Proposed Reg AT: Comments Pile Up at the CFTC

Proposed Reg AT: Comments Pile Up at the CFTC

The CFTC received a last-minute pile-up of comments on proposed rule 80 FR 78824, on automated trading. The commenters generally are not in a mood to pat the agency on its intangible back and congratulate it on a job well done. Quite the contrary.

The notice of proposed rule-making (NPRM) at issue suggests risk controls, transparency measures, and other safeguards. One very hotly contested item in the “other” category is a requirement that the proprietary trading firms that use algorithmic trading and access the market directly must register as floor traders. This is all aimed at reducing the risks that are associated with algorithmic trading activity.

What are these risks? The CFTC writes that malfunctioning “or incorrectly deployed algorithms deploying erroneous messages to trading venues can significantly impact markets and market participants” as shown by market disruptions such as the Flash Crash of May 2010. The speed at which things happen in contemporary trading systems isn’t the key issue, but it can make things worse.

The registration requirement would essentially expand the notion of a “floor trader” so that it won’t become a null set as the floors disappear.

American Gas Association

Many of the late entries look at the proposal from the point of view of the energy industry. The American Gas Association, for example, has a detailed reaction speaking to “the ability of commercial end-users to access the futures markets and use futures as part of their risk management tools.”

The AGA is concerned that the definitions of terms are so far reaching in the NPRM and its proposed Reg AT that they threaten to discourage companies that need to hedge their commercial operations from trading futures, subjecting themselves not just to Reg AT itself but to general recordkeeping rules as they apply to registered floor traders, specifically Rule 1.35(a).  Similarly the newly christened floor traders/commercial hedgers would be subject to the CFTC’s margin requirements in their swap trading.

Drilling down a bit: the CFTC is considering a redefinition of algorithmic trading that would include trades that are manually entered into a front-end system by a natural person, so long as the orders are generated using algorithmic methods. The AGA is, as you might expect, especially unhappy with this.

International Energy Credit Association

Another final-day submission comes from the International Energy Credit Association, which shares the concerns of the AGA and other commercial users. The IECA’s comment addresses the possibility of a de minimis threshold, raised by the NPRM as a possible reaction to just such concerns. The IECA isn’t enthusiastic about this, simply because it would be “yet another de minimis threshold that will have to be applied to market participants.” Still, yes, it does think that the protection of some commercial use from the adverse consequences of becoming a de jure floor trader is necessary, and protection through such a threshold is better than none at all.

The IECA is also unhappy about the CFTC’s statutory cost/benefit analysis, which it says doesn’t assess the costs of the floor registration requirement specifically, or explain what (“if any”) are the benefits of its application to commercial end-users.

The Intercontinental Exchange

The ICE of course is an electronic exchange focused on energy commodities. Back in 2001 it acquired the International Petroleum Exchange, i.e. it became the guardian of the Brent Crude benchmark of oil prices. In 2005 it moved all of its trading onto an electronic platform.

Unsurprisingly, the ICE shares many of the concerns of the energy trade groups. It also has a pressing issue with the CFTC’s proposal to mandate a source code repository as a record keeping requirement, available on request (without due-process details such as subpoenas) to the CFTC itself or to the U.S. Department of Justice.  This raises “a number of serious concerns surrounding protections of intellectual property and information security.” ICE makes references to “many recent circumstances” in which “confidential information provided to U.S. government agencies has been compromised as a result of cyber-attacks.” Such theft could have “a disastrous impact on the market.”

Like other commenters, ICE objects to what it sees as a slapdash job of cost/benefit analysis on the part of the CFTC. Okay, the august institution involved would not use such language and is of course polite. It objects to a cost-benefit analysis that “vastly underestimate[s] the costs of complying with the many requirements of Regulation AT given the broad drafting.”  Sotto voce: that means slapdash.

 

 

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