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NFA President outlines changing role of regulation in address to Bond Market Association

Citing the dramatic changes that are occurring throughout the financial services industry, NFA President Dan Roth stressed the need to redefine the role of regulation in a keynote address at the Bond Market Association's "New Domestic Landscape for Financial Futures" seminar on September 9 in New York.

"The landscape of the futures industry, for that matter for all of the financial services industry, continues to evolve at an accelerating rate," said Roth. "Given the recent scandals in the securities industry, particular attention is being given to the role of self-regulation."

In the futures industry, the Commodity Futures Trading Commission (CFTC) is conducting a thorough review of the current self-regulatory structure. The CFTC's inquiry will examine several important issues, notably how changes in the competitive environment of the futures industry are affecting potential conflicts of interest in the self-regulatory process.

Roth believes that the CFTC's review, as well as changes already being considered by NFA and the futures exchanges, will result in redefining the role of regulation.

"At NFA, we believe that regulation is a service that we provide to a very diverse customer base. Our customers include over 4,200 Member firms, the CFTC, the Congress and all of the members of the public who use the futures markets."

Although these customers have diverse interests, Roth asserted that they all look to NFA for the same thing. They want NFA to provide the best possible regulation to ensure the integrity of the markets, and they want NFA to provide its services as cost-effectively as possible.

Roth suggested that all regulators should periodically examine their operations to see if they are meeting their customers' needs. "SROs should ask themselves 'Are we providing the highest level of service we can and are we delivering our service at the best possible price'."

Roth acknowledged that there are many differing ideas on how to restructure self-regulation-some good, some bad. One bad idea would be to take the "self" out of self-regulation.

"If the goal is to provide regulation that is both effective and efficient, establishing a 'private regulator' is a bad idea. This private regulator would have the authority to tax futures industry participants without really being accountable to them. There's no need to strive for greater efficiency, to be smart in allocating resources, if the private regulator has basically unfettered ability to tax the industry it regulates."

Another bad idea would be to remove all SRO functions from the exchanges.

"Some have suggested that self-regulatory duties should be divorced from the operation of a marketplace. I'm not sure it's the right direction. The exchanges have a huge stake in maintaining their market's reputation and certain core regulatory functions, such as market surveillance, are core to their brand and their business model. Suggesting that exchanges should be completely out of the self-regulation business strikes me as going too far."

Although removing the "self" from self-regulation would not be productive, Roth did suggest greater public participation in all aspects of the SRO, including enforcement.

"SRO members have to be involved in the disciplinary process. They bring a depth of knowledge that members of the public just do not have. But no one constituency of the SRO should control the disciplinary process. SRO enforcement committees should be structured to ensure that public representatives have an equal voice with various membership categories so that neither the respondent's colleagues nor competitors control this critical regulatory function. I think it would bolster public confidence in the process."

Public confidence in the integrity of the marketplace is critical to its success, said Roth, and the recent (and ongoing) scandals in the securities industry have damaged that confidence.

"Given the need to shore up public confidence and the changes occurring in the markets, I think it is inevitable that the self-regulatory structure will change significantly in the next few years. From the regulatory side, it's all of our jobs to make sure those changes are positive, that self-regulation changes in ways that enhance performance, that provide the best possible service to all our customers at the best possible price."

The complete text of Mr. Roth's speech can be found in the News Center section of NFA's Web site (www.nfa.futures.org).

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