Futures & Derivatives Law

On November 4, 2016, the U.S. 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. It revises a number of the regulations and concepts proposed in the Initial Proposal, while leaving others in place. The Supplemental Proposal addresses issues 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 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” (“DEA”); (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 (“FCMs”) and review requirements for designated contract markets (“DCMs”) proposed under the Initial Proposal. Given the results of the recent U.S. presidential election and forthcoming changes in administration, the ultimate fate of this rulemaking is uncertain.

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