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: Gary Gensler 

Chairman

FROM: A. Roy Lavik 

Inspector General 

DATE: November 16, 2009 

SUBJECT: Inspector General’s Assessment Of The Most Serious Management 

Challenges Facing the Commodity Futures Trading Commission (CFTC) 

Introduction 

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

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

and the public, through publication of the Performance and Accountability Report (PAR). 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, all for inclusion in the PAR. 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 PAR, 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 of the Inspector General, we applied the following definition in preparing this 

statement: 

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

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

attention, would seriously impact Agency operations or strategic goals. 

 

 

 

 

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

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

most serious management challenges that we have identified: 

1. Harmonization of CFTC and Securities and Exchange Commission 

(SEC) Overlapping Regulations; 

2. CFTC’s Regulatory Model for the Swaps Derivatives Market; and, 

3. CFTC’s Regulatory Responsibilities over the Potential Carbon Emission 

Trading Markets. 

CFTC Financial Statement Audit Results 

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

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

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

The results of the fiscal year 2009 financial statement audit are discussed in the PAR, and the 

financial statement audit resulted in an unqualified audit opinion. 

CFTC’s Progress on Last Year’s Challenges 

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

Electronic Market Surveillance and the Efficient Acquisition and Integration of Skilled Human 

Capital to address expanding Congressional mandates. During fiscal year 2009 the Agency has 

addressed both issues. Over the past year the Agency has upgraded its servers and trade analysis 

systems to modernize and improve its surveillance of exchange traded futures and options 

contracts. As the Agency acquires additional regulatory responsibilities, we hope that the Agency 

is able to scale up its market surveillance capabilities. Since the start of FY 2009 the Agency has 

increased its staff by 100 new employees (a 21% increase). This dramatic influx of manpower 

should assist the Agency in meeting its expanding regulatory mission. The OIG is conducting a 

review of the recent recruitment in order to evaluate the effect of the CT pay system on 

recruitment and retention, which review will examine the skill sets of this new talent pool. 

Most Serious Management Challenges 

Three issues likely to challenge the CFTC in the coming year are: Congressional demand that the 

CFTC and SEC harmonize their regulation of overlapping financial products; a decision on the 

CFTC’s regulatory model for the swaps derivatives market; and expansion of CFTC’s regulatory 

responsibilities over the potential carbon emission trading markets. 

Harmonization of CFTC and SEC Overlapping Regulations 

On June 17, 2009, the White House released a White Paper on Financial Regulatory Reform 

calling on the SEC and CFTC to “make recommendations to Congress for changes to statutes 

2
and regulations that would harmonize regulation of futures and securities.”1

 Specifically, the 

White House recommended “that the CFTC and the SEC complete a report to Congress by Sept. 

30, 2009, that identifies all existing conflicts in statutes and regulations with respect to similar 

types of financial instruments and either explains why those differences are essential to achieve 

underlying policy objectives with respect to investor protection, market integrity, and price 

transparency or makes recommendations for changes to statutes and regulations that would 

eliminate the differences.”2

In September 2009, the CFTC and SEC collaborated on an initial effort to begin implementation 

of the White House mandate, and released the required joint report on October 16, 2009. This 

effort identified numerous areas for operational coordination that will require substantial analysis 

and may yield a more efficient regulatory structure over the financial markets. The OIG looks 

forward to the resulting regulatory model that will define the future mission of this Agency. 

CFTC’s Regulatory Model for the Swaps Derivatives Market and the Need for Additional 

Human Capital 

Congressional deliberations over how the CFTC will regulate the swaps markets will determine 

the Agency’s need for additional human capital to regulate these markets. The Congressional 

Budget Office estimates that up to 235 employees3

 may be needed by fiscal year 2011 to 

regulate central counterparty clearing of swaps. In our estimation, this would require a 40% 

increase over existing staffing levels--a considerable challenge for any organization. We believe 

both the intricacies of any forthcoming derivatives regulation and the acquisition of human 

capital to carry out the regulatory tasks will challenge the CFTC in the coming year. 

CFTC’s Regulatory Responsibilities over the Potential Carbon Emission Trading Markets 

Congress may soon move forward on new legislation to regulate carbon emissions trading. A 

recent Congressional Budget Office study projected that trading in carbon offsets could be a $60 

billion market in 2012.4 Presuming Congress assigns regulatory responsibility to the CFTC, the 

CFTC will require additional staffing increases in order to absorb this additional regulatory 

responsibility. We believe the increased responsibility will challenge the CFTC in the coming 

year. 

Conclusion 

The past year has continued to witness dramatic movement in the financial markets and the 

commodity futures markets. While the Agency has addressed the most serious management 

challenges identified last year, Congressional initiatives to overhaul regulation of over-the- 

 

1

 Financial Regulatory Reform: A New Foundation, p.14 

http://www.financialstability.gov/docs/regs/FinalReport_web.pdf 

2

 Id., pg. 50. 

3

 H.R. 3795 Derivative Markets Transparency and Accountability Act of 2009 Congressional Budget Office Cost 

Estimate November 6, 2009 Page 3. http://www.cbo.gov/ftpdocs/107xx/doc10703/hr3795hfs.pdf. 

4 H.R. 2454 American Clean Energy and Security Act of 2009 Congressional Budget Office Cost Estimate June 5, 

2009 Page 11 http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf 

3
4

counter derivatives and the carbon markets may provide a new set of challenges and greatly 

expand the work of the Agency. Our concern is that Congress adequately equip the Agency with 

sufficient resources to carry out all additional responsibilities efficiently and effectively, and that 

the Agency implement any new authority with skill and speed. During the coming year we will 

monitor the Agency’s progress addressing the most serious management concerns, while 

continuing to identify new challenges. The OIG takes its mission and authority seriously, and 

remains committed to promoting integrity, accountability and transparency at the CFTC.