Good afternoon Chairman Durbin, Ranking Member Moran and members of the Subcommittee. Thank you for inviting me to today’s hearing on the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2013 budget request.
It is critical that the derivatives markets – both futures and swaps – work for hedgers, the farmers, ranchers, producers and commercial companies in the real economy. Futures and swaps markets allow them to lock in a price and focus on what they do best – servicing customers, producing products and investing in our country’s future. As it’s the hedgers in the real economy – the non-financial side – that provide 94 percent of private sector jobs, it’s all the more important that these markets work for America’s job providers.
The derivatives markets that the CFTC oversees are where hedgers across the country meet financial firms, and others generally called speculators. Over time, the makeup of these markets has shifted dramatically. Financial firms and speculators now make up the vast majority of these markets. For instance, producers, merchants, processors and other end-users make up approximately 15 percent of the crude oil futures market. Swap dealers, managed money accounts and other financial actors make up the remaining 85 percent. In Chicago Board of Trade wheat contracts, end-users make up nine percent of the long and 29 percent of the short positions, meaning that over 70 percent of this market consists of financial interests.
The CFTC is not a price-setting agency. Our critical mission is to ensure that derivatives markets are transparent, and free of fraud, manipulation and other abuses. Our mission is particularly important considering hedgers, America’s job creators, use these markets to lock in a price and make their investments. Given the dominance of financial actors and speculators in these markets, it’s that much more crucial that the CFTC is well funded so that we can ensure these markets work for hedgers. The need for adequate funding is highlighted by rising gas prices at the pump.
In 2008, the financial system and the financial regulatory system failed America. The unregulated swaps market helped concentrate risk in the financial system that spilled over to the real economy, leading to eight million jobs lost, millions of families losing their homes, and thousands of small businesses closing their doors. In 2010, Congress and the President came together to pass the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Beyond swaps market reform, Congress benefited commercial hedgers by closing gaps in the CFTC’s oversight, including the so-called “Enron Loophole” and “London Loophole,” as well as strengthening the agency’s anti-manipulation authorities. But effectively overseeing these markets depends on adequate funding for the agency’s expanded mission.
At its FY 2012 staffing level of 710 FTEs, the agency is but 10 percent larger than our peak in the 1990s. But since then the futures market has grown to approximately $37 trillion notional, and Congress added oversight of the $300 trillion swaps market, which is far more complex than the futures market. This growth is highlighted on pages 148-149 of the CFTC’s budget submission.
It is as if all of a sudden the National Football League (NFL) expanded eight times to play more than 100 games in a weekend. I think we’d all agree that the same number of referees could not monitor all those games. And referees on the field do more than call penalties and watch for violations of the rules. They also protect the players, promote fair competition and ultimately ensure the integrity of the game.
Thus, just as in my NFL analogy, the CFTC needs more referees. The CFTC is requesting significantly more resources to oversee a much expanded field of play. The request is for an appropriation of $308 million and 1,015 FTEs. The CFTC’s budget request strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate. This approximately 50 percent increase in funding includes a 56 percent increase in IT services, but only a 43 percent increase in staff. Though these percentages might seem striking, let me use the football analogy – we’re being asked to oversee the swaps markets, which is eight times the size of the futures markets. And we need more referees to protect the players, promote fair competition and ultimately ensure the integrity of the markets.
The CFTC is dedicated to using taxpayer dollars efficiently – nearly a fourth of our overall budget request, $70 million, is for outside IT services. When the CFTC’s dedicated IT staff is included, we’re requesting $96.2 million for IT, or nearly a third of the overall budget. But it still takes human beings to watch for market manipulation and abuses that affect hedgers, farmers, ranchers, producers, and commercial companies, as well as the public buying gas at the pump.