The Commodity Futures Trading Commission, the main U.S. derivatives regulator that pried $1.7 billion in fines and other penalties from the firms it regulates during the past year, is furloughing workers because it doesn’t have enough money to pay them.
“This is the budget reality we face,” commission Chairman Gary Gensler told employees Thursday in an email, which announced they would be asked not to work on as many as 14 days in the federal fiscal year that began Oct. 1. “I understand this is extremely tough news for your families and you. I want to thank each and every one of you for your dedication to this agency and your hard work, which is of great benefit to the American public.”
The trading commission’s investigation of manipulation of the London InterBank Offered Rate, which sets rates on products such as mortgages and interest-rate derivatives, led to fines this year including $700 million from UBS AG. The furloughs coincide with the Washington based regulator’s mandate, stemming from the 2010 Dodd-Frank Act, to start overseeing the $633 trillion over-the-counter derivatives market.
“The timing is unfortunate given the need to implement Dodd-Frank,” said Robert Webb, a finance professor at the University of Virginia. The 16-day partial U.S. government shutdown this month also disrupted the agency, and further time off will only make the commission’s job harder, he said.
“The work has piled up,” Webb said.
Dodd-Frank has provisions designed to move swaps, which helped fuel the 2008 credit crisis, from largely unregulated trading negotiated off exchanges to more transparent systems including swap-execution facilities. The commission is currently implementing rules for that transition, and the new government-mandated swap execution facilities were required to open on Oct. 1.
“I’m deeply troubled, though not surprised” by the development, U.S. Rep. Maxine Waters, D-Calif., the top Democrat on the Financial Services Committee, said in a statement.
“The CFTC is currently funded at a level that’s more than 60 percent below the President’s request - a level insufficient to ensure oversight of opaque, often high-risk derivatives trading, which devastated our economy in 2008,” Waters said.
Gensler mentions the need for increased funding in almost every speech he delivers, noting that the swaps market that just fell under the trading commission’s jurisdiction is more than 10 times bigger than the regulator’s prior territory. Nevertheless, the commission employs 676 people, only 40 more than it did 20 years ago, he said Thursday.
“Our agency is smaller than any of the large law firms,” representing companies the commission regulates, Gensler said.
The fines recovered by the trading commission go to the U.S. Treasury Department and aren’t used to fund the agency, Gensler said, adding that while he doesn’t advocate funding the agency with that money, it’s worth recognizing that “the CFTC is a good investment for the American public.”
The commission’s budgetary constraints were cited by Bart Chilton, a Democratic commissioner, in his support last month of a proposal from the Obama administration for a targeted transaction fee for traders of futures and swaps.
Webb said such a transaction tax isn’t a good idea as it creates the wrong incentives for regulators.
“It would be akin to a funding a police department through traffic citations,” he said.
The forced time off affects everyone in the agency except the four active commissioners, said Steven Adamske, a commission spokesman. The agency’s budget is currently $195 million, Gensler said in testimony in July. Obama has requested an increase to $315 million for fiscal year 2014. Congress hasn’t yet passed the president’s budget.
Information for this article was contributed by Silla Brush and Robert Schmidt of Bloomberg News.
Business, Pages 74 on 10/27/2013