[Senate Hearing 114-181]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2016
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TUESDAY, MAY 5, 2015
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:40 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. John Boozman (chairman) presiding.
Present: Senators Boozman, Moran, Lankford, and Coons.
SECURITIES AND EXCHANGE COMMISSION
STATEMENT OF HON. MARY JO WHITE, CHAIR
OPENING STATEMENT OF SENATOR JOHN BOOZMAN
Senator Boozman. Good morning. The subcommittee will come
to order. I apologize that we are running just a little bit
late.
The only thing that we have to do around here is vote when
we are supposed to vote, and we never really know when those
are called. We'd be living right, though, to get that out of
the way so it is not right in the middle of your testimony.
So I would like to welcome our witnesses, the Securities
and Exchange Commission (SEC) Chair Mary Jo White, and the
Commodity Futures Trading Commission (CFTC) Chairman Tim
Massad. Thank you so much for being with us today. We look
forward to hearing from you about the details of your budget
request, as well as how you are using the increases you
received in 2015 to carry out your core missions.
As members of this subcommittee, we have a tremendous
responsibility to ensure funds we oversee are spent wisely.
Both of your agencies are asking for significant increases for
2016. The SEC is asking for $1.722 billion, a 15 percent
increase. The CFTC is asking for $322 million, which is a 29
percent increase more than in 2015.
Yet just last year, both agencies received sizable
increases. The SEC's budget increased by $150 million, or 11
percent over 2014. The CFTC's budget grew $35 million, or 16
percent. These increases are more generous than those provided
to any other agency in the bill.
Unfortunately, as we have seen too often, access to more
funding does not necessarily ensure that an agency will
successfully achieve its mission or spend that funding
responsibly. Under the Budget Control Act and the House/Senate
budget resolutions, the discretionary spending caps for fiscal
year 2016 limit nondefense spending to just $493 billion. This
represents an increase of just $1.1 billion over the fiscal
year of 2015 level for all nondefense departments and agencies.
While the SEC's funding structure is different than most
agencies under our jurisdiction because it is funded by fees,
we continue to take our oversight duties very seriously. Just
because the SEC's fees come from public companies and investors
does not in any way minimize the responsibility to ensure that
the SEC is operating effectively and the funds are being spent
wisely.
All agencies have to make strategic decisions on how to
best allocate resources. As we review your budget request, I am
most interested to hear what decisions you have made to operate
more efficiently in order to carry out your responsibilities
within current funding levels. Spending on staffing levels and
benefits, space, equipment needs, and technology must all be
carefully considered so that they do not create unsustainable
burdens for future years.
We all benefit from a system that promotes fair and orderly
markets. So I am concerned when regulations fragment the
market, needlessly raise the cost of doing business, or push
trading overseas. I ask you to be persistent in trying to work
together and coordinate with your fellow regulators, including
other Federal agencies, self-regulatory organizations, and your
international counterparts.
Inconsistent rules at the SEC and the Department of Labor
governing fiduciary standards continue to cause uncertainty and
confusion. I remain concerned that the Department of Labor's
(DOL) proposal could limit affordable retirement options for
low- and middle-income Americans.
It is my hope that the SEC will conduct thorough oversight
of the Financial Industry Regulatory Authority's (FINRA)
rulemaking related to its Comprehensive Automated Risk Data
System (CARDS) proposal. FINRA's original rule proposal would
have substantially increased transaction costs while exposing
investors to significant security risks. It is my understanding
these rules are being reworked due to widespread concerns, and
I look forward to working with the SEC to ensure these concerns
have been addressed.
Lastly, cross-border harmonization remains elusive due to
divergent approaches your agencies have taken to implement
derivatives market reforms contained in Title VII of Dodd-
Frank. In numerous instances, the CFTC has simply chosen to
issue guidance in what looks like an effort to avoid cost/
benefit analysis.
In many cases, the CFTC has moved too quickly and opted to
act alone instead of effectively coordinating with the SEC and
international regulators. I encourage you to work with each
other and your fellow commissioners as you negotiate a workable
derivatives regime with European regulators that is clear,
consistent, and reasonable.
You both have an important job of protecting investors who
look to the markets to help ensure their retirements, pay for
their homes, and send their kids to college. Your agencies have
an obligation to protect investors and customers from the next
Madoff, Peregrine, MF Global, or Stanford situation, and you
must improve transparency and uncover fraud and deception
without over-regulating our markets and hindering our economic
recovery.
The American people want a government that works for them,
not against them. They want us to curb wasteful spending; make
the Government more efficient, effective, and accountable; and
pursue policies that create economic opportunities for
everyone. These are the priorities of the American people that
will be reflected in the critical oversight we conduct as we
consider the fiscal year 2016 budget request for all of the
agencies within our jurisdiction.
Thank you again for being here, and we really do appreciate
your hard work.
I will now turn to my ranking member, Senator Coons, for
his opening statement.
STATEMENT OF SENATOR CHRISTOPHER A. COONS
Senator Coons. Thank you, Chairman Boozman.
I would also like to welcome our witnesses here today and
thank them for their service.
We are here to consider the budget requests for the SEC and
the CFTC, two financial sector regulators with tremendous
responsibilities to preserve the integrity of our markets,
protect investors and consumers. The SEC and CFTC play a
critical role in ensuring that we have safe, liquid, and
vibrant capital markets. And as the financial crisis made
clear, we need these agencies to be fully equipped to do their
vital jobs.
Our economy has come a long way since the depths of the
crisis, and as we continue to heal, we must ensure we have
appropriate measures in place to safeguard investors of all
types, from institutional investors to families to those saving
for retirement. In its role working overseeing securities
markets, the SEC protects investors; maintains efficient,
orderly, and fair securities markets; and facilitates capital
formation.
The SEC also oversees investment advisers, mutual funds,
securities exchanges, broker-dealers, investment advisers, and
many other entities. On top of that, it has the daunting and
important task of writing all the regulations in its area for
Dodd-Frank and promulgating relevant rules for the JOBS Act.
The CFTC works to avoid systemic risk by fostering
transparent, open, competitive, and sound futures markets. The
Commission protects market users and the public from abusive
practices and oversees markets, swap execution facilities,
clearing operations, data repositories for swaps and swap
dealers, and other important intermediaries. Their mission is
so expansive that the Commission now oversees a $400 trillion
notional value swaps market.
When I first read that, I thought it was a typo. Four
hundred trillion is more than five times larger than the
combined GDP of Earth. Given the enormity of the
responsibilities--just thought I would start off by emphasizing
the scope of all this.
Given the enormity of the responsibilities assigned to both
SEC and CFTC, it is critical Congress, and in particular this
subcommittee, provide you the resources needed to responsibly
protect investors and oversee markets. So, to Chair White and
to Chairman Massad, I am eager to discuss how you are currently
using the funds Congress provided in fiscal year 2015.
Both your agencies received increases this year, although
significantly less than requested in the budget and more so
than in prior years, and I look forward to learning about what
each of your agencies have been able to accomplish with those
investments. I am also interested in learning about what
resource gaps still exist that, if filled, would allow you to
become more responsive and robust regulators.
As we look ahead to fiscal year 2016, I would like to hear
about your most pressing funding priorities, as well as your
honest appraisal of the potential impacts on your operations
should your funding requests not be fully met. In short, what
planned activities and initiatives would not be realized and
with what practical consequences?
I understand, broadly speaking, funding forecasts always
seem bleak and times remain tough. So with sequestration
looming, this subcommittee and the Appropriations Committee as
a whole will be dealing with challenges as we face competing
demands. Yet in my view, shortchanging your two agencies in
particular would be irresponsible.
So I look forward to your testimony today and to exploring
the opportunities in front of us.
Chairman Boozman, thank you for convening this hearing. I
am committed to working together as we consider the resource
needs of these two important financial regulators.
Senator Boozman. Thank you, Senator Coons.
Chair White, I now invite you to present your remarks on
behalf of the SEC.
SUMMARY STATEMENT OF HON. MARY JO WHITE
Ms. White. Thank you very much, Chairman Boozman, Ranking
Member Coons, Senator Moran, other members of the subcommittee.
Thank you for inviting me to testify in support of the
SEC's 2016 budget request and to discuss what I believe is the
compelling basis for funding the agency at a level of $1.72
billion and how the SEC would effectively use the requested
funds.
I also want to express my appreciation to the subcommittee
for its support of the SEC, its mission and budget, as well as
to Chairman Massad for his cooperation and leadership.
Understanding the growth in the size and complexity of the
SEC's responsibilities and in the markets we oversee is
critical to assessing the agency's current funding needs and
putting into context the SEC's budget over the past several
years. From fiscal year 2001 to the start of this fiscal year,
for example, assets under management of SEC-registered
investment advisers increased approximately 254 percent from
$17.5 trillion to approximately $62 trillion, and our trading
volume in the equity markets more than doubled to in excess of
$67 trillion.
The agency now regulates more than 25,000 market
participants and has entirely new or expanded jurisdiction over
securities-based swaps, private fund advisers, credit rating
agencies, municipal advisors, clearing agencies, and
crowdfunding portals, among others.
Improvements to technology and operations have made the
agency more efficient and effective, but to fulfill our
mission, we must keep pace with the size and complexity of our
markets and the entities participating in them.
As a point of reference, it has been reported that the 4
largest financial institutions--4 of the over 25,000 market
participants we regulate--each spends approximately $7 billion
to $10 billion annually on technology alone, compared to the
SEC's entire budget for fiscal year 2015 of $1.5 billion.
The SEC's fiscal year 2016 budget request would help us to
advance several key priorities, including increasing
examination coverage of investment advisers and other entities
who serve retail and institutional investors. A decade ago, the
SEC had approximately 20 examiners per trillion dollars of
assets under management, while today we have only 7 and can now
examine only 10 percent of investment advisers each year, which
represents approximately 25 to 30 percent of the assets under
management.
Our request would also allow us to further leverage
technology and recruit experts to increase the efficiency and
effectiveness of our programs; enhance our enforcement
program's analytic, investigative, and litigation capabilities;
and strengthen the SEC's economic and risk analysis functions.
SEC ACCOMPLISHMENTS AND FUNDING CHALLENGES
Since I testified last April, the SEC has accomplished a
great deal. We, for example, completed critical reforms to
money market funds, credit rating agencies, Regulation A, and
asset-backed securities, as well as significant enhancements to
market resiliency, including against cyber attacks.
Most of our Dodd-Frank and JOBS Acts mandates are now
completed, and we are prioritizing finalizing the remaining
ones, which primarily relate to the securities-based swap
market, executive compensation, and crowdfunding. In other core
areas of our mission, we advanced our work on U.S. equity and
fixed-income market structure and made significant progress in
developing measures for enhancing risk monitoring and
regulatory safeguards for the asset management industry and on
our initiative to improve the effectiveness of the public
company disclosure regime.
Our Division of Enforcement also achieved very significant
results, bringing 755 enforcement actions across all priority
areas and obtaining orders for more than $4.16 billion in
disgorgement and penalties, both at record levels.
These and other accomplishments represent substantial
achievements for the agency, but significant funding challenges
remain. As I have detailed in my written testimony, the SEC's
fiscal year 2016 budget request seeks to address those
challenges head on by providing the resources to allow the SEC
to hire additional staff needed in critical core areas and to
further advance our information technology.
As the Chairman indicated, the SEC's funding mechanism is
deficit neutral, which means that the amount Congress
appropriates to the SEC will not have an impact on the Nation's
budget deficit, nor will it impact the amount of funding
available for other agencies. Nonetheless, we take very
seriously, as the Chairman also indicated, our very important
responsibility to be prudent stewards of the funds the agency
is appropriated.
Thank you again for your support of the agency's vital
mission to protect investors, strengthen our markets, and
promote capital formation. I would be very pleased to answer
your questions.
[The statement follows:]
Prepared Statement of Hon. Mary Jo White
Chairman Boozman, Ranking Member Coons, and members of the
subcommittee:
Thank you for inviting me to testify today in support of the
President's fiscal year 2016 budget request for the Securities and
Exchange Commission.\1\ I appreciate the opportunity to describe the
compelling basis for funding the agency at a level of $1.722 billion to
help it fulfill its obligation to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation.\2\
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\1\ A copy of the SEC's fiscal year 2016 Congressional Budget
Justification can be found on our Web site at http://www.sec.gov/about/
reports/secfy16congbudgjust.shtml.
\2\ The views expressed in this testimony are those of the Chair of
the Securities and Exchange Commission and do not necessarily represent
the views of the President, the full Commission, or any Commissioner.
In accordance with past practice, the budget justification of the
agency was submitted by the Chair and was not voted on by the full
Commission.
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The U.S. securities markets are complex and constantly evolving,
and the activities within our jurisdiction are not static.
Understanding the growth in the size and complexity of the agency's
responsibilities and in our markets, market participants, and
investment products is critical to assessing the agency's funding
needs. From fiscal year 2001 to the start of this fiscal year, for
example:
--Assets under management of SEC-registered investment advisers
increased approximately 254 percent from $17.5 trillion to
approximately $62 trillion;
--Assets under management of mutual funds grew by 143 percent from
$6.4 trillion to $15.6 trillion; and
--Annual trading volume in the equity markets more than doubled to in
excess of $67 trillion.
During this same period, the SEC's responsibilities have also
dramatically increased, adding or expanding jurisdiction over
securities-based swaps, private fund advisers, credit rating agencies,
municipal advisors, and clearing agencies, among others. Improvements
to technology and operations have made the agency more efficient and
effective, but to continue to meet our mission, we must be able to keep
pace with the current and growing size and complexity of our markets
and the entities participating in them.
The agency today currently oversees more than 25,000 market
participants, including nearly 12,000 investment advisers,
approximately 10,500 mutual funds and exchange-traded funds, nearly
4,500 broker-dealers, and about 450 transfer agents. The agency also
oversees 18 national securities exchanges, 10 credit rating agencies,
and 8 active registered clearing agencies, as well as the Public
Company Accounting Oversight Board (PCAOB), Financial Industry
Regulatory Authority (FINRA), Municipal Securities Rulemaking Board
(MSRB), the Securities Investor Protection Corporation (SIPC), and the
Financial Accounting Standards Board (FASB). The SEC also has
responsibility for reviewing the disclosures and financial statements
of approximately 9,000 reporting companies and for enforcing compliance
with the Federal securities laws.
The SEC's fiscal year 2016 budget request seeks to address our
current needs and the challenges we face by providing resources to
allow the SEC to hire an additional 431 staff in critical, core areas
and enhance our information technology. Specifically, as described in
more detail below, the requested budget level would allow the SEC to
advance several key and pressing priorities, including:
--Increasing examination coverage of investment advisers and other
key entities who service retail and institutional investors;
--Further leveraging cutting-edge technology to permit the SEC to
better keep pace with the entities and markets we regulate;
--Protecting investors by expanding our enforcement program's
investigative capabilities and strengthening our ability to
litigate against wrongdoers;
--Strengthening the SEC's economic and risk analysis functions; and
--Hiring additional market experts to enhance the agency's capability
to fulfill its expanded and increasingly complex
responsibilities.
As the subcommittee is aware, the SEC's funding mechanism is
deficit-neutral, which means that the amount Congress appropriates to
the agency will not have an impact on the Nation's budget deficit, nor
will it impact the amount of funding available for other agencies.\3\
Our appropriation also does not count against the caps set in the bi-
partisan congressional budget framework for 2015 and 2016. Nonetheless,
I deeply appreciate that we have a serious responsibility to be an
effective and prudent steward of the funds we are appropriated, and I
believe we have demonstrated how seriously we take that responsibility.
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\3\ Section 991 of the Dodd-Frank Act requires the SEC to collect
transaction fees from self-regulatory organizations in an amount
designed to directly offset our appropriation.
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Last year was one of important achievements for the SEC, but more
remains to be done. Below is a summary of the accomplishments of the
SEC in the past year and of the significant challenges ahead, as well
as a more detailed description of key aspects of the fiscal year 2016
budget request.
