CFTC Seeks Surveillance Funding

Terry Flanagan

The U.S. Commodity Futures Trading Commission is seeking $62.4 million for surveillance, an increase of $5.9 million and 42 full-time employees over fiscal-year 2015 enacted level. The CFTC 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, CFTC chairman Timothy Massad told the U.S. House Appropriations Committee on Feb. 10.

“The days when market surveillance could be conducted by observing traders in floor pits are long gone,” he said. “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 its 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 the E-mini S&P 500 contract, the most active equity index future. This does not include the approximately 7 million open swaps reported to SDRs.

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,” Massad said. “Each day in the Treasury futures market, for example, there can be millions of bids and offers.”

The $400 trillion 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.

In addition to market surveillance, the Commission must oversee the risk being taken on by individual clearing firms by continually monitoring their customer and house positions and margining practices. 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,” Massad said. “On site examinations are an important component of adequate surveillance, but they can only be conducted infrequently given the small size of our staff.”

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