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 10, 2010 

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: 

• Implementation of the Dodd-Frank Act 

• Human Resource Expansion and Management 

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 2010 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 three most serious management challenges: 

• Harmonization of CFTC and Securities and Exchange Commission (SEC) 

 Overlapping Regulations; 

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

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

Markets. 

CFTC made progress on all three challenges. 

Harmonization of CFTC and Securities and Exchange Commission (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 and regulations that would harmonize regulation of futures and securities.’ 

Specifically, the White House recommended ‘that the CFTC and SEC complete a report to 

Congress by September 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. 

The CFTC jointly with SEC issued a substantial Harmonization Report in October 2009, 

identifying areas where the respective regulatory regimes for futures and securities could be 

better aligned to streamline the regulation of novel derivative products and to avoid duplicative 

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regulation. In November 2009, CFTC and SEC issued two joint orders to clarify their respective 

jurisdiction with respect to certain security index products and to allow additional products to 

underlie security futures products. Most of the statutory recommendations set forth in the 

October 2009 Report were included in the Dodd-Frank Act, and the agencies are now proceeding 

to implement those new authorities. 

CFTC’s Regulatory Model for the Swaps Derivatives Market. In 2009, we believed that both the 

intricacies of any forthcoming derivatives regulation and the acquisition of human capital to 

carry out the regulatory tasks would challenge the CFTC in the coming year. The Commission 

employed 605 FTE in FY 2010, up from 498 FTE in FY 2009. The Commission requested in the 

President’s FY 2011 Budget, 745 FTE for pre-Dodd-Frank Authorities and 119 FTE to 

implement Dodd-Frank authorities, for a total of 864 FTE. The Commission states in order to be 

as timely and substantively prepared as possible to meet the needs of the Human Capital 

requirements of the Dodd-Frank Act, it has: 

• Engaged all offices to identify and implement business process changes that will shorten 

the time to hire new staff; 

• Granted Divisions and Offices FTE ceilings that allow them to identify priority hires and 

make selections according to their greatest needs; 

• Considered recruitment alternatives, such as combining vacancy announcements and 

making multiple selections if applicants are of high quality; 

• Built on past cooperative efforts to target underrepresented groups, to continue and 

enhance diversity recruiting for its workforce; and, 

• Developed a process to ensure it identifies detailed job requirements as quickly as 

possible as it implements financial reform legislation to guide the content and tactics of 

the recruiting actions. 

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

Anticipated legislation regulating carbon emission trading and assigning regulatory duties to the 

Commission did not materialize. On June 26, 2009, the House passed the American Clean 

Energy and Security Act—H.R. 2454—that set forth new legislation to regulate carbon emission 

trading; however, the Senate did not act on this proposed legislation. The Dodd-Frank Act 

requires the Commission to lead an interagency working group tasked with organization and 

completion of a study of regulatory oversight of potential carbon markets, with a report due to 

Congress in January 2011. Staff convened the interagency group and began work on the study. 

This forthcoming study may also address issues identified by the Government Accountability 

Office (GAO) in their report issued on August 19, 2010 regarding Carbon Trading: Current 

Situation and Oversight Considerations for Policymakers, GAO-10-851R. 

 

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Most Serious Management Challenges 

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

Implementation of the Dodd-Frank Act 

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

Protection Act (“Dodd-Frank Act”), Pub. L. 111-203, 124 Stat. 1376 (2010). Title VII of the 

Dodd-Frank Act amended the Commodity Exchange Act (CEA) to establish a comprehensive 

new regulatory framework for swaps and security-based swaps. In order to enact the DoddFrank Act, the Commission has identified 30 areas where rules will be necessary. Many of these 

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 of the new rules required under Dodd-Frank must be adopted 

within 180 days. The magnitude of this undertaking under a compressed timeline during FY 

2011 presents a serious management challenge. 

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 of Dodd-Frank Act. We view the possibility of a rapid and dramatic 

increase (35% staff increase in FY11) in new employees to address new rules over newly 

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