Significant Achievements, But More Remains
Since I testified before this subcommittee last April, the SEC has
accomplished a great deal in many areas important to our mission and in
fulfilling congressional mandates. Over the last year, informed and
supported by rigorous and robust economic analyses, the Commission has
adopted a series of critical reforms, including rules that directly
respond to the financial crisis and that protect the integrity of our
markets. We have made substantial progress implementing the rulemakings
mandated by the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) and the Jumpstart Our Business Startups Act (JOBS
Act). The rules on which the Commission has taken action in the last
year include:
--Asset-Backed Securities. The Commission completed rules requiring
significant enhancements to registered offering disclosures for
asset-backed securities, a market with $4.8 trillion in
issuances over the past decade that includes the types of
securities backed by residential and commercial real estate
that played a central role in the financial crisis.
--Credit Rating Agencies. The Commission finalized over a dozen rules
that will reduce conflicts of interest and strengthen the
integrity of nationally recognized statistical ratings
organizations and the transparency of their ratings. The
Commission also continued to remove references to credit
ratings, bringing the total of removed references to 30 and
leaving only four rules and one form with references to be
removed.
--Money Market Funds. The Commission completed reforms designed to
enhance the structure and operation of the $3.7 trillion money
market fund market to enhance the protection of investors and
to support financial stability.
--Security-Based Swaps. The Commission proceeded with the next
critical phase of its implementation of Title VII of the Dodd-
Frank Act, adopting new rules for previously unregulated
derivatives by mandating the parameters for covered entities
and establishing registration and reporting requirements for
security-based swap data repositories. In particular, in June
2014 the Commission adopted the threshold series of key rules
and guidance on cross-border security-based swap activities for
market participants, and earlier this year adopted rules that
require security-based swap data repositories to register with
the SEC and prescribe reporting and public dissemination
requirements for security-based swap transaction data. In
addition, recently the Commission voted to propose rules
governing the application of certain requirements to security-
based swap transactions connected with a non-U.S. person's
dealing activity in the United States.
--Capital Formation. On March 25 of this year, the Commission voted
to adopt a potentially transformative rule under the JOBS Act
to significantly enhance the existing Regulation A exemption
from registration for small offerings of securities. The
Commission also advanced rules to implement JOBS Act provisions
concerning registration and reporting thresholds under Exchange
Act Section 12(g).
--Risk Retention. As required by the Dodd-Frank Act, the Commission
approved a joint agency rule requiring sponsors of
securitization transactions to retain risk in those
transactions.
--Market Stability and Oversight. The Commission adopted Regulation
Systems Compliance and Integrity (Regulation SCI), creating for
the first time mandatory technology and systems standards and
reporting for significant market participants intended to
reduce systems issues and improve the overall resiliency of our
markets. On March 25 of this year, the Commission also voted to
propose rule amendments to enhance the supervision of large
proprietary trading firms, including those engaged in high
frequency trading, which would require that broker-dealers
trading in off-exchange venues become members of a national
securities association.
--Executive Compensation. As required by the Dodd-Frank Act, the
Commission proposed rules for enhancing corporate disclosure of
hedging policies for officers and directors, and last month
proposed rules to require companies to disclose the
relationship between executive compensation and the financial
performance of the companies.
Progress has also been made in our assessment of U.S. equity market
structure to ensure that our markets remain the deepest and fairest in
the world and optimally serve investors and companies of all sizes
seeking to raise capital. In addition to the adoption of Regulation SCI
and the proposal to enhance the supervision of large proprietary
trading firms, we have published for notice and comment a proposal by
the self-regulatory organizations (SROs) for a pilot to assess the
impact of different tick sizes on the quality of the equity markets for
small capitalization issuers. In response to my request, the exchanges
conducted and have now completed an in-depth analysis of order types
and reported on their findings, and have filed proposed rule changes to
improve disclosures about how they use securities information processor
(SIP) feeds and direct feeds. The exchanges and SIPs, at my request,
are also expected to incorporate by June a time stamp in their data
feeds to facilitate greater transparency on the issue of data latency.
And we have brought a number of significant enforcement actions for
violations of market integrity rules, including against exchanges and
dark pools.\4\
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\4\ E.g., Press Release No. 2014-263, Wedbush Securities and Two
Officials Agree to Settle SEC Case (Nov. 20, 2014), available at http:/
/www.sec.gov/News/PressRelease/Detail/PressRelease/1370543504806; Press
Release No. 2014-87, SEC Charges NYSE, NYSE ARCA, and NYSE MKT for
Repeated Failures to Operate in Accordance With Exchange Rules (May 1,
2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/
1370541706507; and Press Release No. 2014-114, SEC Charges New York-
Based Dark Pool Operator With Failing to Safeguard Confidential Trading
Information (June 6, 2014), available at http://www.sec.gov/News/
PressRelease/Detail/PressRelease/1370542011574.
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In addition, we have established an equity market structure
advisory committee to focus on the structure and operations of the U.S.
equities markets (including Regulation NMS) and provide a formal
mechanism through which the Commission can receive advice and
recommendations specifically related to equity market structure issues.
The membership of the committee reflects a diversity of backgrounds,
expertise, and viewpoints on our current equity market structure that
we expect will provide valuable input as SEC staff continues to pursue
a broad market structure agenda focused on high frequency trading and
fairness, market transparency, trading venue regulation, mitigating
broker conflicts, and critical market infrastructure.\5\ Staff also
continues to pursue efforts to improve the market structure for trading
fixed income securities, including municipal and corporate bonds, and
is developing a far-ranging package of measures for enhancing the asset
management industry's risk monitoring and regulatory safeguards.
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\5\ The first meeting of the equity market structure advisory
committee is scheduled for May 13, 2015.
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We are also advancing our initiative to improve the effectiveness
of the public company disclosure regime for investors and companies,
where the staff has sought input from a broad range of market
participants and is developing recommendations for the Commission's
consideration. In addition, consistent with the Dodd-Frank Act, staff
is currently engaged in a comprehensive review of the ``accredited
investor'' definition.
The Division of Enforcement continued to achieve significant
results, filing 755 enforcement actions and obtaining orders for more
than $4.16 billion in disgorgement and penalties in fiscal year 2014.
Notable actions include the first series of cases involving violations
of the ``market access'' rule, the first action enforcing the rule
against investment advisers participating in ``pay to play''
arrangements, the first action against a private equity firm relating
to its allocation of fees and expenses, and the first anti-retaliation
case to protect a whistleblower who reported improper trading activity.
Structural and strategic enhancements--including increased recruitment
of industry experts, the augmentation of our data analytics capacities,
and bolstered new training programs--within our Office of Compliance,
Inspections and Examinations have led to a more effective, efficient
examination program.
Despite this and other significant progress, there is much that the
SEC still needs to do: from further implementing our mandated
rulemakings, to continuing the initiatives outlined above, to further
strengthening our economic and risk analysis functions, to hiring
additional market and quantitative experts to further address our
expanded responsibilities, to continuing to improve our technology and
operations to make the agency more agile and effective. Outlined below
is a brief overview of some of the key components of our request.
Expanding Oversight of Investment Advisers and Strengthening Compliance
Our current level of resources is not sufficient to permit the SEC
to adequately examine investment advisers in a way that investors
expect and deserve. The number of registered advisers has increased
nearly 35 percent over the last decade, and the assets managed by these
advisers have more than doubled. At the same time, the industry has
become more complex, as evidenced by the increasing use of new and
sophisticated products such as derivatives and structured products; the
increased use of technologies that facilitate high-frequency and
algorithmic trading; and the growth of complex families of financial
services by companies with integrated operations that include both
broker-dealer and investment adviser affiliates.
Even with the SEC's efficient use of limited resources to improve
its risk assessment capabilities and focus its examination staff on
areas posing the greatest risk to investors--efforts that helped to
increase the number of investment adviser examinations approximately 20
percent from fiscal year 2013--the SEC was only able to examine 10
percent of registered investment advisers in fiscal year 2014. A rate
of adviser examination coverage at that level presents a high risk to
the investing public.
Under the fiscal year 2016 request, a top priority will be to hire
225 additional examiners, primarily to conduct additional examinations
of investment advisers. Once fully on-board and trained, the investment
adviser examiners would assist the agency's National Examinations
Program (NEP) in increasing its examination coverage of advisers to an
anticipated rate of approximately 14 percent per year.
The NEP also would add positions to improve oversight and
examination functions related to broker-dealers, clearing agencies,
transfer agents, self-regulatory organizations, swap data repositories,
municipal advisors, and, in the future, crowdfunding portals, among
others.
Continue to Leverage Technology
In fiscal year 2016, the SEC plans to build on the substantial
progress made over the past few years to modernize its technology
systems, streamline operations, and increase the effectiveness of its
programs. The SEC's fiscal year 2016 budget request, which includes
full use of the Reserve Fund, would support a number of key information
technology (IT) initiatives, including:
--Data analytics tools, to assist in the integration and analysis of
huge volumes of financial market data, employing algorithms and
quantitative models that can lead to earlier detection of fraud
or suspicious behavior.
--Electronic Data Gathering, Analysis and Retrieval (EDGAR)
modernization, an ongoing, multi-year effort to simplify the
financial reporting process to promote automation and reduce
filer burden. With a more modern EDGAR, both the investing
public and SEC staff will benefit from having improved access
to better data.
--Examination improvements, aimed toward improving risk assessment
and surveillance tools that will help the staff monitor for
trends and emerging fraud risks, as well as improving the
workflow system supporting SEC examinations.
--Tips, Complaints, and Referral (TCR) system enhancements, to
bolster the flexibility, agility, and adaptability of the
system. TCR enhancements will provide more flexible and
comprehensive intake, triage, resolution tracking, searching,
and reporting functionalities, with full auditing capabilities.
--Enforcement investigation and litigation tracking, to support
enforcement teams with handling the substantial volume of
materials produced during investigations and litigations. Among
other initiatives, the SEC hopes to build the capability to
permit the electronic transmittal of data for tracking and
loading (versus the current practice of receiving content via
the mail); implement a document management system for
Enforcement's internal case files; and revamp the tools used to
collect trading data from market participants.
--Enterprise Data Warehouse (EDW), a centralized repository for the
SEC to organize its various sources of data and help SEC staff
gain easier access to more usable market data. The EDW is the
SEC's primary effort to bring together data from different
divisions and offices for easier and more efficient analysis
across the agency.
--SEC.gov modernization, to make one of the most widely used Federal
Government Web sites more informative, easier to navigate, and
secure for investors, public companies, registrants and the
general public.
--Information security, to further automate controls, continue the
transition to continuous monitoring, and build the agency's
risk management capabilities.
--Business process automation and improvement, to build workflow
applications that will improve the efficiency and effectiveness
of the entire agency in serving the public.
The fiscal year 2016 request includes 14 new positions for the
Office of Information Technology (OIT) to better execute these and
other technology initiatives. These staff will serve as project
managers, business analysts, and technical resources who will improve
technology and data management support for the SEC's business areas. In
addition, the positions will enhance information security through
monitoring, and drive further improvements in IT equipment management
and reporting.
Bolster Enforcement
It is vital to the SEC's mission to bring timely, high-quality
enforcement actions when violations of the Federal securities laws are
identified. The agency must adapt its enforcement function to keep pace
with the growing size and complexity of the Nation's markets and to
send strong messages to wrongdoers that misconduct will be swiftly and
aggressively addressed. For fiscal year 2016, the SEC is requesting 93
new positions for the Division of Enforcement in three areas: staff
proficient in conducting intelligence processing and analysis;
investigative staff to permit the agency to more swiftly and
effectively identify and respond to the high volume of securities-
related misconduct; and litigation staff to address the growing number
of contested enforcement matters nationwide.
Analysis of large datasets, including SEC filings and trading data
in equities, options, municipal bonds, and other securities, helps to
limit investor harm by permitting earlier detection of misconduct. The
SEC's Enforcement program expects that both an increasing number of
high-quality TCRs and its improved data analysis capabilities will
yield additional case leads through fiscal year 2016. The Enforcement
program anticipates dedicating 20 of the requested positions to further
develop its data analytic function, increase the number of staff
responsible for reviewing and triaging incoming TCRs, and bolster the
number of staff to whom TCRs are sent for further investigation.
The Enforcement program also requires increased staffing to
promptly detect complex frauds and other difficult-to-detect
misconduct; respond to misconduct involving the changing equity
markets, including misconduct related to algorithmic trading or dark
pools; address large-scale insider trading or stock manipulations;
investigate potential accounting or reporting fraud; and generally keep
pace with a rapidly growing and evolving industry. As a result, the
Division is seeking 50 new positions in fiscal year 2016 to reinforce
its investigative functions. These new positions will help the Division
continue progress on existing investigations and handle its increasing
case load, while quickly investigating and bringing emergency actions
in matters where investors' money may dissipate if immediate action is
not taken.
In addition, in recent years an increasing percentage of
enforcement actions have been filed as contested matters, as opposed to
being fully settled at the outset. This has led to more trials than in
the past, a volume that is expected to continue to grow. Therefore, the
Enforcement program needs additional resources to handle an expansive
and sophisticated docket of litigation and trials, often against well-
funded adversaries. Enforcement requests 23 new positions in fiscal
year 2016 to reinforce its litigation operations nationwide.
Continued Prioritization of Economic and Risk Analysis to Support
Rulemaking and Oversight
The SEC remains committed to strengthening the economic and risk
analysis functions housed in its Division of Economic and Risk Analysis
(DERA), our fastest growing division. For fiscal year 2016, the SEC
plans to add 6 new positions to DERA, building upon the 14 positions
being added in fiscal year 2015. Specifically, in fiscal year 2016,
DERA is seeking three positions to expand the agency's capability to
provide high quality economic data in support of risk assessment and
policy initiatives across the SEC. These employees would continue to
expand DERA's ability to support SEC programs with data cleansing,
normalization, and analysis; statistical programming, text analytics,
and risk modeling; and quantitative research services. We are also
requesting three additional positions for DERA to provide economic
analytical capabilities to support enforcement litigation, particularly
in the SEC's regional offices.
Meet Expanded Rulemaking and Oversight Responsibilities
The agency also is requesting 12 additional positions in fiscal
year 2016 for its Division of Trading and Markets (TM). As the SEC's
oversight of regulated entities and analysis of market events become
more data-driven, TM is expanding its use of advanced quantitative
skills, tools, and data to assess evolving markets. The Division
therefore is expanding its efforts to recruit professionals with
expertise in quantitative analysis, risk management, and equity and
fixed income market structure. The additional positions will enhance
supervision of securities markets, securities market infrastructure,
securities intermediaries, and other market participants. Recent
legislation and rulemaking--including relating to over-the-counter
derivatives, clearing agencies, and crowdfunding--also have
substantially expanded TM's responsibilities. As registration
requirements for these rules become effective, scores of new entities
will require Division oversight.
In addition, the SEC is seeking 12 new positions for its Division
of Investment Management to operationalize new rulemaking requirements,
offer enhanced guidance to registrants, expand the disclosure review
program's ongoing analysis of industry trends, and provide additional
oversight of private fund advisers. The new positions would also
monitor money market funds' compliance with the new requirements
adopted in fiscal year 2014 by the Commission, as well as assist in
adopting--and ultimately operationalizing--the package of measures for
enhancing the asset management industry's risk monitoring and
regulatory safeguards.
Conclusion
Thank you for your support of the agency's vital mission and the
opportunity to present the President's fiscal year 2016 budget request.
I would be happy to answer your questions.
Senator Boozman. Thank you, Chair White.
And Chairman Massad, I now invite you to present your
testimony on behalf of the CFTC.
COMMODITY FUTURES TRADING COMMISSION
STATEMENT OF HON. TIM MASSAD, CHAIRMAN
Mr. Massad. Thank you.
Good morning, Chairman Boozman, Ranking Member Coons,
Senator Moran, and other members of the subcommittee.
Thank you for the opportunity to discuss the President's
fiscal year 2016 budget request for the CFTC. I am pleased to
be here today on behalf of the Commission.
I first want to thank our staff for their hard work and
dedication, as well as my fellow commissioners. I believe we
are all working together in good faith to carry out the
Commission's responsibilities. I also want to thank Chair White
and the staff of the SEC for their cooperation and
collaboration.
