COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FOR THE PERIOD NDING September 30, 2011
Office of the

Inspector General

TO:

FROM:

SUBJECT:

u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

October 31, 2011

The Commission .0

A. Roy Lavik Q rz

Inspector General

Semiannual Report ofthe Office ofthe Inspector General

Attached is the Office ofthe Inspector General's Semiannual Report (SAR) for the period

from April 1, 2011 through September 30, 2011. This report is submitted to you in accordance

with the requirements of Section 5 ofthe Inspector General Act of 1978, as amended. 5 USC

App.3 sec. 5.

The Dodd-Frank Act altered the relationship ofthe designated Federal entity Offices of

Inspector General with the agency head by establishing that "head" of a designated Federal entity

means "the board or commission ofthe designated Federal entity." P.L. 111-203, Titlc IX,

Subtitle I, sec. 989B, 124 Stat. 1945 (codified at 5 USC App. 3 sec. 8G(a)(4)). In accordance

with the Dodd-Frank Act, we submit this report to the Chairman and to each Commissioner.

Under section 5(b) ofthe IG Act, the SAR shall be transmitted to the appropriate

committees or subcommittees ofthe Congress within thirty days after receipt ofthe Semiannual

report, together with a report by the head ofthe establishment conforming to the requirements of

section 5(b) ofthe IG Act.

I appreciate your continuing support ofthis office.
Recipients:

Gary Gensler

Chairman

Mark P. Wetjen

Commissioner

Jill E. Sommers

Commissioner

Attachment:

Semiannual Report for the CFTC OIG

Bart Chilton

Commissioner

Scott D. O'Malia

Commissioner
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 2011 through September 30, 2011

EXECUTIVE SUMMARY

This semiannual report is issued by the Office ofthe Inspector General (OIG) for the

Commodity Futures Trading Commission (CFTC) pursuant to the Inspector General Act of

1978, as amended. It summarizes OIG's activities and accomplishments for the period April 1,

2011, through September 30, 2011. During this period, OIG completed one investigation,

completed one review, completed a procurement, began an investigation, and began the Fiscal

Year (FY) 2011 contract audits ofCFTC's financial statements and the Customer Protection

Fund's financial statements. OIG reviewed proposed enforcement actions and rules proposed by

CFTC and by regulated entities, participated in training, visited CFTC field offices, and

participated in Government-wide OIG professional and cooperative meetings and training. One

investigation was closed during the reporting period. One investigation, initiated in the last

reporting period, remained pending at the close ofthis reporting period. No significant

problems, abuses or deficiencies regarding CFTC programs and operations were identified

during this reporting period.

Highlights ofOIG's completed and ongoing audit, inspection, review, investigative and

other projects include:

• OIG completed two reports addressing the cost-benefit analyses performed by the Agency in

connection with proposed rulemakings undertaken pursuant to the Dodd-Frank Act. OIG

examined in detail the cost-benefit analyses published in connection with eight proposed

rulemakings. Overall, our examinations indicated that the cost-benefit analyses in most cases

were largely drafted, supervised, or controlled by attorneys, with input from economists at

times lacking or disregarded. We recommended that the cost-benefit analyses be more

robust, with the economists given a greater role, and are pleased with subsequent guidance

for cost-benefit analyses issued by the Agency, as well as the cost-benefit analysis to apply

to the final rules published in order to implement Dodd-Frank.

• OIG began its contract audit ofCFTC's FY 2011 financial statements.

• OIG began its FY 2011 review ofCFTC's implementation ofthe Federal Managers'

Financial Integrity Act (FMFIA)

• OIG began its FY 2011 review ofCFTC's implementation ofthe Federal Information

Security Management Act (FISMA)
• In accordance with the Dodd-Frank Act, OIG began a contract audit ofthe CFTC Customer

Protection Fund.

• DIG began an inspection into record retention practices by the Division ofEnforcement

pertaining to investigative records. This inspection should enable us to ascertain, over the

review period, whether CFTC-DOE policies and procedures complied with National

Archives and Records Administration (NARA) guidelines for retaining/destroying

investigative files.

• OIG began an inspection into a disclosure oftrade information to Congress in 2008. This

inspection should enable us to ascertain the Commissions' procedures and controls

associated with the disclosure oftrade information in 2008 (and to review any revisions since

then), to determine whether existing procedures were adequate and followed.

• OIG began an investigation of anonymous allegations pertaining generally to technical

aspects ofthe proposed rulemaking addressing position limits for swaps, and alleging poor

management ofthe rulemaking team.

• OIG hired an experienced auditor and implemented the recommendations reported in the peer

review ofthe OIG audit function issued by the Federal Election Commission OIG on March

31,2011.

11
TABLE OF CONTENTS

EXECUTIVE SUMMARY ..........•................................................•..........•...•..................................•i

INDEX OF IG ACT REPORTING REQUIREMENTS .............................................•.•.................v

INTRODUCTION .....................................•...•..•...•••.....................................•.....................•..•......... 1

CFTC PROGRAMS AND OPERATIONS .........•................................................................•..•........•..... 1

OIG RESPONSIBILITIES .•..•.•....................•...................................................•.•............................... 1

OIG RESOURCES ......................•........................................................................•.•..•.•...................3

COMPLETED AUDITS, INSPECTIONS, EVALUATIONS, REVIEWS AND OTHER

PROJECTS .........................•..•.•..................•.....•..............................•.........•....•...•.•.........................•3

COMPLETED AUDITS....................•......•.••....•...................•••...•.••.....•.............................•.....•..........3

