The House Agriculture Committee held a hearing at which it examined the CFTC-proposed Regulation Automated Trading ("Reg. AT"). Committee members heard testimony that focused primarily on the regulation's source code provision.
Agriculture Committee Chair K. Michael Conaway opened the hearing calling for a "more modest" CFTC proposal that would leverage industry incentives by requiring the "universal adoption of a flexible framework for best practices." He asserted:
The most confusing parts of Reg. AT – the source code rules, the registration regime, the reporting requirements, and the inflexible risk controls – are unnecessary to achieve the [CFTC's] stated goals. Market participants already have incentives to police bad algorithms, prevent disruptions and plan for recovery. In many cases, there are already ongoing processes across the industry to impose and refine risk controls.
The Delta Strategy Group summary report noted that all four witnesses agreed that the source code provision was unprecedented and posed significant due process and confidentiality concerns. The four witnesses also asserted that the CFTC should continue to issue subpoenas and safeguards before requiring access to source code.
Highlights of the hearing include the following:
- RGM Advisor CEO Richard Gorelick and Trading Technologies International, Inc. Executive VP and General Counsel Michael Ryan argued that source code is of little value in itself, since it is difficult to interpret and future trading events depend on many factors working in conjunction with source code in the marketplace.
- Futures Industry Association Market Access Committee Chair Greg Wood and Mr. Gorelick recommended that the CFTC focus on activities instead of arbitrarily designating who should apply risk controls by creating unnecessarily specific definitions (i.e., "AT Persons").
- Chicago Mercantile Exchange Executive Director of Global Investigations Andrew Vrabel and Mr. Wood emphasized that a market participant's size and complexity have no bearing on the risk that it poses to the marketplace; all market participants pose the same risks, and every market participant should be subject to risk controls (for which Mr. Vrabel specified a two-tier pre-trade risk control structure).
- Mr. Gorelick and Mr. Wood stressed that the focus of CFTC's cost-benefit analysis of Reg. AT is too narrow. They concluded that the regulation fails to address wider implications for the markets, and warned that it could have an adverse effect on competition and liquidity in U.S. futures markets.
Delta Strategy Group Summary of Hearing
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