The Commodity Futures Trading Commission received 18 formal comment letters in response to its re-opening of the comment period for Regulation Automated Trading following a staff roundtable on June 10. Although there were no uniform topics addressed by all commentators, some themes were addressed similarly by multiple commentators particularly around risk controls, third-party provided software and systems, and source code.
In one comment letter submitted jointly by the Futures Industry Association, the Managed Futures Association, the International Swaps and Derivatives Association and the Asset Management Group of the Securities Industry and Financial Markets Association, the industry organizations urged the CFTC to separate and prioritize at this time its consideration of pre-trade risk controls from the remaining portions of proposed Regulation AT.
The industry organizations also emphasized that pre-trade risk controls are the responsibility of all market participants regardless of registration. However, futures commission merchants facilitating customers’ electronic access could be made responsible for ensuring that all orders are subject to pre-trade risk controls – either through “pre-trade risk controls provided by the FCM itself, or those provided by software that the FCM has administrative control over,” said the industry organizations.
The industry organizations also reiterated their prior objections to providing source code outside of a subpoena process, and encouraged the CFTC to adopt a “principles-based retention policy” as opposed to requiring the establishment of new, separate source code repositories.
ICE Futures U.S. echoed the industry organizations’ themes in its own comment letter by advocating that Regulation AT should be addressed in phases and that all market participants should maintain appropriate pre-trade and other risk controls.
IFUS also argued that the definition of Algorithmic Trading and AT Person should “focus on algorithmic trading activity that may pose a risk to the derivatives markets” as opposed to the definition as currently proposed in Regulation AT that it claimed “is overly broad and may include a wide range of market activity that does not capture the type of systemic risk that Proposed Rule attempts to target.”
The Commercial Energy Working Group, the Commodity Markets Council and the Electric Power Supply Association submitted a joint comment letter that repeated themes raised by the industry organizations and IFUS. According to this letter, the CFTC should not adopt a quantitative measure to establish who AT Persons are, but instead should “focus its resources and efforts on (i) identifying market participants whose automated trading activities present a legitimate threat of systemic risk to commodity markets, and (ii) requiring the application of appropriate risk controls to mitigate such risks.”
CME Group argued that Regulation AT should not mandate that designated contract markets “prevent” algorithmic trading disruptions or compliance issues. According to CME Group, “no rule…can always prevent disruptions and other operational problems...” and thus a “prevent” standard is not achievable. Accordingly, CME Group recommended that the CFTC “adopt a standard that [solely] requires DCMs to implement tools to mitigate the effect of an Algorithmic Trading Disruption.”
Both the industry organizations and Quantitative Investment Management raised in their comment letters concerns about the practicality of AT Persons conducting system testing, as required by Regulation AT, on third-party provided Algorithmic Trading systems and software. According to QIM, “[d]espite contrary assertions at the Roundtable, clients of many [independent software vendors] have limited ability to comprehensively test ISV algorithms.”
Trading Technologies, in its comment letter, argued that requirements related to the testing of source code “should focus on the output of an Algorithmic Trading system or software rather than the source code underlying such systems or software, which would yield no material benefit.”
Taking a different perspective, Better Markets argued that source code should be made available to the CFTC upon its request – potentially in real time and not just through subpoenas – in order to facilitate its timely investigations. The self-identified public interest group also requested that the CFTC reconsider its proposed exclusion of the application of Regulation AT to trades executed on swap execution facilities.
(Click here for background on 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.)