Monday, June 06, 2016

CFTC to accept additional comments after Regulation AT roundtable

By Lene Powell, J.D.

The CFTC will reopen the comment period for proposed Regulation Automated Trading (AT) for two weeks following a public roundtable on June 10. During the reopened comment period, comments will be accepted relating to the announced roundtable agenda and any topics that arise during the roundtable.

Automated trading proposal. In November 2015, the CFTC proposed a set of rules to require risk controls and other safeguards to enhance the U.S. regulatory regime for automated trading. Proposed Regulation AT would require certain market participants using algorithmic trading systems to register with the CFTC, implement risk controls, submit reports of their trades, and maintain books and records about their risk controls and trading procedures. The proposal would also require futures commission merchants (FCMs) and exchanges to implement risk controls, and would require exchanges to provide information concerning trade matching platforms and market maker and incentive programs. The initial comment period closed in March 2016.

Derivatives industry groups including the Futures Industry Association and the International Swaps and Derivatives Association have expressed concerns with many aspects of the proposal. The groups particularly oppose the registration provisions, as well as a measure that would require covered persons to maintain the source code for their algorithmic software in a repository and provide it to the CFTC upon request.

Some industry participants have suggested that bids should be required to be kept open for a certain period of time before cancellation, to prevent what some perceive as “fleeting liquidity” where bids may be pulled before execution. However, CFTC Chairman Timothy Massad has said the CFTC is not looking at a prescriptive requirement in this area.

Roundtable. The CFTC has scheduled a public roundtable for June 10 to discuss specific topics relating to the proposal. The agenda includes:
  • Potential amendments to the proposed definition of “Direct Electronic Access” (DEA), consistent with and in furtherance of Regulation AT’s proposed registration regime;
  • Potential quantitative measures to establish the population of “AT Persons” covered by the rules;
  • A potential alternative to Regulation AT’s requirements for AT Persons in proposed Regulations 1.80, 1.81, and 1.83(a), which could require FCMs to impose specific requirements on their customers and perform due diligence regarding customers’ compliance;
  • AT Persons’ compliance with Regulation AT’s proposed requirements for Algorithmic Trading and Algorithmic Trading Systems when using third-party algorithms or systems;
  • Source code access and retention.
Reopened comment period. The comment period will reopen on June 10 and will close on June 24. The additional comment period is intended for public comments solely on the specific items in the agenda for the staff roundtable and that arise during the roundtable.

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