United States: CFTC Revises Reg AT Proposal

Last Updated: November 11 2016
Article by Cadwalader, Wickersham & Taft LLP

Most Read Contributor in United States, September 2017

The CFTC approved revisions to Regulation Automated Trading ("AT") by a vote of 2-1. CFTC Commissioner J. Christopher Giancarlo dissented. Regulation AT originally was proposed in December 2015.

Under the revised proposal, which includes a 60-day public comment period, an algorithmic trading firm ("AT Firm") would be required to register with the CFTC if it trades on average 20,000 futures contracts a day over a six-month period. This revised threshold would capture about 50 new firms. The proposal also would allow the CFTC to obtain access to an AT Firm's source code upon approval by a majority of the CFTC members and using the CFTC Division of Market Oversight's special call process.

As set out in the CFTC Fact Sheet, the revised proposal:

  • imposes two layers of pre-trade risk controls (down from three in the original proposal): first, at the level of the AT Firm, but with the potential of delegating responsibility for control to the firm's Futures Commission Merchants ("FCMs"); and second, at the level of the Designated Contract Market ("DCM");
  • recognizes comments to expand the risk control requirements to encompass electronic trading, including at the FCM and DCM levels;
  • revises the risk control provisions to provide AT Firms, FCMs and DCMs greater flexibility regarding the level at which pre-trade controls must be set;
  • incorporates a volume-based quantitative test for registration as a floor trader and applies this test to existing registrants and persons otherwise required to register with the CFTC to determine whether they are AT Firms;
  • provides that the CFTC would have access, via a subpoena or special call approved by the CFTC, only to: (i) an AT Firm's Algorithmic Trading Source Code; (ii) records that track changes to an AT Firm's Algorithmic Trading Source Code; and (iii) log files that record the activity of an AT Firm's Algorithmic Trading system;
  • requires that: (i) each DCM establish a program for effective periodic review of the AT Firms' compliance with Regulation AT; and (ii) DCMs must require AT Firms to provide the DCMs with an annual certification attesting that the AT Firm complies with Regulation AT;
  • requires that: (i) each DCM establish a program for effective periodic review of FCMs' compliance with Regulation AT; and (ii) each FCM provide the DCM with an annual certification attesting that the FCM complies with Regulation AT;
  • provides AT Firms, that use third-party systems as part of their Algorithmic Trading, with options to facilitate their compliance with elements of Regulation AT; and
  • discusses a number of changes to certain defined terms as well as other provisions that the CFTC is considering in response to comments from market participants (including limiting the scope of "Algorithmic Trading Compliance Issue," "Algorithmic Trading Disruption," and "Algorithmic Trading Event").

In a concurring statement, Commissioner Sharon Y. Bowen noted that the proposed rule "seeks to allay some . . . fears" for those worried that automated trading is occurring free of any oversight or regulation. Characterizing the proposal as "merely a first cut," she expressed "doubts whether we are doing enough to ensure that all market participants, especially end-users in certain markets, are being given a level-playing field at present due to the proliferation of algorithmic trading."

Chair Timothy Massad confirmed that: (i) the proposal "requires the Commission itself to make the decision to seek access to source code"; (ii) no staff member can do so without Commission approval; and (iii) this new policy represents "a significant departure from our standard practice, which allows staff to seek access to information that registrants are required to preserve without a subpoena or specific Commission authorization."

In a dissenting statement, Commissioner Giancarlo asserted that the supplemental proposal "would strip owners of intellectual property of due process of law" by allowing the CFTC to obtain a firm's source code with the special call process, providing the CFTC with "an end-run-around the subpoena process." This, in effect, gives unchecked power to the CFTC to decide if, when, and how property owners must turn over their source code, allowing the Enforcement Division to view source code without bothering with a subpoena. "Such sharing of information will likely become routine if this proposal is finalized," says Commissioner Giancarlo.

Commissioner Giancarlo also warned that the proposal does not include specific protections of source code, and cited a recent breach of the Office of the Comptroller of the Currency and a crash of the CFTC's own servers later that same day due to a denial of service attack as further evidence of regulators' "imperfect record as . . . guardian[s] of confidential proprietary information."

Commissioner Giancarlo argued that the additional requirements for AT Firms who use third-party software providers "are infeasible and could harm innovation and intellectual property rights." Specifically, he noted: (i) the prescriptive nature of risk controls and development and testing requirements; (ii) the burdensome reporting requirements; and (iii) the need for a phased-in implementation process. Commissioner Giancarlo concluded that:

Reg. AT is a threat to Americans' liberty AND their security. After twelve score years of ordered freedom, it is a degree turn in the direction of unchecked state authority. If adopted in its present form, it will put out of balance centuries-old rights of the governed against the creeping power of the government.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.