Complying with Reg SCI could cost a broker-dealer at least US$3 million per year, according to the Futures Industry Association's Principal Traders Group (FIA PTG).
In its response to the Securities and Exchange Commission's (SEC) proposal for Regulation Systems Compliance and Integrity (Reg SCI), the FIA PTG called on the regulator to re-examine its proposals for back-up and redundancy requirements, claiming the high cost of implementation would outweigh any potential benefits.
Reg SCI was proposed in March this year following a string of technology failures by exchanges and other market participants, including Nasdaq's error-laden listing of Facebook, which saw orders held up due to technology problems and cost the exchange operator US$10 million in fines.
The SEC's proposals include having backup systems that are sufficiently robust and geographically diverse to ensure a resumption of trading activity by the next working day and a two-hour resumption of clearance and settlement services following an event causing widespread disruption. It also recommends that market participants should run their operations from a backup data center at least one day per year to test them.
A survey of FIA PTG members found the average cost for a broker-dealer to maintain fully redundant systems at all relevant exchange back-up facilities would be around US$3 million annually. However, there would also be additional costs as well, from initial capital costs related to setting up the infrastructure and labour costs to maintain and monitor back-up systems.
One execution and research broker, ITG, said that the staff numbers and financial cost of maintaining back-up sites in geographically diverse locations would: "easily push ITG's annual and recurring compliance costs far beyond the higher estimates provided by the Commission."
Questionable value
FIA PTG also questioned the value of providing fully redundant back-up facilities. FIA CEO, Mary Ann Burns, said: "The Commission must recognise that markets will not operate as normal on any back-up facility."
It cited the Facebook IPO and an April 2013 outage on the Chicago Board Options Exchange, neither of which would have been prevented by back-up or redundancy measures, as orders that are out of sequence or missing would need to be corrected before a return to an orderly market.
The potential cost of implementation was also of concern to NYSE Euronext, which suggested that the SEC should engage in a full cost benefit analysis of its automated review policy (ARP), which forms the basis of Reg SCI, though the latter is much broader in scope.
FIA PTG believes it would be more efficient for market participants to be able to utilise the redundancy that already exists within current market structure. It also suggests that for circumstances where specific redundancy is appropriate, market participants should look to implement cross redundant co-location between markets, so NASDAQ would locate its backup at another exchange such as BATS, for example.
The proposals on backup systems, which would require regular testing of systems, could even increase market risk, according to the Depositary Trust Clearing Corporation (DTCC).
Larry Thompson, managing director and general counsel at the DTCC, said: "extended periods of time would be needed to establish, execute on, and decommission back-up systems contained at alternate data centers. During this time, the back-up data center would be required to perform core functions, negating the redundancy of these systems."
The DTCC is concerned that if systems are being used to run tests simultaneously they could actually increase the inherent risk within the system, despite being intended to prevent it.
Vague proposals
Meanwhile, NYSE Euronext has complained that the SEC's proposals were "vague" and said the SEC should recognise that technology design and implementation is complex and would always suffer from systems issues despite the best efforts of providers.
In its submission, NYSE Euronext called for systems that do not pose risk to markets to be excluded from the regulation. "Reg SCI should apply only to those systems that are reasonably likely to pose a plausible risk to the markets - that is, systems that route or execute orders, clear and settle trades, or transmit required market data - not regulation and surveillance systems or SCI security systems."