The Commodity Futures Trading Commission announced last week that staff will host a public roundtable to discuss five aspects of Regulation Automated Trading, initially proposed in November 2015.
The broad matters to be addressed are
- the definition of direct electronic access;
- market participants covered by Regulation AT;
- alternatives to the Commission’s proposed requirements to mandate pre-trade risk controls and system testing by all impacted registrants that engage in algorithmic trading;
- how impacted registrants might comply with Regulation AT’s requirements when using third-party software or systems; and
- source code retention and access.
The roundtable will be held on June 10, 2016, at the CFTC offices in Washington, DC beginning at 9 am.
In addition, the CFTC announced that, in conjunction with the roundtable, it would reopen the comment period for Regulation AT for items on its agenda, as well as items that may come up during the roundtable. The supplemental comment period will run from June 10 through June 24, 2016.
No panelists have yet been named by the CFTC. In connection with the session on how registrants might comply with certain of Regulation AT's requirements when using third-party software or systems, the CFTC suggested that staff would present possible alternatives.
(Click here for a comprehensive overview of Regulation AT in the article, “CFTC’s Proposed New Algorithmic Trading Rules Augur Potential Increased Obligations and Costs, and a New Registration Requirement” in the November 29, 2015 edition of Between Bridges. Click here for a summary of industry comments in the article, “Industry Comments to Regulation AT Argue CFTC Proposed Rules Too Prescriptive; Registration and Source Code Requirements Particularly Objectionable” in the March 20, 2016 edition of Bridging the Week.)
My View: It seems that CFTC staff has now completed its review of the over 50 comment letters the Commission received in response to Regulation AT from a broad spectrum of industry participants. Although no analysis was provided in conjunction with the release of the agenda for the June 10 roundtable, it appears that staff may be struggling with the Commission’s expectation that Regulation AT would likely impact only 420 registrants (including 100 new persons required to register as Floor Traders). However, it appears that Regulation AT could significantly impact a large percentage of all existing CFTC registrants (this universe constituted 3,953 persons as of April 30, 2016, including 2,557 commodity pool operators and commodity trading advisors), that employ smart order routing systems, let alone idea origination software.
To the extent a larger than expected number of registrants are within the scope of Regulation AT, staff appears to be considering how to reduce application of many of the requirements of the proposed rules for a good number of such persons – in particular the obligation to implement and utilize pre-trade risk controls and engage in system monitoring and testing. There appears to be thought that futures commission merchants could perform all risk control requirements for all or at least a substantial portion of all customer orders. There also appears to be thought that, to the extent that certain customers are still required to apply their own risk controls and engage in system testing, FCMs could “perform due diligence regarding such customers’ compliance” with applicable requirements.
Finally, there seems to be some desire to consider alternative ways to determine who must be registered as Floor Traders and, even possibly, who should be covered by Regulation AT at all. Although proposed Regulation AT suggests direct electronic access being the trigger for a non-registrant to be required to register as a Floor Trader, staff appears to considering whether a quantitative measure of some kind should provide the basis for triggering so-called “AT Person” status, including registration as a Floor Trader. This would be more consistent with the likely European outcome under the Markets in Financial Instruments Directive II scheduled to take effect in January 2018 for so-called “high frequency traders.”
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