COMPLETED INSPECTIONS, EVALUATIONS, REVIEWS AND OTHER PROJECTS ..•.•..•...................•...3

IN-PROCESS AUDITS, INSPECTIONS, EVALUATIONS, REVIEWS AND OTHER

PROJECTS .........................••••.•..................•............................•...•.•..•..•..............................•....•.......3

CURRENT AUDITS ........................•...............•..•..•.........•..........................•.•..•...•....................••.•••.•3

Audit o/CFTC Financial Statementsfor Fiscal Year 2011 3

Audit ofCFTC Customer Protection Fund/or Fiscal Year 2011 4

IN-PROCESS INSPECTIONS, EVALUATIONS, REVIEWS AND OTHER PROJECTS 5

Review o/Compliance with the Federal Managers' Financial Integrity Act, FMFIA 5

Evaluation 0/the Federal Information Security Management Act at CFTC '.' 5

Inspection ofDivision ofEnforcement's Investigative Records Disposition Policy 5

AUDIT REPORTS AND REVIEWS OVER SIX MONTHS OLD 6

CORRECTIVE ACTION NOT COMPLETED................•................................................................••.....6

CORRECTIVE ACTION COMPLETED ........................•...................................................•.•................6

MANAGEMENT DECISION NOT MADE ....................................................•...........................•..........6

INVESTIGATIONS .....................•.................•..•.............................................................................6

COMPLETED INVESTIGATIONS 6

ONGOING INVESTIGATIONS 7

Investigation Involving the Office ofProceedings 7

Investigation Involving Position Limits Rulemaking 7

SUMMARY OF MATTERS REFERRED TO PROSECUTORIAL AUTHORITIES 7

CONGRESSIONAL INQUIRIES 8

A REVIEW OF COST-BENEFIT ANALYSES PERFORMED BY THE COMMODITY FUTURES TRADING

COMMISSION IN CONNECTION WITH RULEMAKINGS UNDERTAKEN PURSUANT TO THE DODDFRANK ACT 8

AN INVESTIGATION REGARDING COST-BENEFIT ANALYSES PERFORMED BY THE COMMODITY

FUTURES TRADING COMMISSION IN CONNECTION WITH RULEMAKINGS UNDERTAKEN

PURSUANT TO THE DODD-FRANK ACT 10

iii
LEGISLATIVE, REGULATORY AND RULE REVIEWS 12

INTRODUCTION AND SUMMARy ••..•..•••.••.••.••.••........•.••••••.•••••••••.•.•....••••.....••••..•.••••....•.•........•••••• 12

RULE REVIEWS INITIATED IN PREVIOUS REpORTING PERIODS......•.••..•.••.•••.•.•......•.••.••.••••.•.•...... 13

RULE REVIEWS INITIATED THIS REpORTING PERIOD ..•••••.•••............•.......•.•..•••.•.•..•..•.............•..• 13

LEGISLATIVE ACTIVITIES ...........•••..........•...•.•.......................•..........................•.••.•..•....•..•.•....... 13

OTHER REVIEWS 13

OTHER REVIEWS AND ACTIVITIES..•.............•..............•....................•...•....................•..•......•...... 14

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD CONCERNING

REQUESTS FOR INFORMATION OR ASSISTANCE 14

REVISED MANAGEMENT DECISIONS 14

INSPECTOR GENERAL DISAGREEMENT 15

GAO LIAISON 15

STRATEGIC PLAN FOR THE OFFICE OF THE INSPECTOR GENERAL 15

INVESTIGATIVE AGENDA ...........•..•.........•••...............................•................................•...••..•.....•.. 15

LEGISLATIVE AND REGULATORY REVIEW AGENDA .......................•.............................•......•.•.•.. 16

AUDIT, INSPECTION, EVALUATION AND REVIEW AGENDA ......................•..........•....••................. 16

Introduction 16

Annual Audit 17

Annual Review and Evaluation 17

Other Audits, Inspections, Evaluations, Reviews and Projects 18

RESOURCES REQUIRED ....•....•.•..••..•.........•.....•.••..•..••...............................•.•....•.•..•.•........•..........• 18

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL 18

TABLE I-REPORTS ISSUED WITH QUESTIONED COSTS 19

TABLE 2 _ REPORTS ISSUED WITH RECOMMENDATIONS 20

IV
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 4(a)(2) Review oflegislation and regulations 12

Section 5(a)(l) Significant problems, abuses and deficiencies .i

Section 5(a)(2) Recommendations with respect to significant problems .i

Section 5(a)(3) Significant recommendations that have not been completed 6

Section 5(a)(4) Matters referred to prosecutorial authorities 7

Section 5(a)(5) Summary ofinstances where information was refused 14

Section 5(a)(6)' Completed audit, inspection and evaluation reports 3

Section 5(a)(7) Significant reports 3

Section 5(a)(8) Statistical Table-Questioned Costs 19

Section 5(a)(9) Statistical Table-Funds Recommended for Better Use 20

Section 5(a)(1 0) Audit, inspection and evaluation reports lacking

management decision 6

Section 5(a)(II) Significant revised management decisions 14

Section 5(a)(12) Significant management decisions where the IG disagrees 15

Section 5(a)(l3) .Information described under the Federal Financial Management

Improvement Act of 1996 4

Section 6(b)(2) Summary ofreports to Chairman where assistance was refused .l4

v
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1,2011 - September 30,2011

INTRODUCTION

1. eYre Programs and Operations

Congress created the Commodity Futures Trading Commission in 1974 as an

independent agency with the mandate to regulate commodity futures and options markets in the

United States. The Commission's mandate was renewed and/or expanded in 1978, 1982, 1986,

1992 and 1995. In December 2000, the Commission was reauthorized by Congress and the

President through Fiscal Year 2005 with the passage ofthe Commodity Futures Modernization

Act of2000 (CFMA). In May of2008, Congress reauthorized the CFTC through Fiscal Year

2013. On July 21,2010, the President signed into law the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act), P.L. 111-203, which expanded CFTC'sjurisdiction

and authorities.