Futures options and swaps markets that we oversee are
profoundly important to our economy. They enable businesses of
all types to manage risk, whether it is a farmer locking in a
price for his crops, a manufacturer managing supply costs, or
an exporter hedging foreign currency risk. These markets have
been an engine for economic growth in our country, and they can
continue to be so, but only if we maintain their integrity and
transparency through sensible oversight.
We are grateful for our fiscal year 2015 budget increase,
and I thank the subcommittee for their support. It has helped
us modernize our information technology capabilities and
bolster staff in critical areas. However, even with this
increase, the CFTC's budget has not kept pace with its
responsibilities, and this is for two reasons.
The first is the markets the Commission has traditionally
overseen have grown significantly in scale, technological
sophistication, and complexity. The number of actively traded
futures and options contracts has doubled since 2010 and
increased 6 times over the last 10 years. Trading is
increasingly conducted in an automated, electronic fashion,
even for traditional products such as agriculture and energy
futures. Cyber attacks have become a major new threat to our
markets.
Secondly, the Commission now has responsibility for
overseeing the swaps market, the size of which, as Ranking
Member Coons noted, is over $400 trillion measured by notional
amount. In 2008, we saw how the buildup of excessive risk in
this market helped contribute to the worst financial crisis
since the Great Depression. Eight million Americans lost their
jobs.
Now, we are implementing a regulatory framework to make the
swaps market safer and more transparent. Simply put, we need
more resources to do the vital job of overseeing these
important dynamic markets. That is why the President is
requesting a budget of $322 million for fiscal year 2016.
One third of our budget request, about 40 percent of the
total requested increase, will go to data and technology. This
reflects the nature of the markets today and the challenges we
face every day.
Every day, we collect over 300 million data records that
need to be processed. Our data intake and storage needs are
increasing 35 percent a year, and these figures do not even
include message data. That is, the billions of records
regarding bids and orders, not just transactions, that we often
must review to detect improper behavior.
Chair White noted that many financial institutions are
spending $7 billion on technology. Our technology budget this
year was $51 million.
Our budget request is also focused on enhancing our
surveillance program. We must have highly skilled
professionals, as well as high-powered data and technological
capabilities, to monitor for the types of sophisticated
manipulation that can occur today.
Our request will also enhance our enforcement efforts.
Since I took office, we have focused on enforcement, because
there is nothing more important than deterring fraud and
manipulation. Already, in this fiscal year, we have imposed
fines and penalties that are over 10 times our current budget,
all of which go to the U.S. Treasury and are not available to
fund our budget.
But for each case we initiate, there are many that we
cannot pursue because of resource constraints. We must have
adequate resources to go after abuses, whether they are price-
fixing schemes by large institutions or investment scams
perpetrated against retirees.
Our request will increase our ability to perform
examinations of critical infrastructure like clearing houses.
Clearing houses are even more important today in the global
financial system, but we lack the resources to examine them as
often as we should.
And the request will enable us to step up our cybersecurity
efforts. A cyber attack could be devastating and could come not
only from those motivated by money, but from those seeking to
disrupt our financial system.
Finally, this budget will enhance our ability to respond to
the concerns of commercial end-users. This is something I have
made a priority since taking office last June. We have taken
many actions to make sure our regulations do not impose undue
burdens or unintended consequences on the commercial firms that
need these markets to hedge routine risk, and we will continue
to do this.
We will also continue to fine-tune our regulations and work
on harmonizing, internationally and domestically, so that the
new swaps rules fulfill the goals set by Congress.
The United States has had the best derivatives markets in
the world for decades. This is because of the strength of our
private sector, but it is also because we have had a regulatory
framework that was sensible, one that promoted integrity and
transparency as well as competition and innovation.
If we want our markets to continue to thrive and contribute
to economic growth, we must make the necessary investment in
oversight. Your support of our budget request will help us do
just that.
Thank you again, and I look forward to your questions.
[The statement follows:]
Prepared Statement of Hon. Timothy G. Massad
Good morning, Chairman Boozman, Ranking Member Coons, and members
of the subcommittee. I am pleased to testify before you this morning on
behalf of the Commission regarding the President's request for the
fiscal year 2016 budget for the Commodity Futures Trading Commission
(CFTC).
The Commission has been very busy since two of my fellow
commissioners and I joined about 11 months ago. We have taken several
actions to make sure that commercial end-users can continue to use the
derivatives markets effectively and efficiently. We have continued to
work to bring the over the counter swaps market out of the shadows and
implement the regulatory reforms mandated by Congress. We have focused
on making sure clearinghouses are strong and resilient. We have worked
to improve the swap trading framework and to enhance data collection.
We have been collaborating with our domestic colleagues, including at
the Securities and Exchange Commission, and I want to thank Chair
White. There are a number of issues that impact both our agencies, and
I appreciate our strong, cooperative working relationship. We have also
worked closely with our international colleagues toward harmonizing new
swaps rules as much as possible. And we are continuing to engage in the
compliance, surveillance, and enforcement work that is necessary to
prevent fraud and manipulation, and enhance market integrity and
transparency. But there is much more we need to do.
Before discussing our budget request, I know I speak for all the
Commissioners in thanking our dedicated and talented staff for their
hard work and dedication. The progress we have made is a credit to
their tireless efforts. I also want to thank each of my fellow
commissioners for their efforts and commitment. I believe we are
working together constructively and in good faith to do the best job we
can in carrying out the Commission's responsibilities.
Our current fiscal year 2015 budget provides an increase of $35
million over the previous year. This increase was essential to our
ability to carry out our mission. We are grateful for it. We have
outlined in our fiscal year 2015 Spending Plan how we are using these
resources, which includes modernizing our information technology
capabilities and bolstering our staff in critical areas.
Even with this increase, however, the CFTC's budget is not at a
level that is commensurate with its responsibilities. Our
responsibilities in the last few years have increased significantly,
and now include overseeing the swaps market, an over $400 trillion
market in the U.S., measured by notional amount. In addition, the
markets the Commission has traditionally overseen have grown in scale,
technological sophistication, and complexity. The number of actively
traded futures and options contracts has doubled since 2010 and
increased 6 times over the last 10 years. Trading is increasingly
conducted in an automated, electronic fashion, and cybersecurity has
become a major new threat to the integrity and smooth functioning of
the critical market infrastructure that the Commission regulates. While
these developments, among others, have brought new responsibilities and
challenges to the Commission, its capabilities have not kept pace. Our
resources continue to be stretched far too thinly over many important
responsibilities.
the significance of derivatives markets and importance of sensible
oversight
The derivatives markets are profoundly important to a wide variety
of businesses in our country. They enable businesses of all kinds to
hedge commercial risk, whether it is a farmer locking in a price for
his crops, a utility hedging the cost of fuel or an exporter managing
foreign currency risk. Those businesses depend on the Commission to do
its job efficiently and sensibly. The Commission's budget is a small,
but vital, investment to make in order to make sure these markets
operate with integrity and transparency.
It is also helpful to remember how excessive risk related to swaps
contributed to the 2008 financial crisis, and the cost of that crisis
to American families and our economy, to recognize the value of this
investment. That crisis resulted in 8 million jobs lost, millions of
foreclosed homes, countless retirements and college educations
deferred, and businesses shuttered. Indeed, the amount of taxpayer
dollars that were spent just to prevent the collapse of AIG as a result
of its excessive swap risk was over 700 times the size of the CFTC's
current budget. Another perspective on the size of our budget is the
fact that from 2009 through 2014, the Commission collected fines and
penalties of approximately twice its cumulative budgets. This year the
fines and penalties collected are already about 10 times our budget.
the cftc's budget request for fiscal year 2016
The Commission requests a budget of $322 million and 895 full-time
equivalents (FTE) for fiscal year 2016. This will enable us to engage
in the following critical activities, among others, in support of our
mission:
--Enhance our surveillance and enforcement capabilities to keep pace
with our expanded oversight responsibilities and the overall
growth and increasing complexity of the derivatives markets.
--Enable us to perform on a timely and thorough basis the
examinations of critical market infrastructure, such as
exchanges and clearinghouses, as well as intermediaries that
hold billions of dollars in customer funds, to ensure that they
are protecting customer interests and operating in compliance
with Commission requirements.
--Enable us to review and provide timely responses to requests and
concerns of derivatives market participants, including with
respect to new product approvals and other innovations.
--Substantially expand our capabilities with respect to
cybersecurity, which is the single most important threat to
financial stability today.
--Make key investments in technology systems and resources that are
vital to carry out our core mission activities.
Before I discuss the budget request in more detail, I would like to
review what we have been doing in several areas.
addressing the concerns of commercial end-users
Over the last 11 months, we have taken several actions to make sure
that commercial end-users can continue to use the derivatives markets
effectively and efficiently. This has involved fine-tuning rules to
ensure that they work as Congress intended and do not impose unintended
consequences on commercial end-users. Some of the steps we have taken
include:
--Local Utility Companies.--In September, the Commission amended its
rules so that local, publicly-owned utility companies could
continue to effectively hedge their risks in the energy swaps
market. These companies, which keep the lights on in many homes
across the country, must access these markets efficiently in
order to provide reliable, cost-effective service to their
customers. The Commission unanimously approved a change to the
swap dealer registration threshold for transactions with
special entities which will make that possible.
--Customer Protection/Margin Collection.--In March, the Commission
unanimously approved a final rule to modify one aspect of our
customer-protection related rules, which had previously been
unanimously adopted in the wake of MF Global's insolvency and
were designed to prevent a similar failure from recurring and
to protect customers in the event of such a failure. To address
a concern of many in the agricultural community and many
smaller customers regarding the posting of collateral for their
trades, we removed a provision that would have automatically
changed the deadline for futures commission merchants to post
``residual interest,'' which, in turn, can affect when
customers must post collateral.
--Recordkeeping Requirements.--We have proposed to exempt end-users
and commodity trading advisors from certain recordkeeping
requirements related to text messages and phone calls. This
proposal is designed to make sure we do not impose undue
recordkeeping requirements on commercial end-users.
--Treasury Affiliates of End-Users.--The Commission staff took action
to make sure that end-users can use the Congressional exemption
given to them regarding clearing and swap trading if they enter
into swaps through a treasury affiliate. It is common for a
large corporation with significant non-financial operations to
have a separate affiliate enter into swaps and financing
transactions on behalf of the larger corporation and its
subsidiaries.
--Reporting Requirements for Contracts in Illiquid Markets.--CFTC
staff recently granted relief from the real-time reporting
requirements for certain less liquid, long-dated swap contracts
that are not subject to mandatory clearing and do not yet trade
on a regulated platform. We agreed to permit slightly delayed
reporting for these swaps so that the real-time reporting
requirements in Dodd-Frank do not lead to identifying market
participants, as that could result in competitive harm.
--Volumetric Optionality.--Last week, the Commission voted to clarify
an interpretation of when certain agreements are forward
contracts, rather than swaps. Specifically, we clarified when
an agreement, contract, or transaction that contains embedded
volumetric optionality falls within the forward exclusion from
being considered a swap. ``Embedded volumetric optionality''
refers to the contractual right of a counterparty to receive
more or less of a commodity at the negotiated contract price.
Contracts with this feature are important to, and widely used
by, a variety of end-users, including electric and natural gas
utilities. By clarifying how these agreements will be treated
for regulatory purposes, the interpretation is intended to make
sure commercial companies can continue to conduct their daily
operations efficiently. Once this interpretation is acted upon
by the Securities and Exchange Commission, as definitional
issues require actions by both Commissions, we will publicly
release the final interpretation.
--Trade Options.--Likewise, the Commission last week voted to issue a
proposed rule reducing reporting and record keeping
requirements with respect to trade options. These products are
also commonly used by commercial participants.
finishing the remaining rules
A second priority has been to finish the few remaining rules
required for the new swaps regulatory framework as agreed by the G-20
nations and enacted by Congress. This includes the rule on margin for
uncleared swaps, which plays a key role in the new regulatory framework
because uncleared transactions will always be an important part of the
market. Certain products will not be suitable for central clearing
because of their lack of sufficient liquidity or other risk
characteristics. In these cases, margin will continue to be a
significant tool to mitigate the risk of default from those
transactions and, therefore, the potential risk to the financial system
as a whole. We have made sure that our proposed rule on margin for
uncleared swaps exempts commercial end-users from its requirements.
We are also working closely with the domestic bank regulators, who
are also responsible for issuing rules on margin, to harmonize the
rules as much as possible. I am hopeful that we can finalize these
rules by the summer.
Another important rule we are working to complete is the position
limits rule. The law mandates that the agency adopt limits to address
the risk of excessive speculation. In doing so, we must also make sure
that market participants can engage in bona fide hedging. We have
received substantial input on this proposal and staff are considering
these comments carefully.
clearing and risk
Clearinghouse oversight continues to be another priority. In this
post-global financial crisis world, clearinghouses play an even more
critical role than before. In our markets, for example, the percentage
of swaps cleared has increased from 15 percent in December 2007 to
about 75 percent today. So we need to make sure clearinghouses have
strength and resiliency.
Over the last few years, the agency has done a major overhaul of
its clearinghouse regulatory framework, including by incorporating
international standards and taking other steps to strengthen risk
management practices and customer protection. We are also engaged in
extensive oversight activities that include, among other things, daily
risk surveillance, stress testing, and in-depth compliance
examinations. Our oversight efforts also focus on risk at the clearing
member and large trader levels. And while our goal is to never get to a
situation where recovery or resolution of a clearinghouse must be
contemplated, we are working with fellow regulators, domestically and
internationally, on the planning for such contingencies, in the event
there is ever a problem that makes such actions necessary.
In addition, we are addressing new risks like cybersecurity. This
applies to key exchanges and other critical infrastructure as well as
clearinghouses. We have incorporated cyber concerns into our
regulations and made it a priority in our examinations. Our challenge
is to leverage our limited resources as effectively as possible. We do
not have, for example, the resources to do independent testing of
cybersecurity measures. Therefore, we are looking at whether the
private companies that run major exchanges and clearinghouses are doing
adequate testing themselves of their cyber protections, such as control
testing, penetration testing and vulnerability testing.
implementing the framework for swaps trading
We have also continued to make progress implementing the new
framework for swaps trading. It has been a little over a year since the
first made-available-for-trade determinations. We currently have almost
two dozen swap execution facilities (SEFs).
Information compiled by the International Swaps and Derivatives
Association highlights some positive trends. Measured by trade count
and notional value, SEF trading accounted for about half of total
volume in 2014, and the percentage is much higher for swaps on CDS
indices. We have also seen a significant increase in non-U.S. market
participants participating on SEFs for credit indices.
Our goal is to build a regulatory framework that not only meets the
congressional mandate of bringing this market out of the shadows, but
which also creates the foundation for the market to thrive. To do so,
the regulatory framework must ensure transparency, integrity and
oversight, and, at the same time, permit innovation, freedom and
competition.
We have taken several steps recently to improve SEF trading. This
has included the following:
--Package Transactions.--Last fall the staff issued no-action relief
to provide market participants additional time to adapt to
exchange-based trading. That phasing of compliance deadlines
has worked well.
--Block Trades.--The staff addressed the issue of pre-trade credit
checks for block trades, and the so called ``occurs away''
requirement, so that block transactions could continue to be
negotiated between parties and executed on SEF.
--Error Trades.--CFTC staff issued no-action relief that will
streamline the process for correcting erroneous trades.
--Cleared Swap Reporting.--We intend to initiate a rulemaking to
clarify reporting of cleared swaps as well as the role played
by clearinghouses in this workflow. This rulemaking will
propose to eliminate the requirement to report Confirmation
Data for intended to be cleared swaps that are accepted for
clearing and thereby terminated.
--SEF Confirmations.--Staff has issued no-action relief permitting
the SEF legal confirmation to incorporate the ISDA Master
Agreement by reference. This also clarified the SEF reporting
responsibility regarding uncleared swaps--SEFs need only report
``Primary Economic Terms''--as well as any Confirmation Data
they do in fact have.
