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(o) Alternative Methods of Compliance COMMODITY FUTURES TRADING trading firms designated as automated (AMOCs) COMMISSION traders (‘‘AT Persons’’); (ii) futures (1) The Manager, Seattle ACO Branch, commission merchants (‘‘FCMs’’); and FAA, has the authority to approve AMOCs 17 CFR Parts 1, 38, 40, and 170 (iii) designated contract markets 1 for this AD, if requested using the procedures RIN 3038–AD52 (‘‘DCMs’’). In response to the found in 14 CFR 39.19. In accordance with Regulation AT NPRM, the Commission 14 CFR 39.19, send your request to your Regulation Automated Trading; received 54 comment letters from principal inspector or local Flight Standards Withdrawal exchanges, industry trade associations, District Office, as appropriate. If sending public interest organizations, and information directly to the manager of the AGENCY: Commodity Futures Trading others. The views expressed in the certification office, send it to the attention of Commission. comment letters included, among other the person identified in paragraph (p)(1) of ACTION: Proposed rule; withdrawal. things, (i) opposition to the proposed this AD. Information may be emailed to: 9- three-level risk control framework; (ii) SUMMARY: On December 17, 2015, the [email protected]. Commodity Futures Trading opposition to identification and (2) Before using any approved AMOC, Commission (‘‘CFTC’’ or the registration of AT Persons; (iii) notify your appropriate principal inspector, ‘‘Commission’’) published a notice of opposition to provisions relating to or lacking a principal inspector, the manager proposed rulemaking, Regulation source code preservation and of the local flight standards district office/ Automated Trading (‘‘Regulation AT accessibility to the Commission without certificate holding district office. NPRM’’). On November 25, 2016, the a subpoena; and (iv) opposition to (3) An AMOC that provides an acceptable Commission issued a supplemental prescriptive, one-sized fits all rules. On level of safety may be used for any repair, notice of proposed rulemaking to June 10, 2016, Commission staff held a modification, or alteration required by this public roundtable to discuss elements of AD if it is approved by The Boeing Company modify certain rules in the Regulation AT NPRM (‘‘Supplemental Regulation the Regulation AT NRPM. In connection Organization Designation Authorization with the roundtable, the Commission (ODA) that has been authorized by the AT NPRM’’). In light of feedback the Commission received in response to the reopened the Regulation AT NPRM Manager, Seattle ACO Branch, FAA, to make comment period and received 19 those findings. To be approved, the repair Regulation AT NPRM and Supplemental Regulation AT NPRM (together, the additional comment letters, all of which method, modification deviation, or alteration also expressed concern with Regulation deviation must meet the certification basis of ‘‘Regulation AT NPRMs’’), the Commission has determined to AT. the airplane, and the approval must On November 25, 2016, following the withdraw the Regulation AT NPRMs specifically refer to this AD. conclusion of the reopened comment and reject certain policy approaches (4) AMOCs approved previously for AD period, the Commission issued the relating to the regulation of automated 2019–02–03 are approved as AMOCs for the Supplemental Regulation AT NPRM.2 trading contained therein. corresponding provisions of paragraph (g) of The Supplemental Regulation AT this AD. DATES: The Commodity Futures Trading NPRM proposed a revised framework Commission is withdrawing proposed (p) Related Information with pre-trade risk controls at two levels rules published on December 17, 2015 (1) For more information about this AD, (instead of the initially proposed three (80 FR 78824) and November 25, 2016 levels) in the life-cycle of an order, contact Tak Kobayashi, Aerospace Engineer, (81 FR 85334) as of July 15, 2020. Propulsion Section, FAA, Seattle ACO including: (1) The AT Person or the ADDRESSES: Comments previously FCM; and (2) the DCM. In addition, the Branch, 2200 South 216th St., Des Moines, submitted in response to the Regulation WA 98198; phone and fax: 206–231–3553; Supplemental Regulation AT NPRM AT NPRMs remain on file at the proposed some modifications to the risk email: [email protected]. Commodity Futures Trading (2) For service information identified in control framework, trading firm Commission, Three Lafayette Centre, registration criteria, reporting this AD, contact Boeing Commercial 1155 21st Street NW, Washington, DC Airplanes, Attention: Contractual & Data requirements, source code provisions, 20581 and may also be accessed via the Services (C&DS), 2600 Westminster Blvd., and compliance options for trading CFTC Comments Portal: https:// MC 110–SK57, Seal Beach, CA 90740–5600; firms that use third-party algorithmic comments.cftc.gov. telephone 562–797–1717; internet https:// trading systems. The Commission www.myboeingfleet.com. You may view this FOR FURTHER INFORMATION CONTACT: received 27 comment letters during the referenced service information at the FAA, Marilee Dahlman, Special Counsel, comment period for the Supplemental Airworthiness Products Section, Operational Division of Market Oversight, Regulation AT NPRM. Commenters Safety Branch, 2200 South 216th St., Des [email protected] or 202–418–5264; asserted, among other things, that (i) the Moines, WA. For information on the Joseph Otchin, Special Counsel, proposed rules were overly prescriptive availability of this material at the FAA, call Division of Market Oversight, jotchin@ and, if the Commission was intent on 206–231–3195. cftc.gov or 202–418–5623; Esen Onur, proceeding with a rulemaking, should be principles-based; (ii) the proposed Issued on July 7, 2020. [email protected] or 202–418–6146, Office of the Chief Economist; in each case at rules could result in redundant or Lance T. Gant, the Commodity Futures Trading overlapping risk controls; and (iii) the Director, Compliance & Airworthiness Commission, Three Lafayette Centre, benefits of the proposed rules were not Division, Aircraft Certification Service. 1155 21st Street NW, Washington, DC commensurate with the costs. [FR Doc. 2020–15127 Filed 7–14–20; 8:45 am] 20581. The Commission had proposed the BILLING CODE 4910–13–P Regulation AT NPRM and Supplemental SUPPLEMENTARY INFORMATION: On Regulation AT NPRM based on certain December 17, 2015, the Commission assumptions about the relative risk issued the Regulation AT NPRM, which proposed pre-trade risk controls at three 1 Regulation Automated Trading, 80 FR 78824 levels in the life-cycle of an order (Dec. 17, 2015). executed on a designated contract 2 Regulation Automated Trading, 81 FR 85334 market (‘‘DCM’’), including: (i) Certain (Nov. 25, 2016).