The CFTC is responsible for fostering the economic utility offutures markets by

encouraging their competitiveness and efficiency, ensuring their integrity and protecting market

participants against manipulation, abusive trade practices and fraud. Through effective oversight

regulation, the CFTC enables the commodity futures markets better to serve their vital function

in the nation's economy-providing a mechanism for price discovery and a means of offsetting

price risks. The new Dodd-Frank Act authorizes the CFTC to regulate swap dealers, increase

transparency and improve pricing in the derivatives marketplace, and lower risk to the American

public.

The CFTC operating divisions are: Office ofthe Chairman, Office ofthe Executive

Director, Office ofGeneral Counsel, Office ofthe Chief Economist, Division ofClearing and

Risk, Division ofData and Technology, Division ofEnforcement, Office ofInternational Affairs,

Division ofMarket Oversight, and Division ofSwap Dealer and Intermediary Oversight. In

addition to its headquarters office in Washington, DC, the CFTC maintains offices in Chicago,

Illinois; Kansas City, Missouri; and New York, New York.

2. OIG Responsibilities

The CFTC OIG was created in 1989 in accordance with the 1988 amendments to the

Inspector General Act of 1978 (p.L. 95-452). OIG was established as an independent unit to:

• Promote economy, efficiency and effectiveness in the administration of CFTC programs and

operations and detect and prevent fraud, waste and abuse in such programs and operations;

• Conduct and supervise audits, inspections, evaluations, reviews, projects and, where

necessary, investigations relating to the administration ofCFTC programs and operations;

1
• Review existing and proposed legislation, regulations and exchange rules and make

recommendations concerning their impact on the economy and efficiency ofCFTC programs

and operations or the prevention and detection offraud and abuse; and

• Keep the Chairman and Congress fully informed about any problems or deficiencies in the

administration ofCFTC programs and operations and provide recommendations for

correction ofthese problems or deficiencies.

It is the duty and responsibility ofthe GIG to conduct, supervise and coordinate audits

relating to CFTC programs and operations in accordance with generally accepted government

auditing standards. OIG is also charged with the duty and responsibility to recommend changes

to existing and proposed CFTC programs and operations to promote economy, efficiency and

effectiveness and to prevent and detect fraud and abuse.

The purpose of OIG audits, inspections, evaluations, reviews and projects generally is to

ensure that:

• Funds have been expended in a manner consistent with related laws, regulations and policies;

• Resources have been managed effectively and efficiently;

• Stipulated program objectives have been achieved;

• Agency operations have not been subject to improper influence or corruption; and

• Resources have been safeguarded.

DIG operates independently ofthe Agency and has not experienced any interference from

the CFTC Chairman in connection with the conduct of any investigation or audit, inspection,

evaluation, review or project, and our investigations have been pursued regardless ofthe rank or

party affiliation ofthe target. DIG has also conducted audits, inspections, evaluations, reviews

and other projects without interference where OIG has perceived the need to recommend

improvement to futures regulation efforts, again without regard to the party affiliation of any

Chairman. l

CFTC is a designated Federal entity (DFE) under the IG Act of 1978, as amended. 5

USC App. 3 sec. 8G(a)(2). The Dodd-Frank Wall Street Reform and Consumer Protection Act

altered the relationship between the DFE Inspectors General and the agency head by clarifying

that "head" of a DFE means "the board or commission ofthe designated Federal entity." P.L.

111-203, Title IX, Subtitle I, sec. 989B, 124 Stat. 1945 (codified at 5 USC App. 3 sec. 8G(a)(4)).

The effective date ofthis provision was July 22,2010. The DIG has not experienced any

interference from the head ofthe CFIC in the conduct ofits official duties.

I The Inspector General Act of 1978, as amended, states: "Neither the head ofthe establishment nor the officer next

in rank below such head shall prevent or prohibit the Inspector General from initiating, carrying out, or completing

any audit or investigation...." 5 U.S.C. App. 3 sec. 3(a).

2
3. OIG Resources

OIG consists ofthe Inspector General, a part-time Supervisory Senior Auditor hired at

the close ofthe prior reporting period, a full-time Senior Auditor, an Attorney-Advisor and a

secretary. The Inspector General assumed his position on October 7, 1990. The part-time

Supervisory Senior Auditor joined the office in March 2011, the full-time Senior Auditor joined

the office in 1999, and the Attorney-Advisor joined in 2007.

COMPLETED AUDITS, INSPECTIONS, EVALUATIONS,

REVIEWS and OTHER PROJECTS

1. Completed Audits

No audits were completed during this reporting period.

2. Completed Inspections, Evaluations, Reviews and Other Projects

On May 4,2011, we received a request from 10 Senators seeking our review ofCFTC's

cost-benefit analyses provided in connection with an additional four rules proposed under DoddFrank. The 10 Senators requested similar reviews ofthe economic analysis devoted to DoddFrank rulemakings from the Inspectors General for the Federal Reserve Baord, the Department

ofTreasury, the Securities and Exchange Commission, and the Federal Deposit Insurance

Corporation. CFTC OIG completed its review on June 15,2011, and it is discussed fully under

Congressional Inquiries infra at page 8.