Flexibility Regarding Methods of Execution.--Our staff has been
working with SEFs to make it clear that our rules permit flexibility in
methods of execution as long as the regulatory standards and goals are
met. Staff has confirmed that an auction match trading protocol is
acceptable as long as SEFs provide adequate transparency regarding the
process for setting the offer price.
SEF Financial Resources.--Our staff has issued guidance that
clarifies the calculation of projected operating expenses for the
purpose of determining the capital that the law requires SEFs to hold.
Specifically, the guidance clarifies that variable commissions that
SEFs pay do not have to be included in a SEF's calculation of projected
operating costs.
I would note that in some areas where the staff has acted by no-
action letter to provide temporary relief at the request of industry
participants, we are considering taking up the issue in a rulemaking in
order to find a permanent solution.
We are looking at a number of additional issues concerning SEFs,
such as the made available for trade determination process and concerns
about the lack of post-trade anonymity for certain types of trades, and
we will continue to do all we can to improve the regulatory framework
and enhance SEF trading.
cross-border harmonization
We are also focused on addressing cross border issues related to
the new framework. We have had productive discussions with the
Europeans to facilitate their recognition of U.S. based clearinghouses.
We have offered a substituted compliance framework for clearinghouse
regulation which was their principal concern. I believe there is an
ample basis for them to make a determination of equivalence, and I hope
that they will do so soon.
Another important area for cross-border harmonization is the
proposed rule on margin for uncleared swaps. We have been working with
our counterparts in Europe and Japan, and I am hopeful that our
respective final rules will be similar on most issues.
We are also focused on the cross-border implications of our trading
mandate rules. This has been one of the greatest challenges. We were
among the first to implement swaps trading rules and to mandate trading
of certain products; many other jurisdictions have not yet done so. To
avoid the potential for any regulatory arbitrage, we look forward to
others adopting their own rules to implement swaps trading as well as
the other G-20 commitments, and we look forward to working with them to
harmonize rules as much as possible.
enforcement
We remain committed to a robust enforcement and compliance program
to prevent fraud and manipulation. The Commission pursues cases
covering a wide variety of potential market abuses and bad behavior,
ranging from more common fraud and abuse like Ponzi schemes or precious
metal scams that target retirees, to complex manipulation schemes
driven by sophisticated, electronic trading strategies, to price fixing
or benchmark manipulation through collusion among large traders. In
just the last few weeks, we have announced some significant new cases.
Last month, the agency along with our colleagues at the Department
of Justice, the U.K. Financial Conduct Authority and New York's
Department of Financial Services announced settlements with Deutsche
Bank over charges of false reporting and manipulation of the London
Interbank Offered Rate (LIBOR), a critical, global benchmark interest
rate, upon which trillions of dollars of contracts are indexed. The
Commission brought the first LIBOR case in 2012, and collectively, the
Commission has imposed over $4 billion in penalties against 13 banks
and brokers to address LIBOR and foreign exchange benchmark abuses. In
a separate action, the Commission and the Department of Justice brought
civil and criminal charges against an individual who we believe engaged
in spoofing and sought to manipulate the E-mini S&P 500 futures on
repeated occasions, at times successfully. His activity contributed to
the order imbalance in trading in E-mini S&P 500 futures that
contributed to market conditions that led to the flash crash of 2010.
We worked closely not only with the Justice Department, but also the
FBI, the U.K. Financial Conduct Authority and Scotland Yard on this
case.
As these cases illustrate, we will do everything in our power, and
within our resources, to pursue those who attempt to engage in fraud or
manipulation in our markets. It is essential that our markets operate
with integrity and fairness for all market participants.
the 2016 budget request advances key commission priorities
The 2016 budget request is focused on advancing key mission
priorities. Of the requested $72 million increase, nearly $28 million
is allotted for additional information technology investments that will
help to modernize the Commission's capabilities. This would supplement
the approximately $51 million we plan on spending on technology in
fiscal year 2015. The remaining $44 million of the increase would
provide for an additional 149 FTE for related mission-activity support,
specifically targeting critical areas such as surveillance,
enforcement, examinations, registration, and compliance, each described
in more detail below.
surveillance
The 2016 budget request seeks $62.4 million for surveillance, an
increase of $5.9 million and 42 FTE over the fiscal year 2015 enacted
level. The Commission must enhance its surveillance capabilities to
keep pace with the growth and increasing technological sophistication
of the markets. Effective surveillance is essential to detect excessive
risk, fraud, abusive practices, and manipulation.
The days when market surveillance could be conducted by observing
traders in floor pits are long gone. Today, not only is almost all
trading electronic, but in many products a majority is conducted
through highly sophisticated automated trading programs. The Commission
is responsible for overseeing the markets in over 40 physical
commodities, as well as a wide range of financial futures and options
products based on interest rates, equities, and currencies. There are
over 4,000 actively traded futures and options contracts and thousands
more subject to our oversight when all tenors and associated options
are included. On a typical day, there may be 750,000 transactions in
Treasury futures and more than 700,000 in just the E-mini S&P 500
contract, the most active equity index future. And this does not
include the approximately 7 million open swaps reported to SDRs. In
just a single commodity category such as crude oil, there are typically
hundreds of thousands of transactions every day. Transactions are only
part of the picture, however. In today's high speed markets,
manipulation and fraud are often conducted using complex strategies
involving bids and offers, which far outnumber consummated
transactions. Each day in the Treasury futures market, for example,
there can be millions of bids and offers.
Successful market surveillance activities require us to have the
ability to continually receive, load, and analyze large volumes of
data. This requires a massive information technology investment,
sophisticated analytical tools that we develop for these unique
environments and experienced professionals who can identify potential
problems and engage in further inquiry.
Moreover, the swaps market presents different challenges than the
futures and options market with respect to surveillance. This is
because there are multiple trading platforms so data must be analyzed
across platforms. There is also considerable voice-driven activity and
complexities to the execution and processing of trades that do not
exist in the vertically integrated futures markets that require
different surveillance perspectives. Aggregating data to understand
participants' positions across futures and swaps markets is
particularly challenging.
Whether in futures, options, or swaps, market surveillance is not
simply dependent on sophisticated technological systems. We must have
experienced personnel who understand the markets we oversee, who can
discern anomalies and patterns and who have the experience, judgment,
and skills to investigate possible infractions. There is great
variation among the various products traded in our markets, variation
which requires specialized knowledge: The market structure, trading
patterns, and complexities of the crude oil market are quite different
from that of soybeans or any other agricultural product, and each
commodity market itself has its own characteristics.
In addition to market surveillance, the Commission must oversee the
risk being taken on by clearinghouses, individual clearing firms, and
large market participants. We do this by continually monitoring their
customer and house positions and margining practices. Given the global
nature of our markets, our surveillance personnel examine data from
CFTC-registered clearinghouses that are located abroad, and communicate
frequently with regulators in other jurisdictions. These teams also
look through at large customer positions being held at or managed by
intermediaries, and they aggregate customer data across clearinghouses.
Today, for example, 36 firms hold more than $500 million each in
customer funds, and 10 of these firms hold more than $10 billion each
in customer funds. Failure or trouble at any one firm, particularly a
larger firm, could seriously disrupt our markets. On-site examinations
are an important component of adequate surveillance, but we are limited
as to the frequency of these examinations given the small size of our
staff.
Without the requested increase in surveillance personnel and
resources, the Commission will be severely limited in its ability to
detect fraud and manipulation, market abuses, firms in trouble, or
other improper behavior, thereby significantly increasing the potential
costs and risks to our markets and our financial system generally.
enforcement
The Commission requests approximately $70.0 million and 212 FTE for
enforcement activities, an increase of $20.7 million and 48 FTE over
the fiscal year 2015 enacted level. There is nothing more important to
maintaining market integrity and protecting customers than a robust
enforcement program. As I noted earlier, the markets we oversee
continue to grow in size and sophistication, and our challenge is that
for each case the Commission initiates, there are many that we cannot
investigate because of resource constraints.
Some cases can require large amounts of resources due to their
inherent complexities, document-intensive nature, or the ability of
resource-rich defendants to prolong litigation. A recent case that
arose as a result of the Peregrine fraud, for example, lasted more than
2 years and required more than 4,800 hours of staff time. The MF Global
litigation is ongoing, more than 3 years after the firm collapsed. The
LIBOR and foreign exchange benchmark cases--in which, as I noted above,
the Commission obtained an aggregate of over $4 billion in penalties
against several of the world's largest banks for manipulation of these
benchmarks--involved intensive reconstruction of communications and
trades requiring substantial document and email and chat room reviews,
analysis, outside experts and reconstructing timelines.
In particular, the Commission anticipates more time-intensive and
inherently complex investigations due to innovative products and
practices within the industry, including the use of automated and high
frequency trading, and the global nature of the swaps marketplace. We
are also experiencing an increase in international enforcement
investigations in all of our markets. At the same time, we must do all
we can to deter unscrupulous fraudsters who target unsuspecting
investors through scams, tricks and schemes.
Although the effectiveness of our enforcement efforts is best
measured by the quality, breadth and effect of the cases pursued,
quantitative metrics give some picture of the activity. The CFTC filed
67 new enforcement actions during fiscal year 2014. We opened more than
240 new investigations. In fiscal year 2014, the agency obtained $3.27
billion in sanctions, including $1.8 billion in civil monetary
penalties and more than $1.4 billion in restitution and disgorgement.
Already in fiscal year 2015, the agency has obtained $2.5 billion in
sanctions. An increase in our enforcement efforts is a good use of
taxpayer dollars. We need to be able to prevent and punish abusive and
fraudulent behavior, especially preventing losses to consumers whose
customer funds are misappropriated, or to retirees whose savings are
stolen through scams, or to our economy, when the efficiency and
integrity of our markets is damaged by manipulation and fraudulent
trading.
examinations
The Commission requests $35.4 million and 135 FTE for examinations,
an increase of $6.7 million and 21 FTE over the fiscal year 2015
enacted level. Regular examinations, in concert with the Commission's
surveillance and other activities, are a highly effective method to
maintain market integrity so that American businesses can rely on these
markets. This activity includes direct examinations performed by
Commission staff and oversight of examinations performed by the self-
regulatory organizations.
Among the most important examinations that the Commission conducts
are those of clearinghouses, which, as noted, have become critical
single points of risk in the global financial system. Two
clearinghouses under the Commission's jurisdiction have been designated
as systemically important by the Financial Stability Oversight Council,
and the Commission is responsible for the oversight of 12 others. Five
clearinghouses are located overseas, including some that are extremely
important to our markets given the volume of swaps and futures cleared
for U.S. persons. The Commission currently examines the two
systemically important clearinghouses once a year. But the Commission
lacks the resources to engage in annual examinations of other
clearinghouses, and to conduct a greater number of in-depth
examinations overall.
A typical examination of a systemically important clearinghouse
will involve a team of professional staff for the better part of 6
months. For other clearinghouses, the team will be smaller but the time
commitment will be the same. Examinations are resource-intensive, and
they form a critical part of our supervisory program for
clearinghouses.
The Commission is also responsible for examining other critical
infrastructure in our financial markets, including 15 active exchanges,
22 swap execution facilities, and 4 swap data repositories. These
examinations are an important investment in the safety and integrity of
our financial and commodity markets.
Moreover, as I noted earlier, cybersecurity is a major risk to our
financial system today, and therefore we must devote greater resources
to this important challenge. We must also engage in regular
examinations of clearing firms. Current market conditions like low
interest rates and low volatility have increased the risk profiles of
many of these firms. And concentration in the industry means that today
only 20 firms hold $225 billion in customer funds, or approximately 91
percent of total customer funds for the futures and cleared swaps
industries. The Commission must examine whether clearing firms employ
effective risk management techniques, have appropriate compliance
monitoring and retain adequate levels of liquidity.
There are other entities that the Commission is responsible for
examining, such as swap dealers. The recent volatility in the Swiss
franc underscores the importance of examining retail foreign exchange
dealers. We must be able to conduct not only annual or periodic
examinations, but also other reviews triggered by unexpected incidents
so that we can address the concerns of the businesses and individuals
who use these markets. Without the requested level of funding, the CFTC
will lack sufficient resources to conduct these examinations, which
puts the markets and market participants at risk.
registration and compliance
The Commission requests $17.8 million and 63 FTE for registration
and compliance activities, an increase of $1million and 3 FTEs over the
fiscal year 2015 level. The Commission's ability to analyze
registrations in a timely and thorough manner is critical to market
efficiency and confidence. The Commission's responsibilities have
greatly expanded in this area with nearly two dozen SEFs and over 100
swap dealer registrants. In light of the increasing globalization of
the markets and changes made in Dodd-Frank, the Commission has
applications for registration from 21 foreign boards of trade. The
Commission is also considering applications for registration from five
derivatives clearing organizations (DCOs), and must begin to review
petitions for exemption from DCO registration from several foreign
clearinghouses this year. We expect to see additional applications in
the future.
The Commission must also be able to respond to product and market
innovation by carrying out registration reviews efficiently. A lack of
adequate funding impairs the Commission's ability to attract and retain
the experts who understand the markets and who are needed to review
registrations and carry out compliance oversight in a timely and
thoughtful manner, and can result in delay, ineffective customer
protection, regulatory uncertainty, and higher legal and compliance
costs for registrants--severely impacting the efficiency, integrity,
and attractiveness of our markets.
data and technology
The 2016 budget request includes $108 million for the data and
technology activities, consisting of $79 million for information
technology purchases (e.g., hardware, software, and contractor
services), and approximately $29 million for staffing and other
indirect costs. This is an increase of approximately $28 million from
the fiscal year 2015 enacted level. Data and technology accounts for
almost 40 percent of the agency's requested $72 million budget
increase.
The Commission's data and technology budget comprises several
elements. We must expand our data operations and collections systems to
meet our vastly expanded data collection responsibilities as well as
the increasing technological complexity of our traditional markets.
Data, and the ability to analyze and report data, are more important
than ever in the derivatives markets and in CFTC's ability to oversee
those markets; therefore, data understanding and ingestion is the
priority for the Commission's resources. We currently receive over 300
million records per day, and our data needs (intake, storage) are
increasing annually by 35 percent.
The Commission must be able to aggregate various types of data from
multiple industry sources, such as designated contract markets (DCMs),
swap execution facilities (SEFs), swap data repositories (SDRs), and
derivatives clearing organizations (DCOs) across multiple markets
(e.g., futures, exchange-traded swaps, and off-exchange swaps). The
increasing complexity, volume, and interrelations of the data set will
require significantly more powerful hardware such as high performance
computing systems to support business analytics.
Our infrastructure and services must also be expanded to support
the growth in the agency. This includes basic computing, printing,
voice, and data communications, and it requires expansion of storage,
server, telecommunications, and network capacity; implementation of
DHS-mandated cybersecurity measures; and a refresh of end-of-life
equipment. We must also enhance our operations, platforms, and systems
across all divisions. This includes legal, technology systems, and
forensics support systems for enforcement as well as surveillance
systems. It includes business process automation systems, public Web
site operations, and management and administrative support systems.
Without the requested level of funds, the Commission will not have
sufficient capabilities to fulfill the critical mandates of the agency,
directly impacting the Commission's ability to protect market
participants from fraud, manipulation, and abusive practices, and to
protect the public and the U.S. economy from systemic risk.
relationship with the national futures association and other sros
Finally, I want to note that our budget request reflects the fact
that we are working with the self-regulatory organizations (SROs),
including in particular the National Futures Association (NFA), so that
they can take on further responsibilities, subject to our general
oversight. The NFA and other SROs are a very important part of the
overall regulatory framework. We work closely with them. In particular,
recently, we worked very closely with the NFA when the Swiss franc was
unpegged, to monitor potential problems at retail foreign exchange
dealers. We are also working with them now on changes to the rules
governing such firms to insure better protection of customers.
Since I took office, we have been working to have the NFA and other
SROs take on additional responsibilities, including with respect to
review of required filings and financial information of futures
commission merchants and swap dealers, assistance with examinations,
review of swap valuation disputes, and other matters. This will allow
us to focus our own resources on other priorities. Of course, it is
vital that the Commission still oversee the work of the SROs. That
means regular engagement and review of their activities. But by having
them take on greater responsibility we can insure better protection of
the public interest.
conclusion
Thank you for inviting me today. The Commission is grateful to this
subcommittee for its support of the agency's work. The 2016 budget
request is designed to enable the Commission to continue making
progress fulfilling its responsibilities to the American public to
oversee our Nation's futures, options, and swaps markets, so that we
help make sure our markets continue to thrive and contribute to
economic growth into the future. I look forward to continuing to work
with you on this important responsibility.
