President’s Budget

plaint alleged that NMP solicited customers over the Internet on
Dunhill’s behalf by sending unsolicited bulk e-mail in return for a
fee paid by Dunhill for generating a list of prospective customers.
The complaint also alleged that, from October 1995 through the
filing of the complaint, Dunhill, Hutcherson, and Jackam made
false and misleading statements regarding the likelihood of profit,
risk of loss and amount of commissions involved in the trading of
commodity options. Specifically, they led customers to believe
that customers who purchase options on futures contracts would
profit from seasonal and other existing and known supply and
demand forces that affect the prices of certain commodities in the
cash market. These misrepresentations were allegedly made in
advertisements over the Internet, on the radio, in promotional
materials sent to customers, and in direct telephone solicitations
of prospective customers. As alleged in the complaint, at least
91.4 percent of the customer accounts opened by Dunhill from
October 1995 through September 1998 lost money, and that total
net losses, including commissions, were in excess of $9.3 million.

Fraudulent Trade Allocation. In December 1998, the Commission
filed a three-count administrative complaint against Kyler F.
Lunman II, his company, Hold-Trade, Inc. (also known as Hold
Trade, Ltd.) (Hold-Trade) and Steven G. Soule, a former employee
of Coastal Corporation (Coastal). The complaint was amended on
February 4, 1999 to add asa respondent Robert C. Rossi, the
principal owner and manager of Refined Energy Executions, Inc.
and Refine Executions, Inc. (collectively, Refined) which provided
Coastal with floor broker (FB) services on the New York Mercan-
tile Exchange (NYMEX). The complaint alleged that, from Sep-
tember 1993 through December 1994, the respondents defrauded
Coastal by misappropriating its energy futures trades and
wrongfully allocating them to accounts they controlled. Specifi-
cally, the complaint alleged that Soule, as the Coastal employee
responsible for entering its energy futures orders to the floor of
the NYMEX, allocated, with the assistance of one of Refined’s
telephone clerks, profitable Coastal trades to futures trading ac-
counts owned or controlled by respondents Lunman and Hold-
Trade who distributed the profits among the members of the
scheme. In re Soule, et al., CFTC Docket No. 99-4 (CFTC filed De-
cember 22, 1998, amended February 4, 1999).

Part 14 Debarments. In October 1998, the Commission entered
an order instituting proceedings, making findings, and imposing
sanctions on Anatoly Osadchy, also known as Anthony Osadchy,
who the Commission found had engaged in unprofessional con-
duct within the meaning of Commission Regulation 14.8(c) in
connection with his audit of an IB. In the order, which accepted
an offer of settlement in which Osadchy neither accepted nor de-
nied the findings, the CFTC specifically found that Osadchy failed
to follow Generally Accepted Accounting Standards by, among
other things: failing to maintain adequate training and profi-

16

Executive Summary—Significant Developments in the Past Year


President’s Budget

Breakout of $72.0 Million Budget Estimate

By Agency Goal

-... the $72.0 Million Budget is allocated among the agency’s three
Strategic Goals as follows... .

$19.0 Million
$24.3 Million Goal One: Protect the
Goal Three: Foster ‘economic functions of the
‘open, competitive, and commodity futures and

financially sound markets.
34%

option markets,
26%

$28.7 Million
Goal Two: Protect
market users and the
pubiic.

40%

Figure 7: $72.0 Million Budget Estimate by Agency Goal

10 Executive Summary—Budget by Agency Goal


President’s Budget

a task force to consider recommendations that would strengthen
risk management processes, improve information flows and iden-
tify areas where it may be advisable to cooperate with other in-
terested international parties,‘such as the Basle Banking Com-
mittee. Commission staff, working through the working parties
on secondary markets and market intermediaries, respectively,
continued to play an active role in these developments.

“Best Practices.” The Commission also is actively engaged in the
IOSCO Task Force on the implementation of the IOSCO report
Objectives and Principles of Securities Regulation (Core Principles)
that were adopted last year as a statement of international “best
Practices.” The Commission has been participating in drafting
groups that are preparing surveys for a high-level self assess-
ment on the extent to which the Core Principles have been im-
plemented.

Year 2000 Preparedness. The Commission also actively contrib-
uted to IOSCO’s activities to address challenges posed by the
Year 2000 problem, including the development of a draft state-
ment on Year 2000 testing and contingency planning.

Electronic Markets. Responding to the increasing development of
cross-border electronic markets, IOSCO also has initiated work
on examining the status of regulation of electronic markets and
the need for revisions to IOSCO’s 1990 statement of regulatory
principles. The Commission actively participates in this effort.

Over-the-Counter Derivatives. In 1999, the Commission com-
pleted the report, Survey of the Regulation of Over-the-Counter De-
rivatives Transactions, which examined the regulatory regimes in
16 jurisdictions across Europe, Asia and North and South Amer-
ica. The survey was undertaken to support the Commission’s in-
quiries into the over-the-counter (OTC) markets and was in-
tended to serve as a resource to make existing requirements
more accessible and to facilitate further study of the treatment of
OTC derivatives. In this regard, copies of the report were pro-
vided to the President’s Working Group and to members of the
IOSCO Technical Committee.

Agricultural Trade Options

New Regulatory Scheme. Effective June 15, 1998, the Commis-
sion removed the longstanding ban on agricultural trade options.
Despite these rules going into effect, no one had applied for reg-
istration as an agricultural trade option merchant (ATOM). Con-
sequently, in response to additional industry input, the Commis-
sion found it appropriate in December 1999 to amend its agri-
cultural trade option mules in order to stimulate interest in these
instruments. The amended rules, which permit greater flexibility

20

Executive Summary—Significant Developments in the Past Year


President’s Budget

EXECUTIVE SUMMARY
Introduction to the Commission

The Commodity Futures Trading Commission {the CFTC or the
Commission) was created by Congress in 1974 as an independent
agency with the mandate to regulate commodity futures and option
markets in the United States. The Commission’s mandate was re-
newed and expanded in 1978, 1982, 1986, and 1992. In 1995, the
Commission was reauthorized by Congress and the President
through Fiscal Year (FY) 2000.

The CFTC is responsible for fostering the economic utility of futures
markets by encouraging their competitiveness and efficiency, en-
suring their integrity, and protecting market participants against
manipulation, abusive trade practices, and fraud. Through effective
oversight regulation, the CFTC enables the commodity futures mar-
kets better to serve their vital function in the nation’s economy—
Providing a mechanism for price discovery and a means of offsetting
price risks.

The President’s Budget for FY 2001 is $72.0 million with 621 full-
time equivalents (FTEs). This is a $9.2 million or a 15% increase over
the FY 2000 appropriation of $62.8 million and 561 FTEs. This pro-
posed budget provides the Commission with the resources needed to
perform its legislative mandate.

Compared to the FY 2000 appropriation, key changes in the FY 2001
President’s Budget are:

$ +5.3 million to maintain current services levels for 561 FTEs.

$ +3.9 million to provide for the salary and expenses of 60
additional FTEs.

Executive Summary—introduction 1


President’s Budget

ciency as an auditor; failing to educate himself regarding an IB’s
business, even though he had never audited a registrant; failing
to employ adequate audit procedures to find potential fraud, er-
rors, or irregularities in the financial statements; and by opening
an active trading account with the IB and therefore failing to
maintain his required professional independence. As part of the
settlement, the Commission ordered Osadchy permanently de-
nied the privilege of practicing or appearing before the Commis-
sion and ordered respondent to comply with his undertaking not
to apply to the Commission for reinstatement. In re Osadchy,
CFTC Docket No. 99-2 (CFTC filed October 29, 1998).

