COMMODITY FUTURES TRADING COMMISSION AGENCY FINANCIAL REPORT Fiscal Year 2016 COMMODITY FUTURES TRADING COMMISSION Timothy G. Massad Chairman Anthony C. Thompson Executive Director Mary Jean Buhler Chief Financial Officer November 2016 ABOUT THIS REPORT ABOUT THE COVER This is our fifth Agency Financial Report on the Commission’s The cover is a photo mosaic that represents the work of accomplishments, audited financial statements, and Commission staff over the years ensuring market integrity operations management. and protecting market users in the commodity futures, options, and swaps markets. We welcome your views on all aspects of this report. Please send your feedback to [email protected]. You can view the FY 2016 Agency Financial Report website at http://www.cftc.gov/About/CFTCReports/index.htm . This report is in the public domain. Authorization to repro- duce it in whole or in part is granted. While permission to reprint this publication is not necessary, the citation should be: Commodity Futures Trading Commission, FY 2016 Agency Financial Report, Washington, D.C., 20581. All photographs in this document are proprietary and prior permission from the photographer is required for any use or reproduction of the photographs. COMMODITY FUTURES TRADING COMMISSION AGENCY FINANCIAL REPORT F ISCAL Y EAR 2 0 1 6 In the Tradition of Quality Reporting, the Commodity Futures Trading Commission Proudly Presents the FY 2016 Agency Financial Report FY 2016 AGENCY FINANCIAL REPORT TABLE OF CONTENTS A Message from the Chairman 1 FY 2016 Commissioners 4 How This Report is Organized 8 Glossary of Abbreviations and Acronyms 9 MANAGEMENT’S DISCUSSION AND ANALYSIS The Commission in Brief 12 Forward Looking – Future Business Trends and Events 26 Performance Highlights 34 Financial Highlights 48 Management Assurances 55 FINANCIAL SECTION A Message from the Chief Financial Officer 61 Principal Financial Statements 62 Notes to the Financial Statements 67 Required Supplementary Information (Unaudited) 85 Report of the Independent Auditors 88 OTHER INFORMATION Inspector General’s FY 2016 Assessment 96 Management’s Response to Inspector General’s Assessment 99 Summary of Audit and Management Assurances 103 Combined Schedule of Spending 104 Required Improper Payment Reporting 105 Freeze the Footprint 111 Civil Monetary Penalty Adjustment for Inflation 11 2 APPENDIX CFTC Customer Protection Fund 11 6 Suspect Fraud Or Manipulation? Call CFTC 120 CFTC Whistleblower Program 121 II COMMODITY FUTURES TRADING COMMISSION CFTC MISSION TO FOSTER OPEN, TRANSPARENT, COMPETITIVE, AND FINANCIALLY SOUND MARKETS TO AVOID SYSTEMIC RISK; AND TO PROTECT MARKET USERS AND THEIR FUNDS, CONSUMERS, AND THE PUBLIC FROM FRAUD, MANIPULATION, ABUSIVE PRACTICES RELATED TO DERIVATIVES AND OTHER PRODUCTS THAT ARE SUBJECT TO THE COMMODITY EXCHANGE ACT. A MESSAGE FROM THE CHAIRMAN am pleased to present the Fiscal Year (FY) 2016 Agency Financial Report for the U S Commodity Futures ITrading Commission (CFTC or Commission) The pages that follow will detail the agency’s performance, accomplishments, and audited financial statements for this period The CFTC oversees the U S derivatives markets, which include commodity futures, options, and swaps Although most Ameri- cans do not participate in these markets directly, their impact on our economy cannot be understated They shape the prices we pay for food, energy, and a host of other goods and services And these markets play a key role in the economic success of many farmers, ranchers, and commercial businesses in the United States, who rely on them for price discovery and to manage routine commercial risk Our mission is to ensure these markets function properly We focus on fostering transparent, open, competitive, and finan- cially sound markets We work to safeguard customer funds and to protect market participants from fraud, manipulation, and abusive practices We also seek to protect the public from the buildup of excessive risk, a buildup that contributed to making the 2008 financial crisis the worst since the Great Depression This year, the hardworking men and women of the CFTC continued making progress on behalf of the American people We have continued our work to improve the safety and sound- ness of our financial system following the devastation of the financial crisis But we’re not just looking back to the crises of the past; we are equally focused on looking ahead, to the new opportunities and challenges facing our markets COMMODITY FUTURES TRADING COMMISSION 1 FY 2016 AGENCY FINANCIAL REPORT even greater importance, due to the decision by the G20 leaders to require the clearing of over-the-counter (OTC) swaps As a result, we have increased our efforts to ensure clearinghouses are strong and resilient First, we reached