IN-PROCESS AUDITS, INSPECTIONS, EVALUATIONS,

REVIEWS and OTHER PROJECTS

1. In-process Audits

a. Audit of CFTC Financial Statements for Fiscal Year 2011

Background

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to obtain an independent financial

statement audit each year. During the reporting period, the Inspector General selected an

independent public accountant (lPA) to render an opinion on the agency's financial statements

for Fiscal Year 2011 in accordance with generally accepted auditing standards, Government

Auditing Standards, OMB Bulletin 01-02 and OMB Circular A-136.

3
Audit Objective

The objective ofthis audit is to render an opinion on the CFTC's financial statements and report

on internal controls and compliance with laws and regulations.

In May 2011, the Inspector General selected an independent public accountant to conduct

the CFTC Financial Statement Audit. The Fiscal Year 2011 audit began in June with an entrance

conference with senior agency managers, the OIG and representatives from the IPA. Further

meetings and reviews have taken place throughout this reporting period while work on the audit

is ongoing. The final audit report is to be delivered to the Office ofthe Inspector General in

November 2011.2

b. Audit of CFTC Customer Protection Fund for Fiscal Year 2011

Background

Section 745(g)(5)(I) ofthe Dodd-Frank Act requires the Agency to submit to Congress a

yearly report on the Commission's whistleblower award program that includes a complete set of

audited financial statements, including a balance sheet, income statement, and cash flow

analysis. The OIG is undertaking this required audit.

Audit Objective

The objective ofthis audit is to render an opinion on the CFTC's Customer Protection Fund's

financial statements and report on the Customer Protection Fund's internal controls and

compliance with laws and regulations. As part ofthis audit, the OIG will also review the

agency's report to select Congressional committees on activities ofthe Customer Protection

Fund during the previous year.

Prior to the close ofthe reporting period CITC OIG contracted with an independent public

accounting finn to perform this audit, and the audit was in progress at the close ofthe reporting

period. The audit report is scheduled to be issued by October 24,2011.

2 The IG Act and the Federal Financial Management Improvement Act of 1996 (FFMIA) require the Inspectors

General of certain agencies to report "instances and reasons" when the Agency has not met intermediate target dates

established in a remediation plan to bring the Agency's financial management system into substantial compliance

with the FFMIA. CFTC is not subject to the FFMIA; however, it voluntarily seeks to comply with its

requirements. During this reporting period, there were no events giving rise to a duty to report under FFMIA.

4
2. In-process Inspections, Evaluations, Reviews and Other Projects

a. Review ofCompliance with the Federal Managers' Financial Integrity Act, FMFIA

The Federal Managers' Financial Integrity Act of 1982 requires federal managers to

establish a continuous process for evaluating, improving, and reporting on the internal control

and accounting systems for which they are responsible. OMB Circular A-I23, revised December

2004, "Management Accountability and Control," is the implementing guidance for FMFIA.

The annual FMFIA report will be included in the CFTC Annual Performance Report (APR).

The Office ofthe Inspector General is in the process ofreceiving and reviewing draft

internal control reviews produced by agency staff, and will provide comments to the originating

divisions. DIG will report its evaluation ofthe final FMFIA documents in its annual assurance

letters to the Chairman which will be included in the APR.

b. Evaluation ofCompliance with the Federal Information Security Management Act

atCFfC

The Federal Information Security Management Act (FISMA) was enacted on December

17, 2002. FISMA requires the Office ofthe Inspector General to perform annual independent

evaluations ofthe information security program and practices ofthe agency.

The OIG is currently completing its evaluation ofthe agency's FISMA related documents

and will submit its assessment along with the agency's documents to the Office ofManagement

and Budget by November 1, 2011.

c. Inspection of the Division of Enforcement's Investigative Records Disposition Policy

Background

The CFTC Division ofEnforcement (CFTC-DOE) is authorized to conduct investigations of

industry participants for non-compliance with the Commodity Exchange Act and product related

malfeasance. It is incumbent upon CFTC-DOE management to assure that all enforcement

records are disposed ofas authorized under record retention schedules approved by the National

Archives and Records Administration.

5
Objective

This inspection will enable us to ascertain, over the review period (January 1,2008 to August 1,

2011), whether the CFTC-DOE policies and procedures complied with National Archives and

Records Administration guidelines for retaining/destroying investigative files.

At the close ofthe reporting period this inspection was ongoing.

AUDIT REPORTS and REVIEWS OVER SIX MONTHS OLD

1. Corrective Action not Completed

There were no instances ofaudit reports over six months old where corrective action had

not been completed.

2. Corrective Action Completed

There were no instances ofreports issued before the commencement ofthe reporting

period for which corrective action had been completed by the end ofthe reporting period.

3. Management Decision not Made

There were no instances of a report issued before the commencement ofthe reporting

period for which a management decision had not been made by the end ofthe reporting period.

INVESTIGATIONS

1. Completed Investigations

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commissionfs employees and other

sources concerning the possible existence of an activity constituting a violation oflaw, rules or

regulations, or mismanagement, abuse of authority, or gross waste offunds, or a substantial and

specific danger to the public health and safety. At the end ofthe prior reporting period,

significant staffresources were devoted to an investigation requested by the Chairman ofthe

House Agriculture Committee and the Chairman ofthe Subcommittee on General Farm

6
Commodities and Risk Management regarding cost benefit analyses under the Dodd-Frank Act.

OIG issued its report ofinvestigation on April 15, 2011, and it is discussed fully under

Congressional Inquiries infra at page 8.

2. Ongoing Investigations

The CFTC OIG does not comment on all ongoing investigations. Ongoing investigations

that have become public, through the press or otherwise, will be discussed in semi-annual

reports, absent exigent circumstances.