Commission’s Task Force on Regulatory Reform

The Commission has undertaken a broad review of its regulations
and their effect on the competitiveness and efficiency of derivatives
markets. Over the past decade, there have been significant ad-
vances in the development and use of derivative instruments, in-
cluding futures and option contracts, as well as in the trading plat-
forms on which these instruments are executed. In an effort to en-
sure that the regulatory scheme under which these contracts are
traded remains current, the Commission has undertaken a broad
review of its rules with the intention of eliminating obsolete rules
and streamlining and coordinating regulations across markets. The
Commission anticipates completing its review in early 2000.

Regulatory Reform

The CFTC has been engaged in a comprehensive regulatory reform
effort designed to update, modernize, and streamline its regulations
in order to improve markets and protect market participants. This
effort has included:

¢ Bunched Orders. Adoption of new Commission Rule 1.35(a-1)(5)
which allows post-execution allocation of bunched orders. This
new rule eliminates the need for customer account identifiers on
order tickets thereby permitting account managers to allocate the
fills at the end of a day. Pursuant to this, the Chicago Board of
Trade (CBT) and the Chicago Mercantile Exchange (CME) have
submitted proposed rules which the Commission has allowed into
effect. (October 1998)

° EFS Transactions. Approval of the NYMEX proposal to adopt new
Rule 6.21A, which authorizes the noncompetitive exchange of
futures contracts for qualifying swap agreements (EFS transac-
tions) pursuant to the terms and conditions of a three-year pilot
program. (January 1999}

© Block Trading. Issuance of an Advisory on Alternative Execution, or
Block Trading, Procedures for the Futures Industry, whereby the

Executive Summary—Significant Developments in the Past Year 7


President’s Budget

manipulation, market congestion, or the abnormal movement of
such commodity in interstate commerce. The Commission also re-
quested comment on the likely effect on deliverable supplies which
might result from the increasing concentration of control over deliv-
ery facilities.

¢ Rule Amendments. The Commission approved these rule amend-
ments under section Sa(a)(12) of the Act on January 25, 1999.
The Commission noted, however, that the amendments did not
address the fundamental issues raised by the Commission in its
notice and are unlikely to provide a long-term solution to in-
creasing deliverable supplies of wheat during the months of
March and May, when deliverable supplies of wheat are lowest.
In light of the incomplete nature of the response of the CBT to
the problems identified by the Commission in the notice and the
difficulty in forecasting deliverable supplies, the Commission di-
rected the CBT to report on the experience with deliveries and
expiration performance in the wheat futures contract on an an-
nual basis for a five-year period after contract expirations begin
under the revised terms. These reports, in light of existing, and
possible further, increases to concentration in the ownership of
delivery facilities should include an analysis of whether increased
concentration unduly restricts deliverable supply or contributes
to congestion or threatened manipulation of the contract.

Chicago Board of Trade Soybean Oil Delivery Rules

In December 1998, the CBT submitted for Commission approval pro-
posed amendments to its soybean oil futures contract. The proposed
amendments would: 1) increase to 10 cents per hundredweight (cwt.)
from five cents per cwt. the amount by which the contract’s loca-
tional price differentials for nonpar delivery points may be adjusted
under existing rules providing for automatic adjustment of such dif-
ferentials on an annual basis; 2) establish a maximum limit on the
number of warehouse receipts that may be issued for delivery by in-
dividual regular warehouses, equal to 30 times the registered daily
load-out rate for rail cars at the facility; and 3) require that operators
of regular warehouses not located on Class I railroads pay the
switching and/or freight costs to the nearest Class I railroad inter-
change point if requested in writing by the taker of delivery (Class I
railroad amendment). The proposed amendments generally become
effective with respect to existing contract months commencing with
the January 2000 contract month and to all newly listed contract
months.

The Commission approved these amendments in June 1999, con-
cluding that they are not inconsistent with the requirements of the
CEA or the policies and regulations of the Commission. However,
the Commission reminded the CBT of its obligation to maintain de-
livery terms that conform to Guideline No. 1 and the policy of the

Executive Summary— Significant Developments in the Past Year 23


President’s Budget

3) amendments to CFTC Part 10 rules, which update procedures
in administrative enforcement actions brought under the Act.

¢ Performance Data and Disclosure for CTAs. Proposed amendments

to Part 4 of the Commission’s rules concerning the documenta-
tion, computation, and disclosure of CTA Past performance in-
formation. The rules would simplify the recordkeeping and com-
putational requirements for CTAs who accept partially funded cli-
ent accounts while providing for meaningful and focused disclo-
sure to clients regarding the past performance of the CTA and the
risks attendant upon trading on a partially funded basis.

¢ Risk-Based Capital. Review of the impact of risk-based capital
tules of the CME, CBT, and the Board of Trade Clearing Corpo-
ration (BOTCC) on capital requirements of CME and CBT clearing
members. These rules were the first risk-based capital rules ap-
proved by the Commission in FY 1998. The new rules amended
existing capital rules by requiring CME and CBT clearing mem-
bers to maintain adjusted net capital in excess of the greater of
the following: 1) minimum dollar balances established by the ap-
plicable exchange or clearing organization; 2) regulatory capital
requirements set by the Commission or the US Securities and
Exchange Commission (SEC); or 3) risk-based capital computa-
tions.

Innovative New Markets

In FY 1999, the Commission reviewed and approved 73 applications
for new futures and option contracts, 30 of which were submitted
and approved under fast-track procedures. Several of the approved
contracts represent innovative approaches designed to meet special-
ized hedging needs of producers and firms. For example, the Com-
mission approved weather-related futures and option contracts
submitted by the CME based on heating degree days and cooling de-
gree days for 10 cities. These contracts, the first approved relating
to weather-related data, were specifically designed to deal with the
unique hedging needs of firms exposed to risk arising from tem-
perature variations. Also, the Commission approved futures and op-
tion contracts submitted by the Commodity Exchange, Inc.
(COMEX), Division of the NYMEX based on aluminum produced
throughout the world, as well as various dairy and regional electric-
ity contracts.

