SECURITIES
December 15, 2015
Futures and Derivatives Alert
CFTC Proposes “Regulation AT” for Automated Trading
By Paul M. Architzel, Dan M. Berkovitz, Bruce H. Newman, Jeannette K. Boot, Dino Wu,
Douglas J. Davison, Gail C. Bernstein, Daniel J. Martin and Ted Serafini
I. Executive Summary
On November 24, 2015, the Commodity Futures Trading Commission (CFTC or Commission)
proposed a new regulatory regime for automated trading on US designated contract markets (DCM)
(Regulation AT or the proposal).1 The Commission describes the proposal as “a comprehensive
approach to reducing risk and increasing transparency in automated trading.”2 Regulation AT would
impose a series of risk controls and other regulatory requirements on several layers of market
participants: (a) market participants meeting the definition of an “AT Person” (defined below); (b)
clearing member futures commission merchants (clearing member FCM) whose customers are AT
Persons; and (c) DCMs executing orders from AT Persons. According to the Commission, the
proposal enshrines many of the best practices already adopted by industry and generally takes a
principles-based approach to risk control requirements and other measures.
AT Persons. AT Persons would be required to implement pre-trade and other risk controls on the
Algorithmic Trading (defined below) orders they initiate, such as maximum order message and
execution rates, order price and maximum order size parameters, and order cancellation systems.
AT Persons would also be required to implement development, testing and supervision standards
and to submit compliance reports to DCMs regarding the new risk controls. Any person with direct
electronic access (DEA) to a DCM that engages in Algorithmic Trading and that is not already
registered with the Commission would be required to register as a floor trader. Further, all AT
Persons would be required to become members of at least one registered futures association—
currently this means the National Futures Association (NFA).
FCMs. Clearing member FCMs that have customers that are AT Persons would be required to
impose the same types of pre-trade risk controls as AT Persons. For orders submitted to the DCM
through DEA, the FCM must implement DCM-provided risk controls (similar to how customers’
financial risk is managed by the FCM through the DCM). For non-DEA orders, the clearing member
FCMs must establish the risk controls themselves.
DCMs. DCMs would be required to establish pre-trade and other risk controls, for all orders. The
proposal also would require DCMs to disclose specified information related to a DCM’s trade
matching systems and market-maker and trading incentive programs. The proposal further would
require DCMs to implement programs to prevent self-trading and publish information about self-
trading that occurs on their platforms.
