Regulators Eye Systems Integrity

Terry Flanagan

In light of the snafus that have beset exchange-based trading systems with ever-increasing frequency, it’s no surprise that regulators would eventually wade deep into the arcana of systems and technology that support advanced trading.

This they have done, in the case of the Securities and Exchange Commission with proposed Regulation SCI (Systems Compliance and Integrity) and in the case of the Commodity Futures Trading Commission with its concept release on risk controls and system safeguards for automated treading environments.

The CFTC’s concept release provides an overview of the automated trading environment, including pre-trade risk controls; post trade reports and other measures; system safeguards related to the design, testing and supervision of automated trading systems (ATSs); and additional protections designed to promote safe and orderly markets.

“The CFTC’s role and powers have already been greatly enhanced, post-Dodd-Frank, through a combination of the new market abuse powers, the “command and control” approach to risk embodied in Regulation 1.73 and the Commission’s guidance on disruptive trading,” said Mark Brennan, senior business analyst at Fidessa, in a blog post. “In a broad and informed approach to electronic trading, the Commission looks at the complex and overlapping responsibilities of the numerous participants, be they traders, vendors, FCMs, DCMs or DCOs.”

“Putting aside any debate on the possibility of federalized standards and their costs and benefits, and taking a look at the derivatives trading landscape through the prism of the Commission’s paper, it’s not unreasonable to conclude that going forward the industry’s approach to risk controls should be better informed; that our approach to trading and market interdependencies should become more holistic and clearly delineated; and that smart, robust technology that works together across the entire trading lifecycle is a prerequisite,” Brennan said.

As for Reg SCI, some market participants have expressed concerns about its scope and the poetical Brach of confidentiality about proprietary trading systems. They are seeking that the SEC only require public dissemination of information about systems in significant circumstances where such information enhances customer protection.

“Dissemination should not be required where the information provided (e.g., regarding systems intrusions or issues with surveillance systems) may be misused to the detriment of the markets and investors,” said Ari Gabinet, general counsel at OppenheimerFunds, in a comment letter.

Several commenters have raised questions regard the scope of certain of the proposed definitions in Reg SCI and requirements stemming from those definitions. For example, concerns have been raised regarding the scope of such terms as “SCI system,” “SCI security system,” “material system changes,” and “SCI events.”

OppenheimerFunds supports narrowing the focus of several of these terms, and associated requirements, to more specifically focus on system events that are truly disruptive to markets and these systems that are likely to pose a risk to the fair and orderly operation of the markets.

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