Very few topics have been as volatile or highly debated as Regulation AT, the CFTC’s proposal for regulating algorithmic trading.
On November 25, 2016, the CFTC released an update to the proposed rulemaking, which it released to the public for comment. A brief summary of the updates is listed below:
- The Commission proposed moving the regulatory structure from a three-tier system composed of the AT Person, FCM, and Contract Market (Exchange), to a modified two-tier system in which the AT Person could delegate its pre-trade risk controls to its FCM.
- The Commission proposed expanding the scope of the regulation to cover all electronic trading, not just narrowly construed algorithmic trading for AT Person purposes.
- The Commission proposed allowing the Contract Market, FCM, or AT Person the ability to set pre-trade risk controls, creating more flexibility in the regulatory process.
- The Commission proposed registering certain market participants that are not already registered with the Commission, who would become “New Floor Traders” subject to a volume threshold.
- In lieu of an annual compliance reports, the Commission proposed that AT Persons and FCMs would instead be required to retain certain records and submit an annual certification and that contract markets would be required to establish programs for evaluating FCMs’ and AT Persons’ compliance with Regulation AT.
- The Commission proposed updates to its algorithmic trading source code preservation requirements, whereby the Commission would only have access to these records by a special call approved by the Commission itself (not staff), and indicated that the provision was not intended to be used for routine submission.
- The Commission made a variety of changes to defined terms either included in the original proposed rulemaking or as a result of responses from market participants.
- The Commission proposed the inclusion of additional rules focused specifically on DCMs’ trade matching platforms and self-trade prevention tools.
- The Commission proposed revising a series of defined terms throughout the regulation.
Notably, the introduction of a Volume Threshold Test for registration under Reg AT and clarification regarding source code retention were intended to directly address market participants’ concerns. The Volume Threshold Test, included in 17 CFR 1.3(x)(2), indicates an “aggregate average daily volume of at least 20,000 contracts” and also requires the person to include volume from “other persons controlling, controlled by or under common control with such person.”
With respect to the retention of algorithmic trading source code, the metadata included in the Commission’s new Notice of Proposed Rulemaking specifically notes that proposed section “1.81(a)(vi) did not require the transfer of all source code to the Commission or other third party for centralized storage,” nor did it require the provision of source code “to the Commission on a regular basis.”
While these updates will likely satiate the concerns of some market participants, further changes are expected given the impact of the new Administration of the U.S. Federal Government. The dissent of Commissioner Giancarlo’s statement on the subject may provide some guidance, where he highlighted that the Commission’s adoption of this rule would be a “giant stumble backwards in undoing Americans’ legal and Constitutional rights.”
Unfortunately for those of us managing risk, it seems this issue is far from settled. We know how challenging it can be to navigate an ever-changing set of rules and regulations. That’s why we’ve created easy-to-use tools that track regulatory changes in real time—because the more you know, the less you have to worry.