I look forward to answering any questions you may have.
Senator Boozman. Thank you, Chairman Massad.
At this time, we will proceed to our questioning where each
Senator will have 7 minutes per round. I expect that we will
have time to accommodate at least two rounds of questioning.
Chairman Massad, according to GAO precedent, the
Antideficiency Act requires that agencies ensure the cost of
collective bargaining agreements be constrained by the dollar
limitations of their appropriations. Both agencies, in the
course of long-recognized collective bargaining agreements,
cannot supersede the will of the people's elected
representatives as expressed in law.
Congress retains ultimate authority over all Federal
expenditures, and agencies may expend funds only in strict
accordance with appropriations levels enacted by Congress.
In the past, the CFTC has made long-term budgetary and
leasing decisions based on the agency's requested budget level
rather than on your enacted appropriation. Given your budget
request has far exceeded the appropriated amount you have
received in recent years, your IG has criticized the agency for
allowing hope to trump experience in long-term decisions.
I guess the question is, are you basing your negotiating
position on the CFTC's current level of appropriation?
Mr. Massad. Yes, we are, with respect to the union, most
certainly.
Let me just say that we have a great group of employees,
very, very dedicated. They have chosen to be represented by a
union. That is their right, and we are negotiating with them in
good faith.
But we are very conscious of our budget constraints. We do
wish to be competitive with our other financial regulatory
agencies because, otherwise, we are at risk of losing staff to
them. But we are very mindful of the budget constraints, and I
talked to our employees and I raised this in the negotiations
also.
Insofar as you were referring to leasing costs, I am happy
to address that also. One of the first things I did when I took
office was I went to visit all of our offices to look at the
space and in particular in Kansas City, where the IG had noted
that we had excess space.
I promptly took action to notify the landlord that we
wanted to give up some of that space. We consolidated our
employees so that we could do so. We notified him formally of
that, and we are doing all we can. Obviously, the landlord has
to agree with that.
With respect to our other offices, I have also directed the
staff to look at those issues, too, to see if we could be--to
use the space more efficiently. We are very conscious of being
prudent stewards of the taxpayers' dollars, and we will
continue to do so.
Senator Boozman. Collective bargaining agreements typically
comprise multiple years. What budget assumptions are you making
for the CFTC's funding level in future years?
Mr. Massad. We are basing our negotiating strategy on what
we feel we can afford today. We are not assuming that there
would be an increase. Having said that, as I say, I think it is
important that we work toward making sure we are competitive
with our sister agencies.
SEC STAFFING INCREASES AND UNOBLIGATED BALANCES
Senator Boozman. Good. Thank you.
Chair White, the SEC finished fiscal year 2014 with $74
million in unobligated balances. These unobligated balances,
combined with the budget increase that Congress provided for
your agency, has led the SEC to significantly increase your
staffing.
As a result of the number of new hires the SEC plans to
make in 2015 and other recurring obligations, your agency will
require $195 million above your current appropriation to
maintain current levels of service. This represents a 13
percent increase above last year's appropriated level, quite a
significant increase, just to maintain existing operations.
I guess the question, Chair White, is how is the SEC
ensuring it is not hiring a number of staff that cannot be
supported by its current appropriation of $1.5 billion?
Ms. White. Essentially, as you know, we had requested 639
positions, and I think we were able, by virtue of the
appropriations, to hire a few over 200 employees. Some were
hired mid-year or after. So, certainly, the way annualized
costs work, some of those costs will obviously be greater in
the next budget year. But each year we base our spending on
what we are appropriated by Congress and spend it for the
purposes that are specified in our budget request.
In terms of balances that the SEC has, unlike some other
Federal agencies, we have what are called no-year funds, so
that if we haven't spent every dollar we are appropriated by
year end, we can spend it the next year. About $20 million of
those balances are actually due to de-obligating funds on
completed contracts, which is very good financial management.
By having no-year funds, we are also able to hire more
smartly so that if we don't have that exact, right economist
that we can hire at the end of the year, we can hire them in
January or February. But those amounts are taken into account
with respect to the next year's request.
Depending on the level next year of our funding, we would
have to make adjustments and cuts in various places in order to
be able to carry out our mission most optimally.
Senator Boozman. So if you had a continuing resolution, for
instance, then you would have to make some cuts?
Ms. White. Well, I think that would be true in any event.
It wouldn't just be with respect to--in other words, we have
hired the new employees we were allowed to hire under this
year's budget request. We might well have to engage in a hiring
freeze and cut back on IT expenses.
Clearly, every year we spend as smartly as we can our
appropriation and then need to deal with whatever the next
year's level of spending is--level of appropriation is.
SEC'S LEVEL OF UNOBLIGATED BALANCES
Senator Boozman. What level of unobligated balances do you
foresee the SEC will have at the end of the year to spend in
fiscal year 2016?
Ms. White. We really can't determine that at this point. I
mean, we don't really know what that will be. Obviously, it is
not a goal to have the balances at the end of the year. But
again, it makes for smart financial management and better
hiring and spending because we are able to do that. But we
certainly don't know, at this juncture, at what level they
would be.
Senator Boozman. Thank you.
Senator Coons.
Senator Coons. Thank you, Chairman Boozman.
First, as we come close to the fifth anniversary of the
enactment of the Dodd-Frank reforms, just tell me, if you
would, how has the work of your agencies most concretely
contributed to improving the oversight to the markets,
instilling greater investor and market user confidence?
If you put yourself in the shoes of a pensioner relying on
securities income for their retirement or a farmer making
financial risk management decisions before crop planting, what
are the most significant, tangible benefits of the reforms
enacted in the aftermath of the collapse and your actions to
implement them? If you would, Chair White?
Mr. Massad. Happy to go.
Senator, you know, I spent 5 years at the U.S. Department
of the Treasury before I came to the CFTC, overseeing the TARP
program and being general counsel prior to that. And as you
recall, in the fall of 2008, AIG teetered on the verge of
bankruptcy due to its derivatives contracts. And the Government
had to step in and provide a total of $182 billion to save one
company because its collapse at that time probably would have
propelled us into another Great Depression, just given all the
other things that were going on.
That was because we knew nothing about the swaps market. We
didn't regulate the swaps market in any way.
Today, we have implemented four fundamental reforms. We
require clearing of standardized contracts so that we can
monitor and mitigate risk. We require reporting so we know a
lot more about the positions of institutions, particularly the
biggest players in this market. We require oversight, and we
require transparent trading. So we have come a huge way.
We still have a lot to do to fine-tune all of that. But
when you think about the risk that we faced in 2008--and again,
$182 billion were spent, we fortunately recovered it all--but
that is 600 or 700 times, 600 or 700 times our budget. So that
is how I view the benefits of Dodd-Frank.
Senator Coons. Ms. White.
SEC'S RESPONSE TO THE FINANCIAL CRISIS
Ms. White. I think it is fair to say and most financial
regulators would agree with us that we are in a lot stronger
shape than we were because of the actions the regulators have
taken collectively and individually. Plainly the enhancement in
capital requirements and leverage requirements for banks are
enormously important.
From the SEC's perspective, I think our reforms for money
market funds, credit rating agencies, and public securitization
markets have strengthened the markets for investors
tremendously. The work that we are doing not in mandated areas,
but in terms of enhancing market resiliency for investors, is
enormously important. I think our real focus in enforcement and
examinations on the retail investor, as well as the
institutional investor, is really paying dividends.
We are also spending a lot more time and emphasis on
investor education at the retail investor level. And clearly,
our mutual work with respect to over-the-counter derivatives,
you can't overstate the importance of that to the system and
investor protection, as well as market protection.
Senator Coons. And in both instances, your agencies are
charged with rulemaking, with implementing the provisions of
Dodd-Frank. You have made great progress, but there is some
work that remains unfinished.
Please comment, if you would, briefly on what are the
barriers remaining towards completing the most important
rulemaking steps, and what is coming ahead this year? What are
the areas of focus for you in terms of finalizing some of these
most important rules?
SEC PRIORITIES
Ms. White. As I indicated in my oral testimony--our
priority is to finalize the major remaining rulemakings under
the Dodd-Frank Act and the JOBS Act. These include some in the
securities-based swap area, some in the executive compensation
disclosure area, and then crowdfunding under the JOBS Act.
I think we have made tremendous progress. Clearly, you want
to proceed efficiently, but also effectively and smartly to
approve rules that are both workable and carry out the
statutory purpose. And so, those are the major areas where we
are prioritizing our efforts going forward this year.
Mr. Massad. The agency has written most of the rules
required by Dodd-Frank, but there are a couple of very
important ones that remain. Margin for uncleared swaps, in
particular, is one that we are very focused on right now.
And to me, that is a central part of the risk framework
because there will always be a large part of the derivatives
market that is not cleared, and margin is the key thing to
protect against risk. And we are working very hard to harmonize
those rules from the start with the prudential regulators who
are also charged with this responsibility, as well as with our
foreign counterparts.
In addition to finishing the rules that haven't been
written, though, a major thing we are doing is looking at fine-
tuning the rules that have been written. The agency worked very
hard to meet the congressional deadline of writing rules
basically within a year of the passage of Dodd-Frank. Now that
these rules are applying to the market, we are looking at are
they working? Are they doing what they are supposed to be
doing?
We have made a lot of changes to the trading rules, to the
reporting rules, and so forth, and we will continue to do that
and also, again, to harmonize with our European counterparts.
After I leave here, I am flying off to Brussels tonight for
exactly that purpose.
Senator Coons. In the closing minute and a half or 2
minutes we have got, emphasize, if you would, how the budget
request submitted would allow you to strengthen your regulatory
oversight, your implementation of rules and cybersecurity, and
give me some practical, real world consequences if you don't
receive your budget request, if your budget is flat or reduced.
SEC FUNDING LEVELS
Ms. White. I will go with that first. First I would say
everything that we have prioritized in this budget request, and
we really tried to be very surgical about it, would be
compromised. So that includes enhancing our IT, increasing our
ability to examine investment advisers, and enhancing our
enforcement function, enhancing our Division of Economic and
Risk Analysis even further to do better analysis. All of those
areas would be compromised.
The example I would give really would be in the investment
adviser space. I have talked about that before. Current levels
of resources allow us only to examine 10 percent of those
investment advisers a year. Even though it is 25 to 30 percent
of assets under management and we do it a lot smarter, a lot
better with risk-based tools as we go forward, but
nevertheless, that coverage rate is a real investor protection
issue of great concern.
If we were to be given our budget request this year, we
could add, and we are proposing to add, 180 examiners for
investment advisers, which would get us to 14 percent. It is
part of a multi-year project, obviously, but enormously
important. Everywhere we show up with these examiners, nearly
everywhere we show up, there is value add.
For example, in the private equity space where we have just
shown up to do initial exams, it has resulted in tens of
millions of dollars being returned to investors as a result of
our just pointing out improper allocations of fees and
expenses. And that affects retail as well as institutional
investors because those are pension plans that represent our
police and our teachers as well.
Senator Coons. Chair Massad, if you could?
Mr. Massad. The key components of the increase we have
asked for are data and technology--that is 40 percent of the
increase--and then surveillance and enforcement. And those
really reflect the changes that we have seen in the
marketplace, the fact that these markets have become so much
more electronic and complex.
We must make this investment if we really want to
understand what is going on in these markets and be able to
engage in meaningful surveillance and then follow that up with
enforcement, where necessary, to prevent fraud and
manipulation.
Another piece is examinations where, again, we have made
clearing houses far more important in the global financial
system. We have got to make sure they now don't become the new
sources of excessive risk. I think we have good supervisory
framework in place, but we need to be able to examine what is
going on in the clearing houses regularly.
Senator Coons. Thank you both. Thank you, Mr. Chairman.
Senator Boozman. The Senator from Kansas, Mr. Moran.
Senator Moran. Mr. Chairman, thank you very much.
Ms. White, thank you for your appearance today. I have had
the opportunity to hear from you in Banking and here, and I
have always appreciated the way that you have answered my
questions.
And Mr. Massad, I look forward to getting better acquainted
with you. Welcome to your relatively new task. We have had a
long history with the CFTC, and I welcome developing a good
working relationship with you.
Ms. White, let me say that I also serve on the
Appropriations subcommittee that has responsibility for the
Department of Labor. Your head is shaking, and you know where I
am going. I----
Ms. White. Anticipating.
SEC ASSISTANCE WITH THE DEPARTMENT OF LABOR'S FIDUCIARY DUTY RULE
Senator Moran. Yes, ma'am. I am concerned about the
redefinition of the term ``fiduciary'' as it relates to certain
retirement plans. And based upon what I have read you have said
over time, my impression is that the SEC also has concerns with
the direction that the Department of Labor is going.
As the primary Federal overseer of investor protections,
has the SEC been assisting the Department of Labor (DOL) in its
efforts? If not, would it be accurate to say that the DOL could
do harm if they don't--if they go down this path alone?
Ms. White. Since the initial Department of Labor proposal--
which I think was in 2010 before my arrival--the staff was
working very closely in providing technical assistance to the
Department of Labor. We are, at the end of the day, separate
agencies with separate statutory mandates, and obviously, what
their rule proposal relates to is their important Employee
Retirement Income Security Act (ERISA) mandates.
So we including myself with Secretary Perez particularly,
have engaged extensively in providing technical assistance.
Their rulemaking is now proposed, and it is out for notice and
comment.
Two of the primary areas of expertise we have provided is,
one, our knowledge of the broker-dealer model. The other is
what possible impact various ways of defining a fiduciary duty
could have on the availability of reliable, reasonably priced
services to investors particularly at the low end.
CHAIR WHITE'S VIEWS ON A UNIFORM FIDUCIARY DUTY RULE
I have also recently--and I don't want to take all your
time, but I have recently announced my own view with respect to
the SEC, speaking for myself. I have studied it quite
intensively since I have been here, really. My first reaction
for those of you who would remember in my confirmation hearing,
when I was briefed on this issue, was you have to think long
and hard as a regulator before you regulate differently
essentially identical conduct. And that conduct is providing
personalized securities advice particularly in the retail
space.
But it is a very complicated undertaking that needs to be
balanced correctly. So for the SEC, we are authorized under
Section 913 of the Dodd-Frank Act, to impose a uniform
fiduciary duty. I think the SEC should proceed with that. I am
in discussions with my fellow Commissioners about it under 913.
913 clearly has its own parameters that take into account the
broker-dealer model, which I think are important to take into
account.
For example, it is not a per se violation of any uniform
fiduciary duty to charge a commission. And so I am proceeding
in those discussions. It is not an easy task by any means.
Senator Moran. What is the significance of what you are
telling me about the SEC potentially proceeding under 913? What
is the relationship then between what the Department of Labor
is proposing?
Ms. White. Their rule is out for comment and their
authority isn't 913. 913 imposes certain parameters on the
SEC's rulemaking, should we go forward, that is not imposed on
the Department of Labor's.
Now one of the things that we will clearly continue to do,
as we do any time with any other regulatory agency where you
have overlapping issues and jurisdiction, is to continue to
consult and provide technical assistance as we go forward.
TIMEFRAME FOR THE DEPARTMENT OF LABOR'S RULEMAKING
Senator Moran. Sometimes--I can't think of the example, but
sometimes Congress has been critical of the delay or the
slowness of rulemaking. And yet in this case, the Department of
Labor has 75 days appropriate for a rulemaking--my question is,
is 75 days appropriate for the rulemaking that the Department
of Labor is pursuing?
Ms. White. This has been under study for a long time by the
Department of Labor. I think 2010 is actually when their
original proposal was made.
I will speak for the SEC. I mean, the notice and comment
period is required by the APA, but it is also enormously useful
to effective rulemaking, both in terms of achieving your
regulatory objective, and also doing it in a very cost-
effective way.