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associated with automated trading or makes U.S. derivatives markets the envy of markets caused by both human error as well algorithmic trading relative to other the world. What is sound regulation today as malfunctions in automated systems— forms of electronic trading. In addition, may not be sound regulation tomorrow. disruptions that would not have occurred in the Regulation AT NPRMs included I am reminded of the paradoxical open outcry pits. For instance, ‘‘fat finger’’ observation of Giuseppe di Lampedusa in his orders mistakenly entered by people, or fully provisions that would have: prize-winning novel, The Leopard: automated systems inadvertently flooding (1) Required certain types of market If we want things to stay as they are, things matching engines with messages, are two participants, based on their trading will have to change.1 sources of market disruptions unique to functionality, strategies, or market While the novel focuses on the role of the electronic markets. access methods, to register with the aristocracy amid the social turbulence of 19th century Sicily, its central thesis—that Past CFTC Attempts To Address Electronic Commission notwithstanding that they Trading Risks did not hold customer funds or achieving stability in changing times itself requires change—can be applied equally to The CFTC has considered the risks otherwise intermediate futures markets. the regulation of rapidly changing financial (2) Compelled those registrants, associated with electronic trading during markets. much of the last decade. Seven years ago, a including participants not currently Today we are voting on a proposal to different set of Commissioners issued a registered with the Commission, to address the risk of disruptions to the concept release asking for public comment produce source code to the Commission electronic markets operated by futures on what changes should be made to our without a subpoena; and exchanges. The risks involved are significant; regulations in light of the novel issues raised (3) Applied prescriptive requirements disruptions to electronic trading systems can by electronic trading. Out of that concept for the types of risk controls that prevent market participants from executing release, the Commission later proposed exchanges, FCMs, and others would be trades and managing their risk. But how we Regulation AT. For all its faults, Regulation address those risks—and the implications for AT drove a very healthy discussion about the required to implement. the relationship between the Commission In light of feedback the Commission risks that should be addressed and the best and the exchanges we regulate—is equally way to do so. received in response to the Regulation significant. Regulation AT was based on the AT NPRMs, and upon further The Evolution of Electronic Trading assumption that automated trading, a subset consideration, the Commission has of electronic trading, was inherently riskier determined to withdraw the pending A floor trader from the 1980s and even the than other forms of trading. As a result, Regulation AT NPRMs, to specifically 1990s would scarcely recognize the typical Regulation AT sought to require certain reject the policy responses listed above futures exchange of the 21st Century. The automated trading firms to register with the screaming and shouting of buy and sell Commission notwithstanding that they did as means of addressing the perceived orders reminiscent of the film Trading Places risk underlying the Regulation AT not hold customer funds or intermediate has been replaced with silence, or perhaps customer orders. Most problematically, NPRMs. Furthermore, the Commission the monotonous humming of large data Regulation AT also would have required has determined not to proceed with centers. For over the past two decades, our those firms to produce their source code to detailed, prescriptive requirements such markets have moved from open outcry the agency upon request and without as those contained within the trading pits to electronic platforms. Today, subpoena. Regulation AT NPRMs. Finally, the 96 percent of trading occurs through Regulation AT also took a prescriptive Commission has decided not to pursue electronic systems, bringing with it the price approach to the types of risk controls that discovery and hedging functions regulatory proposals that would require exchanges, clearing members, and trading foundational to our markets. firms would be required to place on order additional classes of market participants By and large, this shift to electronic trading to become registrants or compel market messages. But this list was set in 2015. In has benefited market participants. Spreads effect, Regulation AT would have frozen in 2 3 participants to divulge their source code have narrowed, liquidity has improved, time a set of controls that all levels of market 4 and other intellectual property absent a and transaction costs have dropped. And the operators and market participants would subpoena. most unexpected benefit is that electronic have been required to place on trading. Since markets have been able to stay open and that list was proposed, financial markets Issued in Washington, DC, on June 29, function smoothly during the Covid–19 2020, by the Commission. have faced their highest volatility on record lockdowns. By comparison, traditional open and futures market volumes have increased Christopher Kirkpatrick, outcry trading floors such as options pits and by over 50 percent.5 Improvements in the floor of the New York Stock Exchange Secretary of the Commission. technology and computer power have been were forced to close for an extended time. profound—Moore’s Law would predict that Note: The following appendices will not Without the innovation of electronic trading, computing power would have increased at appear in the Code of Federal Regulations. our financial markets would almost certainly least ten-fold in that time.6 Of course, I have seized up and suffered even greater commend my predecessors for focusing on Appendices to Regulation Automated distress. the risks that electronic trading can bring. Trading—Commission Voting But like any technological innovation, But times change, and Regulation AT would electronic trading also creates new and Summary, Chairman’s Statement, and not have changed with them. Commissioners’ Statements unique risks. Today’s proposal is informed by examples of disruptions in electronic An Evolving CFTC for Evolving Markets Appendix 1—Commission Voting In withdrawing Regulation AT, the CFTC Summary 1 Giuseppe Tomasi di Lampedusa, The Leopard is consciously moving away from the (Everyman’s Library Ed. 1991) at p. 22. registration requirements and source code On this matter, Chairman Tarbert and 2 Commissioners Quintenz and Stump voted in Frank, Julieta and Philip Garcia, ‘‘Bid-Ask production. But in voting to advance the Risk Spreads, Volume, and Volatility: Evidence from the affirmative. Commissioners Behnam and Livestock Markets,’’ American Journal of Principles proposal outlined further below, Berkovitz voted in the negative. Agricultural Economics, Vol. 93, Issue 1, page 209 the CFTC is committing to address risk posed (January 2011). Appendix 2—Supporting Statement of 3 Henderschott, Terrence, Charles M. Jones, and 5 Futures Industry Association, ‘‘A record year for Chairman Heath P. Tarbert Albert K. Menkveld, ‘‘Does Algorithmic Trading derivatives,’’ (March 5, 2019), available at https:// The mission of the CFTC is to promote the Improve Liquidity? ’’ Journal of Finance, Volume www.fia.org/articles/record-year-derivatives. 66, Issue 1, page 1 (February 2011). 6 integrity, resilience, and vibrancy of U.S. ‘‘Moore’s Law’’ predicts that the number of 4 Onur, Esen and Eleni Gousgounis, ‘‘The End of transistors in an integrated circuit doubles about derivatives markets through sound an Era: Who Pays the Price when the Livestock every two years, and has held generally true since regulation. We cannot achieve this mission if Futures Pits Close?’’, Working paper, Commodity 1965. See generally Sneed, Annie, ‘‘Moore’s Law we rest on our laurels—particularly in Futures Trading Commission Office of the Chief Keeps Going, Defying Expectations,’’ Scientific relation to the ever evolving technology that Economist. American (May 19, 2015).

