The Securities and Exchange Commission (SEC) has proposed new rules that will require operators of trading systems, market data disseminators and some clearing agencies to establish processes to ensure technological stability.
Dubbed Regulation Systems Compliance and Integrity (Reg SCI), the new rules essentially mandate trading venues to comply with the SEC’s Automation Review Policy, an optional requirement to test systems introduced after the Black Monday market crash in 1987.
Reg SCI will apply to the systems of self-regulatory organisations – comprising exchanges, clearers, the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board – alternative trading systems, operators of NMS market data systems and clearing entities exempt from SEC registration.
Each SCI entity will need to establish policies and procedures relating to the capacity, integrity, resilience and security of systems, and to ensure they comply with relevant federal securities laws and rules.
Firms will also have to take timely corrective actions to deal with disruptions, compliance issues and systems intrusions and must inform the SEC and market participants of issues and the progress of corrective action. Annual reviews of compliance with Reg SCI and testing of business continuity and disaster recovery processes will also be required.
The new rules are a response to increasing concerns over the stability of US financial markets following the 2010 flash crash and a spate of incidents last year – such as the botched Facebook and BATS IPOs and the trading error that nearly wiped out broker Knight Capital.
“While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimise their impact on our markets and ultimately investors,” said SEC chairman Elisse B. Walter. “Reg SCI would provide more explicit technology and control standards to help ensure that our markets remain resilient against technological vulnerabilities.”