Office of the 

Inspector General 

TO: 

FROM: 

DATE: 

SUBJECT: 

Introduction 

U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-511 0 

Facsimile: (202) 41 8-5522 

Timothy Massad 

Chaim1an 

M E MOR A NDU M 

A. Roy Lavik c;;? 4" 

Inspector General ?!3 

November 17, 201 4 

Inspector General's Assessment of The Most Serious Management 

Challenges Facing the Commodity Futures Trading Corrunission (CFTC) 

The Reports Consolidation Act of2000 (RCA) 1 

authorizes the CFTC to provide financial and 

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

p ublic. 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.

2 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 om 

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

tlu·eshold 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 identifi ed. For Fiscal Year 20 I 5, the most 

serious management challenge is: 

1 Public Law 106-53 1,sec3, 11 4STAT.2537(Nov.22, 2000),coc/iflec/at 3 1 USC§ 35 16(a). 

2 !d. 
• For the CFTC to deliver on Congressional expectations embedded in the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (Dodd-Frank Acti, including 

expansion of the CFTC's regulatory footprint to the swaps markets, while adhering to 

government-wide budgetary constraints. 

CFTC Financial Statement Audit Results 

In accordance with the Accountability ofT ax Dollars Act,4 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. 5 The results of the Fiscal Year 2014 financial statement audit will be discussed in the 

Annual Financial Report (AFR), and the financial statement audit resulted in an unmodified audit 

optnton. 

CFTC's Progress on Last Year's Challenges 

Last year's OIG identified management challenge remains relevant for this year and the near 

future ~d, possibly, more acute under a government wide continuing resolution6

; although, 

CFTC has significantly addressed congressional expectations embedded in the Dodd-Frank Act.7 

Since July 21,2010, when President Obama signed the Dodd-Frank Act into law, CFTC has 

completed over 80%8 of the rules mandated by the Dodd-Frank Act. Consequently, the agency 

is now focused on implementing, refining, and ensuring industry compliance with fifty new 

Dodd-Frank Act related rules now in place. Nonetheless, stakeholders will continue to expect 

the agency to meet its regulatory oversight responsibilities by continually improving its 

information technology infrastructure9 for receiving regulatory compliance related data 10 as well 

as swap transaction data 11 • Collecting and evaluating swaps market data will enable CFTC to 

3 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. I376 (2010) 

4 Public Law I07-289, 116 STAT. 2049, Nov. 7, 2002, codified at 31 USC 3501 note 

5 The IG's authority is found at§ 304 ofthe CFO Act, P.L. 101-576, 104 STAT.2852, Nov. 15, 1990, codified at 3I 

USC 352l(e) 

6 See Public Law I I3-164 The Continuing Appropriations Resolution provides continuing FY20I5 appropriations to 

federal agencies until December I 1, 20 I 4, or enactment of specified appropriations legislation 7 See CFTC press release: PR6853-14 CFTC Announces Measures to Promote Trading on Swap Execution Facilities 

and Support an Orderly Transition to Mandatory Trading. Mandatory trading of swaps on Swap Execution 

Facilities (SEF) began for certain interest rate swaps on February 15,2014. 

8 OIG calculation (50 out of60 = 80%) Dodd-Frank mandated rules. See Speech of Commissioner Sharon Bowen 

before the Futures Industry Association Expo 2014 November 5, 2014 paragraph 7. 9 Virtually all communication with industry participants is in electronic form. Therefore efficient use of information 

technology resources is fundamental to the operations of the CFTC. That is why OIG identified management 

challenges reflect this fact. See Fiscal Year 2009, 2011, and 2012 IG management challenge letter. 10 Regulation 23.600(c) (2) (ii) requires that Swap Dealers (SD) and Major Swap Participants (MSP) furnish risk 

exposure reports to the Commission. On March 22, 2013, the Commission implemented a web based portal to 

facilitate the furnishing of risk exposure reports to the Commission by SDs and MSPs. 

11See Remarks of Timothy G. Massad before the Swaps Execution Facilities Conference (SEFCON V) 

November 12,2014, paragraph 8 "We also have four swap data repositories provisionally registered, collecting and 

disseminating market data. This is a work in progress, but today we and the public have much more information 

regarding the swaps marketplace, enabling more competition and better oversight." 

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continue to restore confidence in all aspects of the commodities and swaps derivatives markets 

post 2008 12 market events. 

As an independent sentinel, the OIG is committed to monitoring continuously CFTC's response 

to stakeholders such as Congress. During the 2014 calendar year my staff completed three 

performance audits 13 directly in line with congressional expectations embedded in the DoddFrank Act, sensitive to stakeholders' interests, and consistent with our oversight responsibilities 

for evaluating aspects of the CFTC's strategic plan for FY2011-FY2015. Along with our 

statutory responsibilities for conducting annual audits of the CFTC's financial statements the 

OIG audits relevant to last year's management challenges and supportive of our understanding of 

CFTC's operations executed during calendar year 2014 were: 

1. Performance Audit-Management's Use of Information Technology Resources in Support 

of its Strategic Plan and Regulatory Responsibilities. 

Starting in fiscal year 2011, Congress designated specific spending levels for information 

technology at the CFTC. Our audit objective for undertaking this audit was to ascertain 

how the agency allocated congressionally designated funds for information technology. 

We examined Office of Data and Technology (ODT) spending on information 

technology during fiscal year 2011 and 2012 and, for the first time, we were able to 

evaluate FY2013 ODT spending allocations and found that ODT spent 50% of funds on 

software licenses and staff augmentation and 50% on software modernization and 

surveillance enhancements. Furthermore, we examined the largest contracts entered into 

by ODT that accounted for 49% ofODT spending in FY2013 and found ODT monitored 

vendors and their deliverables under the contracts. In the coming years as additional 

funds are appropriate for ODT we will evaluate their spending to ensure that congress 

and taxpayers expectations are efficiently and effectively address. 