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by electronic trading while strengthening our Principles-based regimes ultimately give penalties when messages exceed filled trades longstanding principles-based approach to discretion to the regulated entity to find the by too large a ratio. Exchanges also may overseeing exchanges. best way to achieve a goal, so long as that conduct due diligence on participants using The markets we regulate are changing. To method is objectively reasonable. To that certain market access methods and may maintain our regulatory functions, the CFTC end, the CFTC has a suite of tools to require require systems testing ahead of trading must either halt that change or change our changes through formal action, escalating through those methods. agency. Swimming against the tide of from denial of rule change requests, to It is not surprising that exchanges have developments like electronic markets is not enforcement actions, to license revocations. developed rules and risk controls that an option, nor should it be. The markets exist The CFTC consistently needs to address the comport with our proposed Risk Principles. to serve the needs of market participants, not effectiveness and appropriateness of these The Commission, exchanges, and market the regulator. If a technological change levers to make sure the exchanges are participants have a common interest in improves the functioning of the markets, we meeting their regulatory objectives. And ensuring that electronic markets function should embrace it. In fact, one of this given that exchanges will be judged on a properly. Moreover, this is an area where agency’s founding principles is that CFTC reasonableness standard, it must be the exchanges are likely to possess the best should ‘‘foster responsible innovation.’’ 7 Commission itself—based on a understanding of the risks presented and Applying this reasoning alongside the recommendation from CFTC staff 9—who have control over how their own systems overarching theme of The Leopard leads us ultimately decides whether an exchange has operate. As a result, exchanges have the to a single conclusion: As our markets been objectively unreasonable in complying incentive and the ability to address the risks evolve, the only real course of action is to with our principles. arising from electronic trading. Principles- ensure that the CFTC’s regulatory framework Proposed Risk Principles for Electronic based regulations in this area will ensure that evolves with it. Trading the exchanges have reasonable discretion to adjust their rules and risk controls as the The Need for Principles-Based Regulation This brings us to today’s proposed Risk situation dictates, not as the regulator So then how do we as a regulator change Principles. The proposal centers on a dictates. with the times while still fulfilling our straightforward issue that I think we can all The three Risk Principles encapsulate this statutory role overseeing U.S. derivatives agree is important for our regulations to approach. First, exchanges must have rules to markets? I recently published an article address. Namely, the proposal requires prevent, detect, and mitigate market setting out a framework for addressing exchanges to take steps to prevent, detect, disruptions and system anomalies associated situations such as this.8 I believe that and mitigate market disruptions and system with electronic trading. In other words, an principles-based regulations can bring anomalies associated with electronic trading. exchange should take a macro view when simplicity and flexibility while also The disruptions we are concerned about assessing potential market disruptions, promoting innovation when applied in the can come from any number of causes, which can include fashioning rules right situations. Such an approach can also including: applicable to all traders governing items such create a better supervisory model for Excessive messages, as onboarding, systems testing, and fat finger orders, or interaction between the regulator and its messaging policies. Second, exchanges must the sudden shut off of order flow from a regulated firms—but only so long as that have risk controls on all electronic orders to market maker. oversight is not toothless. address those same concerns. Third, There are a variety of circumstances in The key attribute of the disruptions exchanges must notify the CFTC of any which I believe principles-based regulation addressed in this proposal is that they arise significant market disruptions and give would be most effective. Regulations on how because of electronic trading. information on mitigation efforts. exchanges manage the risks of electronic To be sure, our current regulations do Importantly, implementation of the Risk trading are a prime example. This is about require exchanges to address market Principles will be subject to a reasonableness risk management practices at sophisticated disruptions. But the focus of those rules has standard. The proposed Acceptable Practices institutions subject to an established and generally been on disruptions caused by clarify that an exchange would be in ongoing supervisory relationship. But it is sudden price swings and volatility. In effect, compliance if its rules and its risk controls also an area where regulated entities have the proposed Risk Principles would expand are reasonably designed to meet the greater understanding than the regulator the term ‘‘market disruptions’’ to cover objectives of preventing, detecting, and about the risks they face and greater instances where market participants’ ability mitigating market disruptions and system knowledge about how to address those risks. to access the market or manage their risks is anomalies. The Commission will have the As a result, exchanges need flexibility in how negatively impacted by something other than ability to monitor how the exchanges are they manage risks as they constantly evolve. price swings. This could include slowdowns complying with the Principles, and will have At the same time, principles-based or closures of gateways into the exchange’s avenues through Commission action to regulation is not ‘‘light touch’’ regulation. matching engine caused by excessive sanction non-compliance. Without the ability to monitor compliance messages submitted by a market participant. and enforce the rules, principles-based It could also include instances when a Framework for Future Regulation regulation would be toothless. Principles- market maker’s systems shut down and the I hope that today’s Risk Principles proposal based regulation of exchanges can work market maker stops offering quotes. will serve as a framework for future CFTC because the CFTC and the exchanges have As noted in the preamble to the proposal, regulations. Electronic trading presents a constant interaction that engenders a degree exchanges have worked diligently to address prime example of where principles-based of mutual trust. The CFTC—as overseen by emerging risks associated with electronic regulation—as opposed to prescriptive rule our five-member Commission—has tools to trading. Different exchanges have put in sets—is more likely to result in sound monitor how the exchanges implement place rules such as messaging limits and regulation over time. Through thoughtful principles-based regulations through reviews analysis of the regulatory objective we aim to of license applications and rule changes, as 9 CFTC Staff conduct regular examinations and achieve, the nature of the market and well as through periodic examinations and reviews of our registered entities, including technology we are addressing, the exchanges and clearinghouses. As part of those rule enforcement reviews. sophistication of the parties involved, and Monitoring compliance alone is not examinations and reviews, Staff may identify issues of material non-compliance with regulations as well the nature of the CFTC’s relationship with enough. The regulator also needs the ability the entity being regulated, we can identify to enforce against non-compliance. as recommendations to bring an entity into compliance. Ultimately, however, the Commission what areas are best for a prescriptive itself must accept an examination report or rule regulation or a principles-based regulation.10 7 Commodity Exchange Act, section 3(b), 7 U.S.C. enforcement review report before it can become In the present context, a principles-based 3(b). final, including any findings of non-compliance. approach—setting forth concrete objectives 8 Tarbert, Heath P., ‘‘Rules for Principles and Likewise, Staff are asked to make recommendations while affording reasonable discretion to the Principles for Rules: Tools for Crafting Sound regarding license applications, reviews of new Financial Regulation,’’ Harv. Bus. L. Rev. (June 15, products and rules, and a variety of other exchanges—provides flexibility as electronic 2020). Vol. 10 (https://www.hblr.org/volume-10- Commission actions, although ultimate authority 2019-2020/). lies with the Commission. 10 Tarbert, at 11–17.