International Regulatory Cooperation

° Hedge Funds. Actions involving responding to events in the fi-
nancial markets related to the activities of hedge funds and other
highly leveraged institutions dominated a significant part of
Commission activities in the International Organization of Secu-
rities Commissions (IOSCO). The Technical Committee organized

Executive Summary—Significant Developments in the Past Year 19


President's Budget

In June 1999, the Commission issued an order accepting the of-
fer of settlement of Merrill (B&D) and Merrill International. With-
out admitting or denying the allegations of the complaint or the
findings contained in the order, Merrill (B&D) and Merrill Inter-
national consented to the entry of the order, which found that
they aided and abetted violations of the anti-manipulation provi-
sions of the Act during the fourth quarter of 1995. More specifi-
cally, the order found that the firms aided and abetted the ma-
nipulators (Sumitomo Corporation of Japan and others) in at
least the following ways: by providing more than one-half billion
dollars of credit and finance to the manipulators; by providing
trading facilities, accounts, and trading capacity through which
the manipulators acquired their dominant position in a combina-
tion of futures contracts and warehouse stocks, and through
which the manipulators sold or lent a small portion of their
holdings at artificially high absolute prices and artificially high
backward-dated spread price differentials; and by providing
trading advice, which the manipulators used in the execution of
their strategy of withholding their copper from the market. The
order stated that Merrill (B&D) and Merrill International pos-
sessed the requisite knowledge and intent to find that they aided
and abetted the manipulators’ violations. In addition, the order
found that Merrill (B&D) benefited from the manipulation by pro-
viding financing, trading facilities, and credit to the manipulators,
and by earning profits through its proprietary trading. The CFTC
ordered the companies to pay a civil monetary penalty of $15
million and to cease and desist from further violations of the Act,
as charged. The settlement also requires the Merrill Lynch re-
spondents to cooperate with the CFTC in Proceedings and any
investigations related to this matter, and dismisses the action as
to Merrill Lynch & Co., Inc. The case against Global is ongoing.
In re Global Minerals & Metals Corp., et al, CFTC Docket No. 99-
11, Order Making Findings And Imposing Remedial Sanctions As
To Respondents Merrill Lynch, Pierce, Fenner & Smith (Brokers &
Dealers), Ltd. And Merrill Lynch International, Inc., and Dis-
missing The Proceedings As To Respondent Merrill Lynch & Co.,
Inc. (CFTC entered June 30, 1999).

Supervision and Compliance. In May 1999, the Commission is-

sued an order, simultaneously instituting and settling an admin-
istrative proceeding naming Refco, Inc., a registered futures
commission merchant (FCM). According to the order, the matter
arose out of trade allocations by a registered introducing broker
(IB). The order states that, from at least January 1995 through
December 1995, the IB typically placed orders for thousands of
US Treasury bond futures and options contracts per day for his
customers through Refco, and the IB placed a substantial num-
ber of such orders without providing account identification to
Refco. After the orders were executed, according to the order, the
IB assigned those trades to customer accounts, directing posi-

14

Executive Summary— Significant Developments in the Past Year


President’s Budget

Breakout of $72.0 Million Budget Estimate

By Object Class

. +». approximately 75% of the CFTC’s budget covers staff salaries
and benefits ....

Compensation &
Benefits
75%

Equipment
3%

‘Supplies & Printing
1%

All Other

6%
Communications &

Utilities

2%
Space Rental
11%
Travel &
Transportation
2%

Figure 5: $72.0 Million Budget Estimate by Object Class

Executive Summary—Budget by Object Class


President’s Budget

Note futures contract traded on Project A. This is the first time the
Commission has addressed the applicability of a dual trading prohi-
bition to an electronic system and, in doing so, the Commission spe-
cifically took into account the quality of the audit trail of the system.

Commission staff completed its analysis of data submitted by CBT
and CME in connection with the November 1997 proposed dual
trading orders of the Commission. The Commission is formulating
final dispositions on a priority basis. Commission staff are also
analyzing NYMEX’s dual trading petition in six affected contract
markets.

Improved Clarity of Commodity Pool Disclosure Documents

The Commission adopted rule amendments and approved a related
NFA rule that requires CPOs to divide their Disclosure Documents
into two separate parts. These rule changes responded to concerns
that prospective participants experienced difficulty focusing on the
large amount of information provided in the Disclosure Documents
of commodity pools filed with the Commission by CPOs. The goal of
the Commission is to arrange the disclosure documents that will
help investors to focus on items in relative order of importance.

Conflicts of Interest

The Commission approved new Rule 1.69, implementing the statu-
tory directives of Section 217 of the Futures Trading Practices Act of
1992, which requires SROs to adopt rules prohibiting governing
board, disciplinary committee, and oversight panel members from
deliberating or voting on certain matters where the member has ei-
ther a relationship with the named party in interest or a financial
interest in the outcome of the matter. The final rules also amend
Commission Rules 1.41 and 1.63. The final rule became effective on
March 5, 1999.

Sexual Harassment Policy & Training

Sexual harassment is a problem faced by employees and employers
nationwide. As a result, many organizations have taken steps to
eliminate harassment in the workplace and to increase awareness of
the various types and impact of inappropriate gender-based conduct.

In response to this growing concern and to highlight its commitment
to equal employment opportunity, in FY 1999, the Commission
adopted a new sexual harassment policy. The new policy was made
available to all employees and was featured as part of Commission-
sponsored sexual harassment training. During FY 1999, all Commis-
sion employees in headquarters and the regional offices attended
mandatory training to review the Commission’s new sexual harass-

Executive Summary—Significant Developments in the Past Year 29


President’s Budget

savings to the participating clearing members and is guaranteed the
sum of those amounts by the other clearing organization. Previous
cross-margining arrangements involved each participating clearing
organization possessing a joint perfected security interest and lien in
the joint account which holds the cross-margined positions and sup-
porting funds.

Over-the-Counter Derivatives and Hedge Funds

The Commission participated in, and wrote several sections of, the
President’s Working Group on Financial Market’s study, Hedge
Funds, Leverage, and the Lessons of Long Term Capital Management.
It also participated in the working group’s study on the OTC deriva-
tives market. The Commission also is working with international or-
ganizations and foreign regulators to develop coordinated regulatory
approaches that address issues related to trading of OTC derivatives
including issues related to systemic risk. Of particular importance is
the work of the Commission with the IOSCO which, through a spe-
cially created task force and its working parties, is addressing ques-
tions related to adequate regulation of hedge funds, appropriate dis-
closure concerning trading of OTC derivatives of the banks and secu-
tities firms, international coordination of derivatives regulations and
other matters. The Commission also designed, and compiled the re-
sults of, an international survey of regulations governing OTC de-
rivative activity.

Streamlining of Contract Market Designation Applications

Following the successful implementation of fast-track designation
and rule change procedures in FY 1997 to reduce significantly Com-
mission review times for contracts submitted under fast-track proce-
dures, the Commission sought to streamline further its review pro-
cedures. On June 1, 1999, the Commission adopted rules to reduce
the filing burdens of the exchanges when exchanges seek approval of
new contracts. The Commission revised its Guideline No. 1 from
narrative information requirements to abbreviated forms and check-
lists. Exchanges also may substitute analyses prepared by third
parties for analyses prepared by exchange staff exclusively for the
Commission. The Commission also reduced the fees exchanges
must submit with their designation applications and created a new,
lower fee structure for a single submission of a series of futures and
option contracts based on a common index.

In addition, on July 27, 1999, the Commission published in the Fed-
eral Register a proposal to modify its rules regarding the listing of
contracts without prior approval. On November 26, 1999, in re-
sponse to industry comments, the Commission issued final rules to
permit exchanges to list commodity futures or option contracts for
trading without Commission approval of the contract or its terms
and conditions. This new listing procedure, adopted as an alterna-

26 Executive Summary—Significant Developments in the Past Year


President’s Budget

Breakout of Requested $9.2 Million Increase

By Current Services Increase & Program Increase

. . . the requested $9.2 Million increase consists of $5.3 Million to
maintain current service levels for 561 FTEs and $3.9 Million for 60
additional FTEs ....

