question to ask, he said, was whether the CFTC was
adding enough staff to satisfy those three areas. Wetjen said the 2015 budget
request will put the agency on a strong footing while taking into account
Congress’s budget resolution.
Farr
then asked for a percentage change in increased responsibilities and noted that
the CFTC has just 40 more employees than it had twenty years ago, despite
Congress having passed Dodd-Frank, which has given the agency far more
responsibility.
Wetjen
said that the number of entities registered with the CFTC that it oversees and
regulates has grown by 40 percent. The amount of customer funds held by
clearinghouses has also increased, he said, and added that these customer funds
must be kept safe.
Farr
continued by asking whether the CFTC has put enough money into its enforcement
functions.
Wetjen
answered that with the agency’s added responsibilities, growth in the
enforcement division hasn’t grown as quickly as it should have. The budget
proposal, he said, would get the CFTC to the minimum level of staff needed to
execute it three core responsibilities.
Rep.
Alan Nunnelee (R-Miss.) asked if the CFTC, because of decreased funding, would
supplement their funding with any types of user fees.
The president’s request references the possibility, Wetjen said, and if Congress is
willing to entertain the idea then the CFTC would like to be part of the
discussion. He added that he was open to considering anything to make sure the
agency has the technology and capital it needs.
Nunnelee
next asked about high-frequency trading and the CFTC’s actions to oversee and
regulate it.
The
use of computers and algorithms to increase the speed of training creates new
risk, Wetjen said. The CFTC put out a letter to the market asking whether
sufficient controls are in place and what could be done to limit risk from this
practice, he added.
Rep.
Sanford Bishop, Jr. (D-Ga.) asked about the CFTC’s international reach and
cross-border guidance, and whether the CFTC works with the Securities and
Exchanges (SEC) regarding the rule-making process.
Wetjen
said that his agency finalized its cross-border guidance last summer after a
long process that included soliciting comments from the marketplace. He said
the SEC is still working on their rules and that there has been much discussion
between the two agencies.
Rep.
David Valadao (R-Calif.) said financial regulators should recognize that the
use of computers to increase trading frequency makes it impossible for humans
to keep track of risk, so more technology at the CFTC is needed. Given this, he
asked why the CFTC’s surveillance and enforcement is not more cyber-based, and
why the budget request doesn’t include more increases in technology.
Wetjen
replied that the CFTC needs more staff and budgeting in general to fulfill its
three core responsibilities. He agreed that more investment in technology is
needed for new initiatives.
Rep.
Rosa DeLauro (D-Conn.) asked what areas are left out due to CFTC priorities and
what the agency could accomplish with more money.
Wetjen
said the CFTC’s enforcement division hasn’t grown, and that with fewer staff
there will be fewer enforcement matters that the division can take up. He
added that in order to respond to every referral that comes in to the
enforcement program, the agency has to have money.
DeLauro
followed up by asking if the CFTC could bring in more revenue with this added
money.
Wetjen
answered that the more matters that are brought, the more revenue there should
be.
Rep.
Kevin Yoder (R-Kan.) asked Wetjen for a status report on the staff advisory
that was put out in November, related to the CFTC’s cross-border guidance.
Wetjen
stated that the comments submitted would be reviewed in order to see how the
industry thinks the problems in the advisory should be addressed. He noted that
the CFTC could “consider other things” and would be “open to considering
different ways” to handle the guidance but that they want to make a decision before
the no action release expires in September.
Yoder
then asked if the CFTC has enough authority to gather the information needed to
protect markets from fraud and manipulation.
“I
believe so,” said Wetjen. He continued that the agency is able to get any
information they need to pursue enforcement action if manipulation is taking
place.
Rep.
Jeff Fortenberry (R-Neb.) asked if Wetjen thought the derivatives markets are
broken or whether they function well.
Wetjen
replied that he did not believe they are broken and said while they function
reasonably well, there will be some adjustment as the market structure changes
during implementation of swaps regulations.
Fortenberry
went on to say that the purpose of the derivatives market is to hedge risk and
volatility, but that speculation in the market itself is undermining the
purpose of the market to decrease volatility and hedge risk.
Wetjen
replied that there has been an increase in volatility for several reasons,
including high-frequency trading.
Second
Round – Question and Answer
In
the second round of questions Aderholt asked why the CFTC needed a 30% budget
increase after their budget over the years had increased by 91%, when the
highest metric Wetjen had given in regards to trading volume for futures was a
40% increase in registered entities.
Wetjen
answered that the number of staff the CFTC has is currently insufficient, and
that the agency needs more people to keep entities honest and capable of
reasonable spot checks of registered entities. He added that based on the
numbers they have today, they are unable to do this. “We have tremendous
demands placed on the agency for clarifications, petitions, guidance, and
interpretation,” Wetjen added. He went on to say that there are a number
of demands on the international front.
Farr
followed up by asking what U.S. entities and companies want better regulation.
Wetjen
answered that most of the participants in the derivatives market think
confidence is built when there is sufficient oversight of the market.
Nunnelee
asked how the CFTC was going to regulate an increased number of firms if it is
requesting fewer resources.
Wetjen
replied that the requested funding level would be a “substantial increase”
above what they have now.
Bishop
said he is concerned that the agriculture markets will “get the short end of
the stick” due to the agency being underfunded.
Wetjen
agreed that agriculture markets have played a special role in the history of
the CFTC and the markets in general. He said that the agency is trying to be
mindful of special needs and issues that can materialize in the agriculture
asset class.
Bishop
continued that transparency in risk management has led to increased costs for
farmers and ranchers in the futures and swaps markets, and asked if the CFTC
was aware of the cost impact on them and whether the agency would be able to
provide relief to them.
Wetjen
replied that when crafting Dodd-Frank, Congress was focused on market
participants and activity that may be fraudulent, and said farmers don’t
usually come to mind with that. He added that the agency is in
“fact-finding mode,” and that they will hold a roundtable to discuss
rule-makings as they apply to the agriculture industry.
Yoder
then asked Wetjen to assure the Committee that he would help increase the transparency
of the Financial Stability Oversight Council (FSOC).
Wetjen
agreed that transparency is important, and that the FSOC has many
responsibilities under Dodd-Frank. He stated there has to be a balance
between the need for transparency and the need to keep information discussed
confidential.
DeLauro
asked about the agency’s investigations backlog, and whether there would be
another MF Global situation due to shortchanging resources.
Wetjen
answered that it is conceivable, as regular, thorough examinations are needed
in order to prevent another MF Global. He added that to do an able job,
expert witnesses are needed, but without proper resources, the agency would not
be able to access them.
Farr
concluded the questions by asking what the worst case scenario would be if
something slipped by the agency’s surveillance, examinations, or lack of
enforcement.
Wetjen
replied that when major participants in the derivates marketplace fail, there
is a reverberating effect throughout the financial industry.
For
more information on this hearing and to view a webcast, please click here.