This is a particularly complicated area, but again, that is
why their rule is out for notice and comment.
SEC WORK REGARDING LIQUIDITY IN FIXED INCOME MARKETS
Senator Moran. I think I understand what you are saying.
Let me turn to another issue at the SEC. Would you walk me
through what, specifically, the SEC is doing about liquidity
concerns on fixed-income markets?
Ms. White. That is an area clearly of interest and concern,
I think, to all the financial regulators, particularly as we
anticipate the rising of interest rates. So what the SEC has
done in particular is, in January of 2014, our Division of
Investment Management put out guidance so that funds and other
market participants could look at how they are managing that
risk if it occurs or when it occurs, and how to best manage
that.
We along with other financial regulators as well actually
report, I think we have done three reports so far, to the House
Financial Services Committee as to whether the Volcker Rule, or
the anticipated compliance period to the Volcker Rule is having
an impact on the corporate bond markets. That is just one
example.
I think all the regulators--it is a subject discussed in
FSOC as well--are looking very closely at that.
CYBERSECURITY ISSUES
Senator Moran. Let me ask a general question of both of
you. What is the nature of the cybersecurity issues that your
agencies face? How capable are you of protecting against a
cyber attack? And how secure is your data from hackers and
others?
Mr. Massad. Thank you, Senator, for the question and thank
you also for the kind words initially. I look forward to
developing a good relationship with you also.
The cyber challenge is a very, very serious one,
particularly with respect to the critical infrastructure like
clearing houses and exchanges. We don't have the budget to do
independent testing or anything like that. So we have to really
think about whether we leverage our resources effectively.
One of the things we are looking at, for example, is making
sure that the exchanges and the clearing houses themselves are
doing adequate testing and are following best practices and are
using independent testers, where appropriate, to do things like
controls testing, penetration testing, vulnerability testing.
We have incorporated cyber concerns into our examinations,
and typically in our examinations, what we are looking for is
whether the board of directors and top management are setting
the right tone with respect to these issues. Are they not only
putting policies on the books, but are they making sure those
policies are enforced? If an incident happens--and incidents do
happen--are they not only looking at those specifics, but
thinking more broadly and about what else might be vulnerable
that has been revealed by this incident?
That is how we are thinking about it. But it is a real
challenge given that most of the institutions we are dealing
with are spending multiples of our entire budget on
cybersecurity.
With respect to our own internal controls, we have done a
lot in that area. We are evaluated according to the Government
standards and we have received good ratings there. But we have
to keep up. This is an area, as you know, where you must
constantly be making new investments in order to stay apace.
CYBERSECURITY EFFORTS AT THE SEC
Ms. White. I would say that the SEC is doing everything in
its own space and then also working with fellow regulators.
Again, this is a nationwide problem and priority, I would say.
And it is with us for the long term. It is one of the highest
risk areas I think we all face, and certainly the financial
system faces.
In the SEC space, with respect to our registrants, we, last
November, did a rulemaking, Regulation Systems Compliance and
Integrity it is called, which essentially with respect to the
critical market infrastructures--the exchanges, large ATSs,
clearing agencies--for the first time, required enhancement of
resiliency and integrity of their systems. And so, we think
that is a very important rulemaking.
We, last March, held a roundtable with Government
participants, as well as private sector participants, to make
sure we brought everybody into the same room to talk about the
issues, best practices, and also sort out who has the ticket
for what. Because one of my concerns is that everybody is into
this, but does everybody really have it covered? And who is
responsible for what aspects of this?
So in our examination program, much like Chairman Massad is
talking about from the CFTC point of view, we have prioritized
cyber preparedness for the last 2 years in our published exam
priorities. We recently published the results of a sweep that
we did in that space, so that investment advisers and broker-
dealers could be informed by the practices of others so that
they could improve and enhance their systems.
Just last week our Investment Management Division put out
guidance, again setting forth best practices, and our exams
will follow suit there.
We also in the Division of Corporation Finance, I think in
2011, put out guidance to public companies about disclosing
when they do have incidents that rise to a material level. But
it is something that has and must have our highest focus and
priority as we go forward.
Senator Moran. Thank you both.
Senator Boozman. Senator Lankford.
Senator Lankford. Thank you.
It is good to get a chance to visit with you all. I am the
new guy on the dais, and I look forward to ongoing
conversations in the days ahead as we work through these
extremely complicated issues that you deal with all the time on
this.
Ms. White, can I ask you--and this is not a trick
question--how many rules does the SEC have? Give me a ballpark
number of how many rules are sitting out there.
Ms. White. You mean in total, how many do we have?
Senator Lankford. Yes, ma'am.
Ms. White. Wow, it would probably depend on--I don't know
the answer to that. I would have to give you a precise number,
but there are obviously hundreds of rules, and if you do it by
subdivision, it is a higher number than that.
SEC OUTSTANDING RULEMAKINGS UNDER THE DODD-FRANK ACT
Senator Lankford. Right. About how many do you think are
still left for Dodd-Frank?
Ms. White. Oh, from Dodd-Frank----
Senator Lankford. And that is separate. I was asking big
picture.
Ms. White. Okay.
Senator Lankford. Separate from that, how many are still
left to do that are unfinished for Dodd-Frank at this point?
Ms. White. I would say--and again, these are done by
subdivisions. I look at them more in terms of buckets, but I
would say that there are probably in total in the neighborhood
of about 20 left to do. That is a guess. I will have to confirm
it for you because there are subdivisions.
Senator Lankford. What are the big ones that are still
left?
Ms. White. Essentially, in terms of the congressional
mandates, I look at it as sort of six major or eight major
buckets. We are essentially finished in six of those. That
includes Volcker. That includes setting up the municipal
advisors regime, credit rating agencies I mentioned before, and
securitization I mentioned before.
The ones that we still have work to do on are primarily
finishing securities-based swap regulations and the executive
compensation disclosure rules.
Senator Lankford. Okay.
Ms. White. We have some isolated other ones, but those are
the major ones.
SEC'S RETROSPECTIVE REVIEWS
Senator Lankford. Okay. I am going to come back to that in
just a moment. The retrospective review, how often do you do
retrospective review?
Ms. White. First, we do it pursuant to the Reg Flex
requirements every--really every year in terms----
Senator Lankford. So give me a ballpark of how many rules
you are reviewing this year, number of rules.
Ms. White. It is on our Web site, but I would say there are
probably 50, and we actually look at it more broadly than is
required under the Act. The Act really applies to impact on
small businesses, but we actually tee up our rules that go out
for notice and comment.
Also, and I think at least equally importantly, in the
disclosure regime area, we are, for example, doing a very
comprehensive review of the entire public disclosure regime
now. In the market structure area for particularly equity
markets, we are looking at a very comprehensive review of our
regulations there, including NMS, which is obviously a baseline
and very important set of rules for the National Market System.
So that is an ongoing real-time review as well.
Senator Lankford. Okay. And the way that you select those,
how do you select those that are coming up for review?
Ms. White. In terms of the Reg Flex selection, some of
those are made for you by the requirements, and then we add to
that, as I have indicated.
With respect to the others, we prioritize areas. They
should be in important areas, and they are areas which we
believe call for review and change after that review.
Senator Lankford. What do you mean, call for review? You
mean outside entities are contacting you, saying this is
antiquated, or this is a problem, or this is----
Ms. White. That is certainly among the inputs. Our
registrants and the folks in the public companies are not shy
about giving us that input, and it is very useful. We also,
from our own end, supply that input as well.
SEC'S EXECUTIVE COMPENSATION RULEMAKING
Senator Lankford. Okay. Let me talk about one of the rules
that you had mentioned that is still pending to be finalized,
it is in that final process, and it is the compensation rule,
for executive compensation. Tell me the goal of that, where you
think that is headed. And I understand some of the issues
coming up from Dodd-Frank on it. As you are thinking through
the rule itself, what is the goal? What do you think it will
accomplish?
Ms. White. You are talking now about the 956 rulemaking for
the----
Senator Lankford. Yes.
Ms. White [continuing]. The joint rulemaking with the other
regulators? The statutory mandate there--and I think, you
know--and the objective there is to try not to have incentive-
based compensation create material risk to the financial
system. I mean, that is the ultimate objective of that.
In terms of the status, we are currently in active work
with our fellow regulators who are jointly charged with going
forward with that rulemaking. There was a proposal some years
ago on that, a couple of years ago. And we are working to
determine what the next step is, but we are quite actively
working on it now.
Senator Lankford. Okay. Is there a concern within SEC and
the conversations that are happening internally that--that the
executive compensation rule attached to stock price and stock
performance could actually incentivize being more focused on
shareholders than it is on employees within the business?
Ms. White. I think that is a concern with all executive
compensation rulemaking, and that you get that balance right
and you consider both ends of the constituents. There have also
been comments in that same vein that have been raised with
respect to the rulemaking, the proposal we went forward with
last week at the SEC, which is a disclosure rule, basically pay
versus performance. So I think that has been raised there as
well.
Senator Lankford. Okay. So how legitimate do you think that
concern is?
Ms. White. Again, you have to be true to the statutory
requirements. That is a judgment made by Congress. And then I
think what you are doing is trying to make it as effective as
you can, as well as cost effective as you can, and not have
negative unintended consequences from it.
Senator Lankford. Right. So the challenge that we face--and
I understand a previous Congress put this into place. The
challenge that we have now is it seems to me the goal of it is
to try to shame companies into paying executives less, to
publish it, to push it, to try to put it to stock prices so
that at any point if stock prices begin to drop, shareholders
would start punishing them and dropping salary.
The problem is, is that that I think puts a tunnel focus
for any exec to say don't focus on people, focus on stock
price. Lay people off, do whatever it takes to keep a good
stock price, even with a falling market, because my pay is out
there. And so, I think the incentive is perverse, at the end of
the day.
Now I understand you are dealing with statutory mandates,
but what I am trying to drive at is Congress has to reevaluate
this in the days ahead as the rule comes out and as everyone
looks at it, and the folks that voted for it and the folks like
me that didn't, to look at it and say is this really what
Congress wants to do, to incentivize execs to only look at
stock prices in the days ahead? And even with the falling
market, chunk as many employees as they can because they have
to guard their salary and their appearance on it.
That is the concern that I have in the days ahead, and I
think this is going--it is something that we have to reevaluate
in this Congress as soon as possible, as you all put forward
what a previous Congress has said to do.
Ms. White. Understood. Those rules will be put out for
notice and comment. So I just want you to know that opportunity
will be there, is all I am saying.
Senator Lankford. Now, Mr. Massad, I don't want you to get
off too easily on this. But let me just take one quick
question, and it is small. You all have had some difficulties
dealing with unused space that has been leased. So, what is the
current vacancy rate for the Kansas City office? How are you
doing with vacant space, and what is the status on that?
Mr. Massad. On Kansas City, shortly after I took office,
about 2 or 3 weeks after, I went out there to look at the
space. And we promptly moved to consolidate our space on one
floor and notify the landlord we are willing to give up the
excess space. We are hoping that he will accept that offer.
With that, I would need to check on exactly what our Kansas
City occupancy rate would be, but it is very high, assuming he
will agree to some sort of deal to take back the space. We
would like to do that.
Senator Lankford. Sure. CFTC is not alone, obviously, in
having unused Federal space. We have it all over the country at
this point, but it is one of those areas of many that we have
to be aggressive on to say where we have empty square footage,
we need to make sure that we are not paying for it with the
Federal tax dollars. And so, I appreciate your aggressive
oversight of that.
Mr. Massad. Agreed.
Senator Lankford. That is one of a million things I know
you have to deal with, especially walking into this inheriting
the issue.
Mr. Massad. Yes, and we don't--as you know, Senator, we
don't get the money even if--you know, we don't get the savings
necessarily, but it still makes sense.
Senator Lankford. Right. $480 billion in deficit this year,
the Federal taxpayer would appreciate it very much on that
oversight.
With that, I yield back.
Senator Boozman. Chairman Massad, over the past year, the
CFTC has taken some incremental steps to reduce the burden of
recordkeeping requirements with Rule 1.35. Can you talk a
little bit about what steps you are trying to take to ensure
that the American farmers and manufacturers are not
overburdened by regulations and compliance costs, and then also
you might talk a little bit about what has changed in the last
few years as far as what you are regulating?
Mr. Massad. Certainly, Senator, happy to answer that. Yes,
we have proposed changes to Regulation 1.35, which concerns the
recordkeeping that participants in our markets must do. And
particularly because of the potential impact on smaller users
in these markets, we have proposed a change. We have received a
lot of comments on that, and we are looking at the issue and
hope to finalize the rule soon.
Also related to that, last week we took another step with
respect to trade options, perhaps less important for the
agricultural community, but very important in the energy
community, where we are proposing to get rid of a form that is
required and reduce the reporting burden on trade options.
I think it is very critical that we look at our rules,
again, to make sure that commercial firms who rely on these
markets, whether they are in agriculture or other industries,
can do so efficiently and effectively, and particularly the
smaller firms. You know, the rulemaking we are doing with
respect to the swaps market was not meant to burden them. It
was meant to address the risk of excessive risk and to oversee
the big players in the market.
Senator Boozman. Good. No, I appreciate your affirming
that. I know that that certainly was the intent, and yet
sometimes the smaller players have gotten caught up in this
stuff. So we really do appreciate your efforts to unwind that.
SEC GUIDELINES FOR ADMINISTRATIVE PROCEEDINGS
Chair White, after Dodd-Frank expanded the SEC's authority
to try civil enforcement cases through administrative
proceedings, the SEC has been bringing more cases to its
administrative law judges, rather than going to Federal
district court. I think it is important for the investment
community to believe there is fairness and transparency in all
judicial venues.
Does the SEC intend to develop and make public guidelines
for determining which cases are brought in administrative
proceedings and which cases will be brought to Federal court?
Will the full Commission participate in that drafting process?
Ms. White. As you correctly point out, Dodd-Frank did
expand the penalties that we can achieve in administrative
proceedings. That forum has been around for many, many years. I
think the SEC has used it since the 1940s, actually.
Questions have been raised about the choices. Of the
litigated cases, I think 57 percent are still in district
court, not in administrative proceedings (APs). But questions
have been raised about those criteria, and I do believe
appearance of fairness is important. And so, one of the things
that we are--I am considering is whether we should do public
guidelines to make that clear and transparent to both
participants and the public.
Senator Boozman. So are you considering it along with the
other Commissioners?
Ms. White. I am one vote, as they say, at the end of the
day. Obviously, there are things that can be done by the staff
as opposed to the Commission. I mentioned staff guidance in a
couple of other areas already today.
I will say that I think all of the Commissioners are
focused on this, and so we are always engaging in dialog, even
if, what at the end of the day--assuming something comes out at
the end of the day--is staff guidance. So there is a lot of
discussion.
Senator Boozman. Okay. No, I think it is important.
FINANCIAL STABILITY BOARD ROLE IN MARKET REGULATION
For both of you all, last month a member of the European
Parliament argued at a swaps and derivatives conference that
the best way to achieve international consistency of
regulations would be to give the Financial Stability Board a
standard-setting role, with national regulators expected to
accept and implement its rules. Although the Financial
Stability Board's roots are in central banking and prudential
regulation, they are moving forward with regulating the
insurance industry and asset management industry.
Do you have concerns with giving bank-centric regulators a
more detailed role in the market's regulation?
Ms. White. The SEC is a member of the Financial Stability
Board (FSB). I think the FSB is enormously important to
bringing international regulators together to assess risks,
among other things. But I also think the work of the FSB,
including reports and suggestions for standards, are not
binding on the national authority, and certainly not binding on
the SEC.
And it is clear, in the FSB setting, that predominantly
they are central bankers who are the members. There are a few
of us who are capital markets regulators, with very important
expertise to bring to bear. But at the end of the day, in terms
of, certainly, the capital markets that we oversee and have
jurisdiction to regulate, we continue to do that. And the FSB
reports are not binding on us.
Senator Boozman. Chairman Massad?
Mr. Massad. I would agree with what Chair White said and
just add we are not even a member. I don't even get to go to
the meeting. So I would agree with you that it is a little
bank-centric.
