SRO APPROACH TO REGULATION

1. ACSDA International Seminar Johannesburg, South Africa November 19-2, 2003 SRO APPROACHTOREGULATION ROB BARROW FINANCIAL SERVICES BOARD

2. INTERNATIONAL DEBATE • PRINCIPLES – IOSCO • PRACTICAL APPLICATION IN SA

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. IOSCO PRINCIPLES • Principle No 7 • Conflict of Interest • The SRO should have procedures in place to address potential conflicts of interest

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. CONCLUSION • Disadvantages: • Danger that supervision/enforcement will not be adequate • Could restrict competition • Potential conflict of interest • May be more expensive