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trading practices evolve, while maintaining recommendations published by the Clearfield of System Logic, a research and sound regulation. In sum, it recognizes that International Organization of Securities consulting firm focusing on issues of risk and things will have to change if we want things Commissions (IOSCO) regarding practices to complexity remarked, ‘‘In every situation, a to stay as they are.11 manage volatility and preserve orderly trader or a piece of technology might fail, or trading. We also heard from the Futures a shock might trigger a liquidity event. Appendix 3—Supporting Statement of Industry Association (FIA) about current best What’s important is that structures are in Commissioner Brian Quintenz practices for electronic trading risk controls. place to limit—not amplify—the impact on 2 I support today’s proposal that would FIA reported that through its surveys of the overall system.’’ Any rule that we put require designated contract markets (DCMs) exchanges, clearing firms, and trading firms, forward should both minimize the potential to adopt rules that are reasonably designed to it has found widespread adoption of market for market disruptions and other operational prevent, detect, and mitigate market integrity controls since 2010, including price problems that may arise from the automation disruptions or system anomalies associated banding and exchange market halts. FIA also of order origination, transmission or with electronic trading. It would also require previewed some of the next generation execution, and create structures to absorb DCMs to subject all electronic orders to pre- controls and best practices currently being and buffer breakdowns when they occur. trade risk controls that are reasonably developed by exchanges and firms to further Unfortunately, today’s proposal regarding designed to prevent, detect and mitigate refine and improve electronic trading Electronic Trading Risk Principles does not market disruptions and to provide prompt systems. The Intercontinental Exchange (ICE) meaningfully achieve this, and thus I notice to the Commission in the event the also presented on the risk controls ICE respectfully dissent. platform experiences any significant currently implements across all of its A little over ten years ago, on May 6, 2010, 3 disruptions. I believe all DCMs have already exchanges, noting how its implementation of the Flash Crash shook our markets. The adopted regulations and pre-trade risk controls was fully consistent with FIA’s best prices of many U.S.-based equity products, controls designed to address the risks posed practices. These presentations emphasize including stock index futures, experienced by electronic trading. As I have noted how critical it is for the Commission to adopt an extraordinarily rapid decline and previously, many—if not all—of the risks a principles-based approach that enables best recovery. After this event, the staffs of the posed by electronic trading are already being practices to evolve over time. I believe the U.S. Securities and Exchange Commission effectively addressed through the market’s proposal issued today adopts such an (‘‘SEC’’) and CFTC issued a report to the Joint incentive structure, including exchanges’ and approach and provides DCMs with the CFTC–SEC Advisory Committee on Emerging firms’ own self-interest in implementing best flexibility to continually improve their risk Regulatory Issues.4 The report noted that practices. Therefore, today’s proposal merely controls in response to technological and ‘‘[o]ne key lesson is that under stressed codifies the existing market practice of DCMs market advancements. I look forward to market conditions, the automated execution to have reasonable controls in place to comment on the proposal. of a large sell order can trigger extreme price mitigate electronic trading risks. It is also long overdue for the Commission movements, especially if the automated Significantly, the proposal puts forth a to withdraw the Regulation Automated execution algorithm does not take prices into principles-based approach, allowing DCM Trading Proposal and Supplemental Proposal account. Moreover, the interaction between trading and risk management controls to (Regulation AT NPRMs). The Regulation AT automated execution programs and continue to evolve with the trading NPRMs would have required certain types of algorithmic trading strategies can quickly technology itself. As we have witnessed over market participants, based purely on their erode liquidity and result in disorderly the past decade, risk controls are constantly trading functionality, strategies or market markets.’’ 5 In 2012, Knight Capital, a being updated and improved to respond to access methods, to register with the securities trading firm, suffered losses of market developments. It is my view that Commission, notwithstanding that they did more than $460 million due to a trading these continuous enhancements are made not act as intermediaries in the markets or software coding error.6 Other volatility possible because exchanges and firms have hold customer funds. Moreover, the NPRMs events related to automated trading have the flexibility and incentives to evolve and proposed extremely prescriptive followed with increasing regularity.7 hold themselves to an ever-higher set of requirements for the types of risk controls After the Flash Crash, the CFTC initially standards, rather than being held to a set of that exchanges, futures commission worked with the SEC to establish controls to prescriptive regulatory requirements which merchants, and trading firms would be minimize the risk of automated trading can quickly become obsolete. By adopting a required to implement. Lastly, by disruptions. Knight Capital demonstrated principles-based approach, the proposal withdrawing these NPRMs, the market and that the Flash Crash was not a one-off event, would provide exchanges and market public can finally consider as dead the prior and in 2013 the Commission published an participants with the flexibility they need to Commission’s significant, and likely extensive Concept Release on Risk Controls innovate and evolve