Quick Glance at SROs in FEAS Region

Author Name: 
Alparslan Budak


What Does an SRO Look Like?

An average Self-Regulatory Organization (SRO) looks like a rather unusual animal with elephant’s feet, tiger’s body, giraffe’s neck and rooster’s head. Instead of trying to identify “an average” strange creature, we should, in fact, accept the fact that SROs are so diverse that some are as big as an elephant, while others are  as fierce as a tiger, or as farsighted as a giraffe and some even give wake-up calls like a rooster.

To begin with, exchanges, industry associations, central clearing and settlement institutions can all be SROs or can have some sort of a self-regulatory function. Obviously, the focus of these institutions would be different from one another. Second, the level of authority, the range of activities, financial and human resources of the SROs differ quite significantly. In other words, the concept of a “Self-Regulatory Organization” is too broad to address the entire range of activities properly. Therefore, we should create a distinction between Self-Regulatory Associations (SRA) and Self-Regulatory Exchanges (SRE).

This article will summarize the study which was conducted with the members of industry association for the Federation of Euro-Asian Stock Exchanges (FEAS)[1]. The aim of the study was to identify the common characteristics and discrepancies among the self-regulatory associations (SRAs) both within and outside the FEAS region.

Why Study SROs?

Self-regulation is an integral part of the regulatory structure of the securities markets in many countries. The market participants such as broker-dealers, listed firms, futures traders, and others are overseen or regulated, to some degree, by a variety of self-regulatory organizations. It is possible to improve the regulatory system’s efficiency by empowering self-regulatory organizations because of the advantages they offer. In a nutshell, SROs;

  • Observe ethical and business standards which go beyond government regulations.
  • Have expertise in market operations and practices.
  • Respond more quickly and with more flexibility to changing market conditions.
  • Build and maintain technological and regulatory infrastructure, funded by regulated persons, not taxpayers.
  • Are instrumental in improving the know-how of the public through investor education programs and/or training of market participants.

Previous Work

Due to the increasing importance and impact of the SROs, several international bodies conducted studies about their structure and functions.

In 2005, International Council of Securities Associations (ICSA)[2] designed a survey to analyze the self-regulatory organizations in different jurisdictions. The survey was done among ICSA members only and the results were compiled in 2006.

In 2007, Self-Regulatory Organizations Consultative Committee (SROCC) of the International Organization of Securities Commissions (IOSCO) developed a similar survey covering stock exchanges, professional associations, clearing, settlement and custody institutions to explore and define the variety of self-regulatory structures.

In 2007, CFA Institute published a report on self-regulation. In 2010, the World Bank published a comprehensive report on self-regulation in the capital markets and in 2011 the report was updated and revised[3]. These papers primarily examined organizations with the authority to regulate their members.


FEAS amended its Charter in 2009 and allowed the associations to become members. Shortly after four associations became affiliate members, the Dealers’ Associations Task Force (DATF) was established and the Association of Capital Market Intermediary Institutions of Turkey (TSPAKB) was elected as the DATF Leader. In December 2010, the DATF proposed and was mandated by the Executive Committee to conduct a survey on the structure of the FEAS-member associations.


The survey was based on the IOSCO’s previous study for reasons of consistency. It was sent to FEAS-member associations as well as other associations to provide a basis for comparability. Exchanges are not covered in the study and the results were compiled in April 2011.


In addition to all of the FEAS-member associations, 8 other associations who are not FEAS members also replied. We are thankful to these institutions for their valuable contribution.

FEAS Members

          Securities and Exchange Brokers Association of Iran

          Association of Certified Capital Market Professionals of Jordan

          Muscat Securities Market Brokers Association of Oman

          The Association of Capital Market Intermediary Institutions of Turkey

Non-FEAS Members

          Bulgarian Association of Licensed Investment Intermediaries

          Iraqi Association of Securities Dealers

          Brazilian Financial and Capital Markets Association

          Investment Industry Regulatory Organization of Canada

          Bundesverband der Wertpapierfirmen an den Deutschen Börsen e.V.

