The Commodity Futures Trading Commission, the main U.S. derivatives regulator that pried $1.7 billion in fines and other penalties from the firms it regulates during the past year, is furloughing workers because it doesn’t have enough money to pay them.
“This is the budget reality we face,” CFTC Chairman Gary Gensler told employees today in an e-mail, which announced they would be asked not to work on as many as 14 days in the fiscal year that began this month. “I understand this is extremely tough news for your families and you. I want to thank each and every one of you for your dedication to this agency and your hard work, which is of great benefit to the American public.”
The CFTC’s investigation of manipulation of the London InterBank Offered Rate, which sets rates on products such as mortgages and interest-rate derivatives, led to fines this year including $700 million from UBS AG. The furloughs coincide with the Washington-based regulator’s mandate, stemming from the 2010 Dodd-Frank Act, to start overseeing the $633 trillion over-the-counter derivatives market.
“The timing is unfortunate given the need to implement Dodd-Frank,” said Robert Webb, a finance professor at the University of Virginia. The 16-day partial U.S. government shutdown this month also disrupted the agency, and further time off will only make the CFTC’s job harder, he said.
“The work has piled up,” Webb said.
Dodd-Frank has provisions designed to move swaps, which helped fuel the 2008 credit crisis, from largely unregulated trading negotiated off exchanges to more transparent systems including swap-execution facilities. The CFTC is currently implementing rules for that transition, and the new government-mandated SEFs were required to open on Oct. 1.
“I’m deeply troubled, though not surprised” by the development, Representative Maxine Waters of California, the top Democrat on the Financial Services Committee, said in a statement.
“The CFTC is currently funded at a level that’s more than 60 percent below the President’s request -- a level insufficient to ensure oversight of opaque, often high-risk derivatives trading, which devastated our economy in 2008,” Waters said. The government should “fully fund our nation’s derivatives cop before more harm is done to America’s agriculture, manufacturing and business sectors.”
Gensler mentions the need for increased funding in almost every speech he delivers, noting that the swaps market that just fell under the CFTC’s jurisdiction is more than 10 times bigger than the regulator’s prior territory. Nevertheless, the CFTC employs 676 people, only 40 more than it did 20 years ago, he said today during an interview.
“I consistently advocate, the president consistently advocates, for new resources,” Gensler said in the interview. He, like President Barack Obama, is a Democrat. “Our agency is smaller than any of the large law firms,” Gensler said.
The fines recovered by the CFTC go to the U.S. Treasury Department and aren’t used to fund the agency, Gensler said, adding that while he doesn’t advocate funding the agency with that money, it’s worth recognizing that “the CFTC is a good investment for the American public.”
Wall Street, trying to preserve profits from swap trading in the face of greater regulation, has found a new way to keep some of its overseas deals private. Banking lawyers have seized on the wording of Footnote 513, contained in an 84-page policy statement issued in July by the CFTC. The largest banks told swap brokers in late September that the language means certain swaps still don’t fall under the agency’s new trading rules, according to three people briefed on the discussions.
CFTC budgetary constraints were cited by Bart Chilton, a Democratic commissioner, in his support last month of a proposal from the Obama administration for a targeted transaction fee for traders of futures and swaps.
Webb said such a transaction tax isn’t a good idea as it creates the wrong incentives for regulators.
“It would be akin to a funding a police department through traffic citations,” he said.
The forced time off affects everyone in the agency except the four active commissioners, said Steven Adamske, a CFTC spokesman. The agency’s budget is currently $195 million, Gensler said in testimony in July. Obama has requested an increase to $315 million for fiscal year 2014. Congress hasn’t yet passed the president’s budget.
The fines and penalties it announced today total more than seven times the CFTC’s annual operating budget, the agency said in a statement today.
The CFTC avoided furloughing employees this year with extra money left over from 2012, cost cuts and $10 million in funds that Congress earmarked for technology, Gensler said.
“Travel, discretionary spending and outside non-technology contractors have been cut to a bare minimum,” he said in the e-mail. “As a result, we are now faced with administrative furloughs.”