2048 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 

1Electronic Trading Risk Principles, 85 FR 42761 

(July 15, 2020). NPRM commenters were as follows: 

Americans for Financial Reform Education Fund 

(‘‘AFR’’), Better Markets, Inc. (‘‘Better Markets’’), 

CBOE Futures Exchange, LLC (‘‘CFE’’), CME Group 

Inc. (‘‘CME’’), Commercial Energy Working Group 

(‘‘CEWG’’), Futures Industry Association and FIA 

Principal Traders Group (‘‘FIA/FIA PTG’’), Institute 

for Agriculture and Trade Policy (‘‘IATP’’), 

Intercontinental Exchange Inc. (‘‘ICE’’), 

International Swaps and Derivatives Association, 

Inc. and Securities Industry and Financial Markets 

Association (‘‘ISDA/SIFMA’’), Managed Funds 

Association (‘‘MFA’’), Minneapolis Grain Exchange, 

Inc. (‘‘MGEX’’), and Optiver US LLC (‘‘Optiver’’). In 

addition, the Commission received a thirteenth 

comment letter from Robert Rutkowski 

(‘‘Rutkowski’’) after the comment period closed. 

2FIA/FIA PTG NPRM Letter, at 2; see also CME 

NPRM Letter, at 1; ICE NPRM Letter, at 3. See also 

CME Group, Market Regulation Advisory Notice 

RA2006–5, ‘‘Disruptive Trading Practices’’ 

(effective Aug. 10, 2020), available at https://

www.cmegroup.com/notices/market-regulation/ 

2020/08/CME-Group-RA2006-5.html (prohibiting 

any market participant from intentionally or 

recklessly submitting or causing to be submitted an 

actionable or non-actionable message(s) that has the 

potential to disrupt exchange systems). 

3FIA/FIA PTG NPRM Letter, at 1. 

4Automated and Modern Trading Markets 

Subcommittee, ‘‘Discussion of the CFTC’s Proposed 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 38 

RIN 3038–AF04 

Electronic Trading Risk Principles 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting final rules 

amending its part 38 regulations to 

address the potential risk of a 

designated contract market’s (‘‘DCM’’) 

trading platform experiencing a market 

disruption or system anomaly due to 

electronic trading. The final rules set 

forth three principles applicable to 

DCMs concerning: The implementation 

of exchange rules applicable to market 

participants to prevent, detect, and 

mitigate market disruptions and system 

anomalies associated with electronic 

trading; the implementation of 

exchange-based pre-trade risk controls 

for all electronic orders; and the prompt 

notification of Commission staff by 

DCMs of any significant market 

disruptions on their electronic trading 

platforms. In addition, the final rules 

include acceptable practices 

(‘‘Acceptable Practices’’), which provide 

that a DCM can comply with these 

principles by adopting and 

implementing rules and risk controls 

reasonably designed to prevent, detect, 

and mitigate market disruptions and 

system anomalies associated with 

electronic trading. 

DATES: 

Effective date: The rules are effective 

on January 11, 2021. 

Compliance date: DCMs must be in 

full compliance with the requirements 

of this rule no later than July 12, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Marilee Dahlman, Special Counsel, 

mdahlman@cftc.gov or 202–418–5264; 

Joseph Otchin, Special Counsel, 

jotchin@cftc.gov or 202–418–5623, 

Division of Market Oversight; Esen 

Onur, eonur@cftc.gov or 202–418–6146, 

Office of the Chief Economist; in each 

case at the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW, Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Purpose and Structure of the Risk 

Principles 

B. TAC Meeting 

C. Existing Part 38 Framework and the Risk 

Principles Proposal 

D. Framework of This Final Rulemaking 

1. Principles-Based Approach 

2. Issues Related to a DCM-Focused 

Approach 

3. Issues Related to Codification in Core 

Principle 4 and Overlap With Existing 

Commission Regulations 

II. The Final Risk Principles 

A. Key Terms 

1. Electronic Trading 

2. Market Disruption and System Anomaly 

B. The Reasonableness Standard 

C. Risk Principle 1 

1. Proposal 

2. Rules Versus Controls and Other 

Procedures 

3. Scope of Electronic Trading Subject to 

DCM Rules 

D. Risk Principle 2—Risk Controls Listed 

in Part 38 

E. Risk Principle 3 

1. Proposal 

2. ‘‘Significant’’ Standard 

3. Notification Requirement 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

1. OMB Collection 3038–0093—Provisions 

Common to Registered Entities 

2. OMB Collection 3038–0052—Core 

Principles and Other Requirements for 

DCMs 

C. Cost-Benefit Considerations 

1. Introduction 

2. Costs 

3. Benefits 

4. 15(a) Factors 

D. Antitrust Considerations 

I. Background 

A. Purpose and Structure of the Risk 

Principles 

The Commission is adopting final 

rules establishing a set of principles 

(‘‘Risk Principles’’) and related 

Acceptable Practices applicable to 

DCMs for the purpose of preventing, 

detecting, and mitigating market 

disruptions and system anomalies 

associated with the entry of electronic 

orders and messages into DCMs’ 