a landmark accord that resolves our differences with European regulators regarding their recognition of clear- inghouses in the United States This agreement is an important step in achieving cross-border harmonization of derivatives rules, bringing the United States and European regimes closer together and reducing the risk of regulatory arbitrage And it will ensure that our global derivatives markets remain robust, while keeping our financial system as strong and resilient as possible We are also working on supervisory stress tests for the largest clearinghouses in our jurisdiction These tests assess the impact of stressful market scenarios across multiple clearinghouses and clearing members on the same date We are making sure Financial markets are constantly evolving Technological trans- our major clearinghouses have adequate recovery plans, and formations are shaping much of that evolution, as are other we are working with the Federal Deposit Insurance Corpora- forces We must make sure our regulatory framework is adapting tion (FDIC) on resolution planning Our work on these issues takes place internationally as well, and we are helping to lead For example, this year we adopted measures to address the important efforts among regulators from around the world on risks posed by cyber-attack and other technological failures clearinghouse resilience, recovery and resolution in our markets Cyber threats are probably the single greatest risk to financial stability today Our rules focus on making Over the last year, CFTC has also continued implementation of sure that the critical market infrastructure that we oversee— the Dodd-Frank Wall Street Reform and Consumer Protection the clearinghouses, exchanges, trading platforms and data Act of 2010 (Dodd-Frank Act), which directed us to bring trans- repositories—are adequately protecting themselves against the parency and oversight to the OTC swaps market Today, a new threat of cyber-attack framework for the regulation of the swaps market is in place Clearing is mandated for most interest rate and credit default We are also working to address the challenges posed by auto- swaps, and this year the Commission expanded that require- mated trading, which has become the dominant form of trading ment to interest rate swaps in several additional currencies in our markets Automation has led to significant increases in Registration and regulation of swap dealers is required Trading speed and complexity And while this technology has brought on regulated platforms is a reality—and the volume is growing benefits, there is also a greater likelihood of disruption and Data repositories are collecting and publically reporting swap other operational problems As a result, we have we issued a data, which gives us much more information regarding the proposal that seeks to minimize the risk of that disruption by marketplace And we are making sure that these requirements requiring adequate risk controls, testing and monitoring of focus on the areas of the greatest risk, and do not improperly algorithms, and other measures We hope to finalize this soon burden commercial end-users who rely on these markets as part of their business activity We have also put a strong focus on issues related to the regula- tion and resilience of clearinghouses Futures have been cleared To this end, we finalized strong, sensible rules setting margin in the United States since at least 1891, and clearinghouses requirements for uncleared swaps this past year This is one are one of the critical factors that propelled the growth of our of the most important reforms required by the Dodd-Frank markets Since the financial crisis, clearinghouses have taken on Act, because it is the first line of defense in the event of a 2 COMMODITY FUTURES TRADING COMMISSION FY 2016 AGENCY FIN ANCIAL REPORT default, and protects against the buildup of excessive risk to the Our progress is a credit to the CFTC’s hardworking and dedicated financial system We worked with regulators in Europe, Japan professional staff Their significant contributions this year are and other countries to harmonize the substance of the rules, so highlighted in the pages that follow that there is a strong global framework in place This, as well as the approach we adopted for cross-border transactions, helps While our achievements this year are significant, there is much protect against the possibility that risks created outside of our more to do The CFTC’s responsibilities were greatly expanded borders will flow back into the United States by the Dodd-Frank Act The swaps market we are now tasked with overseeing is vast, global, and dramatically larger than the The Commission has also worked to improve trading of swaps futures and options markets we also supervise