By Lene Powell, J.D.
As the CFTC mulls an upcoming proposal on automated trading, the agency is considering what controls are needed to safeguard against market disruptions rather than any change to the speed of trading itself, said CFTC Chairman Timothy Massad. The CFTC has seen problems from things like faulty algorithms, fat-finger errors, and algorithms that weren’t adequately tested. In a televised interview at a SIFMA event, Massad said the CFTC is considering a number of controls including maximum order limits, execution throttles, kill switches, and a requirement to test algorithms before unleashing them on the market.
“We’re not looking right now to change the speed with which our markets operate, but rather, to make sure there are sufficient controls to prevent disruptions,” said Massad.
Massad has previously said that any new rules would be principles-based and consistent with best practices already followed by many firms.
Clearing. Chairman Massad said that clearinghouse resiliency is a focus of the CFTC going forward because the health of clearinghouses is very important. Risk can build up in bilateral transactions, and clearinghouses reduce that risk by interposing someone in the middle. Using clearinghouses doesn’t eliminate risk, but it does allow regulators to monitor and mitigate it, said Massad.
Asked whether it’s good that some firms including Goldman Sachs and Credit Suisse are attempting to restart the single-name credit default swaps (CDS) market by moving these trades into a clearinghouse, Massad noted that single-name CDS are under the jurisdiction of the SEC, not the CFTC. However, he agreed that clearing of these types of standardized transactions is generally a good thing.