The U.S. Commodity Futures Trading Commission advanced a proposed rulemaking, "Electronic Trading Risk Principles," by a 4-1 vote on June 25. The proposal, which was based on extensive discussions with FIA members and other market participants, calls on exchanges to comply with three principles for protecting markets from disruptions and anomalies caused by electronic trading.
The Commission also voted 3-2 to formally withdraw a controversial 2015 proposed rule and supplemental proposal, known as Regulation Automated Trading (Reg AT). That rulemaking sought to achieve similar goals but took a more prescriptive approach.
Chairman Heath Tarbert noted the shift to electronic trading has improved the markets. "Spreads have narrowed, liquidity has improved, and transaction costs have dropped," said Tarbert, who also credited electronic trading with helping the futures markets remain open and function effectively during the COVID-19 crisis, and the ensuing record volatility.
Commissioner Brian Quintenz, an outspoken critic of Reg AT and its requirements for designated contract markets (DCMs) and trading firms, said it is "long overdue" for the CFTC to withdraw the proposal. "The market and public can finally consider as dead the prior Commission’s significant, and likely unconstitutional, overreach on accessing firms’ proprietary source code and protected intellectual property without a subpoena." Quintenz, who heads the agency's Technology advisory committee, said he favors a principles-based approach based on best practices developed by market participants. He highlighted the work of FIA in measuring the industry's "widespread adoption" of risk controls that "refine and improve" electronic trading systems.
Commissioner Rostin Behnam dissented to the withdrawal of Reg AT and to the issuance of the lectronic Trading Risk Principles proposal. "As I considered this proposal, I found myself questioning what the proposed Risk Principles do differently than the status quo," said Behnam. "The preamble seems to go to great lengths to make it clear that the Commission is not asking DCMs to do anything."
Commissioner Dawn Stump noted that the markets have become increasingly electronic and recognized that market infrastructure providers have already "implemented a host of measures pursuant to existing regulations" to account for this transition and the associated risk.
Commissioner Dan Berkovitz dissented in the vote to withdraw Reg AT, noting that “withdrawal reflects a belief that there is nothing of value in Reg AT. That is simply not true.” Berkovitz supported advancing the Electronic Trading Risk Principles for public comment, but cautioned that that its principles-based approach to electronic trading and exchange risk controls is too high level and needs more specificity. "Although it leaves important issues unaddressed, the Proposed Rule recognizes the need to update the Commission’s regulations to keep pace with the speed, interconnection, and automation of modern markets,” he said.
FIA has engaged with futures exchanges, market participants and international regulators for over a decade on the development of best practices to mitigate the risks of electronic trading. Commission staff presenting the new Electronic Trading Risk Principles proposal specifically referenced an October 2019 FIA presentation to the CFTC Technology Advisory Committee on best practices for managing risks associated with automated trading systems. Commission staff noted that FIA has conducted numerous surveys which found a substantial increase in the implementation of market controls since 2010.
The Electronic Trading Risk Principles proposal contains the following three principles:
The first risk principle requires each DCM to adopt rules governing participants subject to its jurisdiction to prevent, detect, and mitigate market disruptions or systemic anomalies associated with electronic trading.
The second risk principle requires DCMs to implement adequate risk controls designed to reduce potential threat of market disruptions and system anomalies associated with electronic trading.
The third risk principle requires DCMs to notify CFTC staff in the event of a market disruption. This risk principle supplements existing regulations governing DCMs.
Comments for this proposed rule must be received withing 30 days of publication in the Federal Register.
In addition to advancing the Electronic Trading Risk Principles, the Commission advanced four additional items.
Post-Trade Name Give-Up on Swap Execution Facilities
The Commission voted 5-0 to finalize a proposal to amend Part 37 of CFTC’s regulations to prohibit "post-trade name give-up" practices for swaps that are anonymously executed on a swap execution facility (SEF) and are intended to be cleared. The proposed rule would also require SEFs to establish and enforce rules that prohibit any person from effectuating such a disclosure. For swaps subject to trade execution requirements, compliance must begin by Nov. 1. For other swaps, compliance must begin by July 5, 2021.
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Phase VI Compliance Date Extension)
The Commission advanced a proposal by a 5-0 vote to push the Phase VI compliance date for initial margin requirements for uncleared swaps beyond the current September 2021 deadline. The new proposed deadline is Sept. 1, 2022. This extension is in line with action taken by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.
Exemption from the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures (Inter-Affiliate Exemption 50.52)
The Commission finalized a proposal by a 5-0 vote to reinstate the expired alternative compliance frameworks for the inter-affiliate swaps clearing exemption, with minor revisions to reflect the current variation margining practices of affiliated counterparties electing the exemption. The rulemaking codified existing relief provided by Division of Clearing and Risk (DCR) staff no-action letters, and made alternative compliance frameworks permanently available to affiliated entities.
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Volcker Rule)
During the meeting, the CFTC announced a final rule to modify regulations implementing the Volcker rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds – known as "covered funds." The final rule was not discussed at the meeting; instead the CFTC Commissioners voted 3-2 to approve the rule via a separate "seriatim" process. The rule will be effective on Oct. 1, and was passed in concert with related efforts at other federal regulatory agencies including the SEC, FDIC, OCC and Federal Reserve.
Statements and additional documents
- Official CFTC summary of the meeting and rulemakings
- Statement of Chairman Heath P. Tarbert in Support of the Proposed Rule on Electronic Trading Risk Principles
- Statement of Support by Commissioner Brian Quintenz Regarding Proposed Rule on Electronic Trading Risk Principles
- Dissenting Statement of Commissioner Rostin Behnam Regarding Electronic Trading Risk Principles
- Statement of Commissioner Dan M. Berkovitz on Proposed Rules for Electronic Trading Risk Principles and Withdrawal of Regulation AT
- Joint Statement of Chairman Heath P. Tarbert, Commissioner Rostin Behnam, and Commissioner Dan M. Berkovitz in Support of Final Rule Restricting Post-Trade Name Give-Up
- Supporting Statement of Commissioner Brian Quintenz Regarding the Prohibition of Post-Trade Name Give-Up on Swap Execution Facilities
- Statement of Chairman Heath P. Tarbert in Support of Final Rule on Alternative Compliance for the Inter-Affiliate Swap Clearing Exemption
- Statement of Support by Commissioner Brian Quintenz Regarding the Exemption from the Swap Clearing Requirement for Certain Affiliated Entities
- Concurring Statement of Commissioner Rostin Behnam Regarding Exemption from the Swap Clearing Requirement for Certain Affiliated Entities—Alternative Compliance Frameworks for Anti-Evasionary Measures
- Statement of Commissioner Dan M. Berkovitz on Final Rule to Make Permanent Certain Anti-Evasion Measures for Inter-Affiliate Swaps
- Statement of Commissioner Rostin Behnam Regarding Notice of Proposed Rulemaking on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
- Statement of Chairman Heath P. Tarbert in Support of the Final Rule to Revise the Volcker Rule
- Dissenting Statement of Commissioner Rostin Behnam Regarding Revisions to the Volcker Rule
- Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Volcker Covered Funds Final Rule
- View an archived webcast of the meeting