In two speeches last week, Timothy Massad, Chairman of the Commodity Futures Trading Commission, said the agency is currently considering proposals to mandate various pre-trade risk controls for automated trading as well as requiring registration for proprietary trading firms that are not already registered with the Commission.
The speeches were delivered on October 21 before the Conference on the Evolving Structure of the US Treasury Market hosted by the New York Federal Reserve Bank and on October 22 before the Risk USA Conference in New York.
According to Mr. Massad, the proposals related to pre-trade risk controls would apply to firms engaged in automated trading whether the trading was “high or low-frequency.” The CFTC would not attempt to prescribe the parameters for risk controls but solely require utilization of certain types of measures that mostly will be “consistent with the best practices followed by many firms already,” noted Mr. Massad.
Among the types of pre-trade risk controls being considered by the Commission are message throttles and maximum order size limits, said Mr. Massad. He also indicated the Commission is considering requirements related to the “design, testing and supervision of automated trading systems” as well as measures to limit unintentional self-trading.
Mr. Massad did not provide an expected date for any proposed rules and, in fact, emphasized that “the Commission has not yet decided to issue any proposals.”
At the conference hosted by the NY Fed, Mary Jo White, Chair of the Securities and Exchange Commission, said that the SEC is likewise considering new proposals to (1) strengthen risk controls for firms using trading algorithms; (2) develop standards dealing with “the use of aggressive, destabilizing trading strategies by active proprietary traders in vulnerable market conditions;” (3) require registration for certain active proprietary trading firms that are not currently required to be SEC-registered; and (4) increase the operational transparency of non-exchange trading venues.
Mr. Massad, in his speech before Risk USA, also lamented regarding the failure of European regulators to date to recognize US clearinghouses as subject to equivalent regulation as European clearinghouses, and of banking regulators to permit banks to consider client collateral posted at clearinghouses in connection with their cleared derivatives as an offset against the banks’ exposure there for the purpose of calculating their so-called “supplemental leverage ratio.” Without an equivalency recognition, European banks will likely have to incur substantial extra capital charges to clear trades on US clearinghouses, while most banks will have to incur extra capital charges if offsets are not recognized for cleared positions.