U.S. Commodity Futures Trading Commission

Office of the Inspector General

An Investigation Regarding Cost-Benefit Analyses

Performed by the Commodity Futures Trading Commission 

in Connection with Rulemakings Undertaken Pursuant to the 

Dodd-Frank Act

REPORT OF INVESTIGATION

Prepared by the 

Office of the Inspector General

Commodity Futures Trading Commission

April 15, 2011
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Office of the Inspector General

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EXECUTIVE SUMMARY

The Office of the Inspector General for the Commodity Futures Trading Commission 

investigated the formulation of cost benefit analyses for four separate rulemakings recently 

published by the Commodity Futures Trading Commission: 

1. Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap 

Participant,‖ ―Major Security-based Swap Participant,‖ and ―Eligible Contract 

Participant,‖ 75 FR 80174 (December 21, 2010) (Joint proposed rule; proposed

interpretations);

1

2. Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and 

Major Swap Participants, 75 FR 81519 (December 28, 2010) (Notice of proposed 

rulemaking);

3. Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572

(December 22, 2010) (Notice of proposed rulemaking);

4. Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap 

Participants, 75 FR 71397 (November 23, 2010) (Notice of proposed rulemaking). 

We undertook this investigation at the request of Representative Frank D. Lucas, 

Chairman, House Committee on Agriculture, and Representative K. Michael Conaway, 

Chairman, Subcommittee on General Farm Commodities and Risk.2 We were asked to review 

eight factors in our investigation, and were requested to complete our investigation by April 15, 

2011. 

In order to complete the investigation, we reviewed drafts of the cost-benefit analyses for 

the four proposed rules, staff email, and internal memoranda. In addition, we conducted 

interviews with 24 CFTC employees at staff and various management levels who were involved 

(or were reported to us as involved) with the cost-benefit analyses processes for the four rules.

The cost-benefit analyses were created as follows. Following enactment of the DoddFrank Act,

3

the Chairman and Division Directors created 30 rulemaking teams.4 Because section 

15(a) of the Commodity Exchange Act (the Act)5required the consideration of a cost-benefit 

analysis for each rulemaking, the Office of General Counsel and Office of Chief Economist 

 

1 The Commission published this proposed rule jointly with the Securities and Exchange Commission, in

consultation with the Board of Governors of the Federal Reserve System. 75 FR 80174 (December 21, 2010).

2 The request is available here: http://agriculture.house.gov/pdf/letters/cftc_inspectorgeneral110311.pdf

3 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) 

(―Dodd-Frank Act‖ or ―Dodd-Frank‖). 

4 A 31st team was later created and tasked with developing conforming rules to update the CFTC’s existing 

regulations to take into account the provisions of the Act. Testimony of Chairman Gary Gensler before the House 

Committee on Agriculture, February 10, 2011, available at: 

http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-68.html. 

5

7 USC sec. 19.
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created a uniform methodology for cost-benefit analysis for use Agency-wide. That

methodology, contained in a September 2010 memo signed by the General Counsel and the 

Chief Economist, set out in some detail the types of qualitative considerations that might inform 

a cost-benefit analysis, encouraged the use of both qualitative and quantitative data, and included 

a template for everyone to follow. 

Although the development of a uniform methodology appeared to be an equal effort 

between the Office of General Counsel and the Office of Chief Economist, in practice the costbenefit analyses involved less input from the Office of Chief Economist, with the Office of 

General Counsel taking a dominant role. For the four rules we reviewed, the cost-benefit 

analyses were drafted by Commission staff in divisions other than the Office of Chief 

Economist. Staff from the Office of Chief Economist did review the drafts, but their edits were 

not always accepted. 

Staff in the Office of General Counsel created the first draft of the cost-benefit analysis 

for the proposed rule defining ―swap dealer‖ and ―major swap participant.‖

6

 Staff told us the 

Office of Chief Economist favored addressing in some manner the operational and compliance 

costs that would flow from coverage under the definition of ―swap dealer‖ or ―major swap 

participant,‖ but the Office of General Counsel determined only to address the costs and benefits 

associated with undergoing an examination or other process to determine whether one fell under 

the definitions, or not. 

With regard to the cost-benefit analyses for the proposed rule setting out core principles

for designated contract markets,7staff explained that the process for this rule went relatively 

smoothly, with staff in the Office of General Counsel drafting the cost-benefit analysis with 

some edits from the Office of Chief Economist and from other members of the rule-making 

team. However, staff from the Designated Contract Market (DCM) core principles team wanted 

us to know about disputes regarding an earlier rule regarding swap execution facilities. In 

connection with this other rule, the Office of Chief Economist edited an initial draft created by 

staff in the Office of General Counsel. To put the dispute in simplest terms, the Office of Chief 

Economist undertook a cost-benefit analysis that addressed separate tasks set out in various 

sections of the rule. Staff in the Office of General Counsel strongly encouraged the staff from 

the Office of Chief Economist not to deviate from accepted methodologies for cost-benefit 

analyses employed by the Commission for 10 years, which apparently limited the scope of the 

cost-benefit analysis under section 15(a) to an analysis of the rule as a whole. Staff from the 

Office of General Counsel opined that deviating from this long-standing standard could result in 

litigation risk, and that the adoption of a new methodology could require the Commission to 

engage in the same methodology for future rules (or a litigation risk could result). Inasmuch as 

the Commission’s cost-benefit analyses in rulemakings had never been challenged in court, we 

consider prior practice in this instance to not carry as much weight as if it had received judicial 

approval. Moreover, from our review of relevant email and memoranda, it is apparent that other 

 

6

Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap Participant,‖ ―Major Security-based 

Swap Participant,‖ and ―Eligible Contract Participant,‖ 75 FR 80174 (December 21, 2010) (Joint proposed rule; 

proposed interpretations).

7 Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010) 

(Notice of proposed rulemaking).
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staff within the Office of General Counsel did not appear to embrace this view. In the end, staff 

in the Office of General Counsel revised the cost-benefit analyses in accordance with its views, 

which was approved by the team leader and the team leader’s boss. 

The same team that drafted the proposed rules dealing with portfolio compression and 

reconciliation8also drafted the proposed rule setting out duties for swap dealers and major swap 

participants.

9

 The cost-benefit analysis was created, for both rules, by a sub-set of the 

rulemaking team, and reviewed by staff in the Office of Chief Economist. A staff member in the 

Office of Chief Economist who was assigned to the team told us she was not part of the subgroup that created the cost-benefit analysis, and she was not sure she was invited to all relevant 

meetings for the rulemaking. Instead, she was given drafts to review, and believed the drafts

were complete when she received them, and made few edits. 

To a greater or lesser extent for the four examined rules, the Office of General Counsel 

appeared to have the greater ―say‖ in the proposed cost-benefit analyses, and appeared to rely

heavily on an historic (and somewhat stripped down) analytical approach. While we offer no 

opinion on the cost-benefit analyses for the four rules, we note that similar economic analyses in 

the context of federal rulemaking have proved perilous for financial market regulators.

10

 

Moreover, it seems odd for an agency that regularly engages in economic analysis. We 

recognize that cost-benefit analysis does not possess anywhere near the exactitude of, say, 

calculus, but it does provide structure for evaluation. A more robust process is clearly permitted 

under the cost-benefit guidance issued by the Office of General Counsel and the Office of Chief 

Economist, and we believe a more robust approach would be desirable, with greater input from 

the Office of Chief Economist. 

We note that the Chairman has initiated a review and revision of the cost-benefit analysis 

methodology for use in final rulemakings, and again we recommend that such review should lead 

to more robust cost-benefit analysis methodologies. We recommend that the Office of Chief 

Economist take on an enhanced role. 

 

8

 Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519 (December 28, 2010) (Notice of proposed rulemaking).

9 Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 

(November 23, 2010) (Notice of proposed rulemaking). 

