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CFTC finalizes electronic trading principles and bankruptcy reforms

US derivatives markets regulator also approves six other rules via seriatim

8 December 2020

By Jeff Reeves

The US Commodity Futures Trading Commission finalized rulemakings on electronic trading risk principles and Part 190 bankruptcy regulations at a public meeting held via teleconference on 8 December. The commission also passed six other rulemakings unanimously, via seriatim, including measures relating to uncleared margin rules for swaps.

The rulemakings bring certainty to market participants on two major outstanding issues. In the case of electronic trading risk principles, the CFTC has considered the matter for several years, including via a controversial 2015 proposal which was withdrawn earlier in 2020 and replaced with what became this final rulemaking. In the case of bankruptcy rules, the vote marks the first rulemaking on the topic in roughly 37 years.

Electronic Trading Risk Principles

The CFTC passed the final rulemaking on electronic trading risk principles on a 4-1 vote, with Commissioner Rostin Behnam dissenting.

Chairman Tarbert noted that the principles were necessarily focused on a principles-based approach rather than prescriptive requirements because "if we came out with something very specific, very detailed, the concern would be that it could potentially become obsolete overnight." He added that electronic trading is an area where regulated entities have a better understanding than the regulator about the risks they face and greater knowledge about how to address those risks. As a result, exchanges need flexibility in how they manage risks as they constantly evolve.

Commissioner Brian Quintenz specifically highlighted an FIA presentation to the CFTC’s Technology Advisory Committee in 2019 that showcased how the derivatives industry continues to improve risk controls related to automated trading systems. He said the rulemaking will support the widespread adoption of current best practices, including price banding and other risk controls, yet still "allow for innovation to further define and improve electronic trading systems."

Commissioner Dawn Stump also supported the rule, noting it "recognizes that the front-line responsibility for preventing, detecting, and mitigating material risks posed by electronic trading rests with the exchanges themselves. The exchanges are best positioned to execute this responsibility because they have the best knowledge of the trading that occurs on their own markets."

Commissioner Dan Berkovitz admitted that while there were some items in previous electronic trading proposals that he would have liked to see included, he voted in favor of the measure because he saw it as "a step forward" in this important area and that "something is better than nothing." Berkovitz also kept the door open to supporting more prescriptive measures in the future with respect to risk controls.

In his dissent, Behnam noted the rulemaking seemed merely a "victory lap" without substance, simply codifying current practices. "Why are we doing this, if [risk controls] are already being done, and being done well?" he asked.

In a statement welcoming the rulemaking, FIA President and CEO Walt Lukken said that “electronic trading has brought enormous benefits to markets and customers through greater efficiency and deeper liquidity." He also noted that FIA and FIA PTG have worked tirelessly for more than a decade to develop the best practices supported by this final rulemaking.

Part 190 Bankruptcy Regulations

All five CFTC commissioners voted unanimously to revise Part 190 bankruptcy regulations, the culmination of many years of debate and consideration on procedures. The final rules will provide improved clarity on process and reduce uncertainty and increase transparency for the public.

The final rulemaking incorporated industry feedback, including the withdrawal of a supplemental proposal that was opposed by FIA because of concerns about closeout netting provisions. "FIA appreciates the changes to the proposal and for working with industry to improve the rules," said FIA in a statement.