Investigation Involving the Office ofProceedings During the prior reporting period, we

received an allegation ofmisconduct involving staff and management in the Office of

Proceedings. Due to an internal conflict within the OIG, as well as resource concerns, we

reached out to the OIG investigative community and obtained consent from the Treasury

Inspector General for Tax Administration (TIGTA) to conduct this investigation. The CFTC

entered into a formal Economy Act3 agreement with TIGTA, and the investigation was ongoing

at the close ofthis reporting period.

Investigation Involving Position Limits Rulemaking During this reporting period we

received two anonymous allegations pertaining to the position limit rulemaking currently being

undertaken by the CFTC pursuant to the Dodd-Frank Act. At the close ofthe reporting period,

the rule was not yet final. After receiving the allegations, CFTC OIG began interviews in order

to review or survey the position limits rulemaking. This inquiry was ongoing at the end ofthe

reporting period.

SUMMARY OF MATTERS REFERRED TO

PROSECUTORIAL AUTHORITIES

No matters were referred to prosecutorial authorities during this reporting period.

3 The Economy Act (31 U.S.C. 1535) authorizes agencies to enter into agreements to obtain supplies or services by

interagency acquisition.

7
CONGRESSIONAL INQUIRIES

The Inspector General continues to be involved in legislative activities pertaining to both

the CFTC and the IG community. The IG serves on the legislation committee for the Council of

Inspectors General on Integrity and Efficiency, which discusses and provides guidance on

pending legislation affecting the IG community. At the end ofthe prior reporting period

significant staffresources were devoted to an investigation requested by the Chairman ofthe

House Agriculture Committee and the Chairman ofthe Subcommittee on General Fann

Commodities and Risk Management. The investigation addressed the cost-benefit analyses

issued in connection with four ofCFTC's proposed rulemakings under the Dodd-Frank Act, and

OIG completed this investigation on April 15, 2011.

On May 4,2011, OIG received a request from 10 Senators seeking our review ofCFTC's

cost-benefit analyses provided in connection with an additional four rules proposed under DoddFrank. The 10 Senators additionally requested reviews ofthe economic analyses devoted to

Dodd-Frank rulemakings from the Inspectors General for the Federal Reserve Board, the

Department ofTreasury, the Securities and Exchange Commission, and the Federal Deposit

Insurance Corporation. CFTC OIG completed its review on June 15,2011.

1. A Review of Cost-Benefit Analyses Performed by the Commodity Futures Trading

Commission in Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank

Act

Background

CFTC OIG reviewed the formulation of cost benefit analyses for four notices of pr~posed

rulemakings recently published by the Commodity Futures Trading Commission. We undertook

this review at the request often members ofthe Senate Committee on Banking, Housing, and

Urban Affairs. The request issued May 4,2011, and requested our response by June 13,2011.

The four rules addressed: 1) the treatment ofsegregated funds ofswaps customers; 2)

derivatives clearing organization risk management requirements; 3) swaps relationship

documentation requirements; and 4) core principles for swap execution facilities. Three ofthe

proposed rules were published in the Federal Register in January and February ofthis year. The

proposed rule addressing the treatment ofsegregated funds ofswaps customers was issued by the

Commission in April 2011.

In order to complete this review, we reviewed drafts ofthe cost-benefit analyses for the

four proposed rules, as well as staff e-mail and internal memoranda. In addition, we conducted

interviews with 28 CFTC employees at various staff and management levels who were involved

with the cost-benefit analyses processes for the four rules. Multiple interviews were conducted

with some employees.

8
Objectives and Methodology

In this review we sought to examine six factors pertaining to the Agency's cost-benefit

analyses:

A. The quantitative methodologies the agency uses to evaluate the costs and benefits

ofproposed rules and the effects those rules could have on job creation and

economic growth;

B. The qualitative methods the agency uses to categorize or rank. the effects of

proposed rules;

C. The extent to which the agency considers alternative approaches to its proposed

rules;

D. The extent to which the agency examines the costs, benefits, and economic impact

ofreasonable alternatives to its proposed rules;

E. The extent to which the agency seeks public input and expertise in evaluating the

costs, benefits, and economic impact ofits proposed rules, and the extent to which

the agency incorporates the public input into its proposed rules; and

F. The extent to which the economic analysis performed by the agency with respect

to its proposed rulemakings is transparent and the results are reproducible.

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

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

interviews with 28 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.

Summary ofFindings and Recommendations

Prior to publication ofthe four proposed rules, the Office ofGeneral Counsel and Office

ofChiefEconomist created a uniform methodology for cost-benefit analysis for use with all

proposed rulemakings under Dodd-Frank. That methodology set out in some detail the types of

qualitative considerations that might inform a cost-benefit analysis, encouraged the use ofboth

qualitative and quantitative data, and included a template for everyone to follow.

While the methodology initially adopted by the Office ofGeneral Counsel and the Office

ofChiefEconomist would permit a detailed and thorough approach to the task, in the three

earlier 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 often addressed

in the preamble. In fact, although the development of a uniform methodology appeared to be an

equal effort between the Office ofGeneral Counsel and the Office ofChiefEconomist, at the

outset ofthe rulemaking efforts the cost-benefit analyses involved less input from the Office of

9
ChiefEconomist, with the Office ofGeneral Counsel taking a dominant role. For the three

proposed rules we reviewed that were published in January or February 2011, the cost-benefit

analyses were drafted by Commission staffin divisions other than the Office ofChief

Economist. In these earlier rulemakings, stafffrom the Office ofChiefEconomist did review the

drafts, but their edits were not always accepted. In one rulemaking, the Office ofChief

Economist did not participate at all.

For the more recent cost-benefit analysis accompanying the proposed

segregation/bankruptcy rule, we were pleased with the cost-benefit discussion. Although staff

told us this rule was different with regard to cost considerations from the start, they also told us

the cost-benefit analysis section was influenced by concerns voiced this year regarding costbenefit analyses, including an earlier CFTC OIG report addressing cost-benefit considerations in

connection with Dodd-Frank rulemakings.

