U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

Office of the

Inspector General

MEMORANDUM

TO:

FROM:

DATE:

SUBJECT:

Introduction

Gary Gensler

Chainman . 0

A. Roy Lavik 0. (2 dInspector General

November 10, 20 II

Inspector General's Assessment ofThe Most Serious Management

Challenges Facing the Commodity Futures Trading Commission (CFTC)

The Rep011s Consolidation Act of 2000 (RCA) authorizes the CFTC to provide financial and

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

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

management and performance challenges facing the Agency and to assess the Agency's progress

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

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

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

statement audit and Annual Financial Report, representations by agency management, as well as

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

and threshold of what constitutes a most serious challenge to the discretion ofthe 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 ofthe CFTC's current financial statement audit,

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

most serious management challenges that we have identified:

• Implementation ofthe Dodd-Frank Act

• Human Resource Expansion and Management
o Efficient Deployment ofInformation Technology Resources

o Expanding Delivery ofCustomer Protection Resources and Consumer Education

CFTC Financial Statement Audit Results

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

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

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

The results ofthe Fiscal Year 2011 financial statement audit will be discussed in the Annual

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

opinion.

CFTC's Progress on Last Year's Challenges

Last year, we identified two ofthe most serious management challenges:

o Implementation ofthe Dodd-Frank Act; and,

o Human Resource Expansion and Management.

CFTC made progress on both challenges, but due to ongoing implementation ofthe Dodd-Frank

Act these challenges remain significant. Following is our statement made last year followed by

an update.

DIG Statement 2010

Implementation ofthe Dodd-Frank Act

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

Protection Act ("Dodd-Frank Act" or "Dodd-Frank"), Pub. L. 111-203, 124 Stat. 1376 (2010).

Title VII ofthe Dodd-Frank Act amended the Commodity Exchange Act to establish a

comprehensive new regulatory framework for swaps and security-based swaps. In order to

implement the Dodd-Frank Act, the Commission has identified 30 areas where rules will be

necessary. Many ofthese rules will require or result in cooperative efforts with the Securities

and Exchange Commission or other federal agencies. In addition, the Dodd-Frank Act calls for

numerous studies and other undertakings by the Commission, some also with cooperation from

other agencies. The Commission recognizes that many ofthe new rules required under DoddFrank must be adopted within 180 days. The magnitude ofthis undertaking under a compressed

timeline during FY 2011 presents a serious management challenge.

2
Update

During the past year CFTC staff and Commissioners have met more than 1,000 times with

members ofthe public to discuss rules proposed under Dodd-Frank, and have conducted 14

public roundtables. Additionally, the Commission has received more than 25,000 comment

letters pertaining to Dodd-Frank. The Commission has held 20 public meetings to vote on

various Dodd-Frank matters, and more meetings are scheduled this year and into next year. The

Commission has issued nearly 60 proposed rules, notices, or other requests seeking public

comment, as well as 22 final rules, interim final rules, and exemptions, but implementation is not

yet complete.

In order to address the new regulatory mandates stated in the Dodd-Frank Act, the Agency has

reorganized into 4 Divisions and 7 operating offices. Operational challenges associated with

Dodd-Frank implementation remain, in our view, a serious management challenge.

DIG Statement 2010

Human Resource Expansion and Management

The Commission's new responsibilities under Dodd-Frank significantly increased its workload.

By the end of Fiscal Year 2010, the Commission had on-board 687 employees, which is 58

below the 745 FTE CFTC requested to carry out our pre-Dodd-Frank authorities. To fully

implement the Dodd-Frank reforms, the Commission states it requires an additional 398 FTEs.

Rather than 398, the President's FY 2011 Budget provided for hiring only 238 additional

positions. CFTC is requesting an additional 160 FTEs for FY 2012 to staff areas of critical need.

However, the current budgetary limits imposed by the government-wide continuing resolution

will significantly impact the CFTC's ability to hire any additional employees during FY2011.

Should Congress lift the continuing resolution, the CFTC will need to dramatically expand its

Human Resource function to meet and manage the CFTC's need for additional staff and training

to address the requirements ofDodd-Frank Act. We view the possibility ofa rapid and dramatic

increase (35% staffincrease in FYl1) in new employees to address new rules over newly

regulated markets, such as swaps, a significant management challenge during Fiscal Year 2011.

Update

During Fiscal Year 2011 the agency secured additional appropriations and staff. The CFTC's

2011 spending plan accommodated 717 FTEs. It is our understanding, based on the President's

Budget Submission, that CFTC may increase to 983 staff years - an increase of over 200 staff

years - for FY 2012 and, accordingly, we restate Human Resource Expansion and Management

as a serious and continuing management challenge in the coming fiscal year.

3
Most Serious Management Challenges for the coming year

Two new issues that are likely to challenge CFTC management in the coming year are:

Efficient Deployment of Information Technology Resources

According to current data, over eighty percent offutures and options trading on the Chicago

Mercantile Exchange are transacted electronically. We believe that expanded jurisdiction over

swaps will increase the volume of electronic trading the Agency will monitor. As a result ofthis

structural shift in futures trading (from floor based open outcry to electronic platforms), the

CFTC has requested from Congress and received additional resources to facilitate electronic

surveillance.

Congress in FY 2011 authorized a minimum of $37.2 million for "the highest priority

information technology activities ofthe Commission." In response to this congressional

directive as well as the Agency's added responsibility over the swaps marketplace, the Agency in

FY 2011 allocated over $42 million dollars towards technological modernization (21% ofFY

2011 appropriations). Approximately two thirds ofthis budgeted commitment was targeted

towards automated data processing systems to modernize the Agency's systems for capturing

and processing market related data. We identify efficient deployment ofinformation technology

resources as a serious management challenge for the coming year.

Expanding Delivery of Customer Protection Resources and Consumer Education

Section of 748(g) ofthe Dodd-Frank Act added section 23(g) to the Commodity Exchange Act to

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

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

Protection Fund may be funded -- up to $100 million -- by civil monetary penalties collected

through the Commission's enforcement program that are not otherwise distributed to victims. At

the end ofFY2011 the Customer Protection Fund totaled over $23 million dollars. On October

24, 2011, an initial Office ofthe Inspector General financial statement audit ofthe Customer

Protection Fund resulted in an unqualified opinion on the financial statements, which is

encouraging.

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

significant management attention. This new commitment to whistleblower protection and

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

awards from the CPF, develop its organizational structure, and prudently manage significant

additional resources. We are encouraged that the agency will soon select management for the

startup Customer Protection Fund and Consumer Education initiatives, but nevertheless we count

the creation ofthis new program among the most serious management challenges facing the

Commission in the coming year.

4