Looking through the CFTC’s prism

The CFTC’s recent Concept Release on Risk Controls and System Safeguards for Automated Trading Environments represents a watershed moment for US derivatives markets, setting the stage for a new regulatory approach to electronic trading.

The CFTC’s role and powers have already been greatly enhanced, post-Dodd-Frank, through a combination of the new market abuse powers, the “command and control” approach to risk embodied in Regulation 1.73 and the Commission’s guidance on disruptive trading. But in the Concept Release the Commission spells out in great detail an approach to risk management across multiple segments of the trading realm – pre- and post-trade, operational and policy, as well as software design, development, testing and supervision. And, in a broad and informed approach to electronic trading, the Commission looks at the complex and overlapping responsibilities of the numerous participants, be they traders, vendors, FCMs, DCMs or DCOs.

Putting aside any debate on the possibility of federalized standards and their costs and benefits, and taking a look at the derivatives trading landscape through the prism of the Commission’s paper, it’s not unreasonable to conclude that going forward the industry’s approach to risk controls should be better informed; that our approach to trading and market interdependencies should become more holistic and clearly delineated; and that smart, robust technology that works together across the entire trading lifecycle is a prerequisite.

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