Rules would subject exchanges to inspections and force standards on core technology
The SEC has proposed a series of rules that would impose certain standards on the core technology of securities exchanges and require business continuity testing to help minimize or avoid disruption of the securities market from flash crashes, natural disasters and other calamities.
The proposed rules, which come amid rising concern over the dangers of high-frequency trading, erratic weather patterns and growing security issues surrounding the sophisticated technology used in trading, is up for public comment for 60 days.
‘The rules would require entities essential to the smooth functioning of the US securities markets to have comprehensive policies and procedures regarding their technological systems,’ SEC commissioner Elisse Walter says in a press statement. ‘This is a vitally important proposal.’
The proposed rules, called Regulation SCI ‒ which stands for systems, compliance and integrity ‒ would replace the voluntary system of checks under the 22-year-old Automated Review Policy Inspection Program (ARP), which was created in response to the Black Monday crash of October 1987, with a mandatory system. The SEC says Regulation SCI would formalize and make compulsory many aspects of ARP, as well as introduce a series of new rules.
According to the SEC, the new rules would oblige exchanges, clearing agencies and alternative trading systems to establish procedures to ensure the ‘capacity, integrity, resiliency and security’ of their technology, allow SEC inspections to ensure compliance, notify the SEC whenever systems issues occur and conduct annual reviews of their systems.
The exchanges would also have to ‘designate certain individuals or firms to participate in the testing of their business continuity and disaster recovery plans at least once annually, and coordinate such testing with other entities on an industry or sector-wide basis’, along with other measures.
Regulation SCI comes after months of debate at the SEC over repeated problems caused by natural disasters, such as Superstorm Sandy, which prompted the first two-day closure of US equity markets since the terrorist attacks of September 11, 2001, the flash crash of 2010 that prompted a brief 9 percent drop in the Dow Jones Industrial Average and confusion surrounding Facebook’s IPO.
‘Recent high-profile events have highlighted the systems problems that could arise as a result of a reliance on such technology,’ Walter says in her statement. ‘The May 6 flash crash, systems issues that arose during the IPOs of Facebook and BATS Global Markets, the hacking of NASDAQ’s trading stems and the closing of US markets in response to Superstorm Sandy all exemplify the types of problems and disruptions that can affect our marketplace.’