$3.9 Million
Program
Increase
42%

$5.3 Million

Current Services

Increase
58%

Figure 2: Requested $9.2 Million increase

Executive Summary—Breakout of Requested Increase 3


President’s Budget

The FY 2001 President's Budget

Breakout of $72.0 Million Budget Estimate

The Commission is requesting $72.0 Million in FY 2001 ;

$62.8 Million is the base (FY 2000 Appropriation)
$9.2 Million is the increase in FY 2001... .

$8.2 Million
Increase Requested
13%

$62.8 Million
Base (FY 2000

Appropriation)
87%

Figure 1: $72.0 Million Budget Estimate

2 Executive Summary—Breakout of Budget Estimate


President’s Budget

tions as the IB chose, and sometimes moved trades between ac-
counts after trades had been assigned and cleared. The order
finds that Refco failed to: 1) comply with Commission regulations
regarding order-taking and recordkeeping in handling customer
orders; 2) administer a proper supervisory system; and 3) investi-
gate indications of improper handling of trades. Refco consented
to issuance of the order without admitting or denying the find-
ings.

The CFTC ordered the company to cease and desist from further
violations of those provisions of the CEA and to pay a total of $7
million, of which $6 million will be paid immediately as a civil
monetary penalty. The remaining $1 million will be used to fund
a study of issues associated with order transmission and entry
procedures for exchange-traded futures and options and the dili-
gent supervision of the order transmission and entry process by
commodity professionals. The study, the first of its kind in the
futures industry, will be overseen by representatives of the Na-
tional Futures Association (NFA) and the Futures Industry Insti-
tute (Fl), among others. The order also requires Refco to con-
duct an internal study to review and make recommendations
concerning its compliance policies and procedures related to its
handling of trades by its trading floor and back office personnel
as may be necessary to conform such procedures to the require-
ments of the CEA, CFTC regulations and exchange rules and to
prevent recurrence of the type of conduct discussed in the order.
In re Refco, Inc., CFTC Docket 99-12 (CFTC filed May 24, 1999).

° Fraudulent Internet Solicitations. In FY 1999, the Commission also
demonstrated its ability and commitment to respond when new
methods, such as the Internet and “spam” e-mail, are used as
the means to cheat or defraud the public. Such methods pose a
new threat because they enable malefactors to solicit business
fraudulently from millions of people quickly and cheaply. With
use of the Internet and e-mail growing, the Commission has
brought its first action to address the use of mass marketing via
e-mail, known as “spamming,” to defraud retail customers. In
the case captioned In re Dunhill Financial Group, Inc., et al, CFTC
Docket No. 99-7 (CFTC filed March 4, 1999), the Commission
filed a four-count administrative action against Dunhill Financial
Group, Inc. (Dunhill), Dunhill’s sales manager Mark Hutcherson,
Dunhill’s compliance officer Kevin Jackam, New Millennium Pro-
motions (NMP}, and two NMP employees, Michael Thomas and
Forrest Dayton, Jr. The complaint charged that Dunhill, a regis-
tered IB, and Dunhill’s Tegistered associated persons (APs),
Hutcherson and Jackam, violated the anti-fraud provisions of the
Act and Commission regulations by fraudulently soliciting pro-
spective customers to open accounts to trade options on com-
modity futures contracts. The complaint also charged NMP with
operating as an unregistered IB of Dunhill. Thomas and Dayton
were charged with failing to register as APs of NMP. The com-

Executive Summary—Significant Developments in the Past Year 15


President’s Budget

Breakout of Requested $9.2 Million Increase

By Program Acti

-. - - 85% of the requested $9.2 Million increase is earmarked for the
five programs; only 15% is allocated for support....

$2.4 Million $3.1 Million
Trading & Enforcement
Markets

Ww%

26%

$1.3 Million

Market
Surveillance,
Analysis & $1.4 Million $0.8 Million
Research Executive General
14% Direction & Counsel
Support 9%
15%

Figure 4: $9.2 Million Increase by Program

Executive Summary—Requested Increase by Program 5


President’s Budget

in the offer and sale of agricultural trade options, went into effect
on February 2, 2000.

¢ History. Agricultural options (both on- and off-exchange) were
traded in the US at least from the mid-1800s until the 1930s.
However, concerns about fraudulent sales practices, failures to
perform OTC obligations, and the use of exchange-traded options
to manipulate the prices of agricultural commodities prompted
numerous industry and government efforts to limit or eliminate
trading in agricultural options. In 1936, Congress banned all
sales of options on certain agricultural commodities listed in the
Act. The Commission permitted exchange trading in options on
agricultural futures in 1984. There have been deep divisions
within the agricultural community on whether the ban on off-
exchange agricultural options should be lifted. Opponents of lift-
ing the ban have expressed concerns over possible fraudulent
activity and suggested that such contracts might result in confu-
sion in the producer community. Others wish the Commission
would permit use of trade options in the agricultural sector.

° Public Meetings & Comment. The Commission and its staff con-

ducted numerous meetings with representatives of agricultural
interests focusing on areas of concern in the program rules. Ag-
ricultural trade options were also discussed at meetings of the
Agricultural Advisory Committee on August 12, 1998 and on April
21, 1999. In particular, some observers suggested that certain
provisions of the final rules discourage participation, and agri-
cultural trade options would be offered more readily if the rules
were modified.

° Proposed Rule Amendments. Based in part on those views, the

Commission published a notice of proposed rulemaking in the
Federal Register on August 31, 1999 that Proposed a number of
significant amendments to its agricultural trade option rules.
These proposed changes were to allow more flexibility in the
types of options that can be offered, to streamline the reporting
and disclosure requirements, and generally to bring the rules
more in line with practices in the cash markets.

¢ Rule Amendments. After carefully considering the comments, the
Commission published a notice of final rulemaking in the Federal
Register on December 6, 1999, amending its agricultural trade
option rules. These amended rules were effective on February 2,
2000. In particular, the rules now permit cash settlement and
offset or cancellation of agricultural trade options. Under the
prior rules, an agricultural trade option, if exercised, had to re-
sult in physical delivery of the underlying commodity. These
amended rules give parties greater flexibility to settle an option
through financial means. The amendments also streamlined the
registration requirements for ATOMs and their sales agents in
several respects including removing the training requirement for

Executive Summary—Significant Developments in the Past Year 2


FY 2001 BUDGET &
FY 2001 ANNUAL PERFORMANCE PLAN

Prepared for the
Committee on Appropriations

February 2000


President’s Budget

Crosswalk From FY 2000 to FY 2001

FY 2000 FY 2001 Change
Estimate Request

Budget Authority ($000) $62,761 $72,000 $9,239
Full-Time Equivalents (FTEs) 561 621 +60
Explanation of Change FTEs Dollars

($000)

Increases: (Adjustments to FY 2000 Base)

To provide for full funding of the FTE ceiling of 621 +60 $3,532
To provide for annualization of estimated Jan. 2000 4.94% pay increase 444
To provide for estimated January 2001 3.7% pay increase 956
To provide for within-grade increases 324
To provide for increased costs of benefits 1,681
To provide for increased costs in other non-personnel services 2,302

TravelTransportation ($152)
‘Space Rental ($370)
Communications/Utilities ($-162)
‘Supplies/Printing ($48)

ADP-Systems Analysis & Programming ($911)
Equipment ($633)

All Other (Maintenance, Transcription Svcs, Training, Tenant Alterations, etc.) ($350)

Total increases +60 $9,239
———S

Table 1: Crosswalk from FY 2000 to FY 2001

8 Executive Summary—Crosswalk from FY 2000 to FY 2001


President’s Budget

Breakout of Requested $9.2 Million Increase

By Object Class

. over 70% of the requested $9.2 Million increase covers staff
salaries and benefits. . . .