10 See, e.g., Am Equity Investment Life Ins. Co. v. S.E.C., 613 F.3d 166, 177-178 (D.C. Cir.2010); Chamber of 

Commerce of U.S. v. S.E.C., 412 F.3d 133, 142-144 (D.C. Cir.2005). 
U.S. Commodity Futures Trading Commission

Office of the Inspector General

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................ ii

BACKGROUND ............................................................................................................................ 1

Section 15(a) of the Commodity Exchange Act.......................................................................... 1

Methodology for Cost-Benefit Analysis Under the Dodd-Frank Act......................................... 2

The Commission’s Cost-Benefit Analyses for Four Proposed Rules............................................. 4

1. Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap 

Participant,‖ ―Major Security-based Swap Participant,‖ and ―Eligible Contract Participant,‖ 

75 FR 80174 (December 21, 2010) (Joint proposed rule; proposed interpretations).............. 4

2. Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers 

and Major Swap Participants, 75 FR 81519 (December 28, 2010) (Notice of proposed 

rulemaking).............................................................................................................................. 7

3. Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 

(December 22, 2010) (Notice of proposed rulemaking).......................................................... 9

4. Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap 

Participants, 75 FR 71397 (November 23, 2010) (Notice of proposed rulemaking) ............ 11

Cross-cutting Issues Associated with the Four Proposed Rules................................................... 13

Developments Following Publication of the Four Proposed Rules.............................................. 15

Analysis of the Eight Factors Posed by Chairman Lucas and Chairman Conaway ..................... 16

1. The methodologies the CFTC uses to evaluate costs and benefits ...................................... 16

2. Whether the sequence by which rules are proposed impacts the CFTC’s ability to 

adequately evaluate costs and benefits...................................................................................... 17

3. The extent to which, in light of budget constraints, the CFTC has sought outside input and 

expertise in evaluating costs and benefits................................................................................. 17

4. The extent to which the CFTC has evaluated and distinguished the costs and benefits of 

proposed regulations on market participants of diverse sizes and from diverse sectors........... 17

5. The extent to which the CFTC gives special consideration to evaluating the costs and 

benefits for small businesses..................................................................................................... 18

6. The amount of time, on average, that Commission staff spent per rule evaluating costs and 

benefits as required by 15(a)..................................................................................................... 18
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7. When one proposed rule is highly dependent on another, as is often the case in Title VII, 

the extent to which the CFTC gives consideration to the impact preceding or subsequent rules 

may have on the costs or the benefits of the rule under consideration...................................... 20

8. The impact the current statutory deadline of Title VII has on the Commission’s ability to 

conduct meaningful cost-benefit analysis and the extent to which an extension of the statutory 

deadline would improve the Commission’s ability to consider the costs associated with 

proposed rules ........................................................................................................................... 20

Conclusions and Recommendation............................................................................................... 21

Exhibit 1, Guidance on and Template for Presenting Cost-Benefit Analyses for Commission 

Rulemakings.............................................................................................. .Ex-1
U.S. Commodity Futures Trading Commission

Office of the Inspector General

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BACKGROUND

Section 15(a) of the Commodity Exchange Act

Section 15(a) was added to the Commodity Exchange Act in 2000 with passage of the 

Commodity Futures Modernization Act (CFMA). 11 Section 15(a) provides: 

(a) Costs and benefits.

 (1) In general. Before promulgating a regulation under this Act [7 USCS §§ 1 et 

seq.] or issuing an order (except as provided in paragraph (3)), the Commission 

shall consider the costs and benefits of the action of the Commission.

 (2) Considerations. The costs and benefits of the proposed Commission action 

shall be evaluated in light of—

 (A) considerations of protection of market participants and the public;

 (B) considerations of the efficiency, competitiveness, and financial integrity 

of futures markets;

 (C) considerations of price discovery;

 (D) considerations of sound risk management practices; and

 (E) other public interest considerations.

 (3) Applicability. This subsection does not apply to the following actions of the 

Commission:

 (A) An order that initiates, is part of, or is the result of an adjudicatory or 

investigative process of the Commission.

 (B) An emergency action.

 (C) A finding of fact regarding compliance with a requirement of the 

Commission.

The legislative history for section 15(a) is sparse, and appears to consist of this brief 

statement: 

[The CFMA] amends section 15 of the CEA to add a new subsection (a) requiring 

the CFTC, before promulgating regulations and issuing orders, to consider the 

costs and benefits of its action. This does not apply to orders associated with an 

adjudicatory or investigative process, or to emergency actions or findings of fact 

regarding compliance with CFTC rules.12

CFTC first interpreted new section 15(a) in a proposed rule titled ―Addressing a New 

Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations‖:

13

 

 

11 Commodity Futures Modernization Act of 2000, section 119, Appendix E, Pub. L. No. 106-554, 114 Stat. 2763 

(2000).

12 This statement is found in 106 H. Rpt. 711; Prt 1, *_____ (June 29, 2000); 106 S. Rpt. 390, *___ (August 25, 

2000); and 106 H. Rpt. 711; Prt 3, *___ (September 6, 2000).

13 66 FR 14262 (March 9, 2001). 
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The proposed rule listed the five factors under section 15(a) and provided a brief, qualitative 

discussion of associated benefits and costs for each factor. The CFTC’s approach to cost-benefit 

analysis under section 15(a) has remained relatively consistent through the years, though the 

Commission did drop the practice of separately listing the section 15(a) factors. 14 It appears

section 15(a) has never been challenged in the courts. 

Methodology for Cost-Benefit Analysis Under the Dodd-Frank Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and 

Consumer Protection Act.15 As described by the CFTC, Title VII of the Dodd-Frank Act 

amended the Commodity Exchange Act16 to

...establish a comprehensive, new regulatory framework for swaps and securitybased swaps. The legislation was enacted to reduce risk, increase transparency, 

and promote market integrity within the financial system by, among other things:

(1) Providing for the registration and comprehensive regulation of swap dealers 

and major swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating robust

recordkeeping and real-time reporting regimes; and (4) enhancing the

Commission’s rulemaking and enforcement authorities with respect to, among 

others, all registered entities and intermediaries subject to the Commission’s 

oversight.17

The Dodd-Frank Act required the Commission to promulgate regulations to implement the Act 

by July 15, 2011. CFTC began immediately to work on rule implementation, including the costbenefit analyses. 

From CFTC staff and management, we learned that from the outset the goal was to create 

a uniform cost-benefit analysis methodology for all Dodd-Frank rulemaking that would comply 

with section 15(a). Accordingly, the Office of General Counsel and Office of Chief Economist 

created the following template, which was distributed to staff in September 2010: 

 

14 See, e.g., Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulation, 75 FR 

4144 (January 26, 2010).

15 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) 

(―Dodd-Frank Act‖ or ―Dodd-Frank‖). 

16 7 USC section 1, et seq.

17 Core Principles and Other Requirements for Designated Contract Markets; Proposed Rule, 75 FR 80572 

(December 22, 2010). 
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TEMPLATE

Section 15(a) of the Commodity Exchange Act requires the Commission to 

consider the costs and benefits of its actions before issuing an order under the Act. 

By its terms, section 15(a) does not require the Commission to quantify the costs 

and benefits of rule or to determine whether the benefits of the order outweigh its 

costs; rather, it requires that the Commission ―consider‖ the costs and benefits of 

its actions. Section 15(a) further specifies that the costs and benefits shall be 

evaluated in light of five broad areas of market and public concern: (1) protection 

of market participants and the public; (2) efficiency, competitiveness and 

financial integrity of futures markets; (3) price discovery; (4) sound risk 

management practices; and (5) other public interest considerations. The 

Commission may in its discretion give greater weight to any one of the five 

enumerated areas and could in its discretion determine that, notwithstanding its 

costs, a particular rule is necessary or appropriate to protect the public interest or 

to effectuate any of the provisions or accomplish any of the purposes of the Act. 

Summary of proposed requirements. The proposed rule would [explain briefly 

the requirements of the rule].18 

Costs. With respect to costs, the Commission has determined that [draw 

conclusions about the costs of the rule, associating the appropriate cost-benefit 

categories either directly or by implication]. 

Benefits. With respect to benefits, the Commission has determined that [draw 

conclusions about the benefits of the rule, associating the appropriate cost-benefit 

categories either directly or by implication]. 

Public Comment. The Commission invites public comment on its cost-benefit 

considerations. Commenters are also are invited to submit any data or other 

information that they may have quantifying or qualifying the costs and benefits of 

the Proposal with their comment letters.

In addition, the General Counsel and Chief Economist issued the following guidance (the 

September 10 guidance) to be followed when completing the template: 

In the cost-benefit section of a proposed or interim final rulemaking, an initial 

analysis of the Commission’s views of the costs and benefits of the proposed rule 

should be presented so that interested parties may submit comments that 

challenge, defend, or provide additional support for the analysis. A declarative 

statement of the anticipated effects of the proposed rule should be provided, in 

addition to requesting that interested parties submit their views on the five costbenefit considerations enumerated in section 15. 

