On March 16, MFA submitted comments to the CFTC on its proposed Regulation AT regarding automated trading. While supporting the CFTC’s goal of modernizing regulatory oversight of automated trading with risk controls, transparency measures, and other safeguards, MFA raised many concerns with Regulation AT, as proposed. Despite the numerous new and prescriptive risk requirements, MFA is concerned that the Regulation AT framework would not provide for safer, more efficient or effective futures marketplaces. In fact, we are concerned that it would create new risks, impose greater regulatory burdens, and substantially raise costs, putting the U.S. futures markets out-of-reach for many U.S. and foreign end-users looking to hedge or manage risk. In our letter, we provided a number of recommendations and comments, including:
- Adopt Centralized Marketplace Risk Controls – MFA recommended that in lieu of adopting Regulation AT as proposed, the Commission adopt regulation requiring centralized pre-trade risk controls at designated contract markets (DCMs) and clearing member futures commission merchants. MFA believes that such controls at the DCM and clearing FCM-levels would be highly effective in preventing marketplace disruptions. This approach would share responsibilities along functional lines. In addition, MFA believes that the Commission should address other derivatives marketplace concerns identified in Regulation AT through separate rulemakings and in different stages.
- Adopt a More Flexible Framework rather than a One-Size-Fits-All Approach – MFA is concerned that Regulation AT has a one-size-fits-all framework, which singularly regulates all market participants that use any automation in trading without taking into consideration the type of automation or the different category, business, or operational size of the market participant.
- MFA recommended that the Commission narrow the focus and scope of Regulation AT to exclude commodity trading advisors (CTAs) and commodity pool operators (CPOs). Instead, to address concerns relating to CTAs/CPOs, MFA recommends that the Commission direct the National Futures Association to promulgate CTA/CPO regulatory requirements on operational systems risk controls; and to report to the Commission on data that it collects from an amended CTA/CPO Self-Examination Questionnaire that includes questions on operational systems risk controls. If necessary, the Commission should amend its Part 4 regulations to address CTA/CPO operational systems risk concerns related to algorithmic trading in a manner suitable for CTA and CPO businesses and operations.
- To the extent that the Commission determines to proceed with a broad Regulation AT framework that applies to all categories and sizes of market participants and different types of algorithmic trading functions, MFA believes that the Commission needs to adopt a more flexible framework. The Commission should identify specific marketplace concerns with respect to algorithmic trading activities and require market participants to prevent marketplace disruptions by: (1) using execution systems with pre-trade risk controls (when and if using algorithmic execution systems); (2) adopting development and testing standards reasonably designed to prevent operational systems risks and marketplace disruptions; (3) retaining source code; and (4) adopting monitoring, compliance and training programs reasonably designed to prevent operational systems risks and marketplace disruptions.
- Adopt a Source Code Retention Requirement – MFA has strong concerns with Regulation AT’s source code repository requirement and recommends that the Commission replace it with a source code retention requirement.
- Retain the Current Self-Trade Surveillance System – MFA believes that the current DCM rules regarding self-trading are effective, and that the data does not justify the creation of an entirely new federal regulatory regime on self-trading.
- Require Greater Disclosures with respect to Market Making and Trading Incentive Programs – MFA supports regulation requiring DCM disclosures and surveillance of market making and trading incentive programs.