You know, having said that, it is a forum for bringing
people together. I think the way I look at the task of trying
to harmonize our rules is it just requires a lot of effort on
the part of the individual regulators to get together. And that
is what I have been focused on doing since I took the job.
There are going to be some differences in the rules. There
are differences in most areas of regulation between different
countries' rules, but I think we have made a lot of progress
with respect to over-the-counter derivatives, and we will make
some more.
As I said, I am flying off to Brussels tonight for this
very purpose. We have made a lot of progress on a number of
areas, and I think we will make more progress.
INFLUENCE OF INTERNATIONAL REGULATORY ORGANIZATIONS
Senator Boozman. No, and that is appreciated. I think there
is a concern that perhaps international regulatory
organizations are trying to exert inappropriate influence on
the development of our regulatory policy.
And finally, do you think we are underrepresented in that
regard?
Mr. Massad. Well, I have asked to be invited to the
meeting. So, yes, I would agree with that comment.
Senator Boozman. But you agree, you know----
Mr. Massad. No, but I do have a good personal relationship
with Governor Carney. I think it would help in some of these--
in the FSB in particular to have more market regulators if it
is going to look at things like over-the-counter derivatives.
Senator Boozman. Sure.
Ms. White. I guess I would just add that also there are a
number of work streams, a number of committees at the FSB that
the SEC staff and the CFTC staff participate in, and bring that
perspective to bear. And there is certainly in recent months, I
believe we can call it a consensus on the part of FSB members,
that more of that capital market expertise ought to be brought
to bear in those working groups and committees, which, I think,
is a good thing.
Senator Boozman. Very good.
Senator Coons.
HARMONIZATION OF RULES ACROSS BORDERS
Senator Coons. Thank you, Chairman Boozman.
Let me just continue the discussion along this direction. I
was broadly encouraged by the reforms presented in Title VII,
but I am concerned about how they are being implemented and the
reluctance on the part of some of our European counterparts to
accept U.S. clearing houses for trades and the reports of some
friction between U.S. and European regulators.
So I know you have been working with your European
counterparts to try and find some common ground on a range of
issues. As you fly off to Brussels, as you contemplate further
actions, just talk to us in a little more detail about the
efforts underway to harmonize the rules across borders to
reduce uncertainty for market participants and what you see as
the prospects for real progress and harmonization between your
organizations and between our countries--our country and the
countries of Europe?
Mr. Massad. Sure. I think it is important to look at it
area by area. A big issue, obviously, that has received some
attention is clearing house recognition. And you know, we have,
I believe, the strongest regulatory framework for clearing
houses in the world. I think there is ample basis for the
Europeans to declare us equivalent and recognize us.
They have had a couple of types of issues. One was with
what they referred to as deference more to their regulations
with respect to the regulation of their clearing houses,
meaning that, we do require, in fairly narrow circumstances,
for European clearing houses that clear futures traded in this
country or swaps to register with us.
And they ask that to the extent that we can, we harmonize
our regulations with theirs with respect to those clearing
houses. We proposed a framework that is acceptable, and
assuming we can work out our other differences, I think we will
address that issue.
The other issue they have raised is--pertains to margin
methodologies. Again, we have done a lot of analysis, and I
feel our standards are more than adequate and in some ways
superior. We will try to work that out.
In other areas, we are making progress. Margin for
uncleared swaps, I referred to earlier. There has been a very
good international dialogue on this, where, hopefully, we can
get these rules that are being worked on currently--by us, by
Europe, by Japan, to be fairly similar.
There has been a lot of work in the area of swap data
reporting. We have a number of different trade repositories for
this data, and it is important that we collect the data in
similar ways. It is a very big effort, but a lot of progress
has been made there.
So I think we are making progress. It takes time, but it is
a task that I am very committed to.
Ms. White. It is essential. And particularly in this space
it is obviously a global market. I mean uniquely global. In the
swaps area, we have about 5 percent of that market, but we are
also talking to the Europeans about it and coordinating there.
You are trying to both have as much consistency as you can
for market participants, but also avoid regulatory arbitrage.
And so, I think the discussions are quite constructive, but
again, they are not all easy issues.
INSPECTIONS AND EXAMINATIONS
Senator Coons. Talk for a minute more, if you would, about
examinations and inspections. Both of you in the section of
your spoken and in your written testimony emphasized that
continued increase in your budget would allow for a continued
increase in examination and inspection. You mentioned only 10
percent of the underlying regulated entities are annually
examined.
What would be the consequences for the market, what would
be the benefits for investors were there to be more regular,
more predictable examinations of a broader range or more
regular inspections?
Ms. White. The 10 percent, by the way, applies to
investment advisers. Coverage is about 50 percent of broker-
dealers and higher percentages for other kinds of registrants,
just based on resource availability. More resource raises the
entire bar of compliance. It translates directly into investor
protection, or the lack thereof, if we don't have the resources
to have what is referred to as ``boots on the ground.''
I think I mentioned earlier the example of just by showing
up, with respect to some new registrants, it has resulted in
tens of millions of dollars going back to investors. If we are
not present, including at the lowest levels of the retail
markets, the smallest investment advisers, any massive fraud
can be occurring there.
And if the number of advisers increases--and there is some
discussion that this is the case--as broker-dealers migrate to
the investment adviser area because we are less present there
because of resources, you are lowering the investor protection.
It is quite, quite serious.
Mr. Massad. Similarly for us, we have about 14 clearing
houses, about the same number of exchanges. We have a number of
clearing members, but about 20 of them hold most of the funds.
The total funds held by clearing members is about $250 billion.
So we simply can't get in and examine these entities on a
regular basis. We don't even get to many of the clearing houses
and the exchanges once a year. We get to very few of them, and
that is a big problem.
These clearing houses, as I said, we have made far more
important in the global system. That is a good thing. That was
a wise choice. But we have got to be able to see what is going
on and to be in there and looking at the holding of customer
money, look at the procedures they follow, look at cyber
issues, look at other issues.
The same is true with the clearing members. We don't, you
know, want to be in a position where we don't know what is
going on. We are trying to work with whoever we can who can
assist us in this regard. We work with the National Futures
Association. We work with the Fed, in part, on clearing house
oversight. But there is a lot more we need to be doing.
INVESTMENTS IN IT AND CYBERSECURITY
Senator Coons. In your written testimony, you referenced,
Chairman Massad, that cybersecurity is the single most
important threat to financial security today--and financial
stability of the markets today. And in your spoken testimony,
you also emphasized the increasing scale of complexity and the
automation of a lot of the transactions, the electronic nature
of a lot of the transactions you are charged with overseeing.
Speak in closing, both of you, if you would, briefly to the
resources and expertise that you need in order to keep up. You
referenced that each of the four largest financial institutions
dwarfs your annual budget with their annual investments in IT
and cybersecurity alone. Just speak to how having the resources
to continue to invest and keep up would make a difference in
financial stability and your ability to oversee the markets.
Mr. Massad. Certainly. It is a critical area. And you know,
this is always going to be a joint effort. We are never going
to be able to do all of this by ourselves. It is important that
we work with other regulators. If there is an incident,
obviously, we would work with, you know, the FBI and Homeland
Security and so forth.
But we need the resources to be able to go in regularly and
do examinations and make sure that the critical infrastructure
and these most important participants in the market are doing
enough themselves in terms of testing, in terms of procedures,
in terms of setting a tone, in terms of the attention of the
board of directors. We simply cannot address this risk with the
budget that we have.
And these threats, as we now know today, don't just come
from people motivated by profit. They come from people, you
know, looking to disrupt the system.
Ms. White. I would concur with everything that Chairman
Massad said. I think in terms of resources, I mentioned before,
I am very pleased to get the systems compliance and integrity
rulemaking done to enhance resiliency of the critical market
infrastructures of the exchanges and so forth, but one has to
be able to examine and make sure the rules are being observed
or you might as well not have those rules. Again, it comes back
to the examination resources and challenges we have in that
space for examinations.
I mentioned that our national exam staff has, for a couple
of years, prioritized cyber preparedness when they go out and
examine investment advisers and broker-dealers. But, you know,
that is one presence. It is not nearly enough resources to
actually have a strong enough and broad enough presence on
those issues. And again, no one can overstate the seriousness
of that risk and challenge that comes from cyber.
Senator Coons. I think this remains a particularly
important area for us to focus on, for us to invest in. I share
the concerns phrased by Senator Moran about fixed-income
liquidity. I think we have discussed that before.
And as I have mentioned to you before, I remain quite
interested in the implementation of the conflict minerals
rules, and I will submit some questions for the record. I hope
you will keep us updated on how those reports and
implementations are going.
There was a recent report by Amnesty International and
Global Witness that suggested while some corporations have
really stepped up and advanced the concern in the cause of
transparency in the minerals markets, many others have not. A
majority have not. So I will submit a question for the record.
Thank you very much, Mr. Chairman.
COLLABORATION ON CYBERSECURITY
Senator Boozman. Thank you, Senator Coons.
Do you have any other questions? Good.
Let me just ask you about cybersecurity in the sense that I
think we all agree how important it is. That really is a new
frontier.
Both of you, in different ways and yet in the same way,
have to deal with that through oversight, having the IT in
place, and the infrastructure in place so that you can monitor
others. And then you have to deal with your own security.
Is there any effort on collaboration? I mean, you are
different, but you are similar, and we have so many other
agencies that are also similar. It does make sense. We have
limited resources, and I think all of us would agree with that,
regardless of where we are at.
Can you talk a little----
Ms. White. Yes. The collaboration does occur pretty
extensively. The Financial and Banking Information
Infrastructure Committee (FBIIC) under Treasury's auspices
brings together all of the financial regulators precisely to
focus on cyber issues including at literally the principal
level once a quarter, and our staffs are meeting more often
than that. Again, it goes back to my concern that you do need
to get all the relevant people in the room talking to each
other.
So there is certainly good efforts, good forums for that
occurring, but we also are sharing with each other our various
approaches to the cyber issues.
Senator Boozman. It does seem, Chairman Massad, that, you
know, with limited dollars and the functions that are in
common, it does seem like we could have some sort of a team
approach to use those dollars to build out each other's
infrastructure.
Mr. Massad. Absolutely, Senator. We do collaborate. FBIIC
is one way. Chair White and I discuss a lot of issues just
bilaterally. There are other forums for industry and Government
to work together sharing information.
But it comes back to something fairly simple in terms of
examinations. If we don't even have the resources to go and
examine a clearing house on cyber at least once a year, there
is no way we are going to know what is going on.
So all the collaboration among agencies in the world isn't
sufficient. We still have to be able to have the resources,
because we are the regulator in charge of certain clearing
houses, certain exchanges, certain clearing members. We have to
have the ability to go in and examine.
Senator Boozman. No, I don't disagree with that. And yet
the information that comes in, as you sort that out using the
various components, both of you all have the same problem.
And it does seem like, again, I think we are all saying the
same thing about collaboration in that regard and building out
that infrastructure. You have got a budget. Chair White has a
budget. It does seem like we could do a better job. That is
just something at which Government historically has just not
done a very good job--not very efficient at all.
Mr. Massad. No, I would agree, but, you know, one of the
things we are doing, for example, I refer--I mentioned the fact
that we are thinking about standards on testing. We are looking
at the SEC's rules. We are talking actively with their staff as
we think about what to do, learning from what they have done,
the same with other agencies as well. So there is a lot of
dialogue going on among Federal regulators on this.
Ms. White. Part of this, if I may just add, is that, I
think maybe it has been alluded to, but it is really getting
the word out to the private sector, to not only working
together with them very closely on information sharing, but
when we are actually, by virtue of what we can do by way of
examination, learning things about best practices in an
appropriate way, publicizing that so that the firms can bring
up their own bar, so to speak.
Senator Boozman. Well, thank you all so much for being
here, and the testimony was very helpful in helping us craft
the fiscal year 2016 bill.
I also want to thank your staffs for working very hard to
prepare you and our staffs for doing the same thing and doing
an excellent job of getting us all of this together so that we
could have a good hearing.
ADDITIONAL COMMITTEE QUESTIONS
If there are no further questions, the hearing record will
remain open until next Tuesday, May 12th at noon for
subcommittee members to submit any statements or questions to
the witnesses for the record.
[The following questions were not asked at the hearing, but
were submitted to the Commissions for response subsequent to
the hearing:]
Questions Submitted to Hon. Mary Jo White
Question Submitted by Senator John Boozman
Question. Chair White, unlike our other agencies, the SEC enjoys
the benefit of the Dodd-Frank created Reserve Fund, which has been used
to fund large, multi-year technology projects. This year, Congress did
not receive a spend plan on Reserve Fund expenditures until more than
halfway through the fiscal year. Next year, your agency plans to plans
to spend $75 million from the fund.
What process does the SEC use to determine what projects will be
funded through the Reserve Fund rather than through appropriated funds?
Does the SEC intend to continue using the Reserve Fund for
technology projects in fiscal year 2016 or will the Commission use the
fund for other expenditures?
Will projects that are initiated through Reserve Fund expenditures
continue to be funded solely by the Reserve Fund or will the SEC's
appropriation be used to maintain the project in future years?
Answer. The SEC has dedicated the Reserve Fund to large, multi-
year, mission-critical information technology projects and programs.
The Office of Information Technology, in collaboration with the Chair's
office and other divisions and offices, develops and proposes the suite
of projects and programs that best use the resources of the Reserve
Fund, in conjunction with the Office of the Chief Operating Officer and
the Office of Financial Management. The approved projects include:
--Improved data analytics to support the SEC's efforts to identify
potential securities law violations and inform policymaking;
--EDGAR enhancements to improve the functioning of the Commission's
large filing repository for the public and the agency;
--An EDGAR redesign to create a system that is easier for registrants
to access and use to submit required information and that
serves as a more robust source of data for the SEC and the
investing public;
--Bolstering systems that support enforcement investigations and
litigation and SEC examinations;
--Enhancing the sec.gov website to provide the public with better
access to information in a cost-effective manner;
--Improving the tips, complaints, and referrals system through
additional functionality, such as automated triaging; and
--Business process improvements to make the day-to-day operation of
the SEC more efficient.
In fiscal year 2016, the SEC intends to continue dedicating the
Reserve Fund to investments in such large, multi-year, mission-critical
technology projects and programs. As in the past, the SEC intends to
use the Reserve Fund for development, modernization, and/or enhancement
of such systems, not their maintenance. Once a new system or system
enhancement is deployed, the ongoing maintenance costs are covered from
the General Fund.
______
Questions Submitted by Senator Christopher A. Coons
Question. What is the state of international cooperation in
achieving the goals of the G20 commitments to reform global financial
markets? In particular, some have posited that where there are nuanced
differences in local regulatory implementation, there is a risk of
market fragmentation along regional borders. Do you agree with this
assessment? Why or why not?
Answer. Because global markets are subject to the risk of
fragmentation, international regulators are very focused on regulatory
inconsistencies and possible arbitrage. Commission staff participates
in a variety of multilateral initiatives and bilateral discussions
aimed at helping to ensure that reforms across jurisdictions fit
together in a sensible way. For example, this coordination is necessary
as reforms for the over-the-counter derivatives markets, which are
highly global, are implemented across jurisdictions where a significant
portion of transactions could be subjected to multiple regulatory
regimes. The staff participates in the Financial Stability Board's
(FSB) Over-the-Counter Derivatives Working Group, which is comprised of
staff of regulatory and supervisory authorities responsible for
implementing reforms in the over-the-counter derivatives markets. Since
October 2010, the Working Group has reported regularly to the FSB on
progress in implementing over-the-counter derivatives reforms,
including two reports in 2014. These progress reports published by the
FSB include updates on international, national and regional progress in
finalizing standards and implementing reforms, as well as practical
reviews of identified implementation issues. In addition, senior
representatives from the Commission, the Commodity Futures Trading
Commission and foreign authorities convene regularly in the Over-the-
Counter Derivatives Regulators Group to discuss cross-border issues
related to the implementation of reforms for the over-the-counter
derivatives markets in their respective jurisdictions. Beyond this, the
SEC is a member of the International Organization of Securities
Commissions (IOSCO), a multilateral organization of securities
regulators focused in part on cooperating in developing, implementing
and promoting adherence to internationally recognized and consistent
standards of regulation, oversight, and enforcement.
