Futures Industry Responds To CFTC Concept Release

Terry Flanagan

A concept release by the Commodity Futures Trading Commission on automated trading has drawn detailed responses from industry participants on kill switches and other safeguards.

In its response to the CFTC’s Concept Release on Risk Controls and System Safeguards for Automated Trading, the Futures Industry Association describes the many risk controls and system safeguards that are currently in use in the futures industry, and outlines several principles for the CFTC to consider as it examines ways to further strengthen them.

The response draws on the collective expertise of nearly 100 individuals from members of FIA and the FIA Principal Traders Group.

“FIA has a long track record in identifying best practices for managing the risks of trading, and we appreciate the fact that the CFTC has relied on our work in this area in developing its policies towards automated trading,” said Walt Lukken, president and chief executive officer, FIA.

To assist the CFTC in assessing the current use of various types of risk controls and system safeguards, FIA conducted two surveys: one asking about risk controls used by trading firm members of FIA PTG and the other asking about risk controls used by futures commission merchant members of FIA.

The survey results show that best practice risk controls are widely used by member firms. All responding FIA PTG firms indicated that they used some form of pre-trade maximum order size screens, data reasonability checks, repeated automated execution throttles, and self-trading controls.

In addition, all responding firms indicated they were either using, or considering using, some form of drop copy functionality as a risk control.

The survey results also showed that all responding FCMs use the following controls either administered internally or at the exchange level: message and execution throttles; price collars; maximum order sizes; order, trade and position drop copy; and order cancellation capabilities. In addition, all responding FCMs use some form of a kill switch or other means to stop order submission when necessary.

The response notes that all market participants have a responsibility to implement risk controls appropriate to their role in the life of an order, whether that role is initiating the trade, routing the trade, executing the trade or clearing the trade.

While kill switches can operate at a number of levels – at the market participant, at the clearing firm, or at the trading platform–trading platforms sit at the center of trading and are therefore best positioned to efficiently and consistently monitor activity across a very large number of market participants, according to a comment letter by Citadel.

“Kill switches at the trading platform level are not a replacement for the controls that each member firm must implement,” Citadel said. “To be sure, member firms should have effective controls in place. However, controls at the trading platform level are a necessary back-stop to limit the damage from problems that are not caught by member firm controls. There is no assurance that all member firms will have effective monitoring and controls in place and/or dedicate sufficient resources to their technology development, testing, release and quality assurance.”

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