 

18 Brackets in original. Bracketed text contains instruction to CFTC staff. 
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Typically, the costs typically may be presented by describing a counterfactual –

what the Commission expects will happen if the rule is not adopted, with 

reference to previous or anticipated events. The benefits should be provided in 

declarative form. 

...

The costs discussion in the cost-benefit analysis section of a rulemaking should 

include a quantitative or qualitative description of the kinds of costs involved, and 

upon which parties they will be imposed. When presenting costs qualitatively, the 

costs should be compared to some relevant alternative to the rule (i.e., the 

benchmark). In many cases, the benchmark would be the status quo regulatory 

approach. In some contexts, however, an alternative benchmark may be 

appropriate. If the rulemaking was designed to avoid certain costs associated with 

an alternative rule that could have been imposed, it should be discussed here as 

well; essentially comparing the proposed rule to a second benchmark. 

...

With respect to the benefits associated with a proposed rulemaking, the 

comparison should be to the same benchmark(s) identified in the discussion of 

costs, and again the discussion should highlight the kinds of benefits anticipated, 

and the likely affected parties.19 

THE COMMISSION’S COST-BENEFIT ANALYSES FOR FOUR PROPOSED RULES

1. Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap 

Participant,‖ ―Major Security-based Swap Participant,‖ and ―Eligible Contract 

Participant,‖ 75 FR 80174 (December 21, 2010) (Joint proposed rule; proposed

interpretations)

The Commission proposed definitions for ―swap dealer‖ and ―major swap participant,‖ 

―major security-based swap participant‖ in December 2010.20 With regard to cost-benefit 

analysis, the ―entity definitions rule‖21separately addressed the costs and benefits for each entity 

definition. 

Discussions with CFTC staff and management and review of email indicate that some 

debate centered on how to craft the cost-benefit analysis in the context of a definitions rule, 

including some discussion whether the definitions rule would require much in the way of costbenefit analysis at all. We were told that staff in the Office of Chief Economist prepared an

initial draft that compared the qualitative costs to society of broad or inclusive definitions of 

 

19 Memorandum RE: Guidance on and Template for Presenting Cost-Benefit Analyses for Commission 

Rulemakings, September 29, 2010 (attached as Exhibit 1).

20 Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap Participant,‖ and ―Eligible 

Contract Participant,‖ 75 FR 80174 (December 21, 2010).

21 Staff adopted nicknames for the rules assigned to the 30 rulemaking teams. We are using these nicknames in our 

report. 
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these terms versus narrower coverage. This was scrapped in favor of a draft that addressed the 

costs and benefits of the evaluative processes that market participants might undergo in order to 

determine coverage. Staff in the Office of General Counsel created the new draft. The Deputy 

General Counsel who reviewed the second draft was made aware of the earlier discussions but 

apparently did not review the earlier draft. Few changes were made to the second draft of the 

cost-benefit analysis. 

Staff and management also considered the difficulty to the industry of evaluating and 

commenting on the proposed entities definitions rule concurrently with conduct rules for the 

defined market participants. Staff and management were aware that market participants might 

refrain from comment on conduct regulations in the mistaken belief that they would not fall 

within the definitions. However, at this stage in the rulemaking process, staff indicated the 

overriding concern was meeting the rule-making deadline under Dodd-Frank. Staff and 

management opined that the industry by and large knew that market participants conducting any 

significant swaps business or trading would expect to fall under the definitions of Swap Dealer, 

Security-based Swap Dealer, Major Swap Participant, Major Security-based Swap Participant, 

and Eligible Contract Participant (as appropriate). While market participants on the fringes 

could be expected to NOT know coverage in anticipation of the final definitions rule, these 

participants would constitute the minority of market participants eventually covered under the 

rule. Any market participant anticipating possible coverage under a new Dodd-Frank market 

participant definition should know to review and offer comment on the conduct rules in 

anticipation of coverage, staff and management in the Office of General Counsel opined.

Section 712(d)(1) of the Dodd-Frank Act required CFTC and the Securities and 

Exchange Commission (SEC), in consultation with the Board of Governors of the Federal 

Reserve System (FRB), to jointly define the terms in this rule. Another concern voiced by staff 

and management regarding the definitions rule was the additional time necessitated for joint 

rulemakings with the SEC and FRB. Collaboration would necessarily involve more time. CFTC 

management determined early on that the additional time necessary for the required collaboration

would not permit the definitions to be adopted in advance of conduct rules. 

However, in light of the collaborative requirement, an advanced notice of proposed 

rulemaking was published for this rule (prior to the proposed rulemaking).

22

 Over 80 comments 

were received. The proposed rulemaking does not indicate that commenters on the advanced 

notice of proposed rulemaking discussed costs associated with the definitions, although several 

general statements indicating the definitions could lead to greater costs were received.23 The 

proposed rulemaking does request further comments regarding costs. 

 

22 See, Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act, 

Exchange Act Rel. No. 34-62717, 75 FR 51429 (Aug. 20, 2010). The comment period closed on September 20, 

2010.

23 See Comments filed by: Hess Corporation, available at: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26196&SearchText=; Dairy Farmers of 

America, Inc., available at: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26190&SearchText= ; Metropolitan Life 

Insurance Company, available at: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26178&SearchText=. 
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In the proposed rule, the cost-benefit analysis24 states that the costs to market participants 

associated with the proposed definition of ―swap dealer‖ would arise ―primarily from its need to 

review its activities and determine, as a qualitative matter, whether its activities are of the type 

described‖ in the proposed regulation. In addition, market participants would need ―to repeat 

this review‖ from time to time as its activities change. Because the Commission proposed a 

quantitative de minimis exception, the costs associated with determining coverage under the 

exception would be ―lower.‖ 

Benefits associated with the type of criteria selected by the Commission to indicate 

coverage would include the presence of a ―single set of criteria to be applied by all market 

participants‖ which, according to the Commission, would create a ―level playing field that 

permits all market participants to determine, on an equal basis, which activities‖ would trigger 

designation as a swap dealer. The benefit associated with a quantified de minimis exemption 

(and the exclusion of swaps in connection with the origination of loans) is the ability to make a 

relatively quick and low-cost determination whether the exemption applies. 

Likewise, costs associated with the proposed definition of ―major swap participant,‖ 

would ―arise primarily‖ from the expense associated with the analytical process necessary to 

determine whether the definition applies. The Commission stated it had considered more 

complex tests, i.e., ―market-based tests of potential future exposure such as margin requirements 

or other valuations of the outstanding position,‖ but opted to ―define potential future exposure by 

a factor of the dollar notational value of the swap.‖ Costs of a detailed analysis ―would vary for 

each market participant.‖ 

Under the proposed rule, market participants may request limited designation as a major 

swap participant, but the costs associated with such requests, according to the Commission, ―are 

difficult to predict because they would depend on the complexity of the particular case.‖ 

Benefits associated with establishing limited designation as a major swap participant were not 

discussed. 

Benefits associated with the Commission’s proposed definition of ―major swap 

participant‖ include the presence of a ―bright-line test that can be applied at a relatively low 

cost.‖ The Commission also opined that the definition of ―hedging or mitigating commercial 

risk‖ was general and could be ―flexibly applied.‖ The Commission stated it had considered 

alternative definition methodologies, including ―multi-factor analyses, stress tests and adversary 

processes,‖ but concluded they would result in significantly higher costs without providing equal 

additional benefits. 

The Commission opined that the proposed definition of "eligible contract participant" 

was ―in line with the expectations of market participants and would impose virtually no costs 

while providing the benefit of greater certainty.‖ To the extent the proposal would also clarify 

that certain commodity pools could not qualify as eligible contract participants under certain 

provisions, the Commission stated that while this clarification would potentially impose some 

 

24 75 FR 80173, 80203-80205 (December 21, 2010). 
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costs on the commodity pools that could no longer rely on certain provisions of the definition, 

benefits would arise from preventing the misinterpretation of the definition.25 

Generally speaking, it appears CFTC employees did not consider quantifying costs when 

conducting cost-benefit analyses for the definitions rule. As indicated in the rule’s preamble, the 

costs and benefits associated with coverage under the various definitions (in light of the various 

regulatory burdens that could eventually be associated with coverage) were not addressed, and 

instead the cost-benefit analysis addressed the relative costs and benefits of undergoing the 

process of determining coverage. Costs of being covered would emanate from the business 

conduct requirements adopted through other rules. 