with technological unconstitutional, overreach on accessing developments. DCMs are well-positioned to firms’ proprietary source code and protected S., ‘‘Automated Trading in Futures Markets— determine and implement the rules and risk intellectual property without a subpoena. Update #2’’ at 8 (Mar. 26, 2019), available at https:// controls most effective for their markets. In my view, the Regulation AT NPRMs www.cftc.gov/sites/default/files/2019-04/ATS_2yr_ Under the proposed rule, DCMs would be were poorly crafted and flawed public policy Update_Final_2018_ada.pdf. required to adopt and implement rules and that failed to understand the true risks of the 2 Chris Clearfield, Vision Zero for Our Markets, risk controls that are objectively reasonable. electronic trading environment and the The Risk Desk, Dec. 21, 2016, at 4. The Commission would monitor DCMs for intrinsic incentives that exchanges and 3 See Findings Regarding the Market Events of compliance and take action if it determines market participants have to mitigate and May 6, 2010, Report of the Staffs of the CFTC and that the DCM’s rules and risk controls are address those risks. I am pleased the SEF to the Joint Advisory Committee on Emerging objectively unreasonable. Commission is officially rejecting the policy Regulatory Issues (Sept. 30, 2010), available at http://www.cftc.gov/ucm/groups/public/@otherif/ The Technology Advisory Committee rationales and regulatory requirements documents/ifdocs/staff-findings050610.pdf. (TAC), which I am honored to sponsor, has proposed in the Regulation AT NPRMs and 4 Id. explored the risks posed by electronic trading is instead embracing the principles-based 5 Id. at 6. at length. In each of those discussions, it has approach of today’s proposal. 6 See SEC Press Release No. 2013–222, ‘‘SEC become obvious that both DCMs and market Charges Knight Capital With Violations of Market participants take the risks of electronic Appendix 4—Statement of Dissent of Access Rule’’ (Oct. 16, 2013), available at http:// trading seriously and have expended Commissioner Rostin Behnam www.sec.gov/News/PressRelease/Detail/Press enormous effort and resources to address Release/1370539879795. I strongly support thoughtful and 7 those risks. meaningful policy that addresses the use of For a list of volatility events between 2014 and 2017, see the International Organization of For example, at one TAC meeting, we automated systems in our markets.1 As Chris heard how the CME Group has implemented Securities Commissions (‘‘IOSCO’’) March 2018 trading and volatility controls that Consultant Report on Mechanisms Used by Trading 1 The Commission’s Office of the Chief Economist Venues to Manage Extreme Volatility and Preserve complement, and in some cases exceed, eight has found that over 96 percent of all on-exchange Orderly Trading (‘‘IOSCO Report’’), at 3, available futures trading occurred on DCMs’ electronic at https://www.iosco.org/library/pubdocs/pdf/ 11 Di Lampedusa, at 22. trading platforms. Haynes, Richard & Roberts, John IOSCOPD607.pdf.

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and System Safeguards for Automated not asking DCMs to do anything new is notice and opportunity to comment that is Trading Environments (‘‘Concept Release’’).8 clearest in the cost benefit analysis, which required by the Administrative Procedures Following public comments on the Concept states that ‘‘DCMs’ current risk management Act. These costs become too high where, as Release, the Commission published practices, particularly those implemented to today, we promulgate rules that are too broad ‘‘Regulation AT,’’ which proposed a series of comply with existing regulations 38.157, in their terms and too vague in application. risk controls, transparency measures, and 38.251(c), 38.255, and 38.607, already may There is a reason why the core principles for other safeguards to address risks arising from comply with the requirements of proposed swap execution facilities (‘‘SEFs, DCMs, and automated trading on designated contract rules 38.251(e) through 38.251(g).’’ 15 If the derivatives clearing organizations (‘‘DCOs’’) markets or ‘‘DCMs.’’ 9 Reg AT proposed pre- appropriate structures are in place, and we in our rule set are extensive, and why the trade risk controls at three levels in the life- have dutifully conducted our DCM rule regulations include appendices explaining cycle of an order executed on a DCM: (i) enforcement reviews and have found neither Commission interpretation and acceptable Certain trading firms; (ii) futures commission deficiencies nor areas for improvement, then practices. Without sufficient clarity, merchants (‘‘FCMs’’); and (iii) DCMs. In is the exercise before us today anything more principles actually can become a vehicle for 2016, again based on public comments, the than creating a box to check? The only government overreach—a blank check for potentially new aspect of this proposal is that Commission issued a supplemental notice of broad government action—and that includes the preamble suggests different application in proposed rulemaking for Reg AT, proposing enforcement action. the future, as circumstances change. The a revised framework with controls at two There is a saying in basketball that a good Commission seems to want it both ways: We levels (instead of three levels initially zone defense looks a lot like a man-to-man want to reassure DCMs that what they do proposed): (1) The AT Person or the FCM; defense, and a good man-to-man defense 10 now is enough, but at the same time the new and (2) the DCM. looks a lot like a zone defense. I think the Since 2016, the Commission has not risk principles potentially provide a blank check for the Commission to apply them same can be said of principles-based advanced policy designed to prevent or regulation and rules-based regulation. Good restrain the impact of these market differently in the future. Or perhaps, viewed differently, when there is a technology principles-based regulation should look a lot disruptions resulting from automated trading. like rules-based regulation—it should have While the Commission has not acted, these failure—and there will be—will the Commission stand by its principles