On June 25, 2020, the US Commodity Futures Trading Commission (CFTC) voted to withdraw its proposed Regulation AT—which sought to regulate automated trading in a broad fashion—and replace it with amendments to Part 38 of its rules to address the potential risk to a designated contract market’s (DCM) trading platform arising out of a disruption due to electronic trading.1 The proposed risk principles espouse a more narrow and principles-based approach than Regulation AT.
Through the proposal, the CFTC seeks to prevent disruptions or anomalies such as excessive messaging by malfunctioning systems, “fat finger” orders or erroneous manual messages that result in unintentionally large or off-price orders, and the loss of connection between an order management system and the trading platform. Regulators have, on a number of occasions, brought enforcement actions involving these types of disruptions.
The proposed rule would consist of three new Part 38 principles:
- Implementation of exchange rules applicable to market participants to prevent, detect, and mitigate market disruptions and system anomalies associated with electronic trading;
- Implementation of exchange-based pre-trade risk controls for all electronic orders; and
- Prompt notification to the CFTC by DCMs of any significant disruptions to their electronic trading platforms.
To illustrate how a DCM would be able to comply, the proposal includes proposed acceptable practices for a DCM to follow.
In dissenting to the risk principles proposal, Commissioner Rostin Behnam questioned the utility of the proposal, asking whether the risk principles are materially different than the status quo. Commissioner Behnam also highlighted that the absence of definitions for certain key terms may cause confusion among market participants.
Market participants are invited to comment on the proposed electronic risk trading principles. The comment period will be the latter of 60 days after the June 25 vote or 30 days following the proposed rule’s publication in the Federal Register.
1 CFTC Release, https://www.cftc.gov/PressRoom/PressReleases/8188-20.