FOOTNOTE 66 See Carol Clark &
FOOTNOTE 67 The final firm also sets credit limits, but only for new traders. See id. at 7. END FOOTNOTE
A second report /68/ summarized interviews with five Broker/Dealers ("B-Ds") and FCMs, again detailing their current practices in automated risk controls. As at the trading level, some firms have implemented pre-trade and post-trade checks, along with other credit related controls to mitigate trading losses and resulting burdens on the clearing firm. The report details categories of risks considered by the B-D or FCM when signing on a new client, or updating controls as a client enters new businesses or expands on old ones. These include: Credit risks, market risks, counterparty risks, portfolio risks and regulatory risks. Through these assessments, clearing firms are able to determine appropriate risk thresholds for a given client, and apply them as necessary at multiple points in the trading chain. Specific controls come in forms quite similar to those outlined above in the case of the trading firm. Pre-trade risk controls span order size limits, intraday position limits, credit limits, and message throttles. These can vary by asset class, exchange, and other market factors, along with coincident market dynamics such as volatility levels and current positions of the trading firm. The monitoring done by the clearing firm is aided by post-trade measures such as the drop-copy of executions, which allows for the monitoring of positions and associated credit risks.
FOOTNOTE 68 See Carol Clark &
B. Overview of Risk Controls Addressed in This Concept Release
The risk controls presented below describe specific measures which could be taken by exchanges and participants in automated trading environments. To better understand current industry practices, the Commission is interested in determining, for each risk control: (1) Whether the entity commenting has implemented the control; (2) whether the entity believes implementation of the control within the marketplace is consistently applied; and (3) the benefits and costs of a regulatory mandate of the control. If the Commission determines that the types of risk controls employed across the industry vary widely, the Commission would be aided by understanding the extent of this variance, the reasons for it, and whether regulatory standardization can be of benefit. By gathering this information, the Commission will be better informed regarding beneficial future regulation surrounding automated systems.
The Commission emphasizes that this Concept Release is intended to serve as a high-level enunciation of potential measures intended to reduce the likelihood of market disrupting events and mitigate their impact when they occur. Many of the risk controls listed below are in effect, in part or in full, across multiple entities. Others have been included in recommendations by industry groups and standard-setting bodies, or addressed by foreign regulatory authorities. The Commission also notes that a number of the measures described below offer similar risk controls at various stages in the life of an order (e.g., a safeguard applicable to the ATS generating an order and a similar safeguard applicable to the trading platform receiving such order). Added security through redundancy of risk controls is a feature of safeguard documents reviewed by the Commission in preparing this Concept Release. The Commission seeks public comment on merits of single versus redundant risk control models. Market participants and members of the public are encouraged to comment on the potential risk controls, and the Commission anticipates further refinement of the measures described herein based on the comments received.
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