FOOTNOTE 85 See, e.g., "Managing Credit Lines in a
FOOTNOTE 86 See id. The presentation also noted that post-trade checks at the DCO is another form of risk control based on end-customer position or credit limits. See section III(D) for additional discussion of post-trade reports and other post-trade measures. END FOOTNOTE
The Commission is also interested in credit risk limits as a mechanism for limiting the disruptive activity of a malfunctioning ATS. Therefore, the Commission requests comment on the following:
34. What positions should be included in credit risk limit calculations in order to ensure that they are useful as a tool for limiting the activity of a malfunctioning ATS? Is it adequate for such a screen to include only those positions entered into by a particular ATS or should it include all the firm's positions?
35. Should pre-trade credit screens require a full recalculation of margin based on the effect of the order?
36. In light of your answers to the previous two questions, where in the lifecycle of an order should the credit limits be applied and what entity should be responsible for conducting such checks?
37. If credit checks are conducted post-trade, what should be done when a trade causes a firm to exceed a limit?
38. Please describe any technological limitations that the Commission should be aware of with respect to applying credit limits.
39. The Commission is particularly interested to receive public comment on the "hub" model and its applicability to different types of pre-trade risk controls. What are the strengths and weaknesses of this approach relative to other pre-trade or post-trade approaches to checking trades against credit limits? How would the latency between the "hub" and the exchanges be managed to provide accurate limits for high frequency ATS?
40. If you believe that post-trade credit checks would be an effective safeguard against malfunctioning ATSs, what is the maximum amount of latency that should be allowed for conducting such checks? What technological or information flow challenges would have to be addressed in order to implement post-trade checks with that degree of latency?
41. With respect to any entity that you believe should be responsible for applying credit risk limits, please describe the technology necessary to implement that risk control and the cost of such technology.
The pre-trade risk controls described above are summarized in Appendix A.
D. Post-Trade Reports and Other Post-Trade Measures
The Commission understands that, even with the presence of the most robust set of pre-trade risk controls, unanticipated events occur within a complicated marketplace. For example, the emergence of unexpected feedback loops between multiple algorithms, or malfunctioning pre-trade risk controls can lead to unintended order submissions that adversely impact market quality and investor confidence. Post-trade reports have the potential to mitigate the impact of such events, particularly if the post-trade reports are made available and utilized on a low-latency basis, such that market participants are quickly aware of any malfunction. Other post-trade measures, including enhanced error trade policies, may help counterparties to errant trades to better anticipate and address risk associated with trade uncertainty when such events occur. The post-trade reports and other measures are summarized below.
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