We note that, in the same proposed rule, the Securities and Exchange Commission did 

opt to include in their analyses of costs associated with coverage under the definitions of 

―security-based swap dealer‖ and ―major security-based swap participant,‖ costs associated with 

the regulatory requirements associated with inclusion, e.g., the registration, margin, capital, and 

business conduct requirements. While the SEC acknowledged that the costs and benefits 

associated with compliance with regulatory requirements would be addressed in the separate 

rules, it welcomed comment on costs and benefits of the definitions ―in that broader context.‖26 

The comment period for this proposed rule closed on February 22, 2011. 

2. Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and 

Major Swap Participants, 75 FR 81519 (December 28, 2010) (Notice of proposed 

rulemaking)

The Commission proposed confirmation, portfolio reconciliation, and compression 

requirements for swap dealers and major swap participants in December 2010.27 Section 731 of 

the Dodd-Frank Act added to the Commodity Exchange Act new section 4s(i), a requirement that 

all swap dealers and major swap participants adhere to standards adopted by the Commission 

relating to confirmation, processing, netting, documentation and valuation of all swaps. The 

team assigned to this rule called this one ―the compression rule.‖ Not all members of the team 

were assigned to the drafting of this rule. 

Team members assigned to the compression rule explained their belief that the 

regulations proposed by the Commission would build upon work begun several years earlier. In 

2005 the Commission participated in the OTC Derivatives Supervisors’ Group (ODSG. Lead by 

the Federal Reserve Bank of New York, the ODSG had for several years encouraged the industry 

to perform many of the tasks now being committed to regulation. Team members believed the 

industry had complied with the efforts of the ODSG, that the proposed regulations did not 

impose further tasks or duties, and therefore the costs of compliance with new regulations that 

clarified now-current practices would be minimal. Staff were aware that start-up costs for those 

 

25 Id., 75 FR at 80203-80205. 

26

 Id., 75 FR at 80207.

27 Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010).
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entities that had not followed ODSG-encouraged practices might be significant. Staff indicated 

they had recently received comments from Markit28 offering further insight into costs associated 

with this rule.29 CFTC staff met with representatives of Markit in March 23, 2011 to discuss the 

compression rule.30

Staff also told us that costs were addressed during discussions regarding the technical 

aspects of the rule. They pointed out that they requested comments on:

 ways to reduce the burdens associated with confirmation, reconciliation and compression 

for the swaps market;

31

 

 the feasibility of staggered or delayed effective dates for some regulations, (recognizing 

that some entities may not have the capacity to comply with the new regulations as 

quickly as the larger, established swap dealers and major swap participants);32 

Staff stated that, in an effort to lessen potential costs of compliance, the proposed rule did 

not prescribe a particular venue or platform for confirmation.33 Staff stated discussions 

regarding how to avoid unnecessary or minimize compliance costs were considered during the 

team’s process of formulating the proposed compression rule. Staff explained that the benefits 

of portfolio compression were discussed in the text of the preamble, separate from the costbenefit analysis section.

34

 

The cost-benefit analysis section was created by a subset of the team, using the 

September 2010 guidance and template created by the Office of General Counsel and Office of 

Chief Economist.

35

 Discussions with staff and management on the team and review of email 

indicate that there were no significant debates regarding the approach to take with regard to the 

cost-benefit analysis section. However, staff in the Office of Chief Economist were not sure that 

they were invited to all relevant meetings connected with this rulemaking and stated that, for this 

rule, they reviewed the cost-benefit analysis section without drafting it or having significant 

input. Staff in the Office of Chief Economist at that time were also concerned with the order of 

rulemaking, expressing concern that formal adoption of the definitions for ―swap dealer‖ and 

―major swap participant‖ should precede adoption of regulations governing them. 

In any event, the cost-benefit analysis characterized the costs of compliance as ―nominal‖ 

and ―minimal‖ because the confirmation, reconciliation and compression processes are already

part of compliance practices that ―many, if not most, swap dealers and major swap participants 

already undertake as part of their ordinary course of business.‖ The cost-benefit analysis also 

stated that ―most‖ swap dealers and major swap participants have adequate resources and 

existing back office systems to accommodate any changes necessitated by the new rules ―without 

 

28 Markit is a financial information services company providing independent data, valuations, trade processing, loan 

portfolio management, and other services. www.markit.com. 

29 Available at: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=30669&SearchText=markit. 

30 Meeting details are available here: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=32274&SearchText=markit. 

31 75 FR 81519, 81521 (December 28, 2010).

32 Id. 75 FR at 81521-81522.

33 Id. 75 FR at 81523. 

34 Id. 75 FR at 81525.

35 See Exhibit 1. 
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Office of the Inspector General

9

material diversion of resources away from commercial operations.‖ Third party vendors are also 

available, and to the extent the pay per unit (i.e., number of swaps processed), the costs ―would 

be necessarily proportionate to the benefit.‖ 

The benefits associated with the compression rule included ―reduced risk, increased 

transparency, and greater market integrity‖ for swaps, as well as furtherance of the goal of 

―avoiding market disruptions and financial losses to market participants and the general public.‖ 

The cost-benefit section also stated the compression rule would ―promote levels of operational 

scalability and resilience that are most evident in periods of sustained high volume and market 

volatility.‖ 

The comment period for this rule closed on February 22, 2011.

 

3. Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 

(December 22, 2010) (Notice of proposed rulemaking)

Section 723(a)(3) of the Dodd-Frank Act added section 2(h)(8) of the Commodity 

Exchange Act to require, among other things, that execution of swaps subject to clearing under 

the Commodity Exchange Act must occur either on a Designated Contract Market (DCM) or on 

a swaps execution facility. The Commission published its proposed rule governing core 

principles and other requirements for designated contract markets on December 22, 2010. The 

proposed rules added five new core principles for trading futures and option contracts, and 

required DCMs that list standardized swaps for trading to comply with the same core principles 

applicable to trading futures contracts. The proposed rule also replaced certain ―guidance and 

acceptable practices‖ with regulations. The proposed rule included several procedural changes 

for application for designation as a contract market, including abandonment of expedited 

procedures. 

With regard to the cost-benefit analyses for the DCM core principles rule,36 staff 

explained that the process for this rule went relatively smoothly, with staff in the Office of 

General Counsel drafting the cost-benefit analysis with some edits from the Office of Chief 

Economist and from other members of the rule-making team. However, staff from the team 

wanted us to know about disputes regarding an earlier rule addressing swap execution facilities. 

In connection with the earlier rule, the Office of Chief Economist edited an initial draft created 

by staff in the Office of General Counsel. To put the dispute in simplest terms, the Office of 

Chief Economist undertook a cost-benefit analysis that addressed costs associated with separate 

tasks set out in various sections of the rule. Staff in the Office of General Counsel strongly 

encouraged the staff from the Office of Chief Economist not to deviate from accepted 

methodologies for cost-benefit analyses employed by the Commission for 10 years, which 

apparently limited cost-benefit analysis to the rule as a whole. Staff from the Office of General 

Counsel opined that litigation risk could result from deviating from this long-standing standard, 

and that the adoption of a new methodology could require the Commission to engage in the same 

methodology for future rules (or a litigation risk could result). Inasmuch as the Commission’s 

 

36 Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010) 

(Notice of proposed rulemaking).
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cost-benefit analyses in rulemakings had never been challenged in court, we consider prior 

practice in this instance to not carry as much weight as if it had received judicial approval. 

Moreover, from our review of relevant email and memoranda, it appears that other staff within 

the Office of General Counsel did not embrace this view. In the end, staff in the Office of 

General Counsel performed additional edits to the cost-benefit analyses, which was approved by 

the team leader and the team leader’s boss. 

