MFA Urges CFTC to Abandon Regulation AT

On May 1, MFA, along with Alternative Investment Management Association (AIMA), submitted a comment letter to the Commodity Futures Trading Commission (CFTC ) outlining concerns with the Commission’s reproposed automated trading regulation.

The joint letter urges the CFTC to abandon the current version of the rule and instead take steps to reduce electronic trading risk by implementing risk controls and build on the existing regulatory framework. In regards to implementing marketplace risk controls, the joint letter suggests implementing controls at the “gatekeeper” levels, like designated contract markets, executing futures commission merchants or clearing firms.

The associations wrote in the letter that, “Our members have a keen interest in safeguarding the safety and soundness of U.S. derivative markets. Those concerns include the usability, affordability, efficiency and liquidity of these markets for the U.S. economy and for the hedging and risk management purposes for which these markets serve for market participants globally. The Associations appreciate that the CFTC and its staff have attempted to incorporate comments it received on the NPRM into the Supplemental Proposal; however, we remain strongly concerned that the underlying framework of Regulation AT is flawed. As such, we believe a fundamental revision is necessary, and respectfully urge the Commission to abandon Regulation AT, as reproposed.”

Should the CFTC Commissioners decide to move forward with the proposed rule or decide to craft a new proposal, MFA and AIMA suggested using more precise definitions for automated trading activity as well as raised several points for consideration, including:

  • Adopting a principles-based approach to regulation of automated trading that will allow market participants to tailor controls to suit their firms’ operations and risks.
  • Adopting a preservation requirement for Algorithmic Trading Source Code and use the existing subpoena process for accessing Algorithmic Trading Source Code.
  • Adopting greater regulatory protections for the treatment of Algorithmic Trading Source Code and other intellectual property.
  • Working with financial technology companies to address how regulation can most effectively address new technologies and promote safer and more efficient markets, without subjecting market participants to Regulation AT for use of third-party algorithmic trading systems.

MFA Members believe abandoning the existing rule and focusing on strengthening existing regulations or working on a new rule that considers the market principles outlined above would make markets more efficient and protect important proprietary information created by firms using automated strategies.