Reed Smith Client Alerts

Authors: Kari S. Larsen Peter Y. Malyshev

The Commodity Futures Trading Commission issued a supplemental proposal on automated trading November 4, 2016, that revises a number of the regulations proposed by the Commission in its initial proposal. The Supplemental Proposal includes six significant changes to the proposed regulatory framework for automated trading: (1) revised pre-trade risk controls requirements; (2) a new volumetric threshold for qualification as an “AT Person”; (3) a broader definition of “Direct Electronic Access”; (4) clarification regarding the retention of source code; (5) an alternative compliance pathway via certification for parties using third-party Automated Trading Systems; and (6) an elimination of the annual reporting requirements for AT Persons and clearing member futures commission merchants, and review requirements for designated contract markets proposed under the initial proposal. Given the results of the recent election, the ultimate fate of this rulemaking is uncertain. The 60-day public comment period for the supplemental proposal will begin when it is published in the Federal Register.

On November 4, 2016, the Commodity Futures Trading Commission (“CFTC”), in a two-to-one vote1 , approved a supplemental proposal on the regulation of automated trading (the “Supplemental Proposal”).2 The Supplemental Proposal amends the CFTC’s proposed rulemaking on the Regulation of Automated Trading3 (the “Initial Proposal”) unanimously approved by the CFTC in November 2015.4 The Supplemental Proposal revises a number of the regulations and concepts proposed in the Initial Proposal, while leaving others in place. The Supplemental Proposal addresses concerns raised at a roundtable held at the CFTC in December 2015, where market participants expressed concerns with, among other things, the Initial Proposal’s redundant risk control requirements, source code repository requirement, and third-party systems reporting requirements. Specifically, the Supplemental Proposal includes six significant changes to the Initial Proposal’s regulatory framework: (1) revised pre-trade risk controls requirements; (2) new parameters for qualification as an “AT Person”; (3) a new definition of “Direct Electronic Access”; (“DEA”) (4) clarification regarding the retention of source code; (5) an alternative compliance pathway for parties using third-party Automated Trading Systems; and (6) an elimination of the annual reporting requirements for AT Persons and clearing member futures commission merchants (“FCMs”), and review requirements for designated contract markets (“DCMs”) proposed under the Initial Proposal.

The 60-day public comment period will begin when the Supplemental Proposal is published in the Federal Register. Accordingly, the rulemaking will not be finalized in 2016.

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Client Alert 2016-300