Molly Bayley became Executive Director of the Commodity Futures

Trading Commission in April 1984. Prior to joining the Commission staff, Mrs. Bayley was an employee of the National Association of Securities Dealers (NASD) for more than 13 years. From 1979 to 1984 she served as Vice President of NASDAQ Operations.

Mrs. Bayley was recently elected to the position of nominating director on the board of the Association of Junior Leagues, Inc. Mrs. Bayley served the Junior Leagues of Washington, D.C. as Vice President from 1981 to 1982 and as President from 1982 to 1983.

A native of Spokane, Washington, Mrs. Bayley received her B.A. from Wellesley (Mass.) College in 1967 and later engaged in graduate study at Springfield (Mass.) College in 1979. Mrs. Bayley currently lives in Washington, D.C.

G. HUNTINGTON BANISTER G. Huntington Banister was appointed Director, Operations and Budget Section, Commodity Futures Trading Commission, in November 1981. Prior to that time, he served for over two years as the Commission's budget and accounting officer.

Mr. Banister gained extensive financial management experience while serving almost seven years on active duty as a United States Army finance officer. He is a graduate of the Army's Command and General Staff College and the National De fense University's National Security Management Course. He is presently a colonel in the Army Reserves. His Federal civilian service began in 1972 as a budget analyst for the Interstate Commerce Commission. From 1976 to 1979, he was the budget officer of the Public Health Service's National Institute on Drug Abuse.

Mr. Banister received his Bachelor of Engineering Science degree from the Johns Hopkins University in 1962 and his MBA in finance from the American University in 1976.

He, his wife Linda, and their two daughters, Elizabeth and Caroline, reside in Springfield, Virginia.

Ms. PHILLIPS. Thank you very much, Mr. Chairman.

We are delighted to be here today. I do appreciate the opportunity to present the CFTC's fiscal year 1986 request. I have a long statement which I would appreciate being able to submit for the record, and I would just highlight portions of that statement at this time.

BUDGET REQUEST The fiscal year 1986 budget request for the Commission is $27.2 million. This is a reduction of $342,000 below the estimated FY 85 appropriation. The Commission's initial budget request which was sent to the Congress and to OMB was for $31.9 million. This would have allowed the Commission to cover its operating expenses, increases in those expenses and to add 51 staff members. Most of the increase requested was for enforcement and surveillance programs. OMB, however, reduced this request.

IMPACT OF THE REQUESTED FUNDING LEVEL In view of the growth in the regulated industry and the CFTC's increased responsibilities, the Commission appealed the OMB mark twice to remain at our current staffing level of 533 staff years. The appeals were denied. We anticipate that because of increased fixed operating costs, the $27.2 million level will require a reduction of the equivalent of 80 staff years from the current 533 staff year level. We will begin reviewing our operating costs carefully in the hope that we can save some of those staff years. However, because the 30 percent fixed operating expenses, it is difficult to find areas to cut other than personnel.

In addition, the Commission has begun to assess all program areas to ensure that resources are allocated to our highest priorities. The Commission will have to rely primarily on the states in the future to bring actions against persons not registered with the Commission. There may be some slowdowns in reparations, new contract designations, and rule reviews. Some projects may have to be deferred.

The Commission will not lift the moratoria that are currently in place on new leverage entrants, new leverage products or dealer options. The Commission will continue its commitment to industry self-regulation and look for additional responsibilities which can appropriately be shifted to self-regulation, to exchanges, and the NFA.

In conclusion, in this age of budget deficits, we are concerned about how we can function with less. The CFTC will do its best to carry out its responsibilities and to assure that our highest regulatory, enforcement and surveillance responsibilities are met.

I will be happy to answer any questions from members of the subcommittee.

Thank you very much.


You mentioned the action of the OMB. What request was made of the Office of Management and Budget for your agency, do you know?

Ms. PHILLIPS. We requested $31.9 million originally and the Office of Management and Budget reduced that to $27.2.

OPERATION OF THE CFTC Mr. WHITTEN. When was your agency separated from the Department of Agriculture and how was it done?

Ms. PHILLIPS. In 1974, it was done by an amendment to the Commodity Exchange Act.

Mr. WHITTEN. I have seen the many places where someone like the Office of Management and Budget has seen fit to limit the number of people while increasing the responsibilities.