          Korea Financial Investment Association

          Swedish Securities Dealers Association

          Association of National Exchanges Members of India

SRO Models

The IOSCO SROCC study, conducted in 2007, defined four models for the SROs based on the scope of their authority. The fifth model below is added to this list by the FEAS DATF.

Model 1: Clear delegation from legislative/regulatory authorities granting the power to enact rules to a self-regulatory organization, with those rules becoming a part of the legal framework.

Model 2: The regulatory authority may approve rules enacted by professionals and may embed those rules in the legal framework.

Model 3: Rules enacted by professionals are not embedded in the legal framework but are considered as a relevant reference by legislative authorities or courts.

Model 4: Rules enacted by professionals are used as references by the industry on a voluntary or contractual basis.

Model 5: Organization has no self-regulatory authority; primary focus is on promoting the interests of members.

Although the FEAS DATF observed and attempted to apply these categories in its study the range of activities are so diversified that it is neither easy nor possible to fit an association into any one of these categories. In many cases, the surveyed SRAs are a combination of several of the above models.

Does Size Matter?

The size of an SRA is also an indicator of its activities and effectiveness. Among the respondents, the smallest association has 2 employees and an annual budget of US$ 42 thousand. On the other hand, the largest SRA employs 440 staff with an annual budget of US$ 72 million.

One overwhelming consistency on all SRAS is that all associations generate revenues from membership fees. Training programs are the second major source of revenue. The third largest revenue source is certification of market professionals.

None of the associations benefits from government grants or subsidies. This verifies that self-regulation is funded by regulated persons, not taxpayers. Eventually, the cost of self-regulation is most probably passed on to investors through intermediation costs. However, this could be seen as fair because in the end, the person benefiting from the financial system is also paying for the cost of his own protection. It is a kind of an insurance premium, implicitly paid by investors, for better functioning of the financial system. On the other hand, the costs of statutory regulators are borne by all taxpayers, regardless of their involvement in the financial system.

Who Do They Represent?

Out of 12 respondents, 11 have market intermediaries as members, whereas 1 association has only individual members. Among the 11, 3 of them also have individual members in addition to intermediaries. Another 3 have asset management companies as members.

In 5 jurisdictions, membership to the respondent (SRA) is compulsory for intermediaries. In another 4 jurisdictions, it is necessary to be a member of one of the SROs in the country, but it is up to them to decide among several different options, including the respondent (SRA).

Raison d’Etre

The respondent associations share a range of objectives, with almost all reporting that they have a mandate to promote their members’ interest. 9 of the 12 associations are also involved in improving business conduct, investor protection, market integrity and market efficiency.

Basis of Authority

In this part of the survey, the respondents were asked how they fit into the previously-mentioned SRO models. Out of 12 associations, 2 of them are so-called trade-associations, fitting into Model 5, with no self-regulatory authority and a focus on promoting the interests of members.

The remaining 10 SRAs made multiple selections. For example, all of the 10 SRAs issue recommendations, market practices, guidelines and industry standards that are voluntarily followed by industry participants (Model 4). In addition to these, 5 respondents’ rules are considered as a relevant legal reference to be used by the courts (Model 3). 6 associations enact rules, such as code of conduct, which are recognized in regulations or in the legal framework (Model 2) of the country. Finally, 5 associations’ authority is based on legislation or entrusted to them by the regulatory authorities of that market (Model 1).

Model 1 represents the strongest form of authority and it is obvious, based on the survey results, that there is much more room to further empower SRAs with proper regulatory authority, which will allow them to relieve some of the burden placed on the market authority.


There are three pillars of effective regulation; making of rules, supervising their implementation and enforcement in case of breach. In this section we tried to explore these activities because they are the backbone of an SRA. As mentioned before, the regulatory tools of SRAs span a wide range of possibilities from code of conduct to industry recommendations.