The cost-benefit analysis of the DCM core principles rule stated that compliance with 

core principles for swaps trading on DCMs is ―mandatory under the Dodd-Frank Act, and any 

additional costs associated with these procedures are required by the implementation of the 

Dodd-Frank Act.‖37 The Commission recognized that, while the new regulations (replacing 

certain guidance and acceptable practices with regulations) generally codify existing industry 

practice, they may impose ―some costs‖ on DCMs. With regard to abandonment of former 

expedited procedures for DCM applicants (resulting in additional costs associated with longer 

procedures), the Commission stated that ―few DCMs have been eligible for designation under the 

expedited procedures, so these costs should be limited.‖ 

With regard to benefits, the Commission stated that transaction of swaps on DCMs will 

result in competition that will ―benefit the marketplace.‖ The Commission stated that ―the 

ability to trade standardized swaps openly and competitively additionally will provide market 

participants with enhanced price transparency resulting in greater protection of market 

participants and the public.‖ The new and amended core principles would, in the Commission’s 

view, benefit the public by further enhancing the transparency and integrity of futures and 

options markets as well as swap markets on DCMs. Replacing former guidance and acceptable 

practices will benefit DCMs and the public by providing ―regulatory certainty,‖ and changes to 

the procedures for applying for designation as a contract market would ―benefit new applicants 

by improving the workability and efficiency of the application process.‖ 

Certain staff on the DCM core principles rule team stated that they did not expect a lot of 

comments regarding costs because they believed they were putting into regulation practices that 

were already common in the industry. They stated that costs were a consideration during the 

rulemaking process, volunteering that they had attempted to take a flexible approach to 

compliance when possible, such as with regard to provisions for block trading and emergency 

procedures. They were aware the Chicago Mercantile Exchange and other commenters had 

raised the issue of costs in comments filed in response to the proposed rulemaking.38 The 

Minneapolis Grain Exchange also suggested the proposed regulation may result in unnecessary 

costs,

39 as did the NYCE LIFFE U.S.40

 

 

37 Commissioner Sommers and Commissioner O’Malia dissented from the Commission’s action to propose these 

regulations based on a disagreement with the Commission’s interpretation of Core Principle 9 – Execution of 

Transactions. The cost-benefit analysis is not addressed in this dissent. The text of the dissent may be found here: 

http://www.cftc.gov/PressRoom/SpeechesTestimony/sommersstatement120110b.html. 

38 The CME’s comment may be found here: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27876&SearchText=costs. 

39 The Minneapolis Grain Exchange’s comment may be found here: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27908&SearchText=costs.

40 The NYSE LIFFE US’s comment may be found here: 

http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27910&SearchText=costs. 
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Office of the Inspector General

11

On March 14, 2011, CFTC extended the original comment period for this rulemaking of 

February 22, 2011, to April 18, 2011.41 

4. Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap 

Participants, 75 FR 71397 (November 23, 2010) (Notice of proposed rulemaking)

Section 731 of the Dodd-Frank Act added new section 4s(j) to the Commodity Exchange 

Act. Section 4s(j) set forth certain duties for swap dealers and major swap participants, and the 

Commission proposed regulations pertaining to duties for swap dealers and major swap 

participants in November 2010.42 The nickname assigned to this rule by CFTC staff was ―the 

duties rule.‖ The duties rule for swap dealers and major swap participants was handled by the 

same team that created the compression rule.43 

While the compression rule had a narrower focus, the duties rule more broadly addressed 

risk management infrastructure. That is, the duties rule set out the monitoring and other 

procedures associated with risk management (so-called ―back office operations‖) a swaps dealer

or major swaps participant would need in place in order to ―do‖ swaps. CFTC staff and 

management indicated that, as with the compression rule, the duties rule would commit to 

regulation practices previously encouraged by the OTC Derivatives Supervisors’ Group, lead by 

the Federal Reserve Bank of New York. While the preamble to the duties rule does not discuss 

the OTC Derivatives Supervisors’ Group, the preamble to the compression rule does state that 

the OTC Derivatives Supervisors’ Group ―regularly set goals and commitments to bring risk 

management improvements to all OTC derivatives asset classes.‖44 

Because the industry had begun performing many of the duties set out in the rule, the 

team did not anticipate that the duties rule would add additional costs for much of the industry. 

They were aware that entities falling under the definitions of ―swap dealer‖ and ―major swap 

participant‖ for the first time would face new costs. 

As with the compression rule, the team stated that costs associated with compliance with 

the more detailed aspects of the regulation were discussed during the rulemaking process. For 

instance, team members stated that costs were discussed in connection with regulations affecting 

audit trail and pre-trade documentation. They discussed permissible delays in documentation 

balanced against the need for the certainty (and avoidance of backlogs) afforded through faster 

(and more expensive) processing. 

Staff pointed to spots in the preamble to the proposed rule where they indicated the extent 

to which costs had been considered. For instance, staff noted that the preamble stated -- 

 

41 76 FR 14825 (March 18, 2011). 

42 Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 

(November 23, 2010) (Notice of proposed rulemaking).

43 Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major 

Swap Participants, 75 FR 81519 (December 38, 2010). 

44 Id,. 75 FR at 81520. 
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12

[T]he Commission recognizes that there will be differences in the size and scope 

of the business of a particular swap dealers and major swap participants. 

Therefore, comments are solicited on whether certain provisions of the proposed 

regulations should be modified or adjusted to reflect the differences among swap 

dealers or major swap participants.45 

--as well as

The Commission recognizes that an individual firm must have the flexibility to 

implement specific policies and procedures unique to its circumstances. The 

Commission’s rule has been designed such that the specific elements of a risk 

management program will vary depending on the size and complexity of a swap 

dealer’s or major swap participant’s business operations. Risk management 

policies are expected to provide for appropriate risk measurement methodologies, 

compliance monitoring and reporting, and on-going testing and assessment of the 

overall effectiveness of the program.46 

--and

The Commission also invites comments regarding an appropriate effective date 

for this regulation given the amount of time and cost that may be necessary for 

implementation of a comprehensive business continuity and disaster recovery 

plan.47

Team members stated that the cost-benefit analysis section of this proposed regulation 

was drafted by a team member very early in the process, and prior to creation of the September 

2010 guidance. The first draft generally followed the format generally used for cost-benefit 

analysis following passage of section 15(a), and presented a qualitative analysis of costs and 

benefits under the section 15(a) factors. 

Staff indicated that the second draft of the cost-benefit analysis was performed by a few 

members of the team. Comparison of the first draft and the published cost-benefit analysis 

indicated edits designed to conform the first draft to the template issued in September 2010. As 

with the compression rule, the team member from the Office of the Chief Economist did not 

participate with the drafting process, and is not certain that she was invited to all relevant 

meetings. The draft was reviewed by the team member assigned from the Office of Chief 

Economist and the Office of General Counsel, and no staff reported significant problems or 

disputes. 

The cost-benefit analysis for the duties rule did include quantified costs.48 The estimated 

annual cost to implement a comprehensive risk management program for swap dealers and major 

swap participants was $20,450.00 (each), or 204.5 hours at an hourly rate of $100/hour. One 

wonders how compliance cost estimates for swap dealers and major swap participants could be 

identical, given the differences between those two types of market participants. Moreover, the 

 

45 Id., 75 FR at 71398.

46 Id., 75 FR at 71399.

47 Id., 75 FR at 71401.

48 Id., 75 FR at 71403.
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Paperwork Reduction Act (PRA)49 discussion also estimated 204.5 hours for swap dealers and 

major swap participants ―to generate, maintain, or provide information to or for a Federal 

Agency.‖50 In any event, the basis for the estimated cost to implement a comprehensive risk 

management program is not given, and appears to be an error. The hourly rate of $100/hour was 

explained in the PRA discussion, and it was based on statistics published by the Bureau of Labor. 

Under the heading, ―Costs,‖ some benefits are listed. The ―Costs‖ section includes the 

statement: ―the new regulatory requirements are far outweighed by the benefits to the financial 

system as a whole,‖ and: 

For example, a swap dealer or major swap participant would need to consider, 

among other things, the experience and qualifications of relevant risk 

management personnel, as well as the separation of duties among personnel in the 

business unit, when designing and implementing its risk management policies and 

procedures. These considerations would help facilitate the development of a risk 

management program that appropriately addresses the risks posed by the swap 

dealer’s or major swap participant’s business and the environment in which such 

business is being conducted. In addition, these considerations would guide a 

swap dealer or major swap participant in the implementation of specific policies 

and procedures unique to its circumstances. 

As with the compression rule, the cost-benefit section of the duties rule stated: 

Most swap dealers and major swap participants have adequate resources and 

existing risk management structures that are capable of adjusting to the new 

regulatory framework without material diversion of resources away from 

commercial operations.

CROSS-CUTTING ISSUES ASSOCIATED WITH THE FOUR PROPOSED RULES 

For the four proposed rules we were requested to investigate, we identified 

several cross-cutting concerns raised by CFTC staff and management, and raised by our 

Office. Issues raised across the board by CFTC staff and management include: 

1. Unprecedented Nature of the Regulatory Initiative/Paradigm Shift. 

From all CFTC divisions, the staff and management emphasized that Dodd-Frank 

required regulation of the swaps industry for the first time and therefore presented 

unprecedented challenges. Calculating costs to establish a swaps execution facility, for 

instance, which had never before existed under CFTC regulations, was described as a 

formidable challenge. Staff hoped to obtain cost estimates in comments submitted in 

response to the proposed rules. Staff indicated that comments were currently being 

assessed. 