‘Compensation & Benefits
74%

(Includes ADP Systems
Analysis and Exchange Travel & Transportation
Database System) ‘Space Rental 2%

4%

Figure 6: $9.2 Million Increase by Object Class

Executive Summary—Requested Increase by Object Class.


President’s Budget

sion also consolidated in one part of its regulations its various rules
and policies regarding the administration of speculative position
tules.

A Study of the Global Competitiveness of US Futures Markets

During FY 1999, Market Research staff examined the global com-
petitiveness of US futures markets and found that US-based com-
modities exchanges are successfully competing with foreign ex-
changes. In fact, regulation at overseas commodities exchanges ap-
pear to be converging toward common “best practice” principles im-
plemented by most exchanges around the world. The results of the
study have been published and can be found on the Commission’s
Web site at the following address:

<http://www.cftc.gov/dea/compete/compete.doc>.

Year 2000 Compliance

The Commission has worked since 1994 to prepare for the Year 2000
to ensure that its own systems were Year 2000 compliant. In addi-
tion, the Commission worked with the self-regulatory organizations
(SROs) to execute a comprehensive and multifaceted approach to as-
sist the futures industry in achieving Year 2000 compliance. The
actions taken include: 1) sending questionnaires to SROs and regis-
trants; 2) specifying Year 2000 responsibilities for SROs, registrants,
and auditors; 3) working with the American Institute of Certified
Public Accountants (AICPA) to develop agreed-upon procedures to
assess programs to ensure Year 2000 readiness; and 4) fostering
testing and contingency planning preparations. The Commission
worked closely with the Futures Industry Association (FIA) to achieve
industry-wide testing. The Commission also participates in the
President’s Council on the Year 2000 Conversion, as well as other
domestic and international industry groups addressing the Year
2000 problem. The Commission experienced no Year 2000-related
problems.

Dual Trading

Dual trading is prohibited in an affected contract market unless an
exchange files a dual trading petition that demonstrates that the ex-
change has a trade monitoring system capable of and used for de-
tecting dual trading-related abuses. Once a petition is filed, appli-
cation of the dual trading prohibition is suspended unless and until
the petition is acted upon.

On February 26, 1999, the Commission approved an Order granting
CBT a statutory dual trading exemption for the US Treasury Bond
futures contract traded on its Project A trading system. That Order
was amended on June 4, 1999 to include the Ten-Year US Treasury

28 Executive Summary—Significant Developments in the Past Year


President’s Budget

tive to regular or fast-track procedures for contract market designa-
tion, was in response to concerns of representatives of US exchanges
that the ability to list contracts more quickly than currently possible
is necessary for them to meet competitive challenges by foreign ex-
changes and over-the-counter markets.

Streamlining of Reviews of Exchange Rule Changes

The Commission reviewed its requirements for exchange submis-
sions of proposed rule changes for Commission approval. In June
1999, the Commission proposed amendments to Rule 1.41 to in-
crease the number of exchange rule changes that can become effec-
tive immediately and those that may go into effect within three days
or ten days of submission to the Commission. The proposed proce-
dures also will permit exchanges to reduce significantly the number
of filings of rule changes they are required to make to the Commis-
sion.

In addition, in a Federal Register release published on November 26,
1999 (64 FR 66428), the Commission sought comment on a proposal
to revise its procedures for the review of contract market rules and
tule amendments. The comment period was originally scheduled to
expire on January 25, 2000. Upon the request of seven agricultural
organizations, the Commission has extended the comment period to
February 24, 2000.

Under the proposed new Regulation 1.41(2), a contract market rule
could be placed into effect on the business day after the Commission
had received a submission for the rule. There would be no delay in
the implementation of the rule to allow for prior Commission review.
The submission for the rule would have to include: 1) the text of the
rule or amendment, with redline, as applicable; 2) a brief explanation
of the rule; 3) a description of any substantive opposition; and 4) a
certification that the rule is not inconsistent with the Act or with
Commission regulations. To ensure that a board of trade seeking
initial designation as a contract market would continue to undergo
detailed analysis, the process could be used only by a contract mar-
ket with at least one non-dormant contract.

Speculative Limits

On May 5, 1999, the Commission published final rules that will in-
crease the speculative position limits for the deferred delivery
months for futures and option contracts on various agricultural
commodities. These position limits were restricting the ability of
some traders to maintain as large a position as they determined ap-
Propriate to the risk they wish to assume. The Commission deter-
mined that the markets in question had grown sufficiently in the
years since the Commission last considered these position limits and
that increases in the position limits were appropriate. The Commis-

Executive Summary—Significant Developments in the Past Year 27


President’s Budget

Breakout of $72.0 Million Budget Estimate

By Program Activity

.... the $72.0 Million Budget is allocated among five programs:
Enforcement; Trading & Markets; Market Surveillance, Analysis &

Research; Proceedings; and General Counsel. There is one support
program: Executive Direction... .
$16.7 Million
Trading &
$8.0 Million Markets
Market 23%
Surveillance,
Analysis &
Research
11%
$21.8 Million
$18.0 Million Enforcement
Executive $ 2.4 Million
Direction & $5.1 Million Proceedings
Support General 4%
25% Counsel

T%

Figure 3: $72.0 Million Budget Estimate by Program

Executive Summary—Budget by Program


President’s Budget

Commission will consider contract market Proposals to adopt al-
ternative execution procedures for large size or other types of or-
ders on a case-by-case basis under a flexible approach to the re-
quirements of the CEA and Commission regulations. The advi-
sory enables each contract market to retain its discretion to per-
mit alternative execution procedures and to have the ability to
develop procedures that reflect the particular characteristics and
needs of its individual markets and market participants. (June
1999)

Disciplinary Notices. Delegation to NFA certain Tegulatory re-
sponsibilities associated with Commission Regulation 9.11. The
Commission has issued an advisory informing the exchanges that
they can directly file Regulation 9.11 disciplinary notices with
NFA, either electronically or in writing, rather than with the
Commission. In this vein, the Commission has also issued an
order delegating to NFA the duty to collect, process, and maintain
Regulation 9.11 notices submitted by exchanges.

Foreign Advisors and Disclosures. Adoption of amendments to

Commission Rules 30.5 and 30.6. Amended Rule 30.5 permits a
foreign person acting in the capacity of an IB, commodity trading
advisor (CTA) or commodity pool operator (CPO) who deals with
US customers to obtain an exemption from registration in certain
circumstances. To obtain a Rule 30.5 exemption, the person
must file a petition for exemption with and receive confirmation
from the NFA. The Commission also amended the disclosure re-
quirements of Rule 30.6 to “level the playing field’ between CTAs
and CPOs trading domestic products and CTAs and CPOs trading
foreign futures and options. Under amended Rule 30.6, CTAs
and CPOs must provide similar disclosures to clients or partici-
pants regardless of whether they trade on domestic or foreign
markets. Amended Rule 30.6 also decreases the amount of dis-
closure to be provided to sophisticated investors, Pursuant to a
Delegation Order issued concurrently with the rule amendments,
the Commission authorized NFA to review the disclosure docu-
ments filed pursuant to Rule 30.6.

