FIA responds to CFTC concept release on risk controls and system safeguards for automated trading environments

11 December 2013

The Futures Industry Association today submitted an extensive response to the Commodity Futures Trading Commission’s Concept Release on Risk Controls and System Safeguards for Automated Trading.

The response describes the many risk controls and system safeguards that are currently in use in the futures industry, and outlines several principles for the CFTC to consider as it examines ways to further strengthen those controls and safeguards. The response also contains detailed responses to specific questions posed by the CFTC in its concept release, and draws on the collective expertise of nearly 100 individuals from members of FIA and the FIA Principal Traders Group.

Walt Lukken, president and chief executive officer, FIA:

“FIA commends the CFTC’s decision to examine the risks of automated trading through this concept release. FIA has a long track record in identifying best practices for managing the risks of trading, and we appreciate the fact that the CFTC has relied on our work in this area in developing its policies towards automated trading. We hope that our response will provide policymakers with useful insights on the current state of the art in risk management, and we encourage the CFTC to adopt the approach that we recommend.”

To assist the CFTC in assessing the current use of various types of risk controls and system safeguards, FIA conducted two surveys: one asking about risk controls used by trading firm members of FIA PTG and the other asking about risk controls used by futures commission merchant members of FIA. The survey results show that best practice risk controls are widely used by member firms. All responding FIA PTG firms indicated that they used some form of pre-trade maximum order size screens, data reasonability checks, repeated automated execution throttles, and self-trading controls. In addition, all responding firms indicated they were either using, or considering using, some form of drop copy functionality as a risk control. The survey results also showed that all responding FCMs use the following controls either administered internally or at the exchange level: message and execution throttles; price collars; maximum order sizes; order, trade and position drop copy; and order cancellation capabilities. In addition, all responding FCMs use some form of a kill switch or other means to stop order submission when necessary.

The response urges the CFTC to consider the following principles:

  • The risks of automated trading are not limited to any one set of market participants, and risk controls and system safeguards should apply to all participants that use automated trading systems as well as technology providers.
  • All market participants have a responsibility to implement risk controls appropriate to their role in the life of an order, whether that role is initiating the trade, routing the trade, executing the trade or clearing the trade.
  • Risk control requirements should be principles-based so that they remain effective as markets, technology and trading strategies evolve.
  • Regulators should encourage industry efforts to protect markets through further innovation in risk controls and system safeguards.
  • In order to prevent market disruption due to a malfunctioning automated trading system, localized pre-trade risk controls—not credit-controls—should be used
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