FOA guidance helps industry apply ESMA auto trading policy
New guidance on trading derivatives electronically in Europe
has been provided by trade body the Futures and Options Association (FOA) in an attempt to
help market participants meet new industry standards and mitigate risk.
The guidance helps firms comply with the European Securities
and Markets Authority (ESMA) guidelines on systems and controls in an automated
trading environment for trading platforms, investment firms and competent
Released in February and in force since May,
ESMA’s guidelines were a response to widespread concerns over the adverse
effects of high-frequency trading (HFT) and automated trading. The FOA guidance
addresses electronic markets broadly, rather than just HFT, algorithmic trading
and general automated trading issues. It comes at a time when national regulators are
known to have been conducting supervisory reviews to gauge the market’s implementation
of ESMA’s guidelines.
“We consider this approach is necessary to ensure that
systems and controls across the market are sufficiently robust,” the FOA said
in a statement.
The objectives of the FOA guidance include providing a standard
for firms to judge the appropriateness of their own control environments in
relation to the ESMA guidelines, and clarifying the obligations and
responsibilities market participants have to one another and to regulators and
The guidance provides standards for issues such as technical
and functional conformance, stress testing, the definition of ‘naked access’,
pre-trade risk controls, and live-market access restrictions such as ‘kill
switches’. It also gives example policies for market participants to use when
approving new strategies or technology changes.
“This industry is fluid, dynamic and innovative. Our
intention has been to deal with the concerns within the industry, among
regulators and politicians, and the general public in a way which protects
market integrity without stifling a successful and beneficial industry,” said Paul
Marks, chair of the FOA’s e-trading/risk working group and EMEA head of electronic
execution, listed derivatives products at Citi.
“With this document, the FOA has taken meaningful action to
help the industry to implement a key objective of regulators, which is to
secure the safety and resilience of European electronic market environments,”
added Blake Stephenson, regulation manager at FOA.