With regard to the segregationlbankruptcy rule, the only deficiencies we detected, based

on our review, were somewhat minor. We noted both the lack of clarification ofthe role of

Paperwork Reduction Act costs in the context ofthe cost-benefit analysis, and the lack of

quantified costs to the Agency to implement the regulation. Because the Agency currently

includes with its budget requests amounts necessary to implement the Dodd-Frank Act, we

believe these costs could also be discussed in the context ofDodd-Frank rulemakings. We

believe internal Agency costs, including opportunity costs, are relevant because they may

influence the Commission's decisions when faced with regulatory alternatives.

2. An Investigation Regarding Cost-Benefit Analyses Performed by the Commodity

Futures Trading Commission in Connection with Rulemakings Undertaken Pursuant to

the Dodd-Frank Act

Background

During the prior reporting period, we received a request from the Chairman ofthe House

Committee on Agriculture and from the Chairman ofthe House Subcommittee on General Farm

Commodities and Risk Management, for an investigation into cost-benefit analyses performed by

the CFTC in connection with four proposed rules under the Dodd-Frank Act:

1. Further Defming "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 ofproposed

rulemaking);

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

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

10
3. Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572

(December 22,2010) (Notice ofproposed 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).

Objectives and Methodology

In addition to specifying four rules for examination, the Chairman ofthe House

Committee on Agriculture and the Chairman ofthe Subcommittee on General Farm

Commodities and Risk Management set out eight areas ofspecific inquiry to be addressed:

I. The methodologies the CFTC uses to evaluate costs and benefits;

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

adequately evaluate costs and benefits;

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

and expertise in evaluating costs and benefits;

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.

For example, did the CFTC give consideration to the costs and benefits a "Swap Dealer"

designation would have for non-bank, non-financial companies in addition to large global

financial institutions?

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

benefits for small businesses;

6. The amount oftime, on average, that Commission staffspends per rule evaluating costs

and benefits as required by 15(a);

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 ofthe rule under consideration;

8. The impact the current statutory deadline ofTitle VII has on the Commission's ability to

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

statutory deadline would improve the Commission's ability to consider the costs

associated with proposed rules

Because specific misconduct was not alleged and specific targets were not named, we

treated this as an administrative inquiry rather than a criminal investigation or an investigation

designed to support recommended adverse action against any individual.

II
In order to complete the investigation, we reviewed drafts ofthe 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.

We issued our report on April 15, 2011.

Summary ofFindings and Recommendations

We found that although the development ofa uniform cost-benefit analysis methodology

prepared in connection with the Dodd-Frank rulemakings appeared to be an equal effort between

the Office ofGeneral Counsel and the Office ofChiefEconomist, in practice the cost-benefit

analyses involved less input from the Office ofChiefEconomist, with the Office ofGeneral

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

drafted by Commission staffin divisions other than the Office ofChiefEconomist. Stafffrom

the Office ofChiefEconomist did review the drafts, but their edits were not always accepted. To

a greater or lesser extent for the four examined rules, the Office ofGeneral 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. It appeared clear to us that a more

robust process was clearly permitted under the cost-benefit guidance issued by the Office of

General Counsel and the Office ofChiefEconomist, and we believed a more robust approach

would be desirable, with greater input from the Office ofChiefEconomist.

Following issuance of our report, the Agency created updated guidance for cost-benefit

analyses for use with final rulemakings under Dodd-Frank. We note the updated guidance with

approval and continue to recommend that the Office ofChiefEconomist take on an enhanced or

greater role under both the existing methodology and any future methodologies for cost-benefit

analyses for both proposed and final rules under the Commodity Exchange Act.

LEGISLATIVE, REGULATORY AND RULE REVIEWS

1. Introduction and Summary

As specified in Section 4(a)(2) ofthe Inspector General Act of 1978, OIG reviews the

impact of existing and proposed legislation and regulations on CFTC programs and operations

and makes recommendations regarding more effective or efficient alternatives or protections

against fraud and abuse. OIG also reviews exchange rule proposals circulated to senior staff at

CFTC.

OIG notifies the responsible Divisions as to any concerns with draft and final documents

relating to legislation, rules (including exchange rules) or investigations. Initial discussions are

usually informal. The OIG actively monitors the proposed rules and regulations under

development as a result of Dodd-Frank Act. Formal comments were not submitted to the

Commission during this reporting period.

12
2. Rule Reviews Initiated in Previous Reporting Periods

There were no rule reviews initiated in previous reporting periods which were continued

into this reporting period.

3. Rule Reviews Initiated this Reporting Period

No rule reviews were initiated during this reporting period.

4. Legislative Activities

OIG tracked legislation impacting programs and operations ofthe CFTC and ofthe

Office ofInspector General, and made contact with Congressional staff concerning various

agency and IG issues as appropriate. The IG served on the legislation committee for the Council

ofInspectors General on Integrity and Efficiency, which comments on proposed amendments to

the IG Act and other legislation affecting the IG community.

OTHER REVIEWS

An important function in each Agency OIG is the peer review process~ The Inspector

General community's annual report, A Progress Report to the President, Fiscal Year 2007,S

described the processes for audits and investigative peer reviews as follows:

Government Auditing Standards require that audit organizations conducting audits

ofFederal agencies undergo peer reviews every 3 years. The IG community has

implemented a process to meet this requirement. The purpose ofthe peer review

is to determine whether the reviewed audit organization's internal quality control

systems are adequate and provide reasonable assurance that applicable auditing

standards, policies and procedures are met.