The other thing I noticed here is that you have vacancies all over the lot in the Department of Agriculture. Everybody who has a responsibility seems to have moved someplace else. Of course, you are not in the Department of Agriculture. Most of the problems that I see today come because the Office of Management and Budget hasn't gone along with the Congress in providing adequate personnel to direct performance. They give them responsibilities, then they take away the personnel that would make it operate all right.

Tell us how you go about performing your functions? Everybody does not agree with me but it strikes me that it worked a whole lot better when you were part of the Department of Agriculture, where might describe to me where you may have improved and how the Commission operates.

Ms. PHILLIPS. Yes, sir, I will certainly try. Since the CFTC was separated from USDA and set up as an independent agency, there have been a number of contracts that have been approved. In fact, before CFTC was set up, there were a number of contracts that were not regulated, and, thus one of the purposes of the 1974 Act was to bring under one roof regulation of all futures contracts.

There were currencies, for example, traded in an unregulated fashion. There are a number of contracts now trading that really go far a field of USDA's endeavor, on agricultural contracts, and in fact, last year for the first time, over half of the contracts trading in this country were not agricultural contracts. So, I think that the scope of responsibility has changed somewhat.

I would say that in many ways we do perform in much the same fashion as the CEA did in terms of a spot check approach. By that, I mean, we do rely on self-regulation, and we are increasingly going in that direction. What we intend to do as soon as all of our programs are fully in place is to have the exchanges or NFA be on the front line. They are dealing with the users in the market on a day by day basis. We serve them in an oversight or in an auditing capacity, and overlook and audit via a sampling approach what it is they do.

Now, there are certain responsibilities that we cannot delegate to the self-regulatory organizations, such as enforcement. In that sense, I think we probably differ from the old CEA. I think our goal is to become a self-regulatory oversight agency in the fullest sense of that term.

HANDLING MARKET EMERGENCIES Mr. WHITTEN. I spoke to a group here sometime ago about starting the trading in futures which was somewhat different from the way it had been heretofore. I also read about where they have the money market on the exchanges, where you bet one way or the other on whether the value of money is going up or down.

What do you permit in your operations in a way of notice? I introduced a bill some weeks ago which passed the House 294 to 115, which called on the Farmers Home Administration to guarantee funds to make a crop this year while we argue about all the rest of it.

In connection with that, four or five times an embargo was placed on the export of American farm commodities, with disastrous results in many cases. I also point out many cases where the middleman had bought from the farmer and our government stopped him from exporting. The government paid the middleman, but the farmer who produced the crop wasn't paid anything.

What arrangements do you have for dealing with the markets to take care of unexpected actions by the Federal Government. After a man has bought a futures contract relying on the law of supply and demand under existing law, what do you do if suddenly the government comes out and says you can't export, which is bound to influence the price on the domestic market? Do you have any tracts that are out there, or does the man just have to take his losses because the State Department said we can't export it? Do you make allowances in adjusting outstanding contracts under those conditions?

Ms. PHILLIPS. We have very extensive emergency powers and -Mr. WHITTEN. You can't control the State Department?

Ms. PHILLIPS. No, sir, you are absolutely correct. We would work with USDA in trying to determine the extent of the embargo. If an embargo were going to be put into place—and it has happened one time since the CFTC has been in existence—the Commission could take emergency action and stop trading.

Mr. WHITTEN. You stopped the trading, but you can't go back and rearrange the contracts that were affected?

Ms. PHILLIPS. No, sir. If we declare an emergency action, we could at that time order liquidation only trading, or order that the contracts be traded out at a certain price. We have no prescribed course of action: you would have to look at each situation to determine the appropriate actions in view of whatever the situation happens to be.

Mr. WHITTEN. Well, since the farmer's debt has increased to $212 billion, you would have a ripe field in which to study, wouldn't you?

Ms. PHILLIPS. Yes, sir.

Mr. WHITTEN. Have you been requested to do such a study by the Department of Agriculture or anyone else?

Ms. PHILLIPS. No, sir.


Mr. WHITTEN. You have testified here as to the effect of reducing your funds. How will you go about enforcement? Tell me for the record. When we go to the floor we are going to need this information. What would you do under those conditions? How would you go about enforcement? If OMB cuts off your people, what is the effect?

