FOOTNOTE 82 The Commission understands that some triggers leading to a market pause are not necessarily best classified as "pre-trade" risk controls. Some pauses, as described, may be in anticipation of a certain set of executions, and are pre-trade, while others may be in response to a given execution. The discussion here implicitly includes all of the above, and the Commission requests comment on the full range of pause types. END FOOTNOTE
FOOTNOTE 83 See CFTC and SEC Joint Report on the Market Events of
The Commission is interested in better understanding the relative costs and benefits of each type of pause functionality and whether certain types of pause mechanisms are more effective than others with respect to ATS trading. The Commission is also interested to understand whether additional types of pause triggers would be advisable. These might cover a wider array of adverse states of an automated central limit order book, including, for example, significant depth imbalance, a significant number of aggressive orders, or a significant number of cancelled orders.
30. Trading pauses, as currently implemented, can be triggered for multiple reasons. Are certain triggers more or less effective in mitigating the effects of market disruptions?
31. Are there additional triggers for which pauses should be implemented? If so, what are they?
32. What factors should the Commission or exchanges take into account when considering how to specify pauses or what thresholds should be used?
33. How should the re-opening of a market after a trading pause be effected?
7. Credit Risk Limits
Credit risk limits are a valuable protection for limiting the activity of malfunctioning ATSs. Risk limits are most valuable when implemented as a pre-execution filter. Alternatively, low-latency post-trade risk limits may also provide some risk mitigation. Credit risk controls may be implemented by different entities, including the trading firms that originate orders, the clearing firms that guarantee the orders, the trading platforms matching the orders, and the DCOs that clear the orders. The Commission acknowledges that some trading firms and FCMs conduct post-trade credit checks with varying degrees of latency and that pre-trade credit risk screens are already required pursuant to SUBSEC 1.73 and 23.609. /84/ As noted above, however, the Commission seeks public comments regarding any additional measures that could help protect the financial integrity of DCOs, including measures discussed in this Concept Release or other measures that may be recommended by interested parties.
The TAC has received proposed models for implementing certain pre-trade risk controls for swaps, particularly those pertaining to credit risk. /85/ Relevant solutions for implementing credit-based pre-trade risk controls include those in which credit limits reside at the FCM, at the trading platform (based on instruction from the clearing firm), or, for example, at a "hub" which applies credit controls on a per-order basis. /86/ The Commission is interested to understand whether the "hub" model, one of several proposed solutions received by the TAC, could be usefully applied to futures markets.
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