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By E-Mail (DEAReport@iosco.org)
Mr. Greg Tanzer
C / Oquendo 12
Re: Public Comment on Policies on Direct Electronic Access
Dear Mr. Tanzer:
National Futures Association (NFA) appreciates the opportunity to comment on the IOSCO Technical Committee's Consultation Report on Policies on Direct Electronic Access. NFA is a registered futures association under the U.S. Commodity Exchange Act and an affiliate member of IOSCO. NFA is the industry-wide self-regulatory body for the U.S. futures industry and regulates the activities of approximately 4,000 member firms and over 50,000 registered account executives who work for those firms. Since NFA regulates intermediaries and not exchanges, our comments will be limited to what the Consultation Report refers to as "intermediated direct access."
NFA Members must already comply with the standards articulated in the Consultation Report. In 2002, NFA adopted an Interpretive Notice that addresses intermediaries' responsibilities for the two types of access that the Consultation Report refers to as "intermediated direct access."1 The Interpretive Notice sets out a general standard in each of three areas: 1) security, 2) capacity, and 3) credit and risk-management controls. Each general standard is then followed by more detailed guidance on how to comply with it.
The general standard for credit and risk-management controls states: "Members who accept orders must adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers." The Notice calls for Members to use pre-execution controls in most cases, although it does allow firms to use post-execution controls in lieu of pre-execution controls in some instances. The Member must, however, monitor the trading promptly post-execution.
Most importantly, NFA's Interpretive Notice requires Members to evaluate the customer's sophistication, credit-worthiness, objectives, and trading practices and strategies when deciding what levels to use when setting controls and whether to allow customers to use what the Consultation Report refers to as sponsored access. Although no intermediary can anticipate and prevent every financial risk resulting from direct access, any Member that does not take reasonable steps to avoid those risks violates NFA requirements.
The Consultation Report's possible principles for intermediaries are consistent with NFA's Interpretive Notice, and we support them. We make no comment on those principles that are directed to markets, as we defer to the expertise of those markets and the authorities that regulate them.
Two additional comments are in order. First, regulators MUST be able to determine who has placed a particular trade. This means an intermediary must be able to identify the trader and report that information to the appropriate market or regulator. While we do not encourage sub-delegation, at the very least the customer must be required to identify the sub-delegatee to the intermediary upon request, and both the customer and the sub-delegatee must be legally responsible for that individual's actions.
Second, while we agree in general with the first possible principle under D(2), we recognize that pre-execution controls should not be applied indiscriminately and, in rare instances, may actually be counterproductive. This could occur, for example, where a customer's transactions are part of a broader risk-management strategy. Therefore, we believe that the principle should be flexible enough to allow some exceptions. The intermediary should, however, be required to evaluate the customer's sophistication, credit-worthiness, objectives, and trading practices and strategies before deciding against pre-execution controls.
If you have any questions concerning this letter, please contact me at firstname.lastname@example.org.
Karen K. Wuertz
Senior Vice President,
Strategic Planning & Communications
1 Compliance Rule 2-9: Supervision of the Use of Automated Order-Routing Systems, NFA Manual paragraph 9046.