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  • FR Doc E8-21114[Federal Register: September 11, 2008 (Volume 73, Number 177)]


    [Page 52832-52833]

    From the Federal Register Online via GPO Access []





    Joint Audit Committee Operating Agreement

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Request for comment.


    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is publishing for public comment an agreement submitted by

    the Joint Audit Committee (``JAC'') for approval pursuant to Commission

    Regulation 1.52.\1\ The JAC is a voluntary, cooperative organization

    comprised of representatives of the financial surveillance staff of

    designated contract markets (``DCMs'') and the National Futures

    Association (``NFA'') and was formed for the purpose of coordinating

    the monitoring and examination of common futures commission merchant

    (``FCM'') members of such entities. The agreement governs the operation

    of the JAC and the manner by which the JAC will coordinate and

    cooperate in examining and monitoring FCMs for compliance with

    Commission and self-regulatory organization (``SRO'') minimum financial

    and related reporting requirements. The JAC is submitting the agreement

    to replace the current operating agreement, which has been in effect

    since 1984.


    \1\ Commission regulations may be found at 17 CFR Ch. 1 (2008).


    DATE: Comments must be received on or before October 14, 2008.

    ADDRESSES: Interested persons should submit their views and comments to

    David Stawick, Secretary, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In

    addition, comments may be sent by facsimile transmission to (202) 418-

    5521, or by electronic mail to Reference should be

    made to ``Joint Audit Committee''. This document also will be available

    for comment at

    FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and

    Chief Accountant, or Jennifer Bauer, Special Counsel, Division of

    Clearing and Intermediary Oversight, Commodity Futures Trading

    Commission,, Three Lafayette Centre, 1155 21st Street,

    NW., Washington, DC 20581. Telephone (202) 418-5472.


    The Commodity Exchange Act \2\ (``Act'') authorizes the Commission

    to adopt regulations imposing minimum financial and related reporting

    requirements upon FCMs. In this regard, Section 4f(b) of the Act

    authorizes the Commission to adopt regulations imposing minimum capital

    requirements upon FCMs. In addition, Section 4d of the Act requires

    FCMs to segregate from their own assets all money, securities, and

    property deposited by customers to margin, guarantee, or secure futures

    positions, and Section 4f(a)(1) of the Act authorizes the Commission to

    establish financial reporting requirements upon FCMs. Consistent with

    this authority, the Commission has adopted regulations addressing

    minimum financial and related reporting requirements for FCMs.\3\


    \2\ 7 U.S.C. 1 et seq.

    \3\ For example, see Commission Regulation 1.17 for the minimum

    financial requirements for FCMs and introducing brokers (``IBs'')

    adopted by the Commission, and Commission Regulations 1.10 and 1.12

    for monthly and annual financial reporting requirements and notice

    requirements, respectively.


    The Act further imposes obligations upon DCMs and NFA to monitor

    FCMs for compliance with the minimum financial and related reporting

    requirements. Specifically, DCM Core Principle 11 requires a board of

    trade to establish and to enforce rules addressing the financial

    integrity of FCMs.\4\ In addition, Section 17(p)(2) of the Act requires

    NFA to establish minimum capital, segregation, and other financial

    requirements for member FCMs and to implement a program to audit and to

    enforce compliance with such requirements. Minimum standards for an

    effective financial surveillance program are further set forth in

    interpretations issued by the Commission's Division of Trading and



    \4\ 7 U.S.C. 7(d)(11).

    \5\ See Division of Trading and Markets Financial and

    Segregation Interpretation No. 4-1--Advisory Interpretation for

    Self-Regulatory Organization Surveillance over Members' Compliance

    with Minimum Financial, Segregation, Reporting, and Related

    Recordkeeping Requirements, Comm. Fut. L. Rep. (CCH) ] 7114A (Jul.

    29, 1985); and Division of Trading and Markets Financial and

    Segregation Interpretation No. 4-2--Risk-Based Auditing, Com. Fut.

    L. Rep. (CCH) ] 7114E (August 20, 1999).


    In 1984, a number of futures exchanges (now, DCMs) and NFA

    (collectively referred to as SROs) entered into a Joint Audit Agreement

    (``1984 Agreement''). The 1984 Agreement generally provides that an FCM

    that is a member of more than one SRO would have a single designated

    SRO (``DSRO''). The DSRO is primarily responsible for conducting

    periodic financial examinations, the results of which are shared with

    the other SROs of which the FCM is a member. The DSRO process is

    intended to enhance the effectiveness and efficiency of the SROs'

    financial surveillance function by avoiding unnecessary duplicative

    financial examinations of FCMs that are members of more than one SRO.

