U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre 

Office of the 

Inspector General 

TO: Gary Gensler 

Chairman 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5110 

Facsimile: (202) 418-5522 

MEMORANDUM 

FROM: A. Roy Lavik c;:::'~ Inspector General 

DATE: November 14, 2012 

SUBJECT: Inspector General's Assessment of The Most Serious Management 

Challenges Facing the Commodity Futures Trading Commission (CFTC) 

Introduction 

The Reports Consolidation Act of 2000 (RCA) authorizes the CFTC to provide financial and 

performance information in a meaningful and useful format for Congress, the President, and the 

public. The RCA requires the Inspector General to summarize the "most serious" management 

and performance challenges facing the Agency and to assess the Agency's progress in addressing 

those challenges. This memorandum fulfills our duties under the RCA. 

In order to identify and describe the most serious management challenges, as well as the 

Agency's progress in addressing them, we relied on data contained in the CFTC financial 

statement audit and Annual Financial Report, representations by agency management, and our 

knowledge of industry trends and CFTC operations. Since Congress left the determination and 

threshold of what constitutes a most serious challenge to the discretion of the Inspector General, 

we applied the following definition in preparing this statement: 

Serious management challenges are mission critical areas or programs that have the 

potential for a perennial weakness or vulnerability that, without substantial management 

attention, would seriously impact Agency operations or strategic goals. 

This memorandum summarizes the results of the CFTC's current financial statement audit, 

describes the Agency's progress on last year's management challenges, and finally discusses the 

most serious management challenges that we have identified. For the second year in a row, we 

identified the most serious management challenges as: 

• Efficient Deployment of Information Technology Resources 

• Expanding Delivery of Customer Protection Resources and Consumer Education. 
CFTC Financial Statement Audit Results 

In accordance with the Accountability ofT ax Dollars Act, CFTC, along with numerous other 

federal entities, is required to submit to an annual independent financial statement audit by the 

Inspector General, or by an independent external auditor as determined by the Inspector General. 

The results of the Fiscal Year 2012 financial statement audit will be discussed in the Annual 

Financial Report, and the financial statement audit is expected to result in an unqualified audit 

opinion. 

CFTC's Progress on Last Year's Challenges 

Last year, we identified two of the most serious management challenges: 

• Efficient Deployment of Information Technology Resources; and, 

• Expanding Delivery of Customer Protection Resources and Consumer Education. 

CFTC made progress on both challenges, but these challenges remain significant due to ongoing 

implementation of the Dodd-Frank Act. 

Most Serious Management Challenges for the coming year 

The two issues that we identified last year will continue to challenge CFTC management in the 

comtng year: 

Efficient Deployment of Information Technology Resources 

Last year we stated that over eighty percent of futures and options trading on the Chicago 

Mercantile Exchange are transacted electronically. Since then electronic trading continued its 

inexorable march and now over eighty-five percent of futures and options occurs electronically. 

Last year we also expressed a concern that the agency's additional regulatory responsibilities 

mandated by the Dodd-Frank Act would challenge management's ability to adequately regulate 

the sizeable volume of swaps transactions--currently estimated to exceed $600 trillion in notional 

value worldwide. On October 12, 2012 CFTC regulations required reporting on certain cleared 

interest rate and credit default swaps transactions to Swap Data Repositories (SDR); the agency 

has access to the data received by the SDRs. In order to properly analyze the data and scan for 

trade anomalies the agency is in the process of specifying a standard data structure for swap 

information submitted to SDRs and it is our understanding that the industry and the CFTC are 

working though this new Dodd-Frank Act regulatory mandate. In January 2013 the CFTC will 

receive real time swap transaction data, placing additional regulatory demand on the agency. 

These challenges--electronic trading vs. declining on-exchange floor trading, and expanded 

jurisdiction over the swaps market--remain on the horizon. Both require the efficient 

deployment of effective information technology resources. 

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In fiscal year 2012, Congress appropriated $55 million dollars in multi-year funds for 

information technology to address the structural shift in derivatives trading regulated by the 

agency. Under a period of government-wide fiscal austerity, we anticipate that the agency will 

be challenged during the coming year to adequately conduct surveillance over these complex 

markets, and equally challenged to sift through voluminous transaction data to thwart 

wrongdoing. Reliance on technological solutions may be the agency's best tool to regulate the 

formerly unregulated swaps markets, and time will reveal the agency's success in meeting this 

challenge. We will monitor the agency's use of appropriated funds for information technology 

in light of these challenges. 

Expanding Delivery of Customer Protection Resources and Consumer Education 

Section of748(g) of the Dodd-Frank Act added section 23(g) to the Commodity Exchange Act to 

establish within the Treasury of the United States a revolving fund that will be available to the 

Agency for the payment of whistle blower awards and education initiatives. The new Customer 

Protection Fund is funded by civil monetary penalties collected through the Commission's 

enforcement program that are not otherwise distributed to victims. At the end of FY20 12 the 

Customer Protection Fund held over $100 million dollars, a significant increase from the $23 

million dollar balance held last fiscal year. On October 25, 2012 the Office of the Inspector 

General issued the financial statement audit of the Customer Protection Fund, which for the 

second year in a row resulted in an unqualified opinion on the financial statements. 

Increasingly, the Customer Protection Fund's expanding resources and commitments will 

demand significant management attention. We are encouraged that the agency has staffed the 

fund with new management, refined its policy for issuing awards to whistleblowers, and initiated 

Consumer Education outreach programs. However the recent financial scandals at MF Global, 

Inc., and Peregrine Financial, Inc., both generating reports of misappropriated customer funds, 

underscore the need to strengthen consumer protections in the financial system through 

consumer education. The increased commitment to whistleblower protection and customer 

education will challenge the agency to effectively manage decisions regarding additions to and 

awards from the Customer Protection Fund, to develop its organizational structure, and to 

prudently manage significant additional resources. 

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