When President Barack Obama gave federal workers a 1 percent payraise at the start of the year, employees at the U.S. CommodityFutures Trading Commission (CFTC) assumed they'd get the boost.They didn't.

In a brief e-mail last week, the CFTC said the cost-of-livingincrease wouldn't kick in until August paychecks. While the agencyprovided no explanation, employees chalked it up to budget woesthat forced the derivatives regulator last week to quietly obtainan emergency infusion of funds just to keep its doors open,according to four people familiar with the situation.

The escalating budget crisis has spurred unrest within the700-person agency and hampered its work, the people said. More thana dozen senior employees, many complaining of low pay, have quitfor jobs on Wall Street or at law firms. Others at the CFTC'sWashington headquarters have discussed joining a labor union, saidthe people, who asked not to be identified because the frictionisn't public.

Once little-known, the CFTC gained new powers under the 2010Dodd-Frank Act to oversee swaps, the financial products that helpedfuel the 2008 credit crisis. Continued staff defections andplummeting morale will leave the agency, with a budget of roughly$200 million, outgunned as it polices the $693 trillion worth ofderivatives traded by firms like Goldman Sachs Group Inc. andJPMorgan Chase & Co, current and former regulators said.

“The agency is underfunded and needs significantly moreresources,” said Fred Hatfield, a former Democratic CFTCcommissioner who is now at Patomak Global Partners, a Washingtonfinancial services consulting firm.

CFTC spokesman Steven Adamske declined to comment.

Recently departed CFTC chief Gary Gensler spent his five-yeartenure battling Wall Street over the new swaps oversight enshrinedin Dodd-Frank. His expected replacement, Treasury Departmentofficial Timothy Massad, has yet to be confirmed by the Senate.

Gensler, who stepped down as chairman at the beginning of thisyear, struggled to convince lawmakers concerned about the federaldeficit or opposed to stiffer regulation that more money wasneeded. Unlike most of the other financial regulators, which arefunded with industry fees, the CFTC relies on Congress to provideits budget.

In an interview shortly before his exit, Gensler said the lackof money had crimped the agency's work and led CFTC enforcementlawyers to shelve cases.

“We don't have the staff to oversee the markets,” Gensler toldBloomberg TV on Dec. 30. “Do you want an underfunded regulatorwhere something inevitably might blow up?”

$100 Million Less

After automatic budget cuts kicked in last year, the agency wasleft with $195 million—more than $100 million less than the Obamaadministration requested.

Last week, in an unpublicized incident, cash was so short thatthe CFTC had to arrange a special deal for additional funds fromthe Treasury just to stay open, according to three of thepeople.

House and Senate lawmakers released a government-wide spendingplan this week that included a small CFTC budget boost to $215million. By contrast, the Securities and Exchange Commission (SEC),which has more than 4,000 employees, was given a $1.35 billionbudget.

The CFTC appropriation “won't cut it,” Commissioner BartChilton, a Democrat who has pressed for a higher budget, said in aninterview. “Our employees need more than a government ID and thebelief they are doing worthy work.”

Morale Low

The CFTC's budget pressures come as agency morale is already lowafter a three-year slog to complete more than 60 Dodd-Frankregulations. Gensler, an ex-Goldman Sachs partner, drove the CFTCstaff hard to get the bulk of the rules done before his exit.

According to one report, the agency's workers are the mostdisgruntled they've been since 2005. The Partnership for PublicService, an organization that compiles survey data from federalemployees, ranked the CFTC the sixth-worst place to work of 29small agencies. CFTC employees gave the agency low marks forwork-life balance, pay, training, and quality of leadership.

Some of that frustration was on display at a “town hall” meetingGensler held several months ago, according to two people whoattended. One senior lawyer grilled the chairman about why staffwere subject to a pay freeze, pointing out that other financialregulators, such as the SEC and the Federal Deposit InsuranceCorp., gave regular raises.

Under federal law the CFTC is part of a group of financialagencies allowed to pay more than the standard government scale toattract people with special skills. The CFTC is also required tohave “pay parity” with the other regulators.

CFTC workers at the meeting complained that the agency hadfallen behind its peers in both pay and benefits. One of the fewbenefits they received in recent years—reimbursement of about $400for health-related activities, like gym membership or yogaclasses—was canceled.

The complaints were confirmed by an internal agency memo issuedin March 2013 detailing the previous year's pay and benefits. TheCFTC's average salary of $143,659 was 7 percent less than the SECaverage of $154,295. The CFTC's benefits, as a percentage of theagency's payroll, also lagged behind all other financialregulators, the memo said.

Brain Drain

The CFTC's leadership, aware of the potential for employeeturmoil, commissioned an outside study in 2012 that warned of acoming “brain drain.”

The report, obtained through a public records request, concludedthat the CFTC's compensation was too low to attract the talentnecessary to implement Dodd-Frank. In interviews with theconsulting firms that conducted the study, senior officials saidthe CFTC promoted too many people from within who lacked experienceas executives and managers.

The report recommended the CFTC find ways to hire staff fromWall Street or Chicago derivatives firms in order to bridge gaps inthe agency's knowledge of the markets.

For the most part, movement has been in the opposite direction,as banks and law firms have poached senior staff members, offeringsalaries several times greater than what they earn at the CFTC.

Among more than a dozen departures in the last year were theagency's general counsel and two of his deputies; the head ofenforcement; the director of a division overseeing trading and dataplatforms; and a handful of lawyers advising agencycommissioners.

Union Talks

The union talks that started last year are still preliminary,the people said. Interest picked up after CFTC employees were toldin October that they would be required to take as many as 14 daysoff with no pay. One option would be for CFTC staff to join theNational Treasury Employees Union, which already represents workersat the SEC, the Office of the Comptroller of the Currency, and theFDIC.

One former regulator, Lynn Turner, said the situation at theCFTC reminds him of when he was chief accountant of the SEC in thelate 1990s. Republican lawmakers were “starving” the agency'sbudget, he said, spurring unhappy employees to unionize whileothers fled to the private sector.

“That led to an inability to enforce the laws,” said Turner.“And of course, that led us to the Enrons of the world, the largecorporate scandals” that began a few years later.

With derivatives at the center of the collapse of companies likeAmerican International Group Inc., Turner said Congress ignoresthat history at its own peril.

“It would only seem wise to come up with a couple hundredmillion more dollars to fund the CFTC rather than have to go fundanother multibillion dollar bailout of corporations like AIG,” hesaid. “How stupid can you be?”

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