Financial industry warned on reform funding

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The financial industry will have to pay for the implementation of reforms through new fees if Congress fails to provide the funds, a leading regulator warned on Wednesday.

Bart Chilton, commissioner at the Commodity Futures Trading Commission, accused parts of the industry of adopting a deliberate strategy “to keep us from having the funding” to police derivatives markets – “starving us on the vine”.

He said he had concluded reluctantly that imposing a levy on users of swaps and futures might be the only way to pay for more staff and better technology at the CFTC, which has been given a raft of new responsibilities over derivatives regulation.

“I do think it’s a fairly draconian step,” Mr Chilton told the Financial Times.

But he said his agency had to move to “Defcon 1”, a reference to the US armed forces’ highest level of alert, in anticipation of being starved of funds by Congress.

The CFTC and Securities and Exchange Commission were promised big budget increases by Democrats to fulfil their new duties under the Dodd-Frank financial reforms.

However, the failure to agree a budget has frozen SEC funding at its 2010 level of $1bn. Officials and Democrats want a 12-18 per cent increase. The CFTC’s budget is $168m and it has requested $261m.

Scott Garrett, a Republican member of the House financial services and budget committees, this week all but ruled out the increase, saying it “would further the mindset that our nation’s problems can be solved with more spending, not more efficiency”.

In a speech due to be delivered today, Mr Chilton will say that if Congress stands in the way of more funds the CFTC should use existing authority to “impose [a] reasonable fee” and seek authority to charge supplementary fees.

“I do not like having to take this route,” he said.

“Traders and exchanges will not like it.

“If we don’t get funding from our traditional appropriations, however, we risk the kind of lax oversight that got us into such a fine economic mess starting just a few short years ago,” he added.

Already, regulators have suggested that they may have to outsource some of their monitoring and surveillance tasks to so-called self-regulatory organisations (SROs).

These organisations, such as the National Futures Association and Finra, are used by exchanges to track trading activity. The SROs are funded by charging market participants a fee.

Scott O’Malia, another CFTC commissioner, this week accused Gary Gensler, the agency’s chairman, of “playing a game of ‘chicken’ with Congress” over the budget for technology by directing funds to new staff instead of investment in software and hardware.

Separately, Robert Khuzami, head of enforcement at the SEC, told a California conference this week that the budget stalemate was “clearly impairing our efforts”.

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