Similarly, investigative peer reviews are conducted to ensure compliance with the

requirements ofthe Quality Standardsfor Investigations and determine whether

adequate internal safeguards and management procedures exist to ensure that law

enforcement powers are properly exercised.6

Section 989C ofthe Dodd-Frank Act implemented a requirement to include in each OIG

semiannual report an appendix containing

s http://www.ignet.gov/randp/fy07apr.pdf.

6 Id. at p.l9.

13
• the results of any peer review conducted by another Office ofInspector General during

the reporting period; or if no peer review was conducted within that reporting period, a

statement identifying the date ofthe last peer review conducted by another Office of

Inspector General;

• a list of any outstanding recommendations from any peer review conducted by another

Office ofInspector General that have not been fully implemented, including a statement

describing the status ofthe implementation and why implementation is not complete; and

• a list of any peer reviews conducted by the Inspector General of another Office ofthe

Inspector General during the reporting period, including a list of any outstanding

recommendations made from any previous peer review (including any peer review

conducted before the reporting period) that remain outstanding or have not been fully

implemented.

In accordance with Section 989C ofthe Dodd-Frank Wall Street Reform and Consumer

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

that no peer review was conducted ofthe CFTC OIG during this reporting period. However,

during the prior reporting period, the Federal Election Commission Office ofInspector General

completed a peer review ofCFTC 01G, as ofMarch 31; 2011, that resulted in 35

recommendations for improving CFTC OIG's operations. As ofSeptember 30, 2011, CFTC OIG

had fully implemented all ofthe recommendations. CFTC OIG did not conduct any peer reviews

during this reporting period and there remain no outstanding recommendations from peer

reviews previously conducted by CFTC OIG.

2. Other Reviews and Activities

No other review activity took place during this reporting period.

SUMMARY OF EACH REPORT MADE TO

THE AGENCY HEAD CONCERNING REQUESTS FOR

INFORMATION OR ASSISTANCE

No reports were made to the Agency head under section 6(b)(2) concerning information

or assistance unreasonably refused or not provided (mandated under section 5(a)(5) ofthe Act).

REVISED MANAGEMENT DECISIONS

No management decisions were revised during this reporting period.

14
INSPECTOR GENERAL DISAGREEMENT

The Inspector General did not disagree with any management decisions on OIG

recommendations during this reporting period. In 2006, the CFTC OIG issued a report titled

"Review ofthe Need for a Western Regional Office in Los Angeles." That report recommended,

among other things, that the Commi·ssion review the feasibility ofreestablishing the former Los

Angeles field office. That recommendation was not carried out largely due to budget constraints.

In January 2008, partially in response to a Congressional inquiry, CFTC OIG updated its analysis

and on March 12, 2008, issued a follow-up report which reiterated the earlier recommendation.

In January 2009, the Acting Chairman issued a decision declining to implement the

recommendation generally due to cost considerations, but required the Agency on a yearly basis

to provide to OIG an analysis ofregional case filing statistics and costs associated with cases in

various regions ofthe country. The Division ofEnforcement submitted their yearly analysis to

OIG in March 2010. In light ofincreased funding for FY09, FYI0 and FY 11 (anticipated),

corresponding anticipated staffing increases and the enactment oflegislation that expands CFTC

jurisdiction, we renew the recommendation that the Commission consider opening an additional

CFTC office on the West Coast.

GAO LIAISON

OIG is charged with providing policy direction for, and conducting, supervising, and

coordinating audits and investigations relating to CFTC programs and operations. In addition,

OIG is required to recommend policies for, and conduct, supervise, and coordinate with other

Federal agencies, state and local governmental agencies, and nongovernmental entities, audits,

investigations, reviews and evaluations regarding the economy, efficiency, and effectiveness of

CFTC programs and operations.

GAO also conducts audits of CFTC activities, and OIG plans its audits so as not to

duplicate GAO's efforts. Moreover, OIG in its audit, review and inspection activities identifies

the goals of each endeavor and the methods ofreaching the goals so as to minimize the

requirements placed on CFTC resources.

STRATEGIC PLAN FOR THE

OFFICE OF THE INSPECTOR GENERAL

1. Investigative Agenda.

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

the possible existence of an activity constituting a violation oflaw, rules or regulations, or

mismanagement, gross waste offunds, abuse of authority or a substantial and specific danger to

the public health and safety.

15
OIG has to date conducted only a reactive investigative program chiefly relying on

unsolicited employee complaints as the source ofinvestigative leads. However, allegations and

complaints are also received from the general public and Congress. This reactive program has

resulted in only a handful ofinvestigations per year. This strategy was followed because OIG

believed that an independent regulatory agency such as the CFTC, without grant money or

substantial contracts to award, was not likely to generate a substantial investigative workload.

To insure that employee complaints could easily reach OIG, a 24-hour hotline was

established in February 1993 to receive complaints. The hotline phone number is (202)418-

5510.

Because ofthe necessarily reactive nature ofOIG's investigative program, no

investigative agenda has been established.

2. Legislative and Regulatory Review Agenda.

Because ofthe importance ofthis activity in a financial and economic regulatory agency,

OIG reviews proposed and final CFTC regulations, legislation and selected exchange rules using

six basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be

addressed by the proposal; (2) has defined through case study or data analysis a clear link

between the proposed solution and the identified problem(s); (3) has specified clearly the means

to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and

effectiven.ess of alternative solutions; (5) can reasonably document that the proposal will yield

positive net benefits over the long term; and (6) has met the requirements ofthe Regulatory

Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact ofits

regulations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its information collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

Because OIG does not initiate legislation or, generally, regulations, OIG legislative and

regulatory review program is reactive to the legislative and regulatory proposals developed by

others. Accordingly, no independent legislative and regulatory review agenda has been

established.

