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 authorities.
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 market.
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.