 

49 44 U.S.C. chapter 35; see 5 C.F.R. Part 1320.

50 Id., 75 FR at 71402 (quoting 44 U.S.C. 3502(2)). 
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Office of the Inspector General

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2. Historic Difficulty of Quantifying Industry Costs. 

Staff and management agreed that, historically, the industry has not presented the CFTC 

with quantified costs associated with compliance with existing or proposed regulations. Staff 

opined that the industry considers compliance costs to be proprietary and confidential 

information. Consequently, staff opined that commenters would be highly unlikely to quantify 

projected costs for compliance in the context of a federal rulemaking due to the fact that 

comments are made available to the public. CFTC staff stated they were certain that the industry

has calculated its projected costs; however, there is no requirement to disclose cost information 

to the CFTC in connection with the proposal and adoption of a rule.

3. Frustration with Confusion Surrounding the Paperwork Reduction Act. 

Staff expressed some frustration with a perceived confusion of costs listed under the 

PRA51 section of the proposed rules as compared with the cost-benefit analysis. PRA only 

requires a tally of costs associated with completing and filing forms, but does not require other 

costs associated with completion of forms, such as legal and supervisory review. PRA costs 

necessarily will be lower than overall costs to complete forms, and lower than overall 

compliance costs. Staff did express a desire to better explain PRA in the future. We agree.

4. Need to Avoid Addressing Costs and Benefits for the Mandatory Aspects of Dodd-Frank. 

To the extent the Dodd-Frank Act imposed mandatory requirements, staff uniformly

stressed a desire to refrain from expressing mandatory rules in terms of costs and benefits. If 

Congress required certain conduct, then Congress necessarily had determined that the benefits 

would outweigh costs. 

5. Costs were Considered During the Process of Constructing the Dodd-Frank Rules. 

Staff on the rule-making teams stressed that costs were considered during the rulemaking 

process. In both internal discussions and meetings with industry representatives52 costs were 

raised with a view to determining how to implement requirements that would result in less cost 

without sacrificing legitimate regulatory needs. Staff had difficulty quantifying time devoted to 

cost-benefit analysis for this reason. 

In addition, our Office identified the following issues that applied to all four rulemakings 

we reviewed: 

 

51 44 U.S.C. chapter 35; see 5 C.F.R. Part 1320.

52 CFTC has had at least 675 meetings with outside individuals concerning the Dodd-Frank rules. Testimony of 

Chairman Gary Gensler before the Senate Committee on Banking, Housing and Urban Affairs, available at 

http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-77.html. 
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1. Section 15(a) Compliance was Grouped with PRA and Regulatory Flexibility Act 

Discussions. 

For all four rules we were asked to examine, the cost-benefit analysis was placed at the 

end of the preamble to the proposed text of the regulation, next to the PRA discussion and the 

Regulatory Flexibility Act discussion. These three portions were considered non-technical and 

we got the impression that, prior to enactment of Dodd-Frank, they were generally the province 

of the Office of General Counsel rather than the CFTC staff tasked with crafting the technical 

details of a rule. The cost-benefit analysis, PRA discussion, and Regulatory Flexibility Act 

discussion was referred to by team members as the regulation’s ―caboose.‖ This treatment of the 

cost-benefit analysis discussion might have given the impression that it was merely an 

administrative task associated with the rulemaking, rather than a substantive analysis of the rule. 

2. Nobody Quantified Internal Costs Associated with Rule Implementation by CFTC. 

Across the board, staff and management alike indicated that CFTC’s internal costs were 

not calculated for purposes of analyzing the costs and benefits associated with the four proposed 

rulemakings. CFTC management stated that staff labor necessary to implement Dodd-Frank had 

been calculated overall by each Division, and these quantified estimates were included in CFTC 

budget submissions, but the cost to implement each regulation had not been quantified. 

Implementation costs were not reflected in the cost-benefit analyses for the four rules requested 

for investigation, or in any other rules we reviewed. CFTC also did not quantify or estimate 

opportunity costs, that is, the extent to which implementation of Dodd-Frank with existing staff 

would be expected to diminish regulatory efforts in other areas. We would note that Executive 

Order (EO) 12866 recommended the consideration of costs to the government of enforcement as 

part of the process of regulatory analysis.53 

DEVELOPMENTS FOLLOWING PUBLICATION OF THE FOUR PROPOSED RULES

CFTC published the four rules suggested for this investigation between November 23, 

2010 and December 28, 2010. On January 18, 2011, President Obama issued EO13563,54 which 

states, among other things: 

[e]ach agency is directed to use the best available techniques to quantify 

anticipated present and future benefits and costs as accurately as possible. Where 

appropriate and permitted by law, each agency may consider (and discuss 

qualitatively) values that are difficult or impossible to quantify, including equity, 

human dignity, fairness, and distributive impacts.

***

Where relevant, feasible, and consistent with regulatory objectives, and to the 

extent permitted by law, each agency shall identify and consider regulatory 

 

53 EO 12866 (September 30, 1993), 58 FR 51735, 51736 (October 4, 1993).

54 76 FR 3821 (January 18, 2011).
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Office of the Inspector General

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approaches that reduce burdens and maintain flexibility and freedom of choice for 

the public.55

By its terms, EO 13563 did not apply to the CFTC. The Office of General Counsel 

briefed the CFTC Chairman on this new Executive Order. In light of instructions 

contained in EO 13563, CFTC created a new Dodd-Frank rulemaking team tasked with 

developing conforming rules to update the CFTC’s existing regulations to take into 

account the provisions of the Act. 56 

Also in 2011, and as detailed in the March 11, 2011 letter requesting this 

investigation, cost-benefit analyses issued by the CFTC in connection with the DoddFrank rulemakings were subjected to various degrees of criticism by members of 

Congress, CFTC Commissioners, the industry, and the media. 

On March 14, 2011, CFTC extended the original comment period for the DCM 

Core Principles rulemaking from February 22, 2011, to April 18, 2011.57 CFTC also 

extended the comment period for proposed rules addressing risk management 

requirements for derivatives clearing organizations.58 It does not appear that CFTC has 

published notice of an extension to file comments for any other proposed rules issued in 

accordance with the Dodd-Frank Act. The CFTC Chairman, however, told us that CFTC 

is accepting late comments as they are received. 

The Chairman has informed us that he has directed the Office of General Counsel and 

Office of Chief Economist to provide guidance to staff for addressing cost-benefit analysis in 

final rules under Title VII of the Dodd Frank Act, including responding to public comments. It 

will assist teams in presenting the costs and benefits of final rules under Title VII of Dodd Frank 

and will incorporate elements of EO 13563. 

ANALYSIS OF THE EIGHT FACTORS POSED BY CHAIRMAN LUCAS AND 

CHAIRMAN CONAWAY

1. The methodologies the CFTC uses to evaluate costs and benefits

This factor is fully addressed at pages six through 8 of this report. 

As stated earlier, CFTC began an initiative to rework and improve the cost-benefit 

methodology under section 15(a). This enhancement to the existing policy overhaul was 

motivated by comments received to proposed Dodd-Frank rules, as well as criticisms of the costbenefit analyses from the media and other sources. We understand the process of amending the 

cost benefit analysis methodology is currently ongoing. 

 

55 Id.

56 Testimony of Chairman Gary Gensler before the House Committee on Agriculture, February 10, 2011. Available 

at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-68.html.

57 Comments Extension: 17 CFR Parts 1, 16, and 38 Core Principles and Other Requirements for Designated 

Contact Markets, 76 FR 14825 (March 18, 2011). 

58 Comments Extension: 17 CFR Part 39 Risk Management Requirements for Derivatives Clearing Organizations, 

76 FR 16587 (March 24, 201).
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Office of the Inspector General

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2. Whether the sequence by which rules are proposed impacts the CFTC’s ability to adequately 

evaluate costs and benefits 

CFTC staff and management opined that, with regard to the definitions for both swaps 

and major swap participants, industry participants should broadly be aware of expected coverage 

of common terms. However, staff is aware that ―fringe‖ products and industry participants are 

anticipating these rules. Agency staff and management are of the view that individuals and 

entities that anticipate possible coverage should review and comment on all rules that may apply. 

The CFTC Chairman has stated that no rules adopted under Dodd-Frank will be adopted prior to 

adoption of the definition rules that are currently proposed. 

