Comment Letters

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November 13, 2008

Via E-Mail (

Mr. David Stawick
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581

Re: Joint Audit Committee, 73 Fed. Reg. 52832 (September 11, 2008)

Dear Mr. Stawick:

Self-regulation plays a crucial role in ensuring that futures commission merchants (FCMs) are financially solvent and conduct themselves equitably in their dealings with customers. When self-regulatory organizations (SROs) all attempt to audit dual members, however, the process becomes inefficient for both the FCMs and the SROs. The Joint Audit Agreement (Agreement) is designed to eliminate duplicate audits and make the process more efficient.

The original Agreement has been in effect since 1984, and NFA has been a party to the Agreement since it was adopted. In 2004, the Joint Audit Committee (JAC), which is responsible for implementing the Agreement, attempted to update the then two-decades old Agreement. Although NFA voted for most of the provisions, it objected to two: voting rights and the procedures for assigning an SRO to be an FCM's designated self-regulatory organization (DSRO).

As the Commission noted in its September 11, 2008 Federal Register release, JAC has made additional changes to the Agreement since 2004. Those changes do not eliminate the concerns that NFA raised in its June 16, 2004 comment letter, however. We refer you to that letter (which is attached) for our comments on the provisions relating to voting rights and DSRO assignments. We would also like to emphasize several points regarding voting rights.

Certain aspects of the voting rights section have changed since the 2004 version. One significant change eliminates the discrimination between parties who became signatories before 2000 and those who became signatories during or after 2000, which is a step in the right direction. Unfortunately, the most problematic part of this section remains unchanged-the 2008 version continues to disenfranchise both non-DSROs and those DSROs that subcontract their auditing activities to another entity. Under this provision, only three of the current Parties would have a vote: the Chicago Mercantile Exchange, the Kansas City Board of Trade, and NFA.

In practice, JAC functions primarily as a consultative committee. The existing agreement calls for the majority of JAC parties to elect officers but does not affirmatively require a vote on any other issues, such as audit steps. That will not change under the revised Agreement. Therefore, for the most part, voting rights are irrelevant.

Where they do become relevant, however, is for amendments to the Agreement. None of the three versions (1984, 2004, and 2008) provide for either the parties or the voting members to vote on amendments to the agreement. In practice, however, that is how the JAC adopts changes when the parties cannot reach a consensus, and we recognize that it is the only workable solution.

All three versions (1984, 2004, and 2008) say that the Agreement may not be modified except "in writing duly executed by each of the parties." On the surface, this language gives every party a veto, but as a practical matter it leaves dissenting parties with two options: go along or get out. Therefore, it remains crucial for each party to have a voice in any amendments, particularly where they may impose increased costs on the party.1

As an example, Paragraph 7 of the 2008 version of the agreement provides-as did the 2004 version-that "each of the parties will bear its own costs and expenses associated with its activities as DSRO."2 Under the proposed agreement, those parties with voting rights could presumably amend the agreement to change this provision and impose costs on parties without voting rights. While we are not suggesting this is likely to happen, it does illustrate the pitfalls in the proposed voting rights provisions.

Lastly, Paragraph 13 of the amended Agreement gives the voting members the right to vote on adding new parties. We believe it is important for all futures SROs with FCM members to participate in JAC. Therefore, we would prefer to delete this provision.

NFA recommends amending Paragraph 13 to read as follows:

    13. Amendments. This agreement may not be amended or modified except upon majority vote of all Parties (regardless of whether they are considered voting Parties for other purposes).

For the reasons stated in this letter and in our June 16, 2004 letter, NFA asks the Commission to consider the effect of the provisions on voting rights and DSRO assignments before determining whether the agreement meets the objectives described in Regulation 1.52(g) and is in the public interest. If you have any questions regarding the comments in either letter, please contact me (312-781-1413 or or Kathryn Camp (312-781-1393 or

Respectfully submitted,

Thomas W. Sexton
Senior Vice President and General Counsel


1 We note that the 2008 version provides that parties under common control have only one vote, and we support this change. It does not affect our argument, however. Parties under common control presumably speak with one voice, and they exercise that voice through their voting representative. A DSRO that contracts out its auditing responsibilities may have a conflicting view from its subcontractor, however, and denying it a vote can deny it a voice.

2 The 2008 version deletes a provision that would have allowed JAC (presumably through its voting parties) to approve extraordinary expenses and make non-voting parties share the cost. We support this change.

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