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Regulation at Offering Direct Market Access to Their the Commission Reserves the Right, but A Vol. 80 Thursday, No. 242 December 17, 2015 Part II Commodity Futures Trading Commission 17 CFR Parts 1, 38, 40, et al. Regulation Automated Trading; Proposed Rule VerDate Sep<11>2014 17:37 Dec 16, 2015 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\17DEP2.SGM 17DEP2 tkelley on DSK3SPTVN1PROD with PROPOSALS2 78824 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules COMMODITY FUTURES TRADING The Commission welcomes all public Senior Trial Attorney, Division of COMMISSION comments. Enforcement, [email protected] or DATES: Comments must be received on 202–418–5438; or John Dunfee, 17 CFR Parts 1, 38, 40, and 170 or before March 16, 2016. Assistant General Counsel, Office of ADDRESSES: You may submit comments, General Counsel, [email protected] or RIN 3038–AD52 identified by RIN 3038–AD52, by any of 202–418–5396. the following methods: SUPPLEMENTARY INFORMATION: Regulation Automated Trading • CFTC Web site: http:// Table of Contents AGENCY: Commodity Futures Trading comments.cftc.gov. Follow the I. Introduction Commission. instructions for submitting comments through the Comments Online process A. Overview—Development of Automated ACTION: Notice of proposed rulemaking. Trading Environment on the Web site. • B. Risks and Potential Benefits Associated SUMMARY: The Commodity Futures Mail: Send to Christopher With Automated Trading Trading Commission (‘‘CFTC’’ or Kirkpatrick, Secretary of the C. The Proposed Regulations ‘‘Commission’’) is proposing a series of Commission, Commodity Futures 1. Overview of NPRM risk controls, transparency measures, Trading Commission, Three Lafayette 2. The Proposed Regulations Under Parts 1, and other safeguards to enhance the Centre, 1155 21st Street, NW., 38, 40, and 170 II. Background on Regulatory Responses to regulatory regime for automated trading Washington, DC 20581. • Hand Delivery/Courier: Same as Automated Trading on U.S. designated contract markets A. The Commission’s Regulatory Response (‘‘DCMs’’) (collectively, ‘‘Regulation Mail, above. • Federal eRulemaking Portal: http:// to Date AT’’). The Commission’s proposals B. The Commission’s 2013 Concept Release build on efforts by numerous entities in www.regulations.gov. Follow the C. Other Recent Regulatory Responses recent years to promote best practices instructions for submitting comments. 1. SEC Regulatory Initiatives and regulatory standards for automated Please submit comments by only one 2. FINRA Initiatives trading, including standards and best method. All comments should be 3. European and Other Regulatory Initiatives practices for algorithmic trading systems submitted in English or accompanied by an English translation. Comments will D. Industry and Regulatory Best Practices (‘‘ATSs’’), electronic trade matching and Recommendations engines, and new connectivity methods be posted as received to http:// www.cftc.gov. You should submit only 1. NFA Compliance Rule 2–9: Supervision that characterize modern financial 2. FIA Reports on Automated Trading information that you wish to make markets. In 2012 the Commission 3. IOSCO Reports on Electronic Trading adopted rules requiring futures available publicly. If you wish the 4. CFTC TAC Subcommittee commission merchants (‘‘FCMs’’), swap Commission to consider information 5. FIX Risk Management Working Group dealers (‘‘SDs’’), and major swap that may be exempt from disclosure 6. Senior Supervisors Group (SSG) Briefing under the Freedom of Information Act Note participants (‘‘MSPs’’) to use automated 7. Treasury Market Practices Group Best means to screen orders for compliance (‘‘FOIA’’), a petition for confidential treatment of the exempt information Practices with certain risk-based limits. It also III. Recent Disruptive Events in Automated adopted rules requiring certain financial may be submitted according to the procedures established in 17 CFR 145.9. Trading Environments risk control requirements for DCMs IV. Overview of Regulation AT offering direct market access to their The Commission reserves the right, but A. Concept Release/Regulation AT customers. In 2013 the Commission shall have no obligation, to review, Terminology published an extensive Concept Release prescreen, filter, redact, refuse, or B. Commenter Preference for Principles- on Risk Controls and System Safeguards remove any or all of your submission Based Regulations from http://www.cftc.gov that it may C. Multi-Layered Approach to Pre-Trade for Automated Trading Environments Risk Controls and Other Measures (‘‘Concept Release’’), compiling in one deem to be inappropriate for publication, such as obscene language. D. Codification of Defined Terms Used document a comprehensive discussion Throughout Regulation AT of industry