The FIA, FIA Principal Traders Group (FIA PTG), International Swaps and Derivatives Association, Inc. (ISDA), Managed Funds Association (MFA), and SIFMA’s Asset Management Group (SIFMA AMG) sent a joint letter to the Commodity Futures Trading Commission (CFTC) in response to the reopened comment period on its proposed rule on regulation automated trading (Reg AT).
The Associations emphasized industry consensus on the importance of risk controls and principles-based rulemaking. The letter urges the CFTC to separate the rulemaking into phases and to first address pre-trade risk controls, which have been proven to be the most effective safeguard for markets.
The letter primarily focuses on two topics that have caused significant debate since the CFTC first released the proposed rule: registration and source code access.
On registration, the letter notes that, “history has shown that any market participant, regardless of registration status or type of trader, has the potential to cause marketplace disruptions.” Therefore, the Associations believe that the rule would be more effective if it focused on ensuring that all electronic orders are subject to pre-trade risk controls, rather than centering on the scope of the registration requirement. The letter explains that if the CFTC believes it needs to establish a new registration requirement, it should do so separately from Reg AT.
However, should the CFTC decide that it must tie registration to risk controls, the Associations propose an alternative framework that would ensure that all electronic market activity is subject to appropriate risk controls by requiring that all electronic trading must pass through the pre-trade risk controls of a CFTC registrant.
With respect to the issue of source code, the Associations remain strongly opposed to the level of access proposed by the CFTC. This issue has proved controversial since the release of the proposed rule, as it allows for unfettered access to a firm’s intellectual property. As the letter notes, this requirement “is unprecedented among regulators and threatens commercially valuable intellectual property and proprietary trading strategies.”
While the Associations do not support access to source code without a subpoena, they are proposing an objective definition to help the CFTC clearly define what constitutes source code. Furthermore, the Associations propose a framework for a principles-based retention policy that would ensure regulators, after obtaining a subpoena, have access to consistent records in the event of a market disruption.
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