3. Audit, Inspection, Evaluation and Review Agenda

a. Introduction

The primary objectives ofthe OIG audit, inspection, evaluation and review agenda is to

promote long-term efficiency and effectiveness in the administration and operation ofthe

Commission and to protect against fraud and abuse. The audit, review, evaluation, and

inspection agenda and priorities for DIG are determined based on the following factors:

16
• Adequacy ofinternal control systems as indicated by vulnerability assessments and

internal control reviews recommended by OMB Circular A-123;

• . Changes in the program conditions or particular vulnerability ofthe organization,

program, activity, or function to problems or deficiencies;

• Current and potential dollar magnitude and likely benefits of a review on the

efficiency or effectiveness ofCFTC programs and operations;

• Management priorities and improvements that may be possible;

• Results of audits ofCFTC programs and operations by other Federal agencies; and

• Availability of audit resources and the potential opportunity costs to the agency.

b. Annual Audit

The following required audit is performed on an annual basis.

Audit of CFTC Financial Statements

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to have its financial statements audited

annually. To this end, OIG has engaged a contractor to provide the audit effort required to

enable the contractor to render an opinion on the agency's financial statements for each fiscal

year in accordance with generally accepted auditing standards, Government Auditing Standards

and OMB Bulletin 07-04.

c. Annual Review and Evaluation

We will perform the following review and evaluation on an annual basis:

Review ofCompliance with the Federal Managers' Financial Integrity Act, FMFIA

In support ofOMB Circular A-123 (Revised), the Inspector General will evaluate,

provide technical assistance and advise the agency head as to whether the agency's review and

evaluation process was conducted in accordance with the circular's requirements.

Evaluation ofthe CFTC Information Security Management Act, FISMA

The Federal Information Security Management Act requires the Inspector General or his

designee to perform annual independent evaluations ofthe information security program and

practices ofthe agency.

17
d. Other Audits. Inspections, Evaluations, Reviews and Projects

Looking to the long term, the DIG intends to focus the balance ofits resources on the

review ofthe management and operation ofthe agency and compliance with Congressional

mandates. DIG plans to concentrate its efforts in reviewing activities relating to the most serious

management challenges facing the CFTC.

In addition, DIG is aware ofthe immense regulatory undertaking required under the

Dodd-Frank Act. DIG will seek to identify issues and to conduct inspections, reviews,

investigations and other activities relating to these management and regulatory challenges.

Finally, DIG will stand ready to respond to issues and requests as they are received from

Congress, the Agency and merrlbers ofthe public or any other source.

At the close ofthe last reporting period, DIG reported that a previously intended examination of

communications between CFTC staff and large traders had been tabled due to our workload

during this prior reporting period. This review continues to be tabled.

e. Resources Required

OIG estimates that approximately one staff year of effort will be devoted over each ofthe

next five years to the annual audit, the annual review, and the annual evaluation described above.

However, DIG is updating its audit universe in view ofCFTC's increased responsibilities under

the Dodd-Frank Act and will reevaluate its staffing needs once the update is complete. Revision

ofthe CFTC DIG audit procedures and other remediation-related tasks, and all other

investigations, inspections, evaluations, review and other projects will consume up to two and a

halfstaff years. Because DIG resources can be diverted at any time to an investigation or audit,

inspection, evaluation, review or project that responds to current concerns or allegations, and

must be completed in a timely fashion in order to be of assistance to the Agency or Congress, it

is impossible to forecast with complete accuracy how resources will be utilized from year to

year. In accordance with a recommendation contained in the recent peer review, we have hired

an experienced auditor to assist with remediation and supervise all audit activity, including audits

performed by independent public accountants obtained on a contract basis. Due to staffsize, we

will continue to utilize outside independent auditors to perform DIG audits as necessary.

CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

DIG is located at 1155 21st Street, N.W., Washington, D.C. 20581. Regular business

. hours are between 8:30 AM and 5:00 PM, Monday through Friday, except Federal holidays. The

telephone number is (202)418-5110. The facsimile number is (202)418-5522. The hotline

number is (202)418-5510. The DIG web page is located at:

http://www.cftc.gov/AboutlOfficeofthelnspectorGeneraUindex.htm.

18
Table 1

Reports Issued with Questioned Costs

(April 1, 2011- September 30,2011)

Number

Dollar Value

Thousands

Questioned Unsupported

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

C. For which a management decision was

made during the reporting period

o

o

o

o

o

o

o

o

o

o

o

o

(I)

(ii)

dollar value of

disallowed costs

dollar value of costs not

disallowed

o

o

o

o

o

o

D. For which no management decision

has been made by the end ofthe

reporting period

19

o o o
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(April 1, 2011- September 30,2011)

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

c. For which a management decision was

made during the reporting period

( i ) dollar value of

recommendations that

were agreed to by management

Number

o

o

o

o

o

Dollar Value

Thousands

o

o

o

o

o

(ii) dollar value of

recommendations that

were not agreed to by

management o o

D. For which no management decision

has been made by the end ofthe

reporting period

20

o o
THE INSPECTOR GENERAL

NEEDS YOUR HELP TO ASSlTRE

THE INTEGRITY OF CFTC'S

PROGRAMS AND OPERATIONS.

Report FRAUD, WASTE or ABUSE

in connection wit11

CFTC Programs and Operations

to the Office of the

INSPECTOR GENERAL.

You may report ANONYMOUSLY.

HOTLINE

(202) 418-5510

Office of the Inspector General

Commodity Futures Trading Commission

1155 21ST Street, N.W.

Washington, D.C. 20581