I personally participate on the FSB Steering Committee and IOSCO
Board to address these same types of concerns and priorities.
Question. Corporations have a right to utilize their earnings in a
variety of ways. For example, firms can repurchase stocks, issue
dividends, increase R&D spending, invest in innovation, train workers,
or spend money on other priorities. Some commentators have suggested
that large amounts of corporate earnings are going toward buybacks and
dividends, rather than some of the other investments outlined above. Is
this a trend that you see and, if so, is it something you are concerned
about?
Answer. The SEC's mission is to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation.
Consistent with that mission, the SEC does not generally seek to
regulate how a company uses its available resources. The SEC does,
however, seek to protect investors that own or may wish to buy or sell
the issuer's securities by ensuring that investors have the information
they need about the company and its activities, and by requiring that
companies that engage in buybacks or issue dividends do not engage in
deceptive or manipulative conduct.
With respect to disclosure, issuers must disclose in their
quarterly and annual reports all issuer and ``affiliated purchaser''
purchases of shares or other units of any class of the issuer's equity
securities that is registered under Section 12 of the Exchange Act,
regardless of the manner of purchase (e.g., whether the purchases were
made in open-market transactions, tender offers, in satisfaction of the
company's obligations upon exercise of outstanding put options issued
by the company, or other transactions). This information about the
number and amount of purchases is disclosed in tabular format by month.
For all plans or programs publicly announced, the issuer must provide
additional details about the plan or program, including information
about when the program was announced, the amount to be repurchased, and
the expiration of the program. In addition, reporting issuers are
required to disclose the number of shares purchased other than through
a publicly announced plan or program and the nature of the transaction.
Generally, issuers that publicly announce a buyback program file a
current report on Form 8-K.
Similarly, issuers listed on national securities exchanges are
required to report upcoming dividends to a self-regulatory organization
to ensure that all investors receive such information in a fair and
timely manner. Item 201(c) of Regulation S-K requires issuers to
disclose the frequency and amount of any cash dividends that are
declared by the issuer in annual reports that are filed with the
Commission.
The Commission also vigorously pursues cases of market
manipulation, whether executed through buybacks or otherwise. In
particular, the Commission often brings enforcement actions alleging
violations of Section 10(b) of the Securities Exchange Act and Rule
10b-5 thereunder to address conduct intended to manipulate common stock
prices. For example, the Commission actively pursues ``pump and dump''
cases in which the issuer either itself or indirectly through others
touts its common stock through false and misleading statements to the
market place.\1\
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\1\ See, e.g., SEC v. Pagnano, et al., Civil Action No. 14-CV-7691
(VM) (S.D.N.Y.) (filed Sept. 23, 2014); SEC v. Benou, et al., Civil
Action No. 14-CV-7284 (PGS) (D.N.J.) (filed Nov. 21, 2014); SEC v.
Zenergy Int'l, Inc., et al., Civil Action No. 13-CV-5511 (JBG) (N.D.
Ill.) (filed Aug. 1, 2013); SEC v. Spongetech Delivery Systems, Inc.,
et al., Civil Action No. 10-CV-2031 (DLI) (E.D.N.Y.) (filed May 5,
2010). See also the lists of SEC enforcement actions, including market
manipulations, which are published annually, including the fiscal year
2014 list available at http://www.sec.gov/about/secstats2014.pdf.
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Question. Section 1502 of Dodd-Frank directed the SEC to impose
additional disclosure requirements on issuers that use tin, tantalum,
tungsten, and gold (so-called ``conflict minerals'') from the
Democratic Republic of Congo (DRC) and adjoining countries. The DRC is
an important source of minerals that are essential for electronic
devices, such as smartphones and laptops. For over 15 years armed
groups in eastern DRC have preyed on the mining sector to finance their
operations with devastating impact, committing gross human rights
abuses in the process.
The Dodd-Frank directive aimed to establish transparency and
accountability in mineral supply chains to ensure that companies do not
source their minerals from the region, and thus fund the conflict. SEC
issued final rules on August 22, 2012. Companies were required to file
their first specialized disclosure report on May 31, 2014 (for the 2013
calendar year) and annually on May 31 every year thereafter.
Global Witness and Amnesty International recently published an
analysis of how well corporations are adhering to the disclosure
requirements based ion SEC filings The report's key findings indicated
that:
--79 of the 100 companies analyzed failed to meet the minimum
requirements of the U.S. conflict minerals law.
--Most companies in the sample are not doing enough to map out the
supply chain of the minerals they purchase. Only 16 percent go
beyond their direct suppliers to contact, or attempt to
contact, the smelters or refiners that process the minerals.
--More than half of companies sampled do not even report to senior
management when they identify a risk in their supply chain.
--The fact that one in five surveyed companies did comply with the
law's requirements dismantles the argument that implementation
is too difficult and too expensive for companies failing to
properly investigate their supply chains.
What efforts are currently underway or planned (and on what
timetable) by the SEC to address deficiencies in corporate compliance
with the required disclosures under Section 1502?
Answer. As you know, there is ongoing litigation regarding the
First Amendment implications of a portion of the disclosure required by
the rule. I am mindful that the Commission and registrants are awaiting
the court's final decision on the rulemaking, and registrants are
preparing their Form SD filings using the interim staff guidance issued
on April 29, 2014, subject to further action taken either by the
Commission or a court. Until the litigation is resolved, companies have
not been required to have an Independent Private Sector Audit of their
conflict mineral reports, which we expect to improve compliance.
Since the rule's adoption, the staff has issued interpretive
guidance in response to a number of questions and will continue to
consider the need to provide further interpretive guidance, as
appropriate. In addition, Commission staff selected a sample of
approximately 70 Forms SD filed in 2014 for calendar year 2013 to
assess compliance with the disclosure requirements established by the
form and the new rule. In that review, while registrants generally
appeared to be complying with the form and rule requirements, the staff
observed some items where it believed registrants could improve in
their subsequent filings. The staff conveyed its observations for
improvements at various conferences and speaking engagements.
______
Questions Submitted by Senator Jerry Moran
fiduciary duty
Question. Chair White, during your appearance before the
subcommittee, you indicated that the SEC has provided technical
assistance to the Department of Labor on their proposed rule to change
the definition of fiduciary investment advice under ERISA. You
indicated that the SEC's assistance primarily focused on your knowledge
of the broker dealer model and the way in which the definition of a
fiduciary duty could impact the availability of reasonably-priced
services to lower-income investors. Can you please elaborate on how
changes to the fiduciary duty could impact lower-income investors?
Answer. Commission staff has provided DOL staff with technical
assistance and expertise on our regulatory regime as DOL developed
their re-proposal. As part of these discussions, Commission staff
shared their experiences with how services are provided in this area of
the market and the potential economic and market impacts that policy
changes the DOL was considering could have on SEC registrants and
retail investors.
It is important to achieve the right balance in addressing these
issues, while making sure investors, particularly retail investors, are
appropriately protected and have access to the type of investment
advice and services they need and can afford. I believe that ongoing
analysis of potential impacts is required to achieve this balance and
to identify possible costs. The DOL has completed the first phase of
its comment process and will soon hold a public hearing in an effort to
fully understand the potential practical effects of any rulemaking.
nms plan construct
Question. Chair White, I am hearing concerns that the SEC has
frequently addressed critical market structure issues by delegating its
responsibility to regulate our markets to the exchanges, which, as you
know, are for-profit entities that have a fiduciary obligation to
maximize profitability. As both regulator and market participant, they
may often find themselves competing alongside those they regulate.
I understand that the exchanges have addressed market structure
initiatives under a conflicted governance structure that largely
excludes meaningful input from affected market participants such as the
broker-dealer community. The SEC has used this delegated authority,
otherwise known as an NMS Plan construct, in a number of key areas,
including the Consolidated Audit Trail and the Tick Size Pilot. In
addition, the operation of the public market data feeds, or SIPs, has
also been delegated to the SROs and their governance structure. I
understand that the SEC may in part be delegating these
responsibilities to protect their resources. It seems to me that this
provides all the more reason to improve the Operating Committee
structure, include additional market participants in the planning,
development, and operation of these NMS plans, and collectively benefit
from the most efficient and resilient regulatory regimes possible.
Kansas based BATS Exchange has suggested that the governance structure
be amended to include voting representation by the asset management and
broker-dealer communities.
With that background, do you agree that the current governance
structure appears incomplete and will you consider amending the
existing NMS Plans to improve their governance structure while
including the broker-dealer and asset-management industries in the
Operating Committees, as others have suggested? Do you have the
required legal authority to accomplish this reform with congressional
involvement or is a statutory modification necessary?
Answer. The SROs, which are subject to Commission oversight,
participate in joint NMS Plans in connection with the planning,
development, operation, and regulation of the national market system.
The governance of the NMS Plans occurs through their Operating
Committees, which are comprised of representatives of the member SROs.
The Commission has rulemaking authority under Section 11A of the
Securities Exchange Act of 1934 to facilitate the establishment of a
national market system for securities and has relied on that authority
to establish rules governing NMS Plans. In that regard, the Commission
in 2005 required certain NMS Plans to establish non-voting advisory
committees in an effort to improve NMS Plan transparency and broaden
participation in NMS Plan governance. Advisory committees have served a
useful role in the administration of NMS Plans. Members of an advisory
committee have the right to submit their views to the Operating
Committee on Plan matters, including any new or modified product, fee,
contract, or pilot program. Members also have the right to attend all
Operating Committee meetings and to receive any information distributed
to the Operating Committee relating to Plan matters, except when the
Operating Committee, by majority vote, decides to meet in executive
session after determining that an item of Plan business requires
confidential treatment.
When the SROs implement Commission initiatives, such as the
requirements for a Consolidated Audit Trail or the Tick Size Pilot,
they are done pursuant to SRO actions subject to Commission review and
approval. The implementation and operation of the initiatives
themselves is closely overseen by Commission staff.
As part of its undertaking to do a comprehensive review of equity
market structure, the Commission recently established the Equity Market
Structure Advisory Committee with the objective of providing the
Commission with a diversity of views on the structure and operations of
the equity markets. The role of SROs in today's markets covers a
variety of issues that both the staff and the committee will be
considering.
______
Question Submitted to Hon. Timothy G. Massad
Question Submitted by Senator Christopher A. Coons
Question. What is the state of international cooperation in
achieving the goals of the G20 commitments to reform global financial
markets? In particular, some have posited that where there are nuanced
differences in local regulatory implementation, there is a risk of
market fragmentation along regional borders. Do you agree with this
assessment? Why or why not?
Answer. Substantial progress has been made and a variety of efforts
are currently taking place. As Chairman, I have made several trips to
Europe and Asia and I meet frequently with my counterparts at foreign
regulatory agencies, as well as through formal and informal
international organizations, to further the work of harmonizing
derivatives regulations as much as possible. It is important to keep in
mind the scale of the challenge and the unique circumstances in which
the swaps market evolved. In all areas of financial regulation, there
are significant differences between the laws of different nations. What
is unusual about the derivatives market is that it grew to a global
scale without any meaningful regulation. Now, in seeking to regulate
it, there will inevitably be differences between national rules and
requirements. While the G-20 nations agreed to basic reform principles,
individual nations must adopt rules and requirements and these will
vary given each jurisdiction's own legal traditions, regulatory
philosophy, political process, and market concerns. The challenge is to
achieve as consistent a framework as possible while recognizing that
our responsibility as national regulators is first and foremost to
faithfully implement and enforce our own nation's laws.
In each of the four major areas of swaps regulation required under
Dodd-Frank--oversight of swap dealers, central clearing, trading of
swaps and reporting--the U.S. is leading the way both in terms of
implementing the legislative mandates (which reflect the G-20
commitments) as well as in the efforts to achieve international
coordination. Other nations are not as far along. That poses challenges
in achieving coordination.
Oversight of Swap Dealers.--Central to our harmonization efforts is
the Commission's substituted compliance program. Under this approach,
market participants may comply with foreign rules in lieu of compliance
with the Commission's rules where the foreign jurisdiction's
requirements and oversight are comparable and comprehensive compared to
corresponding requirements under the Commodity Exchange Act and
Commission regulations. To date, we have issued comparability
determinations with respect to the key swap dealer rules of six
jurisdictions--the European Union, Japan, Australia, Hong Kong,
Switzerland, and Canada. To our knowledge neither the European Union
nor any other jurisdiction has taken similar action. We will continue
to look at other jurisdictions' rules as those are finalized.
Another aspect of oversight of swap dealers on which we are making
good progress is with regard to proposed rules on margin for un-cleared
swaps. The Commission, together with the U.S. bank regulators, has
played an active role in encouraging international harmonization and
coordination of margin rules. The Commission's proposed margin rules
are consistent with the standards in the final international framework,
and we are in regular communication with regulators in the EU and Japan
as we and they finalize our respective rules.
Clearing.--Another important area that has been a high priority
under my tenure is central clearinghouse recognition and regulation. As
you may know, the Europeans have not yet recognized our central
clearinghouses as equivalent. We believe there is--and has been--ample
basis for them to do so. However, they have raised various issues,
which we continue to discuss, and I am hopeful that we can resolve this
issue soon.
We are also in dialog with European regulators to coordinate, where
possible, clearing mandates. Europe has not yet acted but we will seek
to work with them where possible. We have also helped to lead efforts
to implement international principles on regulation of clearinghouses,
known as the Principles for Financial Market Infrastructures. We
revised our regulations to be consistent with those principles. In
addition, we are currently co-chairing an international effort to
develop standards for stress testing of clearinghouses and for
clearinghouse recovery plans.
Trading.--In the area of trading, most jurisdictions, including the
European Union, have not implemented rules regarding mandatory trading
of OTC swaps. This makes it a challenge to harmonize. Nevertheless, we
are working with various jurisdictions to do all we can in this area.
For example, we have taken action to permit U.S. persons to trade
on foreign trading platforms even if those platforms do not register
with us, as exemplified by a recent no action letter we issued for an
Australian trading platform. See CFTC No-Action Letter 14-117, which
was superseded by No-Action Letter 15-29 on May 15, 2015.
Additionally, the CFTC has developed registration requirements and
procedures for Foreign Boards of Trade (FBOTs) that wish to provide
their members and other participants in the United States with direct
access, i.e., the ability to enter trades directly into the trade
matching system of the FBOT. The Commission has issued a series of no
action letters in this regard and has adopted formal registration rules
that can replace the process of issuing staff no-action letters. The
Commission currently has 22 applications for registration pending, 15
of which were permitted to engage in trading by direct access pursuant
to no-action relief and can continue to do so until the Commission
approves or disapproves their applications for registration.
Lastly, we have also taken steps to improve our swap trading
framework and we will continue to do so in response to feedback.
Reporting.--CFTC staff serves as the co-chair of the CPMI-IOSCO
Working Group for Harmonization of Key OTC Derivatives Data Elements,
along with a representative of the European Central Bank, facilitating
international swaps data harmonization.
The Financial Stability Board previously requested a feasibility
study to analyze the various options for global aggregation of over-
the-counter derivatives trade repository data. Based on the published
recommendations of the Aggregation Feasibility Study Group, CPMI and
IOSCO established this international working group to develop guidance
on the harmonization of key swap data elements reported to trade
repositories. These key swap data elements focus on the goal of
fostering global aggregation and include, but are not limited to, a
global Unique Transaction Identifier (UTI) and global Unique Product
Identifier (UPI).
In addition to this particular CPMI-IOSCO effort on swap data
harmonization, CFTC staff participate in several other working groups
that address reporting in cooperation with other domestic and
international regulators.
SUBCOMMITTEE RECESS
Senator Boozman. The subcommittee stands in recess until
Tuesday, May 12 at 10:30 a.m., when we will consider the fiscal
year 2016 budget request for the Federal Communications
Commission.
The subcommittee hearing is hereby adjourned.
[Whereupon, at 11:56 a.m., Tuesday, May 5, the subcommittee
was recessed, to reconvene at 10:30 a.m., Tuesday, May 12.]