The Managed Funds Association ("MFA") and the Alternative Investment Management Association ("AIMA") urged the CFTC to abandon a re-proposed automated trading regulation ("Reg. AT").

In a joint letter to the CFTC, MFA and AIMA criticized the underlying framework of the proposed rule as "flawed and misdirected" and stated that a "fundamental revision is necessary." In particular, the letter claims that "Regulation AT creates a complex and elaborate regulatory framework, which . . . will be burdensome for both regulators and market participants." The associations explained the problem as follows:

". . . Regulation AT proposes to apply a very prescriptive, unnecessary, one-size-fits-all regulatory framework on many different types of market participants. For example, the definitions under Regulation AT continue to be so broad that almost all trading by all market participants will be needlessly swept within the scope of Algorithmic Trading and Direct Electronic Access. Subjecting all market participants to Regulation AT for the use of third-party Algorithmic Trading systems puts them in the untenable position of being responsible for systems and processes for which they have no means to assess regardless of their technical expertise."

The associations recommended that the CFTC reduce electronic trading risk not by pursuing Reg. AT, but by focusing on (i) implementing risk controls and (ii) improving the existing regulatory framework. They argued that risk control should exist at the "gatekeeper" levels (i.e., designated contract markets, executing futures commission merchants and clearing firms).

The MFA and AIMA advised that if the CFTC decides to proceed with Reg. AT, then it must better define what constitutes automated trading activity. The associations recommended that the CFTC:

  • "Adopt a principles-based approach to regulation of automated trading that will allow market participants to tailor controls to suit their firms' operations and risks.
  • "Adopt a preservation requirement for Algorithmic Trading Source Code and use the existing subpoena process for accessing Algorithmic Trading Source Code.
  • "Adopt greater regulatory protections for the treatment of Algorithmic Trading Source Code and other intellectual property.
  • "Work with financial technology companies to address how regulation can most effectively address new technologies and promote safer and more efficient markets, without subjecting market participants to Regulation AT for use of third-party algorithmic trading systems."

Commentary / Steven Lofchie

CFTC Chair J. Christopher Giancarlo is a critic of certain aspects of Regulation AT,  particularly those that force firms to hand over their source codes to the CFTC. It seems unlikely that the Regulation will go effective as currently proposed.

Commentary / Bob Zwirb

As was the case with the original proposal, this rulemaking is primarily an exercise in imposing existing industry best practices requirements with the CFTC's imprimatur.  The Associations' letter  here appears to agree, maintaining that the risks associated with automated trading (which the CFTC cites as the rationale for Regulation AT) "would be best addressed through regulatory interpretive guidance and best practices."

In his  White Paper calling for reconsideration of the CFTC Swaps Trading Rules, Commissioner Gianarcarlo urged the CFTC to allow the "swaps trading markets to evolve rationally and organically without the forced, unwarranted and unnecessary [regulatory] construct."  He emphasized that "[p]rudent regulatory oversight should allow methods of swaps execution to evolve organically based on technological innovation, customer demand and quality of service." Although Commissioner Giancarlo was referring to the CFTC's regulatory prescription for trading swaps, the same principle would seem to be equally applicable to prescribing rules for automated trading.  As the Associations observe, "adopting regulations prescribing development and testing standards will not allow industry development and testing standards to evolve and improve with new technologies."

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