U.S. Commodity Futures Trading Commission’s (CFTC) new 60-second rule will require futures commission merchants (FCMs) to have a maximum of 60-seconds to accept or reject a trade for clearing. Risk reports that the CFTC regulation 1.74–Timing of acceptance of trades for clearing – was announced in April of last year, which requires clearing decisions to be made “as quickly as would be technologically practicable if fully automated systems were used.”
After two extensions, the CFTC required FCMs the ability to accept or reject trades within 120 seconds from February 1, 2013. The first phase of mandatory clearing in the U.S., at 60 seconds, begins after March 11. Complying with these new rules will not prove to be too difficult, but as clients consume more of the clearing capacity allocated to them by FCMs, this will make quick decisions more difficult. According to Risk, banks warn they will err on the side of caution.
Piers Murray, global head of fixed-income prime brokerage and OTC clearing in the markets prime finance unit at Deutsche Bank in New York, said in a statement to Risk, that the rule has the potential to cause particular problems for trading strategies that have two or more legs:
Think about a relative-value trading strategy that involves putting on trades where the risk information is being transmitted trade-by-trade rather than as a single, three-legged transaction. We would have 60 seconds to accept each of those trades, not knowing if there’s an additional, risk-reducing leg coming down the pipe.
Other FCMs are concerned about the practicalities of complying with the rule, when there is little room for error. This argument was made to the CFTC unsuccessfully, and FCMs are warning their clients of the consequences, reports Risk. Murray speculates:
I suspect you will see a very, very high percentage of trades accepted within 60 seconds in the first stages of clearing – when the consumption of risk limits is still low – but the risk of rejections will rise over time. Eventually, technology development will also enable the sequencing issues to be addressed, but between now and then the 60-second rule will continue to stress the relationship between client and FCM, and will be a constraint on risk management standards.
Other FCMs believe the markets will need to adapt, and see these issues as growing pains that come with the implementation of new systems and rules.