The Technology Advisory Committee (TAC) of the US Commodity Futures Trading Commission (CFTC) reconvened this week after a 20 month intermission. On the agenda were regulation of automated trading, swap data standardisation and harmonisation, and the potential of blockchain technology.
Timothy Massad, chairman of the TAC, opened discussion on the Commission’s proposed rule to address the increased use of automated trading, Regulation Automated Trading (Reg AT). The regulation focuses on principles based, industry best practices that mitigate operational risks and minimise the potential for disruption.
Addressing the meeting in an opening statement, Commissioner J Christopher Giancarlo, revisited concerns around Reg AT’s requirement that registrants hold their proprietary source code in data repositories that are available for inspection by the CFTC or US Department of Justice at any time, for any reason, without a subpoena.
On a broader basis, he said: “My overarching concern is that, in essence, Regulation AT is a registration scheme. Yet, registration is not policy and policy is not registration. The relatively simple process of registering users of trading algorithms does not begin to address the hard public policy considerations that arise from the automation revolution in modern markets. These difficult policy issues can only be considered through industry wide dialogue, technological expertise and careful analysis. They should not be addressed as a reaction to media headlines, best-selling books or political campaign agendas.”
Commissioner Sharon Bowen warned in her opening statement: “This regulation is to me only a first cut. If our new rule is failing to address aspects of algorithmic trading that pose systemic risks or pose undue risks to ordinary investors, I am absolutely willing to take additional steps to craft additional, appropriate regulations on this nascent technology.”
Turning to the issue of swap data standardisation and harmonisation, Giancarlo noted the inability of regulators to assess the counterparty credit risk of large banks and swap dealers during the 2008 financial crisis, and the resulting legislation including the establishment of swap data repositories under the Dodd Frank Act. Despite the intent of Dodd Frank, he said swap data repositories still cannot provide accurate visibility into global swaps counterparty exposure as promised by the regulation, and added: “Of all the many mandates to emerge from the financial crisis, transparency into swaps counterparty exposure of major financial institutions was perhaps the most pressing. The failure to accomplish it is certainly the most disappointing.”
To remedy the problem on a global basis, he suggested the need for a big data solution, saying: “What is needed in Washington is a concerted and cooperative effort by regulators, market participants, commercial technology vendors and academia that draws on the emerging fields of big data analysis, network science and financial cartography. It is long past time to broaden this important implementation.”
On the issue of blockchain technology and its potential application to the derivatives market, Giancarlo said: “Regulators must cultivate and embrace new technology such as the blockchain and not stifle innovation.” Bowen took a more cautious approach, saying: “This technology, even more nascent than algorithmic trading, carries with it tremendous potential for electronic trading and electronic commerce more broadly. Yet, before we can make use of this technology, we need to understand it. Not one, from industry to regulators to consumers, is served if we run head-long toward adopting a new technology that we all do not understand . . . For those of you who are experts, who perhaps spend hours in the bitcoin sub-forum on Reddit or elsewhere on the internet, be patient with the rest of us.”
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