Temporary Licenses. Adoption of rule amendments and approval
of related NFA rules to permit NFA to issue temporary licenses
(TLs) to certain applicants for tegistration as APs, FBs, floor trad-
ers (FTs), and guaranteed IBs despite a “yes” answer to a disci-
plinary question.

Administrative Process. Improvement of the fairness and effi-
ciency of the administrative process by adopting: 1) new rules to
establish a specific procedure for filing requests for no-action, ex-
emptive, and interpretative letters to give structure to the proc-
ess; 2) new rules to provide greater guidance to requesters and
make the process more transparent to all interested parties; and

18

Executive Summary—Significant Developments in the Past Year


President’s Budget

Commission on locational price differentials. In particular, the
Commission reminded the CBT of its obligation to monitor locational
price differentials of the contract and, if appropriate, take steps to
assure that the futures delivery value of soybean oil in each delivery
territory reflects the cash market value of soybean oil at each regular
warehouse located within such territories. The Commission advised
the CBT to monitor carefully the operation of the proposed Class I
railroad amendment to assure that it does not serve as an impedi-
ment to delivery on the futures contract.

Electronic Trading Developments

The Commission is faced with an increasing number of important
issues concerning the impact of technological changes on methods of
transacting business on futures exchanges. The Commission has
before it three different issues related to developments in electronic
trading:

¢ Foreign Boards of Trade Automated Trading Systems in the US.

On March 16, 1999, the Commission issued proposed rules con-
cerning access through automated trading systems (computer
terminals and automated order routing systems (AORS)) in the
US to foreign boards of trade. The Commission received in excess
of SO written comments on the proposed rules and held a
roundtable discussion during the comment period. In light of
substantial comment suggesting that the issues involved needed
to be explored further and the Commission’s own reconsideration
of these issues, on June 2, 1999, the Commission withdrew the
proposed rules and instructed the staff to begin immediately to
Process no-action requests from foreign boards of trade seeking
to place trading terminals in the US. The Commission also com-
mitted simultaneously to initiate processes to address compara-
tive regulatory levels between US and foreign electronic systems
so as not to provide one with a competitive advantage and to pro-
ceed expeditiously toward adoption of rules and/or guidelines. A
no-action letter was issued to the London International Financial
Futures and Options Exchange (LIFFE) in July, 1999. No-action
letters were issued in August 1999 to Eurex (Germany), Marché 4
Terme International de France (MATIF) as well as the Sydney
Futures Exchange and New Zealand Futures and Options Ex-
change, which jointly operates the Sydney Computerized Over-
night Market (SYCOM) system. No-action letters were issued ot
the International Petroleum Exchange (IPE) in November 1999
and to the Singapore International Monetary Exchange (SIMEX)
in December 1999. A supplemental no-action letter was also is-
sued to LIFFE in December 1999. As of the end of January 2000,
there are pending no-action requests from the OM Exchange in
the UK (OMLX), the Hong Kong Futures Exchange, and Eurex
(Switzerland), The Global Markets Advisory Committee (GMAC)
has pursued the regulatory parity issue and presented a report to

24 Executive Summary—Significant Developments in the Past Vear


Figure 1:
Figure 2:
Figure 3:
Figure 4:
Figure 5:
Figure 6:
Table 1:

Figure 7:
Figure 8:
Table 2:

Figure 9:

Figure 10:

Table 3:

Figure 11:

Table 4:

Figure 12:
Figure 13:
Figure 14:

Table 5:

Figure 15:

Table 6:

Figure 16:
Figure 17:
Figure 18:

Table 7:

Figure 19:

Table 8:

Figure 20:

Figure 21:
Figure 22:

Table 9:

Figure 23:

Table 10:
Figure 24:
Figure 25:
Figure 26:
Table 11:
Figure 27:
Table 12:
Figure 28:
Figure 29:
Figure 30:
Table 13:
Figure 31:
Table 14:
Figure 32:
Table 15:
Table 16:
Figure 33:
Figure 34:
Table 17:
Figure 35:
Figure 36:

FY 2001 President’s Budget—Figures and Tables
$72.0 Million Budget Estimate.
Requested $9.2 Million Increase
$72.0 Million Budget Estimate by Program .
$9.2 Million Increase by Program.............
$72.0 Million Budget Estimate by Object Class.
$9.2 Million Increase by Object Class
Crosswalk from FY 2000 to FY 2001 ..
$72.0 Million Budget Estimate by Agency Goal.
$9.2 Million Increase by Agency Goal..
Outcome Objectives by Dollars Budgete
Market Surv., Analysis & Rsrch Percentage of Total Budget Dollars
Market Surv., Analysis & Rsrch Percentage of Total Budget FTEs -31
Market Surv., Analysis & Rsrch Summary of Request...
Market Surv., Analysis & Rsrch FY 2001 Budget Dollars .
Market Surv., Analysis & Rsrch Summary of Request by Goal .
Market Surv., Analysis & Rsrch FY2001 Budget Dollars by Goal.
Trading & Markets Percentage of Total Budget Dollars .
Trading & Markets Percentage of Total Budget FTEs.
Trading & Markets Summary of Request .....
Trading & Markets FY 2001 Budget Dollars .
Trading & Markets Summary of Request by Go:
Trading & Markets FY 2001 Budget Dollars by Goal
Enforcement Percentage of Total Budget Dollars .
Enforcement Percentage of Total Budget FTEs
Enforcement Summary of Request....
Enforcement FY 2001 Budget Dollars
Enforcement Summary of Request by Goal
Enforcement FY 2001 Budget Dollars by Goal .
Proceedings Percentage of Total Budget Dollars
Proceedings Percentage of Total Budget FTEs
Proceedings Summary of Request...
Proceedings FY 2001 Budget Dollars
Proceedings Summary of Request by Goal .
Proceedings FY 2001 Budget Dollars by Goal
General Counsel Percentage of Total Budget Dollars
General Counsel Percentage of Total Budget FTEs.
General Counsel Summary of Request..............
General Counsel FY 2001 Budget Dollars .....
General Counsel Summary of Request by Goal
General Counsel FY 2001 Budget Dollars by Goal .
Executive Direction Percentage of Total Budget Dollars
Executive Direction Percentage of Total Budget FTEs
Executive Direction & Support Summary of Request
Executive Direction & Support FY 2001 Budget Dollars
Executive Direction and Support Summary of Request by Goal
Executive Direction & Support FY 2001 Budget Dollars by Goal .
Summary by Program..... sean
Summary by Object Classification

Growth of Volume of Contracts Traded and FTEs.
CFTC Actively Traded Contracts
Number of Registered Commodities Professionals
CFTC-Regulated Pools and Managed Account Funds.
Map of CFTC-Regulated Commodity Exchanges.



President’s Budget

Breakout of Requested $9.2 Million Increase

By Agency Goal

. the requested $9.2 Million increase is allocated among the
agency ’s three Strategic Goals as follows . . .