or will it enough clarity to provide market participants events have continued to occur. In September with certainty and the opportunity to provide and October 2019, the Eurodollar futures fashion an enforcement action around a black swan event so that everyone walks away comment regarding what regulation will look market experienced a significant increase in like. messaging.11 According to reports, the bruised, but not harmed? For market participants, this may be It is worth noting that the Commission volume of data generated by activity in described the unanimously approved Reg AT Eurodollar futures increased tenfold.12 The extremely confusing. What precisely are DCMs being asked to do, and what will they proposal as principles-based.17 Multiple DCM responded by changing its rules to commenters to that proposal noted that it increase penalties for exceeding certain be asked to do in the future? Frankly, I am not sure. But it could be more than they was too principles-based.18 I suspect that messaging thresholds and cutting off each of us on the Commission believes that connections for repeat violators.13 The DCM bargained for. The first Risk Principle requires DCMs to the CFTC has a tradition of principles-based acted appropriately in such a situation and regulation, and that that tradition should strengthened the rules for its participants; ‘‘[a]dopt and implement rules . . . to prevent, detect, and mitigate market continue. However, I think there is however, Commission policy could well have disagreement as to precisely what that prevented this event by requiring pre-trade disruptions or system anomalies associated with electronic trading.’’ None of the key means.19 risk controls, including messaging terms in this principle are defined in the Finally, I want to make a few comments on thresholds. regulation or the preamble. DCMs are left the vote regarding the withdrawal of Reg AT. Given the importance of the issue, I would some clues, but they are not told precisely On one hand, the Risk Principles proposal like to commend the Chairman for stepping what a market disruption or system anomaly today expressly is not about automated or forward with a proposal today. However, as is. Perhaps most importantly, they are not algorithmic trading. This applies to I considered this proposal, I found myself told what it means for something to be electronic trading generally. Yet there seems questioning what the proposed Risk ‘‘reasonably designed’’ to prevent these to be a perception that this is a replacement Principles do differently than the status quo. things. This lack of clarity continues through for Reg AT, and that is already reflected in The preamble seems to go to great lengths to the other two new Risk Principles. And while media accounts of our action today.20 And if make it clear that the Commission is not the Commission provides some clues by asking DCMs to do anything. The preamble stating that current practice ‘‘may’’ meet the 17 Reg AT at 78838. states that the ‘‘Commission believes that new principles, it then goes on to say that DCMs are addressing most, if not all, of the 18 See Comments of Americans For Financial future circumstances may require future Reform and Better Markets, Inc., available at https:// electronic trading risks currently presented to action by DCMs in order to comply with the 14 comments.cftc.gov/PublicComments/Comment their trading platforms.’’ As the preamble principles. List.aspx?id=1762. discusses each of the three ‘‘new’’ Risk As a recent article by our Chairman in the 19 As I have stated before, ‘‘A principles-based Principles, it goes on to describe all of the Harvard Business Law Review points out, the approach provides greater flexibility, but more actions taken by DCMs today that meet the CFTC has a long tradition of principles-based importantly focuses on thoughtful consideration, principles. The fact that the Commission is regulation.16 The concept runs through our evaluation, and adoption of policies, procedures, core principles, which form the framework and practices as opposed to checking the box on a 8 Concept Release on Risk Controls and System predetermined, one-size-fits-all outcome. However, for much of what we do and how we the best principles-based rules in the world will not Safeguards for Automated Trading Environments, regulate. It certainly is tempting to 78 FR 56542 (Sept. 12, 2013). succeed absent: (1) clear guidance from regulators; promulgate broad rules that provide the (2) adequate means to measure and ensure 9 Regulation Automated Trading, Proposed Rule, CFTC with flexibility to react to changes in compliance; and (3) willingness to enforce 80 FR 78824 (Dec. 17, 2015). compliance and punish those who fail to ensure 10 the marketplace. The problem is that this Supplemental Regulation AT NPRM, 81 FR flexibility comes at a number of costs—it compliance with the rules.’’ See Rostin Behnam, 85334 (Nov. 25, 2016). potentially denies market participants the Commissioner, CFTC, Remarks of Commissioner 11 See Osipovich, Alexander, ‘‘Futures Exchange Rostin Behnam before the FIA/SIFMA Asset Reins in Runaway Trading Algorithms,’’ Wall Street certainty they need to make business decisions, and, if the principles are too Management Group, Asset Management Derivatives Journal (Oct. 29, 2019), available at https:// Forum 2018, Dana Point, California (Feb. 8, 2018), www.wsj.com/articles/futures-exchange-reins-in- flexible, it denies market participants the https://www.cftc.gov/PressRoom/Speeches runaway-trading-algorithms-11572377375. Testimony/opabehnam2. 12 Id. 15 Proposal at IV.C.3. 20 See Bain, Ben, ‘‘Flash Boys New Rules Won’t 13 See CME Group Globex Messaging Efficiency 16 Press Release Number 8183–20, CFTC, ICYMI: Make Them Hand Over Trading Secrets,’’ Program, available at https://www.cmegroup.com/ Harvard Business Law Review Publishes Chairman Bloomberg (Jun. 18, 2020), https:// globex/trade-on-cme-globex/messaging-efficiency- Tarbert’s Framework for Sound Regulation (June 15, www.bloomberg.com/news/articles/2020-06-18/ program.html. 2020), https://www.cftc.gov/PressRoom/Press flash-boys-new-rules-won-t-make-them-hand-over- 14 Proposal at I.A. Releases/8183-20. trading-secrets.

