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New electronic exchange calls on NFA to provide regulatory services
NFA took another step into the electronic trading arena when it recently signed an agreement with BrokerTec Futures Exchange, LLC ("BTEX"), to provide regulatory services on its behalf. The announcement on June 19, 2001, a day after BTEX was designated as a contract market by the Commodity Futures Trading Commission ("CFTC"), marks the third time NFA has made such an agreement with an electronic futures exchange.
"With the addition of BTEX," says Yvonne Downs, NFA's Senior Vice President of Compliance and head of the Trade Practice and Market Surveillance division, "NFA will now perform regulatory services for a financial instruments exchange, in addition to an agricultural exchange and a business-to-business exchange."
BTEX is an all-electronic interdealer-broker trading platform owned by 14 institutional shareholders. The consortium behind BTEX consists of some of the largest users of futures. The firms consist of: ABN Amro, Banco Santander, Barclays Capital, CS First Boston, Deutsche Bank Securities, Dresdner Bank, Goldman Sachs, Greenwich Capital Markets, J.P. Morgan Chase & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, and UBS Warburg. BTEX plans to begin futures trading in the third quarter of 2001. BTEX's initial futures products will include the 30-year bond and 10-, 5- and 2-year notes.
NFA will perform trade practice and market surveillance activities for BTEX, as well as other regulatory services including conducting background checks, investigating and litigating disciplinary matters, auditing and financial surveillance, and arbitration. "We gave them a menu approach; they could take any one of our services," says Downs. "For the most part BTEX took them all."
This is in addition to NFA's agreement last year with onExchange Board of Trade ("onExchange"), an online trading platform that will provide commodity derivative and product transaction capabilities for business-to-business exchanges. onExchange was granted designation from the CFTC as a contract market in January 2001.
NFA's initial foray into the trade practice and market surveillance arena occurred when NFA entered into an agreement in May 2000 with the Merchants' Exchange of Saint Louis, LLC ("Merchants' Exchange"), which trades deliverable Illinois Waterway and St. Louis Harbor barge freight futures contracts using its electronic trading system. Merchants' Exchange was granted designated contract market status from the CFTC in July 2000 and began trading on December 8, 2001.
Outsourcing regulatory functions is a prime example of how the face of regulation has changed dramatically in the last decade. Nowhere is this more evident than with the new electronic exchanges. The industry is finding that what was traditionally done in the past may not be the most efficient and cost-effective way to do things today.
"While older exchanges typically have their own internal departments to provide these functions, the recent trend has been for new exchanges to outsource these functions to external regulatory authorities," said Hank Mlynarski, President of BTEX and BrokerTec Clearing Company. "BTEX believes that NFA is the most skilled and respected independent body in the industry to perform these duties, and its selection confirms BTEX's desire to deliver the safest, soundest, most efficient and transparent futures exchange available today to market participants."
As far as the outsourcing of regulatory services goes, Downs says NFA has not stopped looking for new markets. "There has been a lot of interest in single stock futures, especially since the passage of the Commodity Futures Modernization Act of 2000, and we are also in discussions with non-regulated markets," says Downs. "But some of those markets are not yet ready to add futures to their portfolio of product offerings. What we ask ourselves, for those that may want to eventually get into futures is, can we help them out sooner? These market places have told us we can. Our help may not be quite as intense as we would do in a regulated market, but certainly it would ensure the integrity of these markets for customers."
"NFA is pleased that the initial responses to our service by the three exchanges have been very favorable, and we believe others will follow," Downs adds.