US regulators seek huge budget increases to keep up with industry
It’s not just the banks that are struggling with the costs of regulation – so are the regulators. In the US. The Commodity Futures Trading Commission has requested a 52% budget hike to $315 million dollars – described by one of its own commissioners as “improbable and unsustainable”.
CFTC chairman Gary Gensler told a US House Committee last week that $73 million of the request was for outside IT services, while internal IT and staffing takes this to $94.8 million – almost a third of the budget.
Commissioner Scott O’Malia – who is also head of the CFTC’s Technoogy Advisory Committee – gave dissenting testimony and called for a five year technology investment plan. “I did not vote for the Commission’s 2014 budget request for two reasons. First, I believe the requested funding level of $315 million, an increase of 52.5% from current year funding, is both improbable and unsustainable,” said O’Malia. “Second, this budget fails to provide specifics and makes a broad, unsubstantiated appeal for more resources without the requisite demonstration of either mission priorities or essential deliverables. This shortcoming is especially glaring in the area of how regulatory objectives are met through the integrated use of staff and technology.”
O’Malia said that he recognised that there have been “stratospheric” increases in futures trading, but these are strongly tied to the prevalence of electronic trading and the of algorithmic and high-frequency trading protocols. “Execution in today’s market is done electronically. Therefore, if the Commission is going to keep pace with growth and technological innovation in these markets, it must make automated surveillance the foundation of its oversight and compliance programme,” he said.
This will involve harmonising the data that dealers are sending to swap data repositories “to provide regulators a view across repositories that facilitate data aggregation and oversight”.
He compared this to actions taken by the National Futures Association and the CME Group in response to financial scandals involving the misuse of customer funds. They implemented a customer segregation surveillance system to reconcile, on a daily basis, the balances claimed by the futures commission merchant and the custodian bank. FCMs and banks now “automatically push out daily balances that are reconciled by an independent third party, alerting the [NFA and CME] to the slightest deviations in the expected balances of both cash and securities”, said O’Malia.
“This technology solution was 100% paid for by the industry and developed without a federal rule. It highlights the great potential of technology to help us perform our oversight responsibilities in an efficient manner given our limited resources,” he said. “I believe the Commission has only scratched the surface of the technology applications we can develop and deploy.”
The CFTC is not the only US regulator to be looking for a huge boost. The 2014 budget request put out by President Obama includes a 27% hike for the Securities and Exchange Commission, taking its total to $1.674 billion.
The SEC says that the money is essential because its current level of resources is “not sufficient to keep pace with the growing size and complexity of the securities markets and of the agency’s broad responsibilities”.
It also says that it needs big money to keep up with the firms it is charged with monitoring: “A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends annually on all its operations. Similarly, SEC enforcement teams bring cases against firms that spend more on lawyers’ fees than the agency’s annual operating budget.”