3. The extent to which, in light of budget constraints, the CFTC has sought outside input and 

expertise in evaluating costs and benefits

We are not aware of any entity or individual hired by CFTC specifically to assist with 

cost-benefit analyses under Dodd-Frank. The Chairman stated that CFTC has consulted 

individuals and entities in the course of numerous meetings held in connection with the DoddFrank rulemaking effort and noted on the CFTC website. Staff indicated that costs were 

addressed in both internal and public meetings in the course of the rulemaking effort. 

4. The extent to which the CFTC has evaluated and distinguished the costs and benefits of 

proposed regulations on market participants of diverse sizes and from diverse sectors. 

We did not encounter examples of CFTC requesting comment specifically aimed at 

smaller entities. However, staff stated that costs were discussed during the process of drafting 

the regulations, including costs for smaller entities. For instance, with regard to the compression 

rule,59 team members told us that costs were discussed during meetings regarding the technical 

aspects of the rule. They pointed out that they requested comments on ways to reduce the 

burdens associated with confirmation, reconciliation and compression for the swaps market. 

They told us that, in an effort to reduce the potential burden on compliance, they requested 

comments on the feasibility of staggered or delayed effective dates for some regulations, and 

recognized that some entities may not have the capacity to comply with the new regulations as 

quickly as swap dealers and major swap participants. Staff stated that, in an effort to lessen 

potential costs of compliance, presumably for smaller as well as larger entities, the proposed rule 

did not prescribe a particular venue or platform for confirmation. Staff stated discussions 

regarding how to avoid unnecessary or minimize compliance costs were considered during the 

team’s process of formulating the proposed compression rule. 

With regard to the DCM core principles rule,60 team members stated that costs were a 

consideration during the rulemaking process, volunteering that they had attempted to take a 

flexible approach to compliance when possible, presumably to accommodate smaller (and larger)

entities. For instance, staff said they suggested a flexible approach regarding block trading and 

emergency procedures. 

 

59 Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519 (December 28, 2010). 

60 Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010).
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In the notice of proposed rulemaking for the duties rule,61 the Commission stated: 

[T]he Commission recognizes that there will be differences in the size and scope 

of the business of a particular swap dealers and major swap participants. 

Therefore, comments are solicited on whether certain provisions of the proposed 

regulations should be modified or adjusted to reflect the differences among swap 

dealers or major swap participants. 

5. The extent to which the CFTC gives special consideration to evaluating the costs and benefits 

for small businesses

Again, we found no indication that CFTC gave special consideration to evaluating the 

costs and benefits for small businesses (above and beyond the Regulatory Flexibility Act62

statements), other that the statements from staff discussed above in response to the fourth 

question, discussed above. 

6. The amount of time, on average, that Commission staff spent per rule evaluating costs and 

benefits as required by 15(a) 

Obtaining an average time Commission staff spent per rule evaluating costs and benefits 

was not easy. We asked the team leaders to identify the individuals who had drafted the costbenefit sections for the four rules, and then sat down with those individuals. If those individuals 

named other team members who had assisted with the cost-benefit analysis section, we 

interviewed those individuals as well, and so forth. Occasionally we encountered an individual 

named as an author or co-author of the cost-benefit analysis who told us he (or she) had done no 

drafting. From these individuals we learned that every team member reviewed every rule, 

including the cost-benefit analysis section; however, if cost-benefit analysis wasn’t the focus of 

your work for the team, time spent reviewing it would be minimal. We questioned team 

members (from all Divisions) and team leaders. We have not included time spent by 

management in the Office of General Counsel or Division Directors on the cost benefit analyses. 

Staff time devoted to cost benefit analyses for the four rules follows: 

1. Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap 

Participant,‖ ―Major Security-based Swap Participant,‖ and ―Eligible Contract 

Participant.‖

For the definitions rule for swap dealers and major swap participants,

63 the team member 

who crafted the first draft worked in the Office of General Counsel, and estimated he spent 

approximately 20 hours creating the first draft. The team member from the Office of Chief 

Economist estimates he spent approximately 3 to 4 hours reviewing and editing the draft cost-

 

61 Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 

(November 23, 2010).

62 5 U.S.C. sec. 601, et seq.

63 Further Defining ―Swap Dealer,‖ ―Security-based Swap Dealer,‖ ―Major Swap Participant,‖ ―Major securitybased Swap Participant,‖ and ―Eligible Contract Participant,‖ 75 FR 80174 (December 21, 2010). 
U.S. Commodity Futures Trading Commission

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benefit analysis. The team leader stated that she spent minimal time on the cost-benefit analysis, 

and spent most of her time on the technical aspects of the proposed rule. 

2. Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and 

Major Swap Participants.

and

4. Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap 

Participants.

The same Dodd-Frank rulemaking team handled both the compression rule64 and the 

duties rules for swaps dealers and major swaps participants.

65 With regard to the duties rule, the

first draft of the cost-benefit analysis was created by a team member from the Division of 

Clearing and Intermediary Oversight, based on prior cost-benefit analyses published following

passage of section 15(a) but before the September 2010 guidance issued for the Dodd-Frank 

rulemaking teams.66 That first draft took about an hour and a half. 

Following issuance of the September 2010 template, a sub-team undertook to create a 

second draft of the cost-benefit analysis for the duties rule. We were not able to ascertain the 

identities of the sub-team that undertook the second draft. A team member from the Office of 

General Counsel indicated that he spent couple hours editing the second draft. 

The cost-benefit analysis for the compression rule was also drafted by a sub-team. We 

were unable to pin down which members of the team comprised the sub-team that created the 

first draft. Consequently, our time estimate for the cost-benefit analysis for the compression rule 

and the duties rule likely is not complete. A member of the team from the Office of General 

Counsel indicated he spent a couple hours reviewing the cost-benefit analysis section for each 

rule after it was drafted. The team leader for both the duties and compression rules estimated she 

spent approximately five to 10 hours working on the cost-benefit analysis section for each rule, 

but stressed that costs and benefits were also discussed at various points during the rule-making

process.

The team member from the Office of Chief Economist stated she did not spend a great 

deal of time on the cost-benefit analyses for the compression and duties rules because she 

believed they were complete when she received it. She was not sure she was invited to all 

relevant meetings for either rule. She indicated that during that period she was reviewing a great 

deal of draft proposed rules under Dodd-Frank for multiple teams, often with quick turn-around 

times. She was not a part of the sub-team that drafted the cost-benefit analysis for the duties rule

or the compression rule. 

 

64 Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519 (December 28, 2010).

65 Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 

(November 23, 2010). 

66 See Exhibit 1.
U.S. Commodity Futures Trading Commission

Office of the Inspector General

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3. Core Principles and Other Requirements for Designated Contract Markets.

With regard to the DCM core principles rule, the team member (from the Office of 

General Counsel) who drafted the cost-benefit analysis stated she spent approximately a half day 

working on the cost-benefit analysis for about a week (roughly 20 hours), and spent additional 

time dealing with revisions suggested by the team member from the Office of Chief Economist. 

The team member from the Office of Chief Economist told us he spent a great deal of time on 

the cost-benefit analysis section of the rule, but could not give us a precise number of hours. He 

also stated that costs were considered throughout the rulemaking process. The team leader for 

the definitions rule stated that he reviewed drafts of the entire rule throughout the process, but 

did not spend significant time editing the cost-benefit analysis section. 

7. When one proposed rule is highly dependent on another, as is often the case in Title VII, the 

extent to which the CFTC gives consideration to the impact preceding or subsequent rules may 

have on the costs or the benefits of the rule under consideration

CFTC management asked about this factor indicated the same approach as to the 

situation created with proposed definitions rules preceding conduct rules for defined entities and 

products. Again, where a rule must be created in cooperation with other Agencies, these rules 

necessarily would run on a different schedule in order to assure compliance with the deadline for 

the Dodd-Frank rulemaking. Staff also stated that, to a very great extent, the rules are setting out 

in regulation what the industry has been moving toward for a number of years. The Chairman 

stressed that the definitions would be finalized prior to rules hinging on the final definitions. He 

also stressed that CFTC was continuing to receive comments past the rule closing dates, which 

presumably would permit commenters to respond in light of subsequently published related 

proposed rules. On March 16, 2011, the Chairman set out with some specificity his plans to 

issue Dodd-Frank rules in three stages structured to avoid adverse impact to the industry.

67

8. The impact the current statutory deadline of Title VII has on the Commission’s ability to 

conduct meaningful cost-benefit analysis and the extent to which an extension of the statutory 

deadline would improve the Commission’s ability to consider the costs associated with proposed 

rules

As stated, above, the Chairman has determined not to adhere to the Dodd-Frank deadline 

and instead has initiated a structured approach, with intended promulgation of all rules by early 

Fall.68 Presumably, this should permit a more extensive cost-benefit analysis of various rules to 

be employed. 

