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


[Page 52832-52833]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]





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 [email protected] Reference should be

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

for comment at http://www.regulations.gov.

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, [email protected], 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 http://www.cftc.gov 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]


Last Updated: September 11, 2008