ISSUE 39 Q2 | 2016

REGULATION AT: WHAT INVESTMENT MANAGERS NEED TO KNOW

by J.P. Bruynes and Libbie Walker

Pages 45-47

automatedtrader.net COMPLIANCE

REGULATION AT: WHAT INVESTMENT MANAGERS NEED TO KNOW by J.P. Bruynes and Libbie Walker The latest in a series of regulatory moves highlighting heightened scrutiny of automated trading came late last year with the CFTC’s Notice of Proposed Rulemaking on Regulation Automated Trading (Regulation AT).

Aimed at addressing the inherent risks in that may undermine the integrity of the US markets, Regulation AT AUTHOR’S BIO proposes new risk control, transparency and compliance measures J.P. Bruynes is a partner in the investment for automated trading on US designated contract markets (DCMs). management practice at Akin Gump with a focus in the quantitative and global While the market evolution from pit trading to electronic trading macro space. He advises investment has led to many efciencies and benefts, it has also resulted in advisers, commodity trading advisors, increased potential for market disruptions. Regulation AT is commodity pool operators and designed to consolidate previous work of the CFTC and other funds in connection with asset raising regulators, as well as practice by industry participants, into a unifed and interactions with global regulators. body of law addressing automated trading systems (ATS) in US derivatives markets. Its overarching goal is to reduce the potential of automated trading disruptions, such as the ‘Flash Crash’ of May 6, 2010, and the events of October 15, 2014, when the market AUTHOR’S BIO for US Treasury securities and futures underwent unusually high Libbie Walker is an associate in Akin volatility. A very rapid upswing was followed by an equally rapid Gump’s investment management downswing in prices. practice, focusing primarily on the formation and operation of domestic While many safeguards that Regulation AT would require of and offshore private investment funds, market participants are already broadly used in the industry, several including hedge funds and private equity requirements will come as a surprise to many. Automated traders funds. will need to adjust their program logic accordingly.

AUTOMATED TRADER QUARTER 02 | 2016 45 COMPLIANCE

Only those engaged in what the CFTC at least one RFA. Tis proposed regulation called ‘price collars’ or ‘price tolerance limits’ defnes as ‘algorithmic trading’ will be particularly afects foor brokers and foor and ‘fat-fnger limits’. Each order will also subject to this new regulation. Te CFTC traders who are not otherwise required to be required to pass through a predetermined defnes algorithmic trading as trading in be RFA members. limit check that sets a maximum quantity any commodity interest on, or subject and a maximum deviation level in order to the rules of, a US designated contract price as measured against a predetermined market, where: (1) one or more computer RISK CONTROL MEASURES price, such as last trade price or market algorithms or systems determines whether open price. to initiate, modify, or cancel an order, or Te CFTC proposes that AT Persons adopt otherwise makes determinations with AT Persons will be required to implement signifcant new risk control measures. To a ‘kill switch’ control that immediately respect to an order, including but not ease the burden, the CFTC will allow AT stops trading, cancels some or all of the limited to: the product to be traded; the Persons the discretion to tailor their risk resting orders, and prevents any new AT venue where the order will be placed; the control programs to their own strategies. Order Messages. Further, AT Persons must type of order to be placed; the timing of Additionally, an AT Person may outsource maintain systems that monitor connectivity the order; whether to place the order; the its risk management to an external ven