CFTC Proposed New Algorithmic Trading Rules Augur Potential Increased Obligations and Costs, and a New Registration Requirement

Last week, the Commodity Futures Trading Commission proposed a comprehensive set of new rules that, if adopted, potentially would impose many new obligations on certain CFTC registrants that use algorithmic trading systems to trade futures, options or swaps on designated contract markets (but not on swap execution facilities). Potentially impacted registrants are future commission merchants, floor brokers, swap dealers, major swap participants, commodity pool operators, commodity trading advisors, introducing brokers and certain persons proposed to be registered as floor traders for the first time because of their algorithmic trading activities.

FCMs who are clearing members of DCMs and carry accounts for covered algorithmic traders; DCMs (but not SEFs); and the National Futures Association would also be impacted by the CFTC’s proposed new requirements.

The CFTC’s proposed new rules would also mandate the registration with the CFTC as a floor trader any person who uses an algorithmic trading system that electronically and directly routes orders to a DCM other than first through a clearing-member FCM, unless such person is otherwise registered with the CFTC in another capacity. The CFTC estimates there will be a maximum of 100 potential new floor trader registrants under this proposed new requirement.

Finally, all current categories of CFTC registrants that engage in algorithmic trading and newly required to be registered floor traders would be required to maintain copies of all source code used in a production environment, including all changes, in accordance with general CFTC record-keeping requirements (e.g., retain for five years), and, upon request, make available such source code for inspection by CFTC and US Department of Justice staff without subpoena or other process of law.

Proposed Regulation AT was included in a 521-page document that provided insight into the CFTC’s thinking in proposing the new rules, as well as a cost and benefit analysis.

Previously, in 2013, the CFTC published a concept release regarding algorithmic trading to which many industry and public representatives commented.

The CFTC will accept comments to its proposed rules—known as Regulation AT—for 90 days after its publication in the Federal Register. To assist its analysis, the Commission requested comment on 164 specific issues addressed by the proposed rules.

Algorithmic Traders:

Under proposed Regulation AT, algorithmic trading is not limited to the black box derivation and electronic placement of orders on DCMs. Covered activity also may include solely automated order placement. There is no minimum number of transactions that constitutes algorithmic trading.

Algorithmic trading is defined broadly to include any trading of any future, option or swap subject to DCM (but not a SEF) rules where an order, modification, or order cancellation is electronically submitted and one or more computer algorithms or systems:

  1. decides whether to initiate, modify or cancel the order, or

  2. otherwise makes “determinations” with respect to the order including but not limited to:

  • the product to be traded;

  • the DCM where the order will be placed;

  • the order type;

  • the order’s timing;

  • whether to place the order;

  • the sequencing of the order (compared to other orders);

  • the order price;

  • the order quantity;

  • the partition of the order into smaller components for submission;

  • the number of orders to be placed; or

  • the management of orders after submission.

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