05.01.2014
By Terry Flanagan

SEC To Move Forward With Reg SCI

The Securities and Exchange Commission is moving forward to bolstering resilience throughout critical market systems.

In testimony before the House Committee on Financial Services on Tuesday, SEC chair Mary Jo White said that Commission staff is working to prepare a recommendation for the adoption of Regulation SCI this year. In addition, in March 2014, the SEC conducted a roundtable on cyber-security which addressed the issues faced by financial market participants.

Some of the most pressing market structure issues “relate to controls around trading,” said Howard Meyerson, general counsel at Liquidnet. “Many of those issues are addressed by Reg SCI, which the SEC put out for comment last year. My expectation is they will move forward on that. We think that would be good for the market because it would enhance investor confidence.”

The Commission has declared its intent to create a robust market infrastructure and reduce the number of systems disruptions through a focus on systems compliance and integrity. In March 2013, the Commission proposed Regulation SCI, which would require that exchanges and other key market players maintain policies and procedures to meet certain technology standards and ensure compliance with relevant laws and rules.

After the August 2013 interruption in the trading of Nasdaq-listed securities, the equities and options exchanges, Finra, and the clearing corporations have been working with market participants to identify a series of concrete measures designed to address specific areas where robustness and resilience of market systems could be improved.

Formalizing and broadening Commission oversight of the key technological and operational underpinnings of market infrastructure can help maintain industry focus and prioritization in these areas and give the investing public greater faith in the existence and maintenance of high standards, exchange operator Direct Edge said last year in a comment letter

“Direct Edge unequivocally supports the concept of Reg SCI as a mechanism to improve risk management systems in our nation’s financial markets and improve investor confidence therein, said the letter signed by Direct Edge CEO William O’Brien. “In an era where technology is the foundation that supports all aspects of market operation, investor faith in our industry’s ability to appropriately mitigate related risks is essential.”

To achieve these objectives successfully and efficiently, Direct Edge said that Reg SCI should have a narrow, risk-based focus on industry participants that are essential to continuous market-wide operation, and should reflect a realization that it serves as a framework for risk mitigation, as opposed to risk elimination.

“The regulated participant is the best (and in many ways only) entity suitably equipped with the knowledge and capabilities to manage its own technological and operational risks,” said Direct Edge, which is owned by Bats Global Markets. “Reg SCI would only supplement commercial incentives to manage such risks, and would not be the sole (or even primary) driver of an affected entities’ risk-management systems.”

Featured image via iStock

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