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there is any question, the Commission is the need to update the Commission’s excesses of deregulation, the Dodd-Frank Act separately voting on withdrawal of Reg AT regulations to keep pace with the speed, overhauled the CEA, including in its (and mentions Reg AT repeatedly in the interconnection, and automation of modern treatment of the core principle regime.3 document) at the same time it is issuing this markets. I support the Commission’s long- Specifically, section 735 of the Dodd-Frank NPRM. overdue re-engagement in this area. Act made clear that a DCM’s discretion with A separate vote specifically to withdraw a While I support issuing the Proposed Rule respect to core principle compliance was prior Commission proposal is highly for public comment, I do not support circumscribed by any rule or regulation that unusual—particularly in a situation where, withdrawing the proposed rule known as the Commission might adopt pursuant to a as here, the original proposal was Regulation Automated Trading (‘‘Reg AT’’).1 core principle.4 I am able to support today’s unanimously issued. I believe that this action The notice of withdrawal reflects a belief that Proposed Rule for publication in the Federal establishes a dangerous precedent for a there is nothing of value in Reg AT. That is Register because of improvements that clarify Commission that has historically prided itself simply not true. Reg AT was a the respective authorities between a DCM on its collegiality and efforts to work in a comprehensive approach for addressing and the Commission. Under the CEA, the bipartisan fashion. I have followed in a automated trading in Commission regulated Commission is the ultimate arbiter of tradition of some of my predecessors on the markets. Certain elements of Reg AT attracted whether a DCM’s rules and risk controls are Commission, at times voting for proposals intense opposition and may have been a reasonably designed, under an objective that I would not have supported as final bridge too far. However, I applaud that standard. I thank the Chairman for his efforts rules, for the purpose of advancing the proposal’s efforts to identify the sources of at building consensus in this regard. conversation.21 I worry that the withdrawal risk and implement meaningful risk controls. The Proposed Rule overlaps with existing of Reg AT could lead to future withdrawals I believe the comments received on Reg AT requirements in part 38 of the Commission of Commission proposals, and a loss of this are worth evaluating going forward. regulations, including regulation 38.255, historical collegiality. We should be standing The Proposed Rule would codify in part 38 which requires DCMs to ‘‘establish and on the shoulders of those who came before of the Commission’s regulations three ‘‘Risk maintain risk control mechanisms to prevent us, not tearing down what came before us. Principles’’ applicable to electronic trading and reduce the potential risk of price on designated contract markets (‘‘DCMs’’). Market participants expressed valid distortions and market disruptions ....’’5 Risk Principle 1, for example, would require concerns to the original Reg AT, as they do While the Proposed Rule and Risk Principle DCMs to implement rules applicable to with many of our proposals. But, market 2 are more explicit with respect to electronic market participants to prevent, detect, and displeasure with just one or even a few of trading, they may add little to existing mitigate market disruptions and system those original policy concepts is not a reason requirements and practices regarding the risk anomalies. Risk Principle 2 would also to throw away the rest of the proposal. Let’s controls that DCMs build into their own require DCMs to implement their own pre- revisit, review, and refresh sound policy to systems. Indeed, the Proposed Rule provides trade risk controls. While worthwhile as better reflect modern market structure and a numerous examples of specific risk controls statements of principle, these proposed healthy relationship between market at major DCMs that likely already meet this participant and market regulator. I firmly requirements are drafted in terms that may ultimately prove too high-level to achieve the requirement, and of disciplinary actions believe we collectively strive for the same taken by DCMs against market participants goal: Safe, transparent, orderly, and fair goal of effectively preventing, detecting, and mitigating market disruptions and system related to electronic trading. Although the markets. Unfortunately, today’s proposal Commission articulates a need for updating does not advance the conversation, and as anomalies. This concern is discussed in greater detail below, and I look forward to its risk control requirements, the fact that the such I cannot support it. Risk Principles as proposed are likely to have The preamble to today’s NPRM expressly public comment on the issue. The Proposed Rule includes Acceptable no practical effect undermines the usefulness says ‘‘The Risk Principles proposed here are of this exercise. intended to accomplish a similar goal . . .’’ Practices in Appendix B to part 38, which provide that a DCM can comply with the Risk The Proposed Rule possibly may be of to the original Reg AT.22 The Reg AT greater benefit in with respect to Risk proposal rule text took up more than 6 pages Principles through rules and risk controls that are ‘‘reasonably designed’’ to prevent, Principle 1 and its requirement that DCMs in the Federal Register, and made revisions implement risk control rules applicable to and additions to Parts 1, 39, 40, and 170, detect, and mitigate market disruptions and system anomalies. The Proposed Rule their market participants. Market providing a comprehensive—and principles- participants, who originate orders via based—framework for addressing a very real specifies that reasonableness is an objective measure, and that a DCM rule or risk control systems ranging from comparatively simple issue that all market participants should be that is not ‘‘reasonably designed’’ would not automated order routers to nearly concerned about. Today’s proposed satisfy the Acceptable Practices or the Risk autonomous algorithmic trading systems, are principles are all of three sentences long. Principles. As the Proposed Rule indicates, crucial focal points for any adequate system This is not a miracle of brevity. It just shows the Commission will monitor DCMs’ of risk controls. An effective system of risk that the proposal today does not really do compliance with the Risk Principles. In this controls must therefore include controls at anything—while paradoxically writing the regard, the Commission has multiple multiple stages in the life cycle of an Commission a blank check to change its oversight activities at its disposal, including automated order submitted to an electronic mind about what the principles mean in the market surveillance activities, reviews of new trade matching engine. Although Risk future and who will stand by them when the rule certifications and approval requests, and Principle 1 could benefit from greater rigor, next black swan lands. rule enforcement reviews. it is nonetheless a critical recognition that Appendix 5—Statement of The Proposed Rule is also clear on the market participants have an important role in Commissioner Dan M. Berkovitz fundamental division of authority under the any effective risk control framework. Commodity Exchange Act (‘‘CEA’’) between I look forward to public comments on I support issuing for public comment the DCMs and the Commission. Amendments to additional measures that the Commission proposed rule on Electronic Trading Risk the CEA made through the Commodity should consider for effective risk controls Principles (‘‘Proposed Rule’’). The Proposed Futures Modernization Act (‘‘CFMA’’) in the across the ecosystem of electronic and Rule is a limited step to address potential year 2000 introduced the core principle algorithmic trading. My support for any final market disruptions arising from system errors regime and provided DCMs with flexibility in rule that may arise from this proposal is or malfunctions in electronic trading. establishing how they comply with a core conditioned upon a thorough articulation of Although it leaves important issues principle.2 Ten years later, however, learning the technology-driven risks present in today’s unaddressed, the Proposed Rule recognizes from the 2008 financial crisis and the markets, and a concomitant regulatory

21 See Concurring Statement of Commissioner 1 Regulation Automated Trading, 80 FR 78824 3 Dodd-Frank Wall Street Reform and Consumer Rostin Behnam Regarding Swap Execution (Dec. 17, 2015); 81 FR 85334 (Nov. 25, 2016) Protection Act, Public Law 111–203, 124 Stat. 1376 Facilities and Trade Execution Requirement, (Nov. (supplemental notice of proposed rulemaking for (2010). 5, 2018). https://www.cftc.gov/PressRoom/Speeches Regulation Automated Trading). 4 Commodity Exchange Act section 5(d)(1)(B), 7 Testimony/behnamstatement110518a. 2 Commodity Futures Modernization Act of 2000, U.S.C. 7(d)(1)(B) (2010). 22 Proposal at I.B. Public Law 106–554, 114 Stat. 2763A–365 (2000). 5 17 CFR 38.255 (2012).