electronic trading platforms. Such 

market disruptions or anomalies 

originating at a market participant may 

negatively impact the proper 

functioning of a DCM’s trading platform 

by limiting the ability of other market 

participants to trade, engage in price 

discovery, or manage risk. 

The Commission, DCMs, and market 

participants all have an interest in the 

effective prevention, detection, and 

mitigation of market disruptions and 

system anomalies associated with 

electronic trading. As discussed in the 

notice of proposed rulemaking for the 

Electronic Trading Risk Principles 

(‘‘NPRM’’) 1 and noted by several NPRM 

commenters, the Commission believes 

that DCMs are addressing most, if not 

all, of the electronic trading risks 

currently presented to their trading 

platforms. DCMs and other market 

participants have worked together to 

better understand electronic trading 

risks and adapt risk control systems 

through the use of new technological 

tools and safety procedures, such as ‘‘fat 

finger’’ controls, dynamic price collars, 

kill switches, cancel-on-disconnect, 

drop copy feeds, self-match prevention, 

and granular pre-trade controls to 

manage limits within a product group.2

Since April 2010, FIA has published six 

papers proposing industry best practices 

and guidelines related to identifying 

risks and strengthening safeguards 

related to electronic trading in the 

futures markets.3

The Risk Principles will require 

DCMs to continue to monitor these risks 

as they evolve along with the markets, 

and make reasonable modifications as 

appropriate. The Risk Principles reflect 

a flexible approach that complements 

industry-led initiatives and previous 

Commission measures to address market 

disruption risk. The Risk Principles 

provide further regulatory clarity to 

market participants while preserving the 

DCMs’ ability to adapt to evolving 

technology and markets. 

B. TAC Meeting 

At the Commission’s Technology 

Advisory Committee (‘‘TAC’’) meeting 

on July 16, 2020, the TAC’s 

Subcommittee on Automated and 

Modern Trading Markets 

(‘‘Subcommittee’’) presented the 

Subcommittee’s position regarding the 

proposed Risk Principles.4 The 


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Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2049 

Rule on Electronic Trading Risk Principles,’’ (July 

16, 2020) (‘‘Subcommittee PowerPoint’’), available 

at https://www.cftc.gov/About/CFTCCommittees/ 

TechnologyAdvisory/tac_meetings.html. 

5See July 16, 2020 TAC Meeting Transcript at 

54:5. 

6As discussed in further detail below, the NPRM 

described ‘‘electronic trading’’ as all trading and 

order messages submitted by electronic means to 

the DCM’s electronic trading platform, including 

both automated and manual order entry. The NPRM 

described ‘‘market disruption’’ as generally 

including an event originating with a market 

participant that significantly disrupts the: (1) 

Operation of the DCM on which such participant 

is trading; or (2) ability of other market participants 

to trade on the DCM on which such participant is 

trading. See NPRM at 42765. 

See id. at 54:11–55:14, 56:6–16; Subcommittee 

PowerPoint at 3. 

7See July 16, 2020 TAC Meeting Transcript at 

55:21–56:10. 

8See id. at 58:6–17. 

9See id. 

10See id. at 6; July 16, 2020 TAC Meeting 

Transcript at 62:13–63:15. 

11See id. 

12See NPRM, supra note 1 at 42762. 

13 17 CFR 38.251(c). 

14 17 CFR 38.255. 

15See supra note 1. 

16See NPRM at 42762. 

17CME NPRM Letter, at 1, 12, 16; CFE NPRM 

Letter, at 1; CEWG NPRM Letter, at 2; FIA/FIA PTG 

NPRM Letter, at 2–4; ICE NPRM Letter, at 2, 9; 

ISDA/SIFMA NPRM Letter, at 1–2; MFA NPRM 

Letter, at 1–2; Optiver NPRM Letter, at 1. 

18FIA/FIA PTG NPRM Letter, at 2–4; ISDA/ 

SIFMA NPRM Letter, at 1; MFA NPRM Letter, at 1– 

2. 

19CME NPRM