As the Commodity Futures Trading Commission (CFTC) met last Thursday to consider proposals to implement the Dodd-Frank Wall Street Reform Act, commissioners expressed alarm that the deep budget cuts passed by the House for fiscal year 2011 will not only threaten the agency’s ability to meet its new mandate under Dodd-Frank to regulate the derivatives market but also its traditional duties — overseeing the futures market.

“The CFTC is under serious strain in its current funding level. We lack the staff and technological resources to implement Dodd-Frank and continue to fulfill our pre-Dodd-Frank duties under the Commodity Exchange Act” to regulate the energy, agriculture and metals futures markets, said Commissioner Michael Dunn. “Without additional funding the strain will only become worse in July when much of Dodd-Frank goes into effect.”

Dodd-Frank, which was signed by President Obama last July, requires the CFTC to assume the responsibility of regulating the swaps market in addition to overseeing the futures market. The swaps markets, which has been estimated at about $300 trillion in the United States, is about nine times larger than the futures market, Dunn said.

“All of these things [proposed reforms] that we’ve been doing…will mean nothing; they’ll mean squat; they’ll be diddly…if we don’t get the resources to do the job,” Commissioner Bart Chilton said.

“We’re going from roughly $5 trillion in annualized [futures] exchange trading to…hundreds of trillions in oversight. To think that we can do that without another cent is crazy…We will be [particularly] vulnerable in the regulated futures market to fraud, abuse and manipulation if we don’t receive at least the current funding. If we get cut, we are going to be in a world of hurt,” he said.

A budget resolution passed by the House on Feb. 19 would slash the initial annualized budget of $168 million for the CFTC in the current fiscal year to about $112 million. As a result, the agency would be forced to cut its current staff of 680 to fewer than 440, which would make it difficult for it to enforce the reforms in the Dodd-Frank bill, CFTC Chairman Gary Gensler told Congress recently (see NGI, Feb. 21).

“Even at the administration’s requested funding level [$168 million] and with increased assistance from SROs [self regulatory organizations, exchanges], this [regulation of both swaps and futures markets] would be a Herculean task,” Dunn said.

“There would essentially be no cop on the beat and no one to ensure that our industry, which was largely untarnished by the financial meltdown, would not be blamed if another meltdown occurs.”

The House continuing resolution (CR) would shave a total of $61 billion from the budget to fund the federal government through Sept. 30. The Senate is taking up its own measure, and it’s unclear whether Congress can resolve its budget disagreement before the current CR expires on Friday (March 4). House Republicans have threatened to shut down the federal government if their measure is not enacted into law.

The House budget resolution also would cut the Environmental Protection Agency’s budget for the current year by about one-third, tying the agency’s hands to regulate greenhouse gas emissions, The Hill reported. Interior also would have a slimmer budget for the remainder of the year, while spending for the Low Income Home Energy Assistance Program would be pared by $390 million.

The House rejected by 174-251 a Democratic amendment to the CR that sought to close a loophole that has allowed some oil and gas producers to avoid paying royalties on deepwater production in the Gulf of Mexico (GOM).

Due to an omission on Interior’s part to include price thresholds in contracts that were signed in 1998-1999, producers holding those leases have been able to produce in the deepwater GOM without paying royalties — regardless of the price of oil or gas (see NGI, Sept. 18, 2006). The Government Accountability Office has estimated that the federal government has lost billions of dollars in royalties as a result. Congress and the federal government so far have been unsuccessful in their repeated efforts to get producers to pay the back royalties.

“These hugely profitable companies are tapping oil and gas resources that belong to the American people, selling it back to us and then reaping a massive profit,” said Rep. Maurice Hinchey (D-NY), one of the sponsors of the amendment. “But the real kicker is that these oil companies are not paying one red cent to the public for the oil and gas they have extracted from publicly owned resources. They get it for free — and we pick up the $53 billion tab.”

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