Friday, November 14, 2014

SEC to Mull New Market Integrity Rules

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The SEC will decide next week if it is going to adopt new rules to better ensure the reliability of key market infrastructures. According to a Sunshine Act notice issued yesterday, the Commission will hold an open meeting on Wednesday, November 19, 2014 to mull adoption of Regulation Systems Compliance and Integrity (Regulation SCI).

Proposed Regulation SCI would replace the existing Automation Review Policy or ARP (developed in the late 1980s and early 1990s) and related Exchange Act rules for some alternative trading systems (ATSs) with an updated regime for monitoring SCI systems and reporting any problems.

This past June, SEC Chair Mary Jo White said Regulation SCI, which the staff was then finalizing, would play a key role in a larger effort to improve the structure of equity markets. “And last March, the Commission proposed Regulation SCI to put in place stricter requirements relating to the technology used by exchanges, large alternative trading systems, clearing agencies, and securities information processors -- the SIPs.”

Soon after Chair White's speech, Stephen Luparello, director of the SEC's Division of Trading and Markets, explained the goals of Regulation SCI in his testimony to the U.S. House of Representatives Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services.

“The proposed rule would require these entities to have in place policies and procedures reasonably designed to help ensure that their systems are robust, secure, and compliant; and require their key members to participate in business continuity and disaster recovery testing,” said Luparello.

In addition to written policies and procedures, the proposal would require periodic testing of systems in coordination with other SCI entities. SCI events and material systems changes would be reported on proposed Form SCI. Entities subject to the rules also would need to take corrective actions in response to identified problems.

SCI systems are those computer and other electronic systems operated by (or for) an SCI entity that directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance. SCI entities include several entities further defined in the proposal, including SCI self-regulatory organizations, SCI ATSs, plan processors, or exempt clearing agencies under the ARP. SCI events include systems disruptions, compliance issues, and intrusions.

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