Exchanges Detail Plans for Resilience

Terry Flanagan

Self-regulatory organizations (SROs) for the equities and options markets have been working with the Securities and Exchange Commission (SEC) on their collective plans to strengthen the resilience, performance, disaster recovery capability and governance of the critical infrastructure of the US capital markets, including the Securities Information Processors (UTP, CTA and OPRA).

The SROs have come to general agreement on certain recommendations and preliminary implementation timetables in response to the September 12, 2013 meeting between leaders of the equities and options exchanges, FINRA, DTCC and Options Clearing Corporation and SEC Chair Mary Jo White.

“This is an offshoot of meetings we had with Chairman White on September 12, where she asked the exchanges to undertake rulemaking for such things as holds, trade breaks, and infrastructure,” said Lisa Fall, president of BOX Options Exchange. “She asked us to come back with concrete plans in 60 days. We wish to inform the public that the exchanges are working cooperatively on a comprehensive plan to address these concerns.”

Specific details of the SROs’ proposals will be presented in subsequent SRO rule filings and NMS Plan Amendments and will be subject to public comment and SEC approval. The multi-pronged proposals address each of the following areas identified in the SEC’s September 12, 2013, press release.

Securities Information Processor (SIP): The SROs and SIP Committees have compiled a series of proposals designed to improve operational resiliency, strengthen interoperability standards and disaster recovery capabilities, enhance governance, accountability and transparency and establish a clear testing framework for the industry.

These proposals set out a process for sharing best practices, reviewing policies and procedures of all Operating Committees, and updating technology change procedures, as well as improving audit and assessment processes.

Critical Infrastructure: The SROs have established a pathway to identify contingencies related to critical infrastructure items such as essential regulatory messaging (LULD, SSR, Halts), the open/close of the markets, initial public offerings, DTCC/OCC outages, singly-listed options and industry testing and connectivity to exchange disaster recovery facilities.

Halts: The SROs have agreed to three core principles for halting the equities and options market (transparency, limited discretion, and the coordination of halts/resumptions by the primary markets) and proposed rules and metrics incorporating these key principles are under consideration among the SROs.

Trade Breaks: The SROs are reconciling trade-break rules among the exchanges for both equities and options markets. Subsequent changes will be submitted in a series of rule proposals for public comment and SEC approval.

Kill Switch: Work continues in the equities markets on a year-long industry effort to reach a consensus on a proposed common “kill switch” functionality to prevent risk and disruption to the markets.

“It’s good to see that the exchanges have announced a unified front to address and limit future market system breakdowns, and we do look forward to seeing more details emerge,” said Jim Myers, senior manager, business consulting, trading & risk management at Sapient Global Markets. “What is quite conspicuously absent in this week’s announcement are clear details around industry-wide systems testing, and there’s been no consensus to date on the “kill switches.” I think the regulators, public and industry alike will be put at ease once the exchanges further clarify their action plan in the coming weeks and months.”

Options exchanges have agreed to each refine and enhance their existing kill switch functionality. In addition to kill switches, the options exchanges also agreed to enhance or develop functionality for price filters, drill-through protections, and activity-based kick outs.

“You’ll see common rules in areas such as trade breaks , and there may be an NMS plan that we all sign on to,” Fall said. “And there will be areas where each exchange crafts its own rule. We will all have rules for kill switches, and they may be individualized. We have sent draft rule proposals to the SEC, and most exchanges are in that process.”

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