Monday, October 24, 2016

Massad discusses possible adjustments to Regulation AT proposal

By John Filar Atwood

CFTC Chair Timothy Massad said that the forthcoming supplemental proposal on Regulation AT will be responsive to public feedback in some key areas. Among other things, the new proposal will provide for a two-tiered structure for risk controls, and will pertain to all electronic trading, not just algorithmic trading, he said.

In remarks at the Managed Funds Association Outlook 2016 conference, Massad said the Commission is pleased with the comments it has received on the Regulation AT proposal, which is designed to address the risk of disruption posed by automated trading. For example, the original proposal called for risk controls at three levels—the exchange, the futures commission merchant (FCM) and the trading firm—but commenters said this was too many.

Massad said that he supports commenters’ call for a two-tier structure, which would require risk controls at the exchange level, and either the trader or FCM level. A trading firm could have its own controls or opt in to the FCM controls, he added, but the Commission would not require both.

Registration requirement. The CFTC also received a number of comments that the registration requirement was too broad and burdensome, according to Massad. Some commenters suggested that the proposed requirement would cause thousands of firms to register, he noted, but that was not the Commission’s intention.

The CFTC received a recommendation that firms not be required to register at all, and that risk controls be the only requirement. Massad said that he is not persuaded by this argument, and pointed out that without a registration requirement, the Commission cannot make sure that some of the biggest traders are following the basic risk controls called for in the Regulation AT proposal. He supports retaining the registration requirement, but would agree to adding a volume-based quantitative test, so that the focus is on the most active firms.

On the issue of source code, Massad reiterated his support for a rule that respects the proprietary value and confidentiality of source code. However, the rule also must ensure that the Commission has access to source code when necessary, in his view.

Capital requirements. Massad also discussed the CFTC’s reproposal of capital requirements for swap dealers and major swap participants. He said that he will ask the Commission to consider a proposal that takes three approaches. For swap dealers that are affiliates of prudentially regulated firms, he believes there should be a method based on the one used by banking regulators. For swap dealers that are also broker-dealers, the approach would be based on the SEC’s net liquid assets approach, and for dealers engaged primarily in non-financial activities, the approach would be based on net worth.

FSOC project. Finally, Massad briefly touched on the asset management project of the Financial Stability Oversight Council (FSOC). He said that after the initial FSOC report on asset management products and activities, the CFTC’s focus in the short-term has been on examining the role of leverage by hedge funds.

A key concern, in his view, is how to define leverage and the metrics used to measure it. To analyze the implications of leverage, a variety of factors that affect risk must be considered such as product type and offsetting positions, and whether a transaction is cleared and margin is collected.

Massad emphasized that this effort should be data driven. He recommended that the data the CFTC holds for the futures markets, as well as the data now collected on the swaps markets, be used, particularly on the cleared swaps market. He believes examining existing data will enable regulators to understand where the data gaps are and to develop a more precise analytical approach.

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