$2.9 Million
Goal Three: Foster
‘open, competitive, and

financially sound $2.8 Million
markets. Goal One: Protect the
32%

‘economic functions of the

commodity futures and

option markets.
30%

$3.5 Million
Goal Two: Protect
market users and the
public.
38%

Figure 8: $9.2 Million Increase by Agency Goal

Executive Summary—Requested Increase by Agency Goal "1


President’s Budget

Significant Developments in the Past Year

Enforcement

The primary goal of the Enforcement Program is to police futures
markets for conduct that violates the Commodity Exchange Act (CEA
or the Act) or Commission regulations. Such misconduct undermines
the integrity of the markets and the confidence of market partici-
pants. The Enforcement staff always look for new ways to enhance
their ability to detect and deter wrongdoing. In FY 1999, Enforce-
ment staff recommended that the Commission take important ac-
tions using novel substantive and procedural approaches. The fol-
lowing matters are examples of significant developments in FY 1999:

© Copper Manipulation. In May 1999, the Commission filed a one-
count administrative complaint against Global Minerals and Met-
als Corporation (Global); Global’s president and chief executive
officer R. David Campbell; and Global’s chief copper trader, Carl
Alm. The complaint alleged that the respondents manipulated,
cornered, and attempted to manipulate and attempted to corner
the copper market in late 1995. The complaint also named
Merrill Lynch & Co. Inc. (Merrill Lynch), Merrill Lynch Interna-
tional Inc. (Merrill International), and Merrill Lynch, Pierce, Fen-
ner and Smith (Brokers & Dealers) Limited of London, England
(Merrill (B&D)) (collectively referred to as the Merrill Lynch re-
spondents), and alleged that these respondents aided and abet-
ted Global, Campbell, and Alm in the worldwide copper market
manipulation and attempted manipulation. Specifically, the
complaint alleged that between October and December 1995,
Global, Campbell, and Alm, together with Sumitomo Corporation
of Japan, manipulated and attempted to manipulate upward the
worldwide price of copper and copper futures contracts in viola-
tion of the Act. According to the complaint, the manipulation of
copper prices was the culmination of a long and deliberate
scheme by Campbell and Sumitomo’s former chief copper trader,
Yasuo Hamanaka (Hamanaka), to acquire large market positions
and liquidate them at distorted and artificially high prices. The
CFTC alleged that Global, Campbell, and Alm, among other
things: acquired and maintained a dominant and controlling po-
sition in London Metal Exchange (LME) warehouse stocks of cop-
per and thereafter withheld substantially all or a large percentage
of that copper from the market; purchased and held massive and
unneeded long copper futures contract Positions; and engaged in
an elaborate scheme of deception and false statements, which
fostered the manipulation. As a result of their conduct, the com-
plaint alleged that the prices of Copper futures contracts, copper
spread price differentials, and the prices of cash or physical cop-
per, both in the US and abroad, reached artificially high levels. in
re Global Minerals & Metals Corp., et al., CFTC Docket No. 99-11
(CFTC filed May 20, 1999).

Executive Summary—Significant Developments in the Past Year 13


Revisions to Rules of Practice (Part 10 Rules)
Consumer Advisory.....
Enforcement Task Force:
Integrated Case Tracking of Reparations Cases
Freedom of Information Act Appeals Streamlined
Financial Management Improvements
Automated Access to Research Information
Information Technology Improvements ....
Restructuring of Administrative Support Services ..
Better Access to Human Resources Information ....

WORKING RELATIONSHIPS
President’s Working Group on Financial Markets.
Information Sharing with Other Financial Regulators
National Futures Association ..
US Department of Agriculture .
Educational Opportunities & Outreach Efforts
Agricultural Advisory Committee
Technology Advisory Committee.
Global Markets Advisory Committee .........ccecseses.
Memoranda of Understanding, International Arrangements
International Organization of Securities Commissions
Cooperative Enforcement .........cccccscssssesssssesececesseeseese 97
US Treasury Department Strategy to Combat Money Laundering and Related
Financial Crime ..0.0....... esses :

US Treasury Department Financial Stal ility Agenda
International Financial Regulators.
Year 2000 Outreach Program...
Executive Direction & Support....

APPENDIX..............
The Commissioners
Summary by Program Table..........00.....
Summary by Object Classification Table.
Growth in Volume of Contracts Traded & FTEs
Actively Traded Contracts..........cccccccessceseseee
Number of Registered Commodities Professionals..
Money Under Management in CFTC-Regulated Pools and Managed Accounts.
Map of CFTC-Regulated Commodity Exchanges..... :
Statement of Obligations & Employment............
Summary of Futures & Option Trading in FY 1998 and FY 1999.
Table of Acronyms...

119
120
133

A Note on the Format:

In addition, there is a cross-cutting analysis in each section. That is, the program-based analysis of the President's
Budget is augmented by a programmatic distribution of resources by Agency Goal. Conversely, the goal-based analysis
of the Annual Performance Plan also disaggregates resources by program. Our intent is to engender greater under-
standing among the public, the Congress, the Administration, market users, and the many other persons and entities
with which we work of how the Commission resources contribute to the accomplishment of the agency’s mission.

Questions or comments about this document can be directed to: Emory H. Bevill, Acting Director, Office of Financial

Management at 202-418-5187, via e-mail at ebevill@CFTC.gov or, Deidre King, Budget Analyst at 202-418-5189, via e-
mail at d_king@CFTC. gov.


President’s Budget

those sales agents. Changes to the rules also revised the re-
quired disclosure statements and streamlined and reduced over-
all reporting and recordkeeping requirements. Commission staff
briefed the public on the amended rules during the latest meet-
ing of the Agricultural Advisory Committee on December 8, 1999,

Chicago Board of Trade Wheat Delivery Rules

CBT Survey and Task Force. In December 1996, the Commission
directed the CBT to complete its consideration of possible
changes to its wheat contract. The CBT responded with a status
report and stated that it would conduct a market research effort to
determine whether a broader review of the contract should be un-
dertaken. In August 1997, the CBT conducted a survey of wheat
futures contract users to identify desirable changes in contract
terms. In January 1998, the Business Development and Market-
ing Committee of the CBT formed a wheat task force to review the
survey results and recommend contract changes to the CBT’s
Board of Directors. In August 1998, the CBT Board of Directors
approved the task force’s recommendations and, on October 14,
1998, the membership approved those amendments. The CBT
submitted those amendments to the Commission for its review on
October 21, 1998.

Amendments to the Wheat Contract. The CBT proposed amend-
ments were designed to enhance its regulatory oversight of the
wheat contract. Specifically, the CBT proposed to amend its wheat
contract: 1) by reducing the 600-contract spot-month speculative
position limit during the last five trading days in the March con-
tract to 350 contracts and in the May contract to 220 contracts;
2) by changing the locational price differential for delivery of wheat
at Toledo from a two-cent-per-bushel discount to par and for de-
livery at St. Louis from an 8-cent-per-bushel premium to a 10-
cent-per-bushel premium; 3) by changing the quality price differ-
ential for delivery of US No. 1 grade northern spring wheat from
par to a premium of three cents per bushel and for US No. 2
grade northern spring wheat from a one-cent-per-bushel dis-
count to par; 4) by requiring regular warehouse or shipping sta-
tion operators at Chicago and St. Louis to give preference to or-
ders to load out wheat for futures delivery over their cash com-
mitments; 5) by deleting provisions relating to in-loading of wheat
at regular warehouses in Chicago and St. Louis; and 6) by
changing the last trading day of the contract to the business day
prior to the 15th calendar day of the month and the last delivery
day to the seventh business day following the last trading day.

