Futures exchanges would be expected to create defenses against disruptive technology failures, but might not have to upgrade current policies under a proposal issued by the U.S. derivatives regulator.
The proposal from the Commodity Futures Trading Commission, approved Thursday on a 4 to 1 vote, would establish new principles for risk management, but largely relies on exchanges such as those owned by
CME Group Inc.
to decide how to comply with them. The plan breaks with a stricter approach proposed in 2015 when the agency was under Democratic control. The earlier proposal would have placed more large trading firms under comprehensive oversight, including a requirement to furnish to regulators the computer code driving trading decisions.
The new plan rejects that idea and hews more closely to ideas Wall Street offered when it fought the 2015 proposal, known as Regulation Automated Trading. Firms such as high-speed trader Virtu Financial Inc. and hedge-fund giant Citadel said the government shouldn’t be able to sweep up the secret sauce behind trading strategies, warning it could be leaked or stolen.
The CFTC on Thursday voted to formally withdraw the earlier proposal, an unusual and partially symbolic move that means the commission can’t revive the prior ideas without re-proposing them and seeking comment again from the industry and other stakeholders.
“It would have frozen in time, a set of controls that levels of market operators and market participants would have been required to place on trading,” CFTC Chairman Heath Tarbert, a Republican, said of the first proposal. He added of the new plan: “It’s not toothless…It will allow the flexibility we need—both our exchanges as well as the CFTC—to evolve as the risks themselves evolve.”
Financial regulators have struggled for years to supervise markets where many strategies are executed by computer algorithms and orders speed through digital platforms that need to maintain connectivity 24 hours a day. Technology failures have toppled firms that were once goliaths, including Knight Capital Group Inc., which had to merge with a rival in 2012 after suffering a $440 million loss from a computer-trading glitch.
More recently, CME Group’s
responded to firms bombarding its systems with excessive digital messages related to buying or selling Eurodollar futures, a contract that tracks short-term U.S. interest rates.
CFTC officials said exchanges and other market participants have improved operational risk-management risk since Knight’s 2012 fiasco. In addition, futures exchanges and large traders have effectively managed the heightened volatility and heavy trading volumes that infected markets since the global spread of the new coronavirus, officials said.
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“The volatility across all of our markets through the last quarter has reinforced the fact that the pipes are working well,” Dorothy DeWitt, the CFTC’s director of market oversight, said. “It reinforces the fact that the principles are not going to be a sea change.”
The proposal approved Thursday would require exchanges to establish rules addressing three principles, including the mitigation of disruptions caused by technology outages and software glitches.
“It’s become obvious that both [exchanges] and market participants take the risks of electronic trading seriously and have expended enormous effort and resources to address those risks,” CFTC Commissioner Brian Quintenz, a Republican, said.
Democratic commissioners objected to withdrawing the 2015 proposal and said it wasn’t clear the successor plan would require exchanges to do anything differently from today.
“If exchanges are already compliant with this, and this isn’t going to do anything new, what are we getting at here?” CFTC Commissioner Dan Berkovitz, a Democrat, said. “Are we just putting another reg on the books?”
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