CFTC approves proposal for tighter risk controls for automated trading

The U.S. Commodity Futures Trading Commission (CFTC) today unanimously approved proposed rules that concern automated trading on U.S. designated contract markets (DCMs).

The proposed rules, known as Regulation Automated Trading (Regulation AT), represent a series of risk controls, transparency measures, and additional safeguards, aimed to bolster the U.S. regulatory regime for automated trading.

The new rules will affect:

  • market participants using algorithmic trading systems (ATSs), who are defined as “AT Persons” in the rulemaking;
  • clearing member futures commission merchants (FCMs) with respect to their AT Person customers;
  • DCMs executing AT Person orders.

Risk controls

The proposed rules require the implementation of risk controls such as maximum order message and maximum order size parameters, and the establishment of standards for the development, testing, and monitoring of ATSs, among other requirements.

AT Persons and clearing member FCMs will be required to submit reports on their risk controls to DCMs, and keep books and records regarding their risk controls and other algorithmic trading procedures for review by DCMs.

The rules will also require the use of self-trade prevention tools by market participants on DCMs, while permitting trades originating from accounts with independent decision makers.

Proprietary traders registration

The proposed rules require the registration of certain proprietary traders that, while responsible for significant trading volumes in key futures products, are not currently registered with the CFTC. The proposed registration requirement would cover specifically proprietary traders engaged in algorithmic trading through direct electronic access to a DCM.

AT Persons registration

The CFTC proposes that all AT Persons should become members of a registered futures association (RFA). In addition, the RFAs will be required to consider membership rules addressing algorithmic trading for each category of member in the RFA. (To make things clearer, the National Futures Association is an RFA).

The notice of proposal will be open for a 90-day public comment period. Comments may be submitted electronically via the CFTC Comment Online process.

The official announcement from the CFTC on Regulation AT can be viewed by clicking here.

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