Out of 10 SRAs, 7 of them regulate members’ activities, while 6 of them also regulate members’ employees.

Perhaps an interesting outcome for exchanges is that 6 of the respondents have a say in market trading rules. Some of them are directly setting market trading rules, especially in the OTC market, while some of them have to be consulted before the organized market changes its own rules.


Generally, the organizations that are setting the rules also monitor compliance. However, although some associations do not have the authority to make rules, they are expected to supervise compliance with general regulations.

7 organizations supervise compliance of members’ activities, while 5 monitor members’ employees as well.


Generally organizations, which set rules and supervise compliance, also have the power to enforce them. However, some associations do not have the enforcement authority although they can regulate and supervise some activities of intermediaries or market professionals. Instead what they do is act as a watchdog and inform the market authority of any breach of the rules or conduct in their markets.

8 associations can exact fines based on the breach of compliance with standards, codes, guidance or conventions. 3 of these organizations have the authority to enforce market trading rules as well.

Other Activities

Associations also contribute to improve the know-how of the industry and the public.

9 of the 12 respondents organize training programs for market professionals. In some jurisdictions, these programs are mandatory. 8 associations also run investor education programs.

How Would You Like to Have Your SRO?

Self-regulation is a broad concept, covering regulatory, supervisory and enforcement functions of professional associations, exchanges and market infrastructure providers.

The range of activities and the scope of authority are also different among the SROs. Exchanges generally focus on market trading, market integrity and market efficiency rules. Associations, on the other hand, focus more on code of conduct, best practices and ethical rules for market participants.

Therefore, the concept of Self-Regulatory Organizations can be too broad to address all these range of activities properly. We recommend that further studies should be encouraged to distinguish between Self-Regulatory Associations (SRA) and Self-Regulatory Exchanges (SRE).

FEAS DATF survey excluded exchanges and focused on the activities of the SRAs only. With this study, we had the opportunity to compare the size and scope of the SRAs in the FEAS region with that of the SRAs in other jurisdictions.

The size, regulatory authority and scope of activities of SRAs vary considerably. Contrary to the structure of main regulators, there aren’t common models across jurisdictions. There are areas to empower SRAs and enhance the overall efficiency of the regulatory infrastructure. We hope that this study provides a base to discuss and improve the role of self-regulatory organizations.

[1] FEAS (www.feas.org) is an international body for exchanges, post trade institutions and dealer’s associations in South East Europe, Middle East and Asia. It aims to help create fair, efficient and transparent market environments among its members and their operating regions.

[2] ICSA (www.icsa.bz) is composed of trade associations and self-regulatory organizations that collectively represent and/or regulate the vast majority of the world’s financial services firms on both a national and international basis. ICSA aims (1) to encourage the sound growth of the international securities markets by promoting harmonization in the procedures and regulation of those markets and (2) to promote mutual understanding and the exchange of information among ICSA members.

[3] For a summary of the World Bank study, please see WFE Focus No: 218, April 2011, or visit http://www.world-exchanges.org/focus/2011-04/m-2-2.php


About Alparslan Budak


Assistant Secretary General

The Association of Capital Market Intermediary Institutions of Turkey

Mr. Budak graduated from the Bosphorus University in Istanbul with a BA degree in Business Administration in 1993. In 1995, he received his MSc degree in Money, Banking & Finance from the University of Birmingham in the UK.

Between 1993 and 2001, Mr. Budak held various positions at the Research, Asset Management, International Business Development and Corporate Finance departments at Demir Investment, a prominent investment bank in Turkey. During his term, he produced research reports on various topics and industries, managed equity mutual funds, established brokerage firms in Romania and Bulgaria and took part in several IPO and M&A projects.

He joined the Association in 2001 and is currently in charge of the Research & Statistics, International Relations, Public Relations and Information Technology departments.