At a CFTC meeting last week, Chairman Tim Massad outlined the Commission’s fall priorities. Among them is a supplement to the proposed rule on automated trading, or Reg AT. Although the Chairman didn’t go into specifics about what might be included in this supplement, he did thank the industry for providing detailed feedback on the proposed rule.
This feedback from market participants was notable for the degree of consensus on the proposal, particularly on risk controls, cost-benefit analysis, and source code access.
Many commenters urged the Commission to apply risk controls broadly to all automated trading activity so the regulation could effectively address market risk. Five organizations, including FIA and FIA PTG, urged the Commission to separate the rulemaking into phases to allow for an exclusive, initial focus on risk controls. Eight organizations advocated for risk controls to be flexible, principles-based, and applied to all electronic trading activity. As we noted, pre-trade risk controls, “when implemented properly and appropriate to the nature of the activity, have been proven to be the most effective safeguard for the markets, and should be applied comprehensively to all electronic orders.”
Commenters also agreed that the costs of the proposed regulation were underestimated. As ICE explained, “the Proposal’s current cost and benefit considerations vastly underestimate the costs of complying with the many requirements of Regulation AT given the broad drafting.”
While FIA PTG didn’t comment specifically on the cost estimates in Reg AT, we noted a number of troublesome requirements that would create burdens and expenses for market participants that would be completely disproportionate to any potential benefits to market safety. For instance, the rule attempts to impose one-size-fits-all documentation, testing and monitoring obligations that would be costly and unworkable given the broad usage of automated trading technology today. The annual reporting requirement would require market participants to collect tens of thousands of duplicative records on risk parameter settings that would be out-of-date by the time the reports would even be submitted and reviewed. As we told the CFTC, “we fail to understand the potential value of this exercise in the oversight and safeguarding of our markets.”
The area of broadest industry consensus on the proposed rule centers on the CFTC’s proposed access to proprietary source code without a subpoena. Twenty-nine organizations, representing hundreds of thousands of market participants, as well as technology businesses in other sectors of the economy, opposed this unprecedented government overreach. As the Chamber of Commerce asked, “What happened to due process?”
FIA PTG signed on to a consensus letter that argued that the CFTC’s proposal would be of little use in protecting markets, while creating tremendous problems for market participants and business owners alike, including:
- Compromising established and expected due process rights
- Increasing the threat of “copycat” measures from other countries and contradicting established U.S. policy on intellectual property disclosure
- Heightening the possibility of cyberattacks against government-mandated data repositories
The message to the CFTC was loud and clear. Traders and banks, buy-side and sell-side, entrepreneurs and exchanges all agree: the source code provision must be eliminated from Reg AT before the rule becomes final.
We’re hopeful that the Commission takes notice of the consensus on risk controls, cost-benefit analysis, and source code access and that the forthcoming supplement to Reg AT addresses these concerns. We look forward to reviewing it and joining others in providing thoughtful commentary.