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Report Highlights Understaffed CFTC, Gaps in Contract Market Reviews

A new report highlights inadequate staffing at the CFTC and finds that its “rule enforcement reviews” of designated contract markets (DCMs), boards of trade or exchanges under the CFTC’s jurisdiction, are lacking in both scope and number. The reviews are meant to check whether the DCMs are in “ongoing compliance with core principles through the self-regulatory programs operated by the exchange in order to enforce its rules, prevent market manipulation and customer and market abuses, and ensure the recording and safe storage of trade information.”

The report, commissioned by the CFTC’s Office of the Inspector General, found that the CFTC’s Division of Market Oversight is only conducting reviews that cover 7 of 23 of the Commodity and Exchange Act’s core principles and that only 11 of 20 DCMs were reviewed between 2011 and 2014. Additionally, the report notes that the Division’s procedures related to following up on concerns and recommendations found in reviews need to be enhanced. According to the report, these issues are, at least in part, due to the lack of staff in the Division of Market Oversight. The lack of staff also contributed to the average review taking 20 months, exceeding the Division’s goal of one year.

The Division’s response calls the lack of staff a “chronic issue” and suggests that “the Division has made a strategic decision to structure its [review] program to focus on those core principles that it believes are likely to pose the most risk to the general public and areas that are the most fluid, e.g., the effectiveness of exchange trade practice and market surveillance programs, the adequacy of exchange investigations, and the sufficiency of exchange-imposed sanctions for violations of rules or law.” The Division also pointed to “extensive rulemaking and other responsibilities arising from implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act by requiring a significant portion of time from compliance attorneys who otherwise would have been leading [reviews].” The Division predicts that these rulemakings will continue into fiscal year 2016. The Division notes that its review workload is only likely to increase as twice as many entities will be subject to review when all swap execution facilities are permanently registered as required by Dodd-Frank.