The U.S. Commodity Futures Trading Commission’s Technology Advisory Committee held a wide-ranging public meeting via teleconference on July 16. TAC subcommittees offered several short presentations on topics including the recently proposed electronic trading risk principles, cybersecurity, data security, virtual currencies and distributed ledger technology.
Analysis of proposed rule on electronic trading risk principles
A portion of the TAC meeting focused on a discussion of the CFTC's recently proposed rule on electronic trading risk principles, and the importance of flexibility and a principles-based approach in the rulemaking rather than rigid and prescriptive requirements.
Adam Nunes, head of business development at Hudson River Trading and a member of the TAC’s Automated and Modern Trading Markets Subcommittee, voiced support for high-level terms like "electronic trading" and "market disruption" that allow for broad interpretation and flexibility. He also noted practical challenges in prescribing firm guidelines for factors such as latency that can change in both the short term based on market circumstances and in the long-term based on industry innovation.
Nunes also noted that the CFTC proposal’s high-level focus on market disruptions caused by trading systems is most appropriate because "there aren't that many things that happen in the market from a single participant that really inhibit other market participants' ability to effectively trade and manage risk." He acknowledged that individual firms can in rare cases affect price discovery, but stressed that other provisions such as pre-trade risk controls, disruptive trading practices and anti-fraud guidelines already exist to govern this behavior.
Julie Holzrichter, chief operating officer at CME Group, noted that the proposed rulemaking may not materially change existing CME operations but that it "acknowledges all the work that the industry has done to date to safeguard the marketplace." She also noted the proposal’s flexibility is important because CME is "continually innovating on our risk mitigation functionality” along with other firms, and a principles-based approach will allow that evolution to continue in a way that more prescriptive regulations would not.
CFTC data collection, storage and security
The TAC's Cybersecurity Subcommittee discussed the "significant risk" posed by the collection, concentration and storage of highly sensitive industry data during regulatory examinations. While market participants do not the dispute the importance of these assets as part of legitimate regulatory reviews, they did raise concerns over how to best protect information from bad actors. There was an acknowledgement of the CFTC's cooperation to date to address industry concerns on these issues, but TAC members noted the importance of codifying data protection rules both to build on existing goodwill and to encourage other regulatory bodies to adopt similar guidelines.
Cybersecurity lessons learned from the pandemic
In discussions about lessons learned during the COVID-19 pandemic, the Cybersecurity Subcommittee noted that the extraordinary circumstances of 2020 created a unique circumstance where market participants were affected "symmetrically" and with advance notice. That situation differed from many cyber risk scenarios involving more targeted disruptions, and TAC members noted that events highlighted the importance of a complete and accurate inventory of systems that includes third parties and data providers to help coordinate any future cyber response. Discussions also highlighted the general importance of the "agility and commitment" of staff during a crisis.
It was also noted that the CFTC recently endorsed a standardized approach to cybersecurity preparedness, including using best practices such as the Financial Services Sector Coordinating Council's Cybersecurity Profile.
DLT resilience and scalability
The TAC's Distributed Ledger Technology and Market Infrastructure Subcommittee discussed market applications of distributed ledger technology (DLT), including "tokenization" of agricultural commodities in order to provide better information on sourcing and sustainability of finished goods and the possibility of carbon credits for entities looking to offset emissions. Participants also explored recent efforts around industry-led shared standards for DLT, and the need for regulators to balance oversight needs with the need to keep compliance burdens reasonable in order to foster innovation in this fast-moving area.
Virtual Currencies
The TAC's Virtual Currencies Subcommittee offered a presentation by Georgetown professor Chris Brummer on the design and evolution of central bank digital currencies and stablecoins, and specifically how these potential currencies could impact financial intermediation in the derivatives markets in the future. There was also a presentation by ErisX chief executive Tom Chippas on the volatility of bitcoin compared to other assets during the height of market uncertainty caused by the pandemic and changes in the correlation of its price movements compared to other assets.
Statements and additional documents
