Auto Trading, Cybersecurity Proposals Expected in Fall

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By Richard Hill

Sept. 9 — The Commodity Futures Trading Commission hopes to propose rules this fall on risk controls for automated derivatives trading and standards addressing cybersecurity at critical entities, Chairman Timothy Massad said Sept. 9.

The agency also remains on track to act on a pending proposal addressing margin for uncleared swaps by the end of the year, and likely “will have more to say” about position limits in the coming months, Massad said in a speech to the Beer Institute in Washington.

Concept Release

The proposals on electronic trading will stem from a concept release issued by the agency in 2013, Massad told reporters after the speech. That release sought comment on installing risk controls and safeguards for electronic trading programs, which by that time made up more than 90 percent of the marketplace

Massad said the proposals are “to make sure there are adequate risk controls at all levels, and to minimize the chance that algorithmic trading can cause disruptions or result in unfairness.”

The cybersecurity proposals will address derivatives exchanges, clearinghouses, swap data repositories and other “core infrastructure[s]” of the derivatives industry, Massad said. They are meant to ensure that those entities “are doing adequate evaluation” of risks posed by vulnerabilities in their cyber systems, including by testing their cybersecurity and operational risk measures.

The proposed standards will be principles-based and aim to ensure the infrastructures are following best practices, according to Massad. “The concerns include information security, physical security and business continuity and disaster recovery,” the chairman said.

Uncleared Margin

The CFTC proposed rules for margin requirements on swaps traded directly between banks, manufacturers and other firms—i.e., non-centrally cleared trades—almost a year ago, largely mirroring those proposed by U.S. banking regulators. Since then, the CFTC has worked with its foreign counterparts to harmonize their proposals in order to avoid the potential for regulatory arbitrage.

Uncleared trades present a certain element of risk because no central counterparty stands between the parties to the transaction, protecting them from the possibility of a default by the other.

Position Limits

Meanwhile, the CFTC proposed a rule in 2013 to require position limits for 28 physical-commodity agricultural, energy and metals contracts and their economically equivalent swaps.

After reopening the initial comment period once, the agency has found itself grappling with the issue of how to define bona fide hedging—trading strategies designed to mitigate commercial risk for derivatives end-users, which might be exempt from position limits. “We understand it is vital for commercial end-users to be able to continue to engage in bona fide hedging,” Massad said. “We recognize hedging strategies are varied and complicated.”

Massad also said the CFTC is “looking at changes” to a related proposal on aggregation of positions by affiliated entities.

Massad told reporters after his remarks that despite being down to only three commissioner, “we'll still be able to get our work done” on the proposals expected in the fall. At the same time, he acknowledged that the lack of two members “obviously it makes it a little harder.”

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To contact the editor responsible for this story: Phyllis Diamond at

Massad's speech can be seen at