Ms. PHILLIPS. Certainly, a reduction in enforcement personnel is going to have an effect; there is no doubt about that. I would say that we are relying increasingly on the exchanges as a first line of defense, and we are asking them to improve some of their reporting systems. For example, we have asked for improved reporting so that our investigations could be less resource intensive.

Mr. WHITTEN. Have I been right and am I right now in believing that the exchanges have an interest in maintaining their reputation?

Ms. PHILLIPS. Absolutely, yes, sir.

Mr. WHITTEN. If you spot check and find out that there are problems, do you have any trouble getting them to move in as soon as you show evidence? I am talking about general terms.

Ms. PHILLIPS. In general terms, we have, I think, good relationships with the exchanges, although I would say there is a healthy tension. Sometimes, we must prod them a little more than perhaps we would like, but that is our job. If they do not move appropriate

Mr. WHITTEN. I would like for you to take advantage of my request to put other things in the record showing how the Commission operates, and how it would be affected by the reduction. I am asking this so you will be able to testify what the addition of those people would mean in the performance of the Commission's obligation as you see it.

Ms. PHILLIPS. Yes, sir, I would be glad to do that. I appreciate the opportunity. [The information follows:

BUDGETARY IMPACT ON CFTC OPERATIONS The mission of the Commodity Futures Trading Commission is to regulate and and oversee the commodity futures industry in order to foster an openly competitive market environment that serves the economic functions of risk shifting and price discovery, and to protect the public and the markets from price manipulation and fraud. The Commission oversees twelve exchanges (application for thirteen exchanges pending) with a trading volume of over 150 million futures and options per year, about 71,000 registrants and offexchange trading in other instruments including leverage and dealer options.

In order to carry out these responsibilities, the Commission has three major operating divisions. The Division of Economic Analysis monitors the futures and options markets through daily surveillance in order to detect and prevent threats of price manipulation, reviews the terms and conditions of proposed and existing futures and options contracts to ensure that they minimize the potential for manipulation and that they serve a valid economic purpose, and conducts research to support enforcement and to advise the Commission on the economic impact of Commission policies. During FY 1985, the Division has 105 staff-years to perform its surveillance, analysis and research functions. In our initial budget request, we asked for two additional surveillance economists to maintain a ratio of five active futures and options contracts per surveillance economist and to perform special analyses of agricultural options. At the level in the President's budget, each economist will be responsible for surveillance of eight contracts, no special analyses will be performed and attention will be focused only on the most actively traded contracts.

The Commission also requested two additional market analysis staff to meet the statutory deadlines for reviewing the increasing number of designation applications and to allow us to review more existing contracts. Under the President's budget, market analysis will have difficulty in reviewing proposed contracts and rule changes within the statutory time frames and existing contracts will be reviewed only if significant problems occur. The decrease in the research staff will limit the evaluation of the options program and reduce support for enforcement cases. In total, the Division will be reduced by 16 staff-years to a level of 89 staff-years under the FY 1986 budget.

The Division of Trading and Markets proposes, implements and oversees enforcement of rules under the Commodity Exchange Act which protect customer funds, prevent trading abuses and assure the financial integrity of firms holding customer funds and monitors the compliance activities, such as market surveillance and sales practice activities, of exchanges and NFA. During FY 1985, the Division has 104 staff-years. Under our initial budget request, the Division would have increased by three staff-years. One staff-year would have been devoted to rule enforcement re views of exchange and NFA programs. It should be noted that, in their 1982 review of CFTC, GAO recommended that the number of rule enforcement reviews be increased, and the Commission has been trying to move in that direction. In addition, two additional staff-years would have been devoted to audits of commodity pools. Under the President's budget, the Division would be reduced by 16 staff-years to a level of 88 staff-years. At the reduced level, five staff-years will be eliminated from the rule enforcement review and contract market program which will strain the Commission's ability to review rule changes within statutory time frames and will reduce the number of rule enforcement reviews to five per year. In addition, nine staff-years will be eliminated from the audit programs which will place heavier responsibility on SRO's for audits with less CFTC oversight. Two staff-years will be eliminated from the registration program resulting in delays of registration particularly for floor brokers.

The Division of Enforcement investigates and prosecutes alleged violations of the

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