SEC Seeks Rule Requiring Exchanges to Test Technology

SEC Seeks Rule Requiring Exchanges to Test Technology

The U.S. Securities and Exchange Commission (SEC) is currently drafting a rule that would require exchanges and clearing firms to routinely test their technology for stability and security. Bloomberg reports that SEC Chairman Elisse B. Walter told an audience at American University’s Washington College of Law, that the agency is working to move a proposal forward that would require a mandatory technology-review program.

Automation Review Policy & Systems Requirements

The technology review would require market participants, which include exchanges, clearing firms, and other trading platforms, to test how their systems respond to outages and notify the agency about any disruptions. The proposed rule would convert a voluntary program – the Automation Review Policy – which was created in response the Oct. 16, 1987 market crash known as “Black Monday.” Under the Automation Review Policy, exchanges voluntarily follow SEC guidance by submitting to periodic SEC inspections of their systems.

SEC Chairman Walter stated to reporters after her speech: “A voluntary standard is no substitute for a mandate and a requirement that you must follow.” Walter did not state when the SEC might release a rule proposal for public comment.

Walter’s speech covered the SEC’s efforts to improve its technology in an era of high-frequency traders and electronic market makers. Walter said that the commission’s Midas database and planned consolidated audit trail are key to these efforts.

Consolidated audit trails will trace how orders are fed and routed through the equity market’s infrastructure. Midas will allow the commission to view all orders, order cancellations and trade executions on U.S. Exchanges. Walter also stated that the Midas data will aid in reconstructing the causes of market crashes, which would, in turn, inform how new regulations are written.

Walter also noted that the agency is at work developing models to identify suspicious financial results in routine public filings, in addition to a new tool that will electronically scope public companies’ written disclosures for irregularities.

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About The Author


Elan Mendel

Elan Mendel

Elan Mendel is an associate with Shipkevich PLLC, and has done registration, compliance, and enforcement defense work for commodities, futures and forex firms registered with the CFTC and NFA as FCMs, RFEDs, and others. Elan also specializes in domestic and cross-border insolvency issues.

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