Comment Letters

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June 2, 2006

Via E-Mail (

Ms. Tillie Rijk
IOSCO General Secretariat
Oquendo 12
28006 Madrid

Re: Comment on Consultation Report on Regulatory Issues Arising from Exchange Evolution

Dear Ms. Rijk:

National Futures Association ("NFA") appreciates the opportunity to comment on the IOSCO Consultation Report entitled "Regulatory Issues Arising from Exchange Evolution." NFA is a registered futures association under the Commodity Exchange Act and a self-regulatory organization for the United States futures industry, subject to oversight and review by the Commodity Futures Trading Commission ("CFTC"). Since NFA does not operate a market, and is a not-for-profit organization, it does not face many of the issues confronting exchange-SROs. As a result, a number of the issues raised in the Consultation Report do not apply to NFA. We will limit our comments in this letter to those issues that directly affect NFA.

NFA has always been a strong supporter of self-regulation and we believe it is the best model for regulation in the futures industry. The present system of self-regulation in the U.S. futures industry, with a number of SROs under direct CFTC oversight, has proven effective as evidenced by the explosive growth in the market in a relatively scandal-free environment. Self-regulation has also allowed the CFTC to focus its resources on areas that self-regulation can't reach, such as enforcement actions against unregistered firms and individuals. NFA believes that self-regulation, subject to appropriate government oversight, achieves a number of important goals, including maximizing regulatory effectiveness, minimizing regulatory burdens and saving taxpayers' money.

An inevitable result of self-regulation - and its biggest criticism - is the inherent tension between the regulatory interests of the self-regulatory organization ("SRO") and the business interests of the SRO. This tension may increase when the SRO operates a market or has other economic interests that are separate from its regulatory interests. These conflicts of interest must be managed if the SRO is to provide effective regulation while treating both market participants and members fairly.

Governance Arrangements

The most important guiding principle for board composition is that the board should be diverse so that no one constituency of the SRO, including the public, can dominate board actions. An SRO's board should represent the interests of all the SRO's constituents, including members of the SRO and the public. Any conflicts of interest that arise from having SRO members on the board should be managed by ensuring that there are appropriate checks and balances in board composition, not by eliminating the market expertise offered by members.

SRO members are an important component on any SRO's board. The knowledge and experience that these individuals bring to the board is critical. There are often several ways to address a regulatory issue, and SRO members are usually the best qualified to determine which method will address the issue most efficiently - providing the necessary protection to customers and other members while minimizing the burdens on regulated individuals and entities.

SRO members should also have a voice in how they are regulated. Not only are SRO members knowledgeable, they also have a real interest in ensuring that the self-regulatory process works and that the public has confidence in the integrity of the markets and the system. Their knowledge, combined with their interest in a successful self-regulatory process, help to ensure that the process is both fair and effective.

It is also important to remember that in many instances, the members of an SRO can be subdivided into different categories based on the nature of their business. Each category should be represented on the board because they represent different interests and may approach issues with a different perspective. NFA's Board provides one model for this type of structure. Our Board is comprised of representatives from contract markets, futures commission merchants, introducing brokers, commodity pool operators, commodity trading advisors and the public.

NFA strongly believes that an SRO's board should include non-member directors. Participation by public directors ensures representation for the retail public and other end users who must have confidence in the way the market operates. NFA's Board has always had public representatives, and their participation is an important protection for those market participants. Again, however, the board should be structured to ensure that they do not dominate the actions of the board.

While we believe that all SROs should have public directors, one size does not fit all, and who qualifies should depend on the particular SRO. Strong government oversight, however, must be present to ensure that an SRO's public representatives are appropriately diverse and adequately represent the interests of non-members.

NFA's public directors have included bankers, academics, former Congressmen, and end-users, among others. We believe that there should be diversity within the public representative category, but we do not believe that the category should be limited to individuals without any industry connections. Many of our public representatives have been individuals with industry experience or affiliations, such as end-users and a former CFTC chairperson. NFA has found that public representatives with industry experience have brought unique perspectives to the board and have made many positive contributions to NFA's success.

Regulatory Structure

As with board composition, statutory regulators should not mandate a particular regulatory structure. Instead, they should use their oversight role to monitor each SRO's ability to manage conflicts between the SRO's regulatory and business functions and between its interests and those of its members, and require the SRO to take corrective action when necessary.


The SRO process must be transparent to ensure that participants have confidence in the markets. NFA has always strived to make all material information readily available to both our Members and the public. NFA's Manual and website include the names and affiliations of all members of our Board of Directors, all its standing committees, and NFA's disciplinary committees. Significant actions taken by the Board - including committee appointments and mid-term Board replacements - are reported in the membership newsletter after each Board meeting, and the newsletter is posted on the website where it is accessible to the public. Rule submissions are also posted on NFA's website, as well as the entire Rulebook. Information on NFA disciplinary proceedings is also readily available to Members and the public.

In closing, NFA supports the five broad recommendations outlined in the report and firmly believes that any governance principles IOSCO adopts should be broad enough to cover all SROs - including NFA - and flexible enough to accommodate differing SRO models (e.g., exchange or non-exchange, demutualized or for-profit).

NFA appreciates the opportunity to comment on these important issues. If you have any questions or would like additional information, please contact me at 312-781-1335 or by e-mail at


Karen K. Wuertz
Senior Vice President, Planning and Development

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