Release: 4890-04
For Release: February 6, 2004

CFTC PROGRESSES WITH STUDY OF SELF-REGULATION

Washington D.C. – The Commodity Futures Trading Commission announced progress in its review of the effectiveness of self-regulation in the futures industry. Prior to recent events that have drawn attention to self-regulation in other markets, Chairman James E. Newsome announced in May 2003 his intent to review the roles, responsibilities, and capabilities of self-regulatory organizations (SROs) to ensure that objectivity, confidentiality, and consistency continue to characterize a process whose effectiveness is critically important to market integrity.

Today, the Commission announced that several initiatives would be implemented prior to the completion of the Commission’s review. The first is to encourage every SRO to reexamine its policies and procedures, employee training efforts, and its day-to-day practices to confirm that there are adequate safeguards in place to prevent the inappropriate use of confidential information obtained by SROs during audits, investigations, or other self-regulatory activities. SROs are also encouraged to publicize these safeguards so that market participants continue to have full faith in the integrity of the self-regulatory process and participate enthusiastically in it, even as major changes in the futures markets create new competitive pressures.

There has traditionally been productive cooperation among SROs in the futures markets, including formal coordination of the SROs’ compliance examinations of futures commission merchants (FCMs). These exams cover not only financial integrity and financial reporting issues but also compliance by the FCMs in the areas of sales practices, recordkeeping, and anti-money laundering protections. CFTC Rule 1.52 expressly provides for such cooperation among SROs, recognizing that such a system of assigning each FCM to a designated SRO (DSRO) for exam purposes helps avoid redundant burdens on FCMs, makes more effective use of SRO resources, and fosters important information sharing across markets. That rule also expressly reserves for the Commission a role in approving and monitoring the system to ensure that it remains appropriate to the public interest and that it works to strengthen customer protections in the futures markets. Accordingly, the second initiative will be to begin a review by the CFTC of the DSRO system, including its cooperative agreements and programs.

With respect to its continuing study of futures self-regulation, the Commission confirmed that SRO governance issues are a key focus of the effort, noting both the strong national attention given to SRO governance issues and the fact that an SRO’s governing body can significantly influence key aspects of self-regulation. In this respect, the Commission notes that the focus of this year’s International Regulators Meeting to be held in Boca Raton, Florida on March 17 will be SRO governance from an international perspective. Separately, the Commission will solicit written comments on the topic of SRO governance from members of the public. The Commission will then decide what steps should be taken, if any, after a thorough review of all comments received.

Dr. Michael Gorham, Director of Market Oversight, and James�L.�Carley, Director of Clearing and Intermediary Oversight, are coordinating the ongoing review of self-regulation.

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