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December 09, 2002

SPEECH OF DANIEL J. ROTH
SENIOR EXECUTIVE VICE PRESIDENT
NATIONAL FUTURES ASSOCIATION

REMARKS GIVEN AT THE
NFA-KOFEX MEMORANDUM OF UNDERSTANDING
SIGNING CEREMONY
KOREA, DECEMBER 9, 2002

I am very pleased to be here today to sign this Memorandum of Understanding between KOFEX and National Futures Association. I would like to thank Dr. Kang for the invitation to be here. More importantly, I would like to thank Dr. Kang and all of his staff for all of the hospitality they have shown me and other members of NFA's staff. Over the last several months, we have had extensive interactions with KOFEX-starting at the IOSCO meeting last May, meetings at KOFEX offices in August, several meetings in Chicago this fall and here again in Korea today. Through all of these meetings, we have been most impressed with KOFEX and its staff-their drive, ambition, their professionalism and their courtesy to us. Throughout this process we have been building a stronger and stronger relationship with KOFEX.

For those of you who may not be familiar with NFA, let me start with a brief introduction of my organization. I would then like to explain to you why the MOU we are signing today is so important to NFA.

NFA is the industry wide self-regulatory body for the U.S. futures industry. Unlike other self-regulatory organizations, NFA does not operate a market place. Our only function is regulation. NFA exists for the simple reason that our members recognize that sound regulation is good for business. All markets, wherever they are and whatever they trade, have one thing in common. Their success ultimately depends on liquidity and liquidity depends on public confidence. The users of the markets must know that they can depend on the integrity of the market place. They must know that they will be treated fairly and that financial obligations will be met. Our job is to ensure that integrity, to protect the industry's reputation and to instill that public confidence.

We have over 4,000 member firms. They include all of the different types of futures firms regulated under U.S. laws – U.S. futures exchanges, Futures Commission Merchants, Commodity Pool Operators and Commodity Trading Advisors and Introducing Brokers. In addition, we regulate over 50,000 individuals who work for our member firms. Basically, every firm or individual that deals with the public regarding futures is required to be a member of NFA.

Over the last twenty years, NFA has done its job by focusing on four different areas:

    Registration – The first step is protecting the public from unscrupulous individuals is to keep those individuals out of our industry. Every firm and every individual that wants to do futures business with the public is screened by NFA. If a person has had legal or regulatory problems in the past, we may not allow them to become part of our industry.

    Compliance – The next step is to adopt rules providing for fair treatment of customers and then monitoring our members to ensure that they comply with those rules. We have over 100 staff members in our compliance department who do just that. When a member violates a rule, we can take action to either fine the member or, for serious violations, bar them from the industry.

    Arbitration – Third, in any business there will at times be disputes with customers. Through our arbitration program, we provide customers with an informal, inexpensive and fast way to resolve any disputes that arise.

    Education – Finally, we protect the integrity of the market place by through two different types of education programs. We try to educate the public about the futures markets-their uses and their risks. We also educate our members so that they understand the rules and what is expected of them.

These have been our main areas of effort over the years and we have had a fair degree of success. Since NFA began operations, trading volume on U.S. exchanges has grown over 400%. During that same period of time, customer complaints have dropped dramatically-by over 75%. Customer losses due to brokerage house insolvencies have been virtually eliminated.

What NFA has done in the past, though, is not necessarily what we will do in the future. The futures industry has been changing rapidly and dramatically in recent years and NFA's role has changed with it. Electronic trading has grown more slowly in the U.S. than in other parts of the world, but its growth in the U.S. has still been substantial. Electronic trading has led to the creation of new exchanges and those exchanges have followed a new business model.

Like any exchange, these new markets have a legal obligation to police their markets. Even if they didn't, sound business practices would require them to do so, as I mentioned earlier. Rather than build their own self regulatory infrastructure from scratch, these markets have chosen to outsource their market surveillance function and other SRO responsibilities to NFA. For those markets it's our job to ensure that prices are not being manipulated, that the exchanges rules are being followed, that every customer order is filled fairly.

That's a new job for NFA and we knew that we did not have the expertise on our staff to do it so we went and hired that staff. Yvonne Downs had been with the Chicago Board of Trade for over twenty years and she headed their surveillance department. Yvonne joined our staff a little over two years ago. She looked at the surveillance software that was available on the market and decided none of it was as good as the system we could build for ourselves. It was difficult, it was time consuming and it was expensive, but based on our staff expertise and experience we were able to build a market surveillance system that is second to none and that has served us very well in our new endeavors.

We have a number of electronic exchanges as our clients and that number is growing all the time.

That gives you a brief idea of who NFA is and what we do. It also explains, I think, why our relationship with KOFEX is so important to NFA. Both KOFEX and NFA share the same job, at least in part. We are both responsible for ensuring the integrity of our markets. As the industry changes, the way we as regulators do our job also has to change. Twenty years ago, NFA recognized that to do our job we had to work well with other regulators in the U.S. We forged partnerships and working relationships with the CFTC, the SEC, the exchanges and with law enforcement agencies. We have shared information, we have worked on cases together to avoid duplication of effort, and we have learned from each other.

What was true twenty years ago is still true today. To do our job we have to work with and cooperate with and learn from other regulators. But in today's global market place, we cannot limit our cooperation to US regulators. It is critical to NFA to have strong working relationships with other leading regulators in the world. With its dramatic growth over the last several years, and its continued growth in the years ahead, KOFEX is a major player in the world's futures markets. The MOU we sign today provides for information sharing between NFA and KOFEX, mutual education programs and ongoing coordination. The MOU will allow each of us to do our jobs better by working closely with each other.

When regulators work closely together, when they coordinate their efforts, when the avoid imposing inconsistent requirements, we make the markets more efficient and we provide more protection for our customers. That's what regulation is supposed to do. That's how regulation adds value to the market place.

We are grateful to KOFEX for their cooperation in entering into this MOU. We are excited about the exchange's future, and we look forward to working with KOFEX in the years ahead so that each of us can be more effective regulators.

NFA is the premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the futures markets.
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