    This regulatory approach was endorsed by the Commission when it adopted

    Regulation 1.52, which permits DSROs to enter into cooperative

    agreements sharing financial surveillance oversight responsibilities

    for FCMs that are members of more than one SRO, provided that the

    oversight agreement is approved by the Commission after public notice

    and comment.\6\


    \6\ Regulation 1.52(g) states:

    ``After appropriate notice and opportunity for comment, the

    Commission may, by written notice, approve such a plan, or any part

    of the plan, if it finds that the plan, or any part of it: (1) Is

    necessary or appropriate to serve the public interest; (2) Is for

    the protection and in the interest of customers; (3) Reduces

    multiple monitoring and auditing for compliance with the minimum

    financial rules of the [SROs] submitting the plan for any [FCM or IB

    that] is a member of more than one [SRO]; (4) Reduces multiple

    reporting of the financial information necessitated by such minimum

    financial and related reporting requirements by any [FCM or IB that]

    is a member of more than one [SRO]; (5) Fosters cooperation and

    coordination among the contract markets; and (6) Does not hinder the

    development of a registered futures association under [S]ection 17

    of the Act.''


    [[Page 52833]]

    In 2004, the SROs, through the JAC, submitted proposed amendments

    to the 1984 agreement to the Commission for approval. The Commission

    published the proposed amendments for public comment on April 12, 2004.

    The proposal, however, became linked to the Commission's study on the

    SRO process, which encompassed the topic of the general governance of

    SROs and the role of industry self-regulation.\7\ The Commission

    completed its SRO governance study in 2007 with the adoption of a

    regulation providing acceptable practices under core principles for the

    composition of boards of directors of SROs.\8\ However, the

    effectiveness of this regulation has been stayed,\9\ and no final

    action was taken by the Commission with respect to the amendments

    proposed in 2004. The 1984 Agreement has remained in effect, and the

    JAC has continued its role of enabling the cooperative examination of

    member firms in the intervening time period.


    \7\ One of the comments received with respect to the proposed

    amendments published in 2004 was from the Futures Industry

    Association (``FIA''), dated June 18, 2004, which stated that the

    FIA's comments may change based on the results of the Commission's

    SRO study and that any action taken with respect to the proposed

    amendments to the JAC agreement should be deferred until the

    completion of the SRO study.

    \8\ 72 FR 6936 (February 14, 2007).

    \9\ See 72 FR 65658 (November 23, 2007).


    The Commission has now received from the JAC a revised series of

    proposed amendments to the 1984 Agreement (``Proposed Agreement'') for

    which approval has been requested. In accordance with Regulation

    1.52(g), the Commission is publishing this notice to request public

    comment on the Proposed Agreement before taking action to approve or to

    deny approval of the Proposed Agreement.

    The Proposed Agreement includes provisions addressing JAC

    governance procedures and voting rights, membership criteria,

    information sharing arrangements, and DSRO designation criteria. The

    Proposed Agreement differs in several material respects from the

    revisions published for comment in 2004, and many comments received in

    2004 were related to provisions which are no longer applicable in the

    Proposed Agreement. In addition, in the intervening period of four

    years commenters may have changed their positions from those previously

    communicated. Therefore, the Commission will not consider the comments

    submitted in response to the 2004 request for comments in assessing

    whether the Proposed Agreement satisfies the requirements of Regulation

    1.52(g). Accordingly, any person wishing to comment on the Proposed

    Agreement should submit a comment letter.

    The Commission invites comment on the Proposed Agreement,

    particularly with respect to the ability of the DSRO system to continue

    to serve the public interest, reduce duplicative reporting and

    examination burdens on FCMs, strengthen customer protections, and

    foster cooperation and coordination among DCMs.

    The 1984 Agreement, Commission letter approving the 1984 Agreement,

    and the Proposed Agreement are available on the Commission's Web site

    at upon the issuance of this notice by the

    Commission. Copies of these documents also may be obtained from the

    Office of the Secretariat, Commodity Futures Trading Commission, 1155

    21st Street, NW., Washington, DC 20581.

    Issued in Washington, DC on September 8, 2008, by the


    David Stawick,

    Secretary of the Commission.

    [FR Doc. E8-21114 Filed 9-10-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: September 11, 2008