US takes steps to further strengthen control over automated trading

US takes steps to further strengthen control over automated trading

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The US Commodity Futures Trading Commission (CFTC) has approved a supplemental notice of proposed rulemaking that would minimize the risk of automated trading (AT) by introducing a minimum trading volume test, the regulator said over the weekend. The test will be required for new registrees, but will also apply for existing registrants. Floor traders would also be required to become members of a registered futures association (RFA).

The change is on of many proposals that the CFTC has approved in an attempt aim reduce risk and increase transparency in algorithmic order origination and electronic trade execution on all US futures exchanges.

The law change represents a supplemental proposal to the Automated Trading Regulation (RegAT) from December 2015. Under RegAT, floor traders have to meet certain criteria before getting registered, including engaging in proprietary, algorithmic trading through Direct Electronic Access (DEA) on a designated contract market (DCM). With the latest proposals, they will also have to undergo a volume-based quantitative test for registration.

Among the other proposals approved by the CFTC is that registrees preserve the algorithmic trading source code and related recors and make them available to the regulator for inspection when necessary (only via a special call issued and approved by the CFTC itself).

In addition, the CFTC has revised the proposed rulemaking’s risk control framework to place the pre-trade risk control structure at a minimum of two levels rather than three (as previously suggested). Risk controls would be set at the levels of (1) the AT Person or its futures commission merchant (FCM); and (2) the DCM. This would provide greater flexibility regarding the level at which pre-trade controls must be set. An AT service provider would have the option of delegating compliance with pre-trade risk control requirements to its FCM.

Another requirement that the CFTC proposes is that AT service providers should present to DCMs where they operate annual reports with information relevant to their compliance with requirements concerning risk controls, as well as annual certification attesting that they complies with the regulation. DCMs, on their part, have to establish a program for effective periodic review and evaluation of such reports.

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