U.S. derivatives regulators are looking to update risk controls and systems safeguards for markets that have come to be dominated by automated trading systems and high-frequency traders (HFTs).
The U.S. Commodity Futures Trading Commission (CFTC) approved the publication of a concept release today that seeks to modernize the regulatory framework given the rise of automated trading. The release discusses a series of possible pre-trade risk controls; post trade reports; design, testing and supervisory measures for automated trading systems; and, other protections designed to promote safe and orderly markets.
“The [paper] is driven by U.S. derivatives markets’ fundamental transition from human-centered trading venues to highly automated and interconnected trading environments,” it says, noting that, “Traditional risk controls and safeguards that relied on human judgment and speeds must be reevaluated in light of new market structures.”
Additionally, the CFTC says that both regulators and industry players “must ensure that regulatory standards and internal controls are calibrated to match both current and foreseeable market technologies and risks.”
In each of the areas discussed in the paper the CFTC is seeking extensive public comment. “In publishing this concept release, we are seeking public input on what additional risk controls and system safeguards are appropriate given this ever-changing technological environment,” said CFTC chairman, Gary Gensler.
Gensler also noted that regulators must look to risk controls and system safeguards to protect markets given that technical glitches will inevitably occur.
“This concept release is intended to stir public discussion and debate on how best to protect the functioning of markets for the benefit of farmers, ranchers, merchants and other end users who rely on markets to hedge risk – particularly in light of the reality that the majority of the market is using automated trading systems.”