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response that will meaningfully address such trading platform experiencing a may deem to be inappropriate for risks. In a market environment where the vast disruption or system anomaly due to publication, such as obscene language. majority of trading is now electronic and electronic trading. The proposed All submissions that have been redacted automated, inaction is a luxury that we can regulations consist of three principles or removed that contain comments on ill-afford. Although the Proposed Rule may be applicable to DCMs concerning: The the merits of the rulemaking will be characterized as a ‘‘principles-based’’ implementation of exchange rules retained in the public comment file and approach, in fact the Risk Principles are not applicable to market participants to will be considered as required under the a new approach to the regulation of risks prevent, detect, and mitigate market Administrative Procedure Act and other from electronic trading. The current disruptions and system anomalies applicable laws, and may be accessible regulation establishing requirements on associated with electronic trading; the under FOIA. DCMs to impose risk controls—Regulation implementation of exchange-based pre- 38.255—is principles-based. Regulation FOR FURTHER INFORMATION CONTACT: trade risk controls for all electronic Marilee Dahlman, Special Counsel, 38.255 states: ‘‘The designated contract orders; and the prompt notification of market must establish and maintain risk [email protected] or 202–418–5264; control mechanisms to prevent and reduce the Commission by DCMs of any Joseph Otchin, Special Counsel, the potential risk of price distortions and significant disruptions to their [email protected] or 202–418–5623, market disruptions, including, but not electronic trading platforms. The Division of Market Oversight; Esen limited to, market restrictions that pause or proposed regulations are accompanied Onur,[email protected] or 202–418–6146, halt trading in market conditions prescribed by proposed acceptable practices Office of the Chief Economist; in each by the designated contract market.’’ One (‘‘Acceptable Practices’’), which provide case at the Commodity Futures Trading might ask, therefore, why do we need another that a DCM can comply with these principles-based regulation when we already Commission, Three Lafayette Centre, principles by adopting and 1155 21st Street NW, Washington, DC have a principles-based regulation? The implementing rules and risk controls preamble to the Proposed Rule notes the 20581. ‘‘overlap’’ between Regulation 38.255 and the that are reasonably designed to prevent, proposed Risk Principles, and states ‘‘it is detect, and mitigate market disruptions SUPPLEMENTARY INFORMATION: beneficial to provide further clarity to DCMs and system anomalies associated with Table of Contents about their obligations to address certain electronic trading. situations associated with electronic DATES: Comments must be received on I. Introduction trading.’’ In other words, the principles-based or before August 24, 2020. A. Purpose of Electronic Trading Risk regulations previously adopted by the Principles Commission are not prescriptive enough to ADDRESSES: You may submit comments, B. Basic Structure of Electronic Trading address the risks currently posed by identified by RIN 3038–AF04, by any of Risk Principles electronic trading. I fully agree. Although I the following methods: II. Regulatory Approaches To Addressing am voting today to put out this proposal for • CFTC Comments Portal: https:// Market Disruptions and System public comment, I am not yet convinced— comments.cftc.gov. Select the ‘‘Submit Anomalies Associated With Electronic and I look forward to public comment on Comments’’ link for this rulemaking and Trading Activities whether—the principles-based regulations follow the instructions on the Public A. Examples of DCM Responses to proposed today are in fact sufficiently Disruptions and Anomalies Associated Comment Form. With Electronic Trading Activities detailed or comprehensive to effectively • Mail: Send to Christopher address those risks. B. NFA Efforts To Prevent Market I thank the staff of the Division of Market Kirkpatrick, Secretary of the Disruptions and System Anomalies Oversight for their work on the Proposed Commission, Commodity Futures C. CFTC Regulations Governing DCM Rule and for their patience as the Trading Commission, Three Lafayette Operations and Risk Controls Commission worked through multiple Centre, 1155 21st Street NW, D. Prior Commission Proposals and iterations of this proposal. I also thank the Washington, DC 20581. Requests for Comments on Electronic Chairman for his engagement and effort to • Hand Delivery/Courier: Follow the Trading build consensus. I believe that the Proposed same instructions as for Mail, above. E. Market Participants’ Discussions of Best Rule is a much better regulatory outcome Please submit your comments using Practices III. Risk Principles because of the extensive dialogue and give- only one of these methods. Submissions and-take that led to the rule before us today. A. Electronic Trading, Electronic Orders, through the CFTC Comments Portal are Market Disruption, and System [FR Doc. 2020–14383 Filed 7–14–20; 8:45 am] encouraged. Anomalies BILLING CODE 6351–01–P All comments must be submitted in B. Proposed Regulation 38.251(e)—Risk English or, if not, accompanied by an Principle 1 English translation. Comments will be C. Proposed Regulation 38.251(f)—Risk COMMODITY FUTURES TRADING posted as received to https:// Principle 2 COMMISSION comments.cftc.gov. You should submit D. Proposed Regulation 38.251(g)—Risk only information that you wish to make Principle 3 17 CFR Part 38 IV. Related Matters available publicly. If you wish the A. Regulatory Flexibility Act RIN 3038–AF04 Commission to consider information B. Paperwork Reduction Act that you believe is exempt from Electronic Trading Risk Principles 1. OMB Collection 3038–0093— disclosure under the Freedom of Provisions Common to Registered AGENCY: Commodity Futures Trading Information Act (‘‘FOIA’’), a petition for Entities Commission. confidential treatment of the exempt 2. OMB Collection 3038–0052—Core Principles and Other Requirements for ACTION: Notice of proposed rulemaking. information may be submitted according to the procedures established in 17 CFR DCMs C. Cost-Benefit Considerations SUMMARY: The Commodity Futures 145.9. 1. Introduction Trading Commission (‘‘CFTC’’ or The Commission reserves the right, 2. Summary of Proposal ‘‘Commission’’) is proposing but shall have no obligation, to review, 3. Costs amendments to its regulations to pre-screen, filter, redact, refuse, or 4. Benefits address the potential risk of a remove any or all of your submission 5. 15(a) Factors designated contract market’s (‘‘DCM’’) from https://comments.cftc.gov that it D. Antitrust Considerations

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