practices, Commission All submissions that have been so treated that contain comments on the 1. ‘‘Algorithmic Trading’’—§ 1.3(zzzz) regulations, and evolving concerns in 2. ‘‘Algorithmic Trading Compliance merits of the rulemaking will be automated trading.1 Now, through this Issue’’—§ 1.3(tttt) retained in the public comment file and notice of proposed rulemaking 3. ‘‘Algorithmic Trading Disruption’’— will be considered as required under the (‘‘NPRM’’) for Regulation AT, the § 1.3(uuuu) Administrative Procedure Act and other Commission seeks to update 4. ‘‘Algorithmic Trading Event’’— applicable laws, and may be accessible § 1.3(vvvv) Commission rules in response to the under FOIA. 5. ‘‘AT Order Message’’—§ 1.3(wwww) evolution from pit trading to electronic 6. ‘‘AT Person’’—§ 1.3(xxxx) FOR FURTHER INFORMATION CONTACT: trading. In particular, the Commission is 7. ‘‘Direct Electronic Access’’—§ 1.3(yyyy) proposing to adopt a comprehensive Sebastian Pujol Schott, Associate E. Registration of Certain Persons Not approach to reducing risk and Director, Division of Market Oversight, Otherwise Registered With increasing transparency in automated [email protected] or 202–418–5641; Marilee Commission—§ 1.3(x) trading. Proposed Regulation AT is Dahlman, Special Counsel, Division of 1. Concept Release Comments designed to consolidate previous work Market Oversight, [email protected] 2. Description of Regulation by industry participants, the or 202–418–5264; Mark Schlegel, 3. Policy Discussion Special Counsel, Division of Market 4. Request for Comments Commission, and fellow regulators into F. RFA Standards for Automated Trading a unified body of law addressing Oversight, [email protected] or 202– 418–5055; Michael Penick, Economist, and Algorithmic Trading Systems— automation in order placement and § 170.19 execution in U.S. derivatives markets. Office of the Chief Economist, 1. Policy Discussion [email protected] or 202–418–5279; 2. Description of Regulation 1 Concept Release on Risk Controls and System Richard Haynes, Economist, Office of 3. Request for Comments Safeguards for Automated Trading Environments, the Chief Economist, [email protected] G. AT Persons Must Become Members of 78 FR 56542 (Sept. 12, 2013). or 202–418–5063; Andrew Ridenour, an RFA—§ 170.18 VerDate Sep<11>2014 17:37 Dec 16, 2015 Jkt 238001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 E:\FR\FM\17DEP2.SGM 17DEP2 tkelley on DSK3SPTVN1PROD with PROPOSALS2 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78825 1. Policy Discussion 1. Policy Discussion I. Introduction 2. Description of Regulation 2. Description of Regulations 3. Request for Comments 3. Request for Comments A. Overview—Development of H. Pre-Trade and Other Risk Controls for V. Related Matters Automated Trading Environment AT Persons—§ 1.80 A. Calculation of Number of Persons U.S. derivatives markets have 1. Concept Release Comments on Pre-Trade Subject to Regulations historically relied on manual processes and Other Risk Controls 1. Request for Comments 2. Description of Regulation for the origination of orders, B. Calculation of Hourly Wage Rates Used transmission of information, and 3. Policy Discussion in Related Matters 4. Request for Comments execution of trades. Trading decisions C. Regulatory Flexibility Act I. Standards for Development, Testing, were typically initiated by natural Monitoring, and Compliance of 1. FCMs and DCMs persons, and transmitted through 2. AT Persons Algorithmic Trading Systems—§ 1.81 intermediaries via comparatively simple 3. Request for Comments 1. Concept Release Comments communications networks. Execution 2. Description of Regulation D. Paperwork Reduction Act 1. Information Provided by Reporting occurred in open-outcry trading pits 3. Policy Discussion operated by DCMs. Access to these pits 4. Request for Comments Entities/Persons J. Risk Management by Clearing Member a. § 1.3(x)(3)—Submissions by newly was limited to brokers and traders FCMs—§ 1.82 registered floor traders granted trading privileges by the 1. Concept Release Comments b. § 1.83(a)—Compliance reports submitted exchange. A range of other processing 2. Description of Regulation by AT Persons to DCMs and risk management services were 3. Policy Discussion c. § 1.83(b)—Compliance reports submitted equally reliant on manual processes, 4. Discussion of Persons Subject to by clearing member FCMs to DCMs and the complete trading system could Proposed §§ 1.80 and 1.82 d. § 1.83(c)—AT Person retention and move only as fast as its human decision- 5. Request for Comments production of books and records makers. Trading information was often K. Compliance Reports Submitted by AT e. § 1.83(d)—Clearing member FCM recorded on paper order tickets and Persons and Clearing FCMs to DCMs; retention and production of books and Related
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