Public Comment. The Commission requested public comment on
the exchange rule amendments raising a number of specific issues
for response, including whether under the proposed amendments
deliverable supplies would be sufficient to prevent or diminish price

22

Executive Summary—Significant Developments in the Past Year


Table of Contents

The FY 2001 President’s Budget...............
Breakout of $72.0 Million Budget Estimate .
Breakout of Requested $9.2 Million Increase
Breakout of $72.0 Million Budget Estimate .
Breakout of Requested $9.2 Million Increase
Breakout of $72.0 Million Budget Estimate .
Breakout of Requested $9.2 Million Increase
Crosswalk From FY 2000 to FY 2001...........
CFTC Mission Statement and Agency Goals
Breakout of $72.0 Million Budget Estimate .
Breakout of Requested $9.2 Million Increase ..
Ranking of Commission Outcome Objectives

Significant Developments in the Past Year.
FY 2001 PRESIDENT’S BUDGET BY PROGRAM.
Market Surveillance, Analysis & Research..........

CHONDHEYOHOH HE

Total Budget: $ 7,974,000 86FTEs..
Total Increase: $ 1,317,000 9 FTEs
Market Surveillance, Analysis & Research .......
Trading & Markets ..0........ccccssssssssscscsccseveeeeee
Total Budget: $16,724,000 144 FTEs
Total Increase: $ 2,353,000 17 FTEs
Trading & Markets..........ccccccscsssssssssscsseseceececseses

Enforcement............csccsssscsesseseeseesssesscsseesesseases
Total Budge $21,825,000
Total Increase: $ 3,142,000
Enforcement.........

Office of Proceedings .
Total Budget: $ 2,351,000
Total Increase: $ 197,000

Office of Proceedings............

Office of the General Counsel.
Total Budget: $ 5,105,000 38 FTEs
Total Increase: $ 790,000 5 FTEs
Office of the General Counsel .

Executive Direction & Support.
Total Budget: $18,021,000 150 FTEs..
Total Increase: $ 1,440,000 4 FTEs
Executive Direction & Support

IMPROVING EFFICIENCY & EFFECTIVENESS.
Large Trader Reporting ...........c.cccccceeceseeee
Listing New Contracts Via Exchange Certification
Exchange Database System........
Electronic Filing and Recordkeeping
Reductions of Regulatory Burdens
Use of the Internet................
Internet Monitoring ...
Enforcement Modernization Project


President’s Budget

ment policy and increase overall awareness of sexual harassment
issues.

kK

Executive Summary—Significant Developments in the Past Year


President’s Budget

the Commission with recommendations following discussion at a
meeting on July 21, 1999.

¢ Cantor Financial Futures Exchange (CFFE). CFFE is a designated

contract market and is a joint venture between Cantor Fitzgerald,
an interdealer-broker in the US Treasury securities market, and
the New York Cotton Exchange (NYCE) division of the New York
Board of Trade (NYBT), a designated contract market. The Com-
mission has allowed rules to go into effect that enable certain
classes of exchange members to enter orders directly into the
order-matching system of the exchange via terminals provided by
the exchange. The Commission also has allowed into effect CFFE
rules that permit the exchange to operate a trading facility in
London. Lastly, the Commission allowed into effect a market
maker program which provided for transaction fee waivers to
participants who provide minimum levels of liquidity.

¢ Internet and Electronic Contract Market Applicants. Commission

staff are reviewing the application of FutureCom, Ltd. (Future-
Com), a Texas limited partnership owned by the Texas Beef
Group, for designation as a new contract market for the auto-
mated Internet-based trading of cash-settled live cattle and op-
tions contracts. FutureCom is unique in that it would be the first
totally Internet-based futures or securities exchange and every
member would be its own clearing member. Full margin for an
order would have to be deposited with FutureCom before the or-
der was accepted by the system and margin levels and position
limits would be tied directly to the creditworthiness of the mem-
ber. FutureCom would operate on a for-profit basis. Commission
staff concluded a second on-site visit to verify certain aspects of
FutureCom’s operations and participated in mock trading. At the
request of Commission staff, FutureCom obtained a third party
review of its trading system. In January 2000, Commission staff
informed FutureCom by letter that staff had received materials
addressing outstanding issues, including the testing of the sys-
tem, and have an adequate record in support of the FutureCom
proposal. Commission staff are actively working to complete the
Commission’s review of the FutureCom application.

Proprietary Cross-Margining

In June 1999, the Commission gave approval to New York Clearing
Corporation (NYCC) to establish a proprietary cross-margining pro-
gram with Government Securities Clearing Corporation (GSCC) for
the cross-margining of US Treasury futures contracts traded at
CFFE with cash US Treasury securities cleared through GSCC. The
NYCC-GSCC program differs from previous cross-margining pro-
grams because each clearing organization would maintain its own
Separate account of the proprietary positions an funds subject to
cross-margining. Each clearing organization calculates the margin

Executive Summary—Significant Developments in the Past Year 25


President’s Budget

CFTC Mission Statement and Agency Goals

Mission Statement
The mission of the Commodity Futures Trading Commission
ts to protect market users and the public from fraud,
manipulation, and abusive practices related to the
sale of commodity futures and options, and to foster
open, competitive and financially sound commodity
futures and option markets.

Goal One
Protect the economic functions of the commodity futures and option markets.

Outcome Objectives

1. Foster futures and option markets that accurately reflect the forces of
supply and demand for the underlying commodity and are free of dis-
ruptive activity.

2. Oversee markets which can be used effectively by producers, proces-
sors, financial institutions, and other firms for the purposes of price
discovery and risk shifting.

Goal Two
Protect market users and the public.

Outcome Objectives

1. Promote compliance with, and deter violations of, federal commodities
laws,

Require commodities professionals to meet high standards.

3. Provide a forum for effectively and expeditiously handling customer
complaints against persons or firms registered under the Commodity
Exchange Act.

Goal Three
Foster open, competitive and financially sound markets.

Outcome Objectives

1. Ensure sound financial practices of clearing organizations and firms
holding customer funds.

2. Promote and enhance effective self-regulation of the commodity futures
and option markets.

3. Facilitate the continued development of an effective, flexible regulatory
environment responsive to evolving market conditions.

4. Promote markets free of trade practice abuses.

Executive Summary—CFTC Mission Statement and Agency Goals 9



President’s Budget

Ranking of Commission Outcome Objectives

Outcome Objectives

21%

41

3.2

3.3

3.4

3.41

2.2

2.3

0 5,000 10,000 15,000 20,000

Dollars in Thousands

Table 2: Outcome Objectives by Dollars Budgeted

Outcome Objective

Promote compliance with, and deter violations of, federal commodities laws.

Foster futures and option markets that accurately reflect the forces of supply
and demand for the underlying commodity and are free of disruptive activity.

Promote and enhance effective self-regulation of the commodity futures and
and option markets.

Facilitate the continued development of an effective, flexible regulatory
environment responsive to evolving market conditions.

Promote markets free of trade Practice abuses.

Ensure sound financial practices of clearing organizations and firms holding
customer funds.

Require commodities professionals to meet high standards.

Provide a forum for effectively and expeditiously handling customer complaints
against persons or firms registered under the Commodity Exchange Act.

Oversee markets which can be used effectively by producers, Processors,
financial institutions, and other firms for the Purposes of price
discovery and risk shifting.

Denotes Goal Two, Outcome Objective One. (See page 9.)

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Executive Summary—Ranking of Commission Outcome Objectives