2. Recent market disruptions by MF Global Inc. and Peregrine Financial Group Inc. 

exposed management control weakness at some Futures Commission Merchants (FCM). 

The CFTC has regulatory oversight responsibilities for FCMs. Consequently, we sought 

to identify and evaluate the process CFTC employs for monitoring and reviewing 

financial statements ofFCMs and Retail Foreign Exchange Dealers (RFEDs) and assess 

the agency's procedures for evaluating financial information received as well as 

evaluating reporting firm's regulatory compliance reports to the CFTC regarding their 

separation of customers' funds from individual firm's capital. The audit team selected a 

statistical sample of firms and found that the CFTC, an oversight regulator, complied 

with its policies and procedures for reviewing financial information received over the 

12 See Opening Statement of Chairman Timothy G. Massad, Open Meeting on Proposed Rule on Margin 

Requirements for Uncleared Swaps and Final Rule on Utility Special Entities paragraph 2: "It was six years agoSeptember 16, 2008-when our government was required to step in and prevent the failure of AIG, which was on 

the brink of collapse because of excessive swap risk, a collapse that could have thrown our nation into another Great 

Depression." 

13 The OIG contracted with independent public accounting {IPA) firms to conduct each audit and the OIG monitored 

conduct of all performance audits performed by the IP A. 

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three year period examined (FY2011 through FY2013). Following is a link to the final 

audit report14• 

During FY20 14 CFTC enhanced its regulatory requirements to address concerns 

emerging from the two FCM related events mentioned above. CFTC's regulatory 

footprint in this area continues to grow. Today there are 105 swap dealers 15 and 2 major 

swap participants provisionally registered, along with 22 swap execution facilities 

temporarily registered with the CFTC. 16 Consequently, CFTC oversight of these entities 

will present a challenge for the agency during this ongoing period of budgetary 

constraints. We will monitor the agency's effectiveness in meeting its statutory 

responsibilities to stakeholders during the foreseeable period of austere budgets. 

3. Finally, section 748 of the Dodd Frank Act 17amended the Commodity Exchange Act to 

establish a consumer education and outreach program funded from CFTC collected civil 

monetary sanctions, greater than one million dollars, imposed by individual judiciary 

decisions. During FY20 14 the Customer Protection Fund (CPF, Fund) acquired over 

$274.9 million in budgetary resources for use in addressing twin goals of increasing 

Customer Protection education and awarding payments to whistleblowers18 for actionable 

prosecutorial information. 

My office decided to undertake a performance audit of CFTC 's Consumer Outreach 

Program's Efforts for Enhancing Awareness of Regulatory Resources and Protections 

Available to Commodity Market Users Against Fraud. 19 This audit of the three year old 

Customer Protection Fund sought to assess management's plans for addressing its 

mandate as stated in the Dodd-Frank Act. For congress and stakeholders we offered 

several recommendations for improving consumer outreach operations-management 

accepted the audit recommendations. My office continues to manage the annual 

financial statement audit of the Fund which separately provides all financial resources for 

consumer outreach and may revisit this critical operation so as to ensure that it continues 

to operate efficiently and effectively in addressing congressional intent codified in the 

Dodd-Frank Act. 

14 Management Controls and Procedures for Evaluating Futures Commission Merchants'(FCM) and Retail Foreign 

Exchange Dealers'(RFED) Compliance with CFTC Financial Reporting Requirements Mandated by the Commodity 

Exchange Act and the Dodd Frank Act. 

http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/oig_auditreportp05.pdf 

15 Data as of 11-3-14 http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer 16 See Remarks of Timothy G. Massad before the Swaps Execution Facilities Conference (SEFCON V) 

November 12, 2014, paragraph 7 and 11 

17 Public Law No. 111-203, § 748, 124 Stat. 1841 (20 1 0) 18 Section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity 

Exchange Act ("CEA") by adding Section 23, entitled "Commodity Whistleblower Incentives and Protection." 

CEA Section 23 established a whistleblower program under which the Commodity Futures Trading Commission 

("Commission") will pay awards, based on collected monetary sanctions and under regulations prescribed by the 

Commission, to eligible whistleblowers who voluntarily provide the Commission with original information about 

violations of the CEA that lead either to a "covered judicial or administrative action" or a "related action." 

19 See audit report at: http://www.cftc.gov/ucrnlgroups/public/@aboutcftc/documents/file/oigocoaudit2014.pdf 

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Results ofthese three audits and awareness ofCFTC operations confirm our assessment of major 

near term management challenges for the CFTC. 

Current and Future OIG audits 

In the coming year my office plans to contribute meaningful independent analyses towards 

aiding the agency to explore solutions to its management challenges. Toward that goal my office 

has underway an audit to examine the agency's process for conducting Rule Enforcement 

Reviews (RER) of designated contract markets. We will evaluate staffing, frequency of audit, 

and management controls in the program office responsible for RERs which the CFTC identified 

in their FY2011-2015 strategic plan as a significant component oftheir strategic goal #1.20 As we 

learn more about the agency's monitoring of designated contract markets we may further 

evaluate how the agency reviews designated contract markets cyber security efforts-a critical 

infrastructure. These audits along with our two financial statement audits, other program audits, 

and reviews provide us with valuable data for evaluating future challenges at the CFTC 

Cc: Commissioners Wetjen, Bowen, and Giancarlo 

20 See CFTC Strategic Plan 2011-2015 goal 1 located at: 

http://www.cftc.gov/reports/strategicplan/20 15/20 15strategicplan070 l.html 

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