Algorithmic Descriptions Regulation

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Dodd-Frank Timeline, Feasibility Study on the Adoption of Standardized Computer-readable Algorithmic Descriptions
Proposal Date Comment Deadline Study Issued
December 9, 2010 December 31, 2010 April 7 2011

On April 7, 2011, the CFTC and the SEC released a joint study on algorithmic derivatives descriptions. After conducting its analysis, which included meetings with industry leaders, regulators, and academics, as well as comments submitted by the public, the staff offered conclusions. The study found that current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to use both for the calculation of net exposures and to serve as part or all of a binding legal contract.

Also, before mandating the use of standardized descriptions for all derivatives, the following are needed: a universal entity identifier and product or instrument identifiers; a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically; and a uniform way to represent financial terms not covered by existing definitions.<ref>Study: Algorithmic Trading. CFTC. Retrieved on March 22, 2011.</ref>

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To assist in the rulemaking process, the commission created a new subcommittee: the Subcommittee on Data Standardization, which will report to the CFTC’s Technology Advisory Committee. The subcommittee held its first public meeting on August 5, 2011.<ref>Meeting of the Technology Advisory Subcommittee on Data Standardization. CFTC. Retrieved on August 15, 2011.</ref>


The Dodd-Frank Act mandates that the CFTC and the SEC conduct a study on the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives. These algorithmic descriptions would be designed to:

  • facilitate computerized analysis of individual derivative contracts;
  • calculate net exposures to complex derivatives; and
  • consider the extent to which the algorithmic description, together with standardized and extensible legal definitions, may serve as the binding legal definition of derivative contracts.

Request for Public Submissions[edit]

In advance of the feasibility study on the adoption of algorithmic standards, the CFTC and SEC issued a request for public comments on the issue. The request for comments, which appeared in the Federal Register on December 9, 2010, consisted of 41 questions covering several topics, including:

  • Calculation of "net exposures to complex derivatives" and other computerized analysis;
  • Current practices concerning standardized computer descriptions of derivatives;
  • Current use of standardized computer readable descriptions for messaging of derivatives transactions;
  • The need for standardized computer descriptions of derivatives; and
  • Implementation considerations.

Several financial entities and industry groups, including Goldman Sachs, International Swaps and Derivatives Association, and the Managed Funds Association, submitted comment letters.

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The entire proposal, as it appeared in the Federal Register, can be found below.



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