SRO APPROACHTO

REGULATIONROB BARROW

FINANCIAL SERVICES BOARD

ACSDA International SeminarACSDA International SeminarJohannesburg, South Africa November 19-2, 2003Johannesburg, South Africa November 19-2, 2003

INTERNATIONAL DEBATE

PRINCIPLES – IOSCO

PRACTICAL APPLICATION IN SA

THE INTERNATIONAL DEBATE ON USE OF SRO’S

– USA - 24 bodies including 13 clearing agencies

– Canada - extensive use– Australia - yes, including clearing

houses– Hong Kong - yes– New Zealand - yes

Countries that do use SRO’s

THE INTERNATIONAL DEBATE ON USE OF SRO’S

– Germany – some limited use– Italy – not used at all– France - no

Countries that do not make use of SRO’s

THE INTERNATIONAL DEBATE ON USE OF SRO’S

– SRO’s merged into FSA– Limited SRO functions will continue in

LSE and other exchanges

United Kingdom

IOSCO PRINCIPLES

Principle No 6– The regulatory regime should make

appropriate use of self-regulatory organisations (SRO’s) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets

IOSCO PRINCIPLES Principle No 6

– The “appropriate use” of an SRO is related to:• The SRO’s capacity to carry out the

purposes of relevant governing laws, regulations and SRO rules, and to enforce compliance by its members and associated persons with those laws, regulations and rules as reflected in the SRO’s regulatory authorization requirements and oversight program

• The adequacy of the regulator’s oversight• The need for augmentation of regulatory

resources

IOSCO PRINCIPLES

Principle No 7– SRO’s should be subject to the

oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Has the capacity to carry out the purposes

of relevant governing laws, regulations and SRO rules, and to enforce compliance by its members and associated persons subject to those laws, regulations, and rules

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Treats all members of the SRO and

applicants for membership in a fair and consistent manner

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Develops rules that are designed to set

standards and behaviour for its members and to promote investor protection

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Submits to the regulator its rules for

review and/or approval, as the regulator deems appropriate, and ensures that the rules of the SRO are consistent with the public policy directives established by the regulator

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Cooperates with the regulator and other

SROs to investigate and enforce applicable laws and regulations

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Enforces its own rules and imposes

appropriate sanctions for non-compliance

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation, the

legislation or the regulator should require an SRO to demonstrate that it:• Assures a fair representation of members

in selection of its directors and administration of its affairs

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation,

the legislation or the regulator should require an SRO to demonstrate that it:• Avoids rules that may create anti-

competitive situations

IOSCO PRINCIPLES

Principle No 7 Authorisation– As a condition of authorisation,

the legislation or the regulator should require an SRO to demonstrate that it:• Avoids using the oversight role to

allow any market participant unfairly to gain advantage in the market

IOSCO PRINCIPLES

Principle No 7 Oversight– Oversight should be on-going to

ensure that:• An SRO meets the conditions of its

authorisation on an ongoing basis

IOSCO PRINCIPLES

Principle No 7 Oversight– Oversight should be on-going to

ensure that:• The government regulator retains

the authority to inquire into matters affecting investors or the market

IOSCO PRINCIPLES

Principle No 7 Oversight– Oversight should be on-going to

ensure that:• Where the powers of an SRO are

inadequate to investigate, or otherwise to address, alleged misconduct or where the SRO has a conflict of interest, the regulator conducts any necessary investigation rather than the SRO

IOSCO PRINCIPLES

Principle No 7 Oversight– Oversight should be on-going to

ensure that:• An SRO provides information to the

regulator that allows matters requiring regulatory intervention to be identified at an early stage

IOSCO PRINCIPLES

Principle No 7 Professional Standards– The SRO should adopt standards

of confidentiality for its staff and standards of procedural fairness applicable to its members comparable to those for the regulator

IOSCO PRINCIPLES

Principle No 7 Conflict of Interest– The SRO should have procedures

in place to address potential conflicts of interest

SOUTH AFRICAN SITUATION

South Africa does make extensive use of the SRO approach and is in full compliance with IOSCO Principles– Annual licencing– Approve rules and can impose a rule– Oversight through “Relationship

Manager” who attends all meetings

SOUTH AFRICAN SITUATION

South Africa does make extensive use of the SRO approach and is in full compliance with IOSCO Principles– SRO enforces its own rules and

impose appropriate sanctions for non- compliance. We assure that the rules of SRO’s do not unnecessarily restrict competition

SOUTH AFRICAN SITUATION

South Africa does make extensive use of the SRO approach and is in full compliance with IOSCO Principles– Fair representation of members on the

committee of the exchange– Equitable allocation of dues, fees and

charges among their members– Prevent fraudulent and manipulative

practices– Promote just and equitable principles of trade – Protect investors and the public interest

SOUTH AFRICAN SITUATION

South Africa does make extensive use of the SRO approach and is in full compliance with IOSCO Principles– Provide a process for disciplining their

members– Cannot impose any burden on competition– What constitutes improper conduct– Should make provision to share information

with foreign exchanges

SOUTH AFRICAN SITUATION

South Africa does make extensive use of the SRO approach and is in full compliance with IOSCO Principles– The Regulator may inspect the

activities of the exchange or its members or an officer or employee of a member

CONCLUSION Advantages:– More likely to attract technical

expertise– Makes management take more

responsibility– More resources likely to be allocated

to supervision– Likely to be able to react more quickly

CONCLUSION Disadvantages:

– Danger that supervision/enforcement will not be adequate

– Could restrict competition– Potential conflict of interest– May be more expensive