Goal Three Background and Context
In fostering open, competitive, and financially sound markets, the Commission’s priorities are to protect the markets from abusive trading practices, to avoid disruptions to the systems for trading, clearing, and settling contract obligations, and to protect the funds that customers entrust to FCMs. Clearing organizations and FCMs are the backbone of the exchange system⎯together, they work to protect against the financial difficulties of one trader becoming a systemic problem for other traders. Several aspects of the oversight framework help the Commission achieve this goal with respect to traders: 1) periodically reviewing and assessing exchanges’ compliance with statutory and regulatory requirements; 2) directly overseeing activity on exchanges to detect and prosecute abusive trading; 3) requiring that market participants post margin to secure their ability to fulfill obligations; 4) requiring participants on the losing side of trades to meet their obligations, in cash, through daily (sometimes intraday) margin calls; and 5) requiring FCMs to segregate customer funds from their own funds.
The Commission devotes substantial resources to meeting its oversight responsibility over futures industry SROs, including the NFA and DCOs, and to ensure their fulfillment of responsibilities for monitoring and ensuring the financial integrity of market intermediaries and the protection of customer funds. An important component of this effort is conducting risk-based reviews of SROs and DCOs to evaluate their compliance programs with respect to applicable provisions of the CEA and Commission regulations. In addition, financial and risk surveillance of market intermediaries is conducted by the Commission to monitor actual and potential implications of market events and conditions for the financial integrity of the clearing system and to follow up on indications of financial difficulty. The Commission also undertakes examinations of registrants, such as FCMs, to assess the adequacy of the SROs’ and DCOs’ compliance programs, to address compliance with specific Commission regulations, or on an as needed basis. The Commission will incorporate the supervision of swap dealers and major swaps participants into its regulatory programs.
With respect to intermediary oversight, the Commission can investigate and prosecute FCMs alleged to have violated minimum capital and other financial requirements, or to have committed supervisory or other compliance failures in connection with the handling of customer funds or transactions. Such enforcement cases may result in substantial remedial changes in the supervisory structures and systems of FCMs, and can influence the way particular firms conduct business. This is an important part of fulfilling the Commission’s responsibility for ensuring that sound practices are followed by FCMs, and to ensure that markets remain financially sound. The Commission also seeks to ensure market integrity by prosecuting a variety of trade practice violations. For example, the Commission brings enforcement actions alleging unlawful trade allocations, trading ahead of customer orders, misappropriating customer trades, and non-competitive trading. Similar authorities will apply swap dealers and major swap participants.
The financial crisis has led to heightened global concerns with regard to systemic risk, trading in the swaps markets, cross-border transactions and volatility and possible abusive practices in energy and agricultural commodity markets. There is general recognition that because markets are global as the result of electronic access, linkages, mergers, and cooperative business arrangements, an internationally harmonized approach is necessary to avoid regulatory gaps or arbitrage. This means that the Commission must continue to enhance its international coordination efforts with foreign market authorities in order to ensure that it can successfully supervise U.S. markets and protect U.S. customers. The Commission also is increasingly requested to provide technical assistance to developing markets, which helps foster global market integrity.