CFTC Proposed Rule: Regulation Automated Trading (Regulation AT)
|Concept Release Date||Proposed Rule in Federal Register||Comment Deadline|
|September 9, 2013||December 17, 2015||March 16, 2016|
On November 24, 2015, the CFTC unanimously approved a set of proposed rules addressing the evolution of automated trading on U.S. designated contract markets (DCMs). The proposals, known collectively as "Regulation Automated Trading" or "Regulation AT," involve risk controls, transparency measures and other safeguards. The proposal was published in the Federal Register on December 17, 2015. A 90-day public comment period commenced on that date; the closing date for comments is March 16, 2016. Comments may be filed and read HERE.
To read the rule as submitted to the Federal Register, the fact sheet and Q&A documents from the commission, please see the Related Documents section below. To read the statements from the three sitting commissioners, click the links below:
- Statement of Commissioner J. Christopher Giancarlo
- Statement of Chairman Timothy Massad
- Statement of Commissioner Sharon Y. Bowen
After the May 6, 2010 "flash crash," the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues was formed in order to address market structure and regulatory issues that may contribute to volatility. On February 18, 2011, the committee issued its recommendations regarding a regulatory response to the flash crash. In response to the recommendations, the two regulators have finalized several rules:
- SEC Final Rule: Risk Management Controls for Brokers or Dealers with Market Access, November 2010;
- SEC Final Rule: Consolidated Audit Trail, August 2012;
- CFTC Final Rule: Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, April 2012; and
- CFTC Interpretive Guidance: Disruptive Trading Practices, May 2013.
- SEC Final Rule: Regulation Systems Compliance and Integrity, February 2015
In September 2013, the CFTC issued a concept release on risk controls and system safeguards for automated trading environments. The release offers a snapshot of the automated trading environment, and presents a system that would involve pre-trade risk controls, post trade reports and other measures, system safeguards related to the design, testing and supervision of automated trading systems (ATSs) and additional protections designed to promote safe and orderly markets.
The release requested responses from market participants and the general public on 124 questions related to system safety. The release entered the Federal Register on September 12, 2013. Comments may be viewed HERE.
Summary of the Proposed Rule
The rules cover anyone deemed an "AT Person" - essentially any futures commission merchant, floor broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor, or introducing broker that engages in “Algorithmic Trading” on a designated contract market, plus certain unregistered entities whose trading "can significantly impact Commission-regulated markets, who will now be required to register as floor traders.
The proposed rules would also require AT Persons to join a Registered Futures Association.
Algorithmic Trading Definition
The proposed rules define AT as trading in any commodity interest on or subject to the rules of a DCM, where:
- one or more computer algorithms or systems determines whether to initiate, modify, or cancel an order, or otherwise makes determinations with respect to an order, including but not limited to:
- the product to be traded;
- the venue where the order will be placed;
- the type of order to be placed;
- the timing of the order;
- whether to place the order;
- the sequencing of the order in relation to other orders;
- the price of the order; the quantity of the order;
- the partition of the order into smaller components for submission;
- the number of orders to be placed;
- or how to manage the order after submission AND
- such order, modification or order cancellation is electronically submitted for processing on or subject to the rules of a designated contract market; provided, however, that Algorithmic Trading does not include an order, modification, or order cancellation whose every parameter or attribute is manually entered into a front-end system by a natural person, with no further discretion by any computer system or algorithm, prior to its electronic submission for processing on or subject to the rules of a DCM.
Trading Firm Requirements:
- Risk controls - include pre-trade controls on maximum order message and execution frequency per unit time, order price and maximum order size parameters, as well as order cancellation systems
- Development, testing and monitoring - includes setting standards, separation of development and production areas, pre-release testing, maintaining a source code repository, and real-time monitoring
- Compliance reports - must be submitted annually to DCMs. Also AT Persons must keep books and records of AT procedures for inspection by DCMs.
Clearing FCM Requirements - regardless of whether customers have direct electronic access (DEA), defied as "an arrangement where a person electronically transmits an order to a DCM, without the order first being routed through a separate person who is a member of a derivatives clearing organization to which the DCM submits transactions for clearing"
- Risk controls - FCM must establish controls for non-DEA orders; with AT Persons, FCMs are allowed flexibility with the design and calibration of pre-trade controls
- Compliance reports - must be submitted to DCMs describing their program. The program for AT Persons is more stringent.
DCM Requirements - include pre-trade controls on maximum order message and execution frequency per unit time, order price and maximum order size parameters, as well as order cancellation systems
- Compliance reports - DCMs must periodically review the compliance reports, identify outliers and provide instructions for remediation
- Test environments - must be supplied by DCMs, and must include the ability to test compliance with risk controls and order cancellations
- DEA orders - must be established and FCMs must be required to use them
Self-trading, Trade matching and other disclosures
DCMs must establish self-trade prevention tools, and either apply such tools or provide them but require their use. “Self-trading” would be defined as the matching of orders for accounts with common beneficial ownership or under common control. DCMs may either determine which accounts will be prohibited from trading with each other, or require market participants to identify such accounts. As an exception, DCMs may allow matching of orders for accounts with common beneficial ownership when initiated by independent decision makers. DCMs would be required to publish quarterly statistics disclosing approved self-trading.
DCMs must also disclose a description of rules, specifications, or known attributes of the trade matching platform that materially affect the time, priority, price or quantity of execution of market participant orders; the ability to cancel or modify orders; and the transmission of market data and order or trade confirmations to market participants.
The proposed rules would require DCMs to provide certain disclosures regarding their market maker and trading incentive programs, and implement other controls. Such disclosures must be in the form of rule filings, and must include descriptions of eligibility criteria, payments or other benefits. Payments are prohibited where accounts have common ownership.
As the CFTC moves to create new rules for automated trading, the Futures Industry Association and its members have engaged in a dialog with the CFTC and developed its own guide, which it published in March. John Lothian News spoke with two of the key contributors to that report to talk about the guidelines and how new rules may ultimately affect market structure. VIEW THE REPORT
Related Documents: Fact Sheet, Q&A, Proposed Rule
- CFTC Unanimously Approves Proposed Rule on Automated Trading. CFTC. Retrieved on November 24, 2015.
- CFTC Publishes Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. CFTC. Retrieved on September 10, 2013.