US President Barack Obama set out his 2012 budget proposal on February 14, awarding substantial increases in annual funding to the Commodity Futures Trading Commission and the Securities and Exchange Commission.
However, with a political battle brewing over the US’s huge budget deficit, Obama proposed that participants in futures markets be charged fees to supplement the CFTC’s federally supplied budget.
The idea has already been attacked by futures industry leaders such as Terry Duffy, executive chairman of CME Group, who complained that it would give foreign exchanges an unfair advantage.
The administration plans to award the CFTC $308m for 2012, an 82% increase from its 2010 budget and 43% more than the $216m it was awarded for 2011.
Gary Gensler, chairman of the CFTC, told a Congressional hearing that unless the agency was awarded more money, it would not be able to carry out its enlarged duties under the Dodd-Frank Act. With present funding levels, it would have a smaller staff than before the Act was passed, making it responsible for regulating the OTC market as well as listed derivatives.
With much of the law due to come into force in June, it is already clear some deadlines will be missed.
“We don’t have the budget for implementation,” Gensler said, echoing the concerns of other CFTC commissioners. “The CFTC’s current funding is far less than what is required to properly fulfil our significantly expanded mission. Though we have an excellent, hardworking and talented staff, we just this past year got back to the staff levels that we had in the 1990s.”
Gensler added: “To take on the challenges of our expanded mission, we will need significantly more staff resources and – very importantly – significantly more resources for technology. Technology is critical so that we can be as efficient as possible in overseeing these vast markets.”
Congress has refused to pass the CFTC’s 2011 budget, so the agency has had only its 2010 funding level this year.
Now the new Republican majority in Congress wants to freeze the CFTC and SEC’s funding at 2010 levels for 2012.
Obama proposes that $117m of the CFTC’s money would come from market participants by way of fees charged – meaning that the cost of the CFTC to taxpayers would fall to $191m.
The SEC’s budget would rise from $1.1bn in 2010 and a requested $1.23bn in 2011 to $1.4bn in 2012.
Political split
The administration’s suggestion of charging the “regulated community” of futures traders fees to finance the CFTC has surprised the market. The administration expects to publish a detailed draft proposal this year.
The budget said the move would “bring the CFTC into line with all other federal financial regulators”.
The SEC already finances itself this way.
Republicans and Democrats may divide over the issue – already, there are signs it could split the five CFTC commissioners on party lines.
Democratic-nominated commissioner Bart Chilton described the budget proposal as “admirable equilibrium”.
He acknowledged that charging market participants a fee might prove unpopular but concluded: “I believe market oversight and enforcement is a public good and deserving of being funded in whole through annual appropriations [i.e. from taxpayers]. 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, uninformed, or they look at inadequate funding as a way to starve the agency in the hope that regulatory reforms will be delayed or derailed.”
However, Scott O’Malia, one of the two Republican-nominated commissioners, said he opposed what he called a “transaction tax”.
“This user fee is a currently unauthorised and uncollectable tax to offset $117m in new spending,” he said. That means it creates a hole in the budget that the House and Senate Appropriations Committees must backfill in order to meet the needs of the Commission. This is a disingenuous effort that only puts us further behind the requested funding level and will continue to add to the federal deficit.”
An executive at a futures commission merchant in New York agreed, saying the futures market was already facing additional costs from the Dodd-Frank rules and further charges would be “hard to stomach”.
Hiring plans
Detailing how it would spend its increased budget, the CFTC said it would enlarge the staff in its division of market oversight from 139 to 250, and in its enforcement unit from 167 to 235.
The SEC wants to employ 780 new members of staff, of which 468 would concentrate on carrying out new duties under the Dodd-Frank Act. There would be 195 additional examiners and 156 new staff in the enforcement division.
SEC chairman Mary Schapiro emphasised that the SEC’s additional funding would come entirely from market fees.
Although the administration has awarded the agencies the budgets they wanted, the regulators will not celebrate yet because the political climate in the US is strongly against them and Congress may well block the increases.