 

67 Gary Gensler, Remarks, ―Implementing the Dodd-Frank Act,‖ FIA’s Annual International Futures Industry 

Conference, March 16, 2011; available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-73.html. 

68 Id.
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CONCLUSIONS AND RECOMMENDATION

Since enactment of the Dodd-Frank Act, CFTC has published more than 50 proposed 

rules, notices, or other requests related to the new law.

69

 In accordance with section 15(a) of the 

Act, CFTC has published cost-benefit analyses with each proposed rule. We examined the costbenefit analyses for four proposed rules dealing with definitions,70 swaps portfolio compression 

and reconciliation,71 DCM core principles,72 and duties for swap dealers and major swap 

participants.73 

While the methodology initially adopted by the Office of General Counsel and the Office 

of Chief Economist74 would permit a detailed and thorough approach to the task, in the four 

proposed rules we examined it appears the Commission generally adopted a ―one size fits all‖ 

approach to section 15(a) compliance without giving significant regard to the deliberations 

addressing idiosyncratic cost and benefit issues that were shaping each rule, and were often 

addressed in the preamble. 

In our view, two analytical processes proceeded on separate tracks during the 

construction of each of the four rules. One the one hand, team members devoted to the technical 

aspects of the rule considered costs (and benefits) associated with the details of the proposed 

rule’s specific instructions. Separately, other team members, who (often) were not as involved 

with the technical aspects of the proposed rule, drafted cost-benefit analyses in accord with the 

September 2010 guidance, and the cost-benefit analyses did not always appear to us to 

acknowledge the cost issues addressed by the technical side of the rule-making team. Even when 

the technical staff on a given team drafted the cost benefit analysis for a rule, which was the case 

for the duties rule and the compression rule, it appears that the economic factors considered and 

embraced or rejected during the course of constructing the rule were not included in the costbenefit analysis, and instead the cost-benefit analysis was given an homogenized treatment. This 

separation was demonstrated in the placement of the cost-benefit analysis with the proposed 

rules’ ―caboose.‖ Where costs of compliance with duties for swap dealers and major swap 

participants were quantified in some detail, the basis for the data was not provided. 

Other aspects of the cost-benefit analyses gave us pause during our review. The 

confusion between cost-benefit analyses and the required PRA statement was troublesome. 

While PRA necessarily requires calculation of some costs associated with compliance, it does 

not present a complete (or even substantial) estimate. This needs to be better explained in 

proposed and final rules. 

 

69 Statement of Jill E. Sommers, Commissioner, Commodity Futures Trading Commission, Before the 

Subcommittee on Oversight and Investigations, House Committee on Financial Services, March 30, 2011, available 

at: http://financialservices.house.gov/media/pdf/033011sommers.pdf . 

70 Further Defining ―Swap Dealer‖, ―Security-based Swap Dealer‖, ―Major Swap Participant,‖ ―Major Securitybased Swap Participant,‖ and ―Eligible Contract Participant,‖ 75 FR 80174 (December 21, 2010).

71 Confirmation, Portfolio Reconciliation, Compression Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519 (December 28, 2010). 

72 Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572 (December 22, 2010).

73 Regulations Establishing and Governing the Duties of Swap Dealers and Major Swap Participants, 75 FR 71397

(November 23, 2010).

74 See Exhibit 1.
U.S. Commodity Futures Trading Commission

Office of the Inspector General

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We were also troubled at the lack of available (and verified) data pertaining to 

compliance costs borne by the industry, at least at the proposed rulemaking stage. Staff 

indicated that industry and market participants historically have not provided compliance costs to 

the Agency. However, information is being provided to the Commission at this point that does 

quantify costs. In addition to the rule comments cited throughout this report discussing costs

(and we did not cite them all), we would recommend review of the transcript of the Third 

meeting of the CFTC Technology Advisory Committee presented by the Commission earlier this 

year. 75 At that meeting, the Commission was presented with a $1.8 billion cost estimate76 to 

implement compliance with information technology requirements necessitated under DoddFrank, for the top 15 large dealers. We believe the Commission will have a formidable task 

verifying estimated costs submitted by industry sources, and squaring them with the apparent 

staff view that the Dodd-Frank rules (or at least the four we reviewed) largely document current 

practices. We have not attempted to do so here.

We note that the cost-benefit analyses for all four rules lacked any data whatsoever 

regarding the CFTC’s internal costs to implement the Dodd-Frank rules. Inasmuch as the CFTC 

is projecting these costs in their budget submissions to Congress, we believe it would be feasible 

to estimate the costs of implementing the each regulation and include it in any cost-benefit 

analysis. CFTC’s opportunity costs might also be considered.

We detect there was some impetus, at least among some staff, to continue to use the same 

methodology to conduct cost-benefit analyses that had been used since passage of the CFMA

when other approaches were suggested by the Office of Chief Economist. Because section 15(a) 

compliance had never been challenged in the courts, it would appear there was no precedent 

approving (or disapproving) the Agency’s older methodology. Moreover, the joint guidance 

issued in September 2010 did not require or emphasize adherence to prior methodologies. 

Instead, the September 2010 guidance would permit a detailed and in-depth qualitative or 

quantitative approach. We believe it should be followed in a more robust fashion.

In any event, it is clear that the Commission staff viewed section 15(a) compliance to 

constitute a legal issue more than an economic one, and the views of the Office of General 

Counsel therefore trumped those expressed by the Office of Chief Economist, at least for the four 

rules we reviewed. We do not believe this approach enhanced the economic analysis performed 

under section 15(a) for the four rules. 

We believe that as a market regulator, any cost-benefit analysis should take account of 

price theory economics, which should involve the Chief Economist. While we recognize that an 

attorney may possess economic insights gained through his or her academic or professional 

background, the experience of economists who work with such questions on a daily basis should 

be helpful. 

Although we have raised concerns regarding both the methodology and the resulting costbenefit analyses for each of the four rules, a determination whether the cost benefit analyses 

 

75 Third Meeting of the Technology Advisory Committee, Washington, D.C. (March 1, 2011), page 179-available at: 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac_030111_transcript.pdf. 

76 ―Technology Implications and Costs of Dodd-Frank on Financial Markets,‖ Larry Tabb, Founder & CEO, TABB 

Group (March 1, 2011), available at: 

http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_tabb.pdf. 
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Office of the Inspector General

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would survive judicial scrutiny is not the object of this investigation. The Commission’s 

performance under section 15(a) of the Commodity Exchange Act has never been challenged; 

however, in recent years the courts have identified weaknesses in the application of economic 

analysis to regulatory decisions, resulting in rules being sent back to regulators for further 

consideration.77 We would suggest that a more robust examination of costs and benefits should 

only enhance the Agency’s ability to defend its cost-benefit analyses.

We note that the Chairman has initiated a review and revision of the cost-benefit analyses 

guidance for use with final rulemakings. Work is ongoing, and we recommend that the Office of 

Chief Economist take on an enhanced or greater role under both the September 2010 guidance 

and any future methodologies for cost-benefit analyses. 

We are encouraged that concerns regarding deadlines and the order of rulemaking raised 

in the March 11 request from Chairman Lucas and Chairman Conaway appear to be diverted, at 

least for the moment. The recently proposed plan to adopt the Dodd-Frank rules through a 

staggered approach may alleviate some concerns. We appreciate the Commission’s good 

intentions in accepting late comments for closed rulemakings. 

In closing, we believe that compliance with section 15(a) should not represent a ceiling 

when it comes to supporting regulation through economic analysis. We are mindful of the 

adage, ―just because something is legal, doesn’t make it right.‖ And we wholeheartedly agree 

that, ―[i]n the end, economic analysis is more than about satisfying procedural requirements for

regulatory rulemaking.‖

78

 

 

77 See, e.g., Am. Equity Investment Life Ins. Co. v. S.E.C., 613 F.3d 166, 177-178 (D.C. Cir. 2010) ; Chamber of 

Commerce of U.S. v. S.E.C., 412 F.3d 133, 142-144 (D.C. Cir. 2005).

78 Testimony of James A. Overdahl, Vice President, National Economic Research Associates, Before the Committee 

on Financial Services, Subcommittee on Oversight and Investigations, United States House of Representatives 

March 30, 2011, available at: http://financialservices.house.gov/media/pdf/033011overdahl.pdf.