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A nation which intends to have derivatives markets will normally require legislation which addresses several issues. The law should make it clear that derivatives which are in compliance with established regulations are legal instruments. This, in turn, requires legislation which gives a governmental agency the necessary regulatory powers. These include the power to establish regulations, the power to monitor compliance with regulations and the power to enforce regulations. The governmental agency's power over SROs should also be delineated in legislation.
In addition to giving the regulatory agency the power necessary to perform its duties as the derivatives industry is getting started, the authorizing legislation should give the agency the ability to adapt to a changing environment. As an industry grows, as technology changes, as customer needs change the appropriate type and scope of regulation is almost certain to change also. Thus, regulatory flexibility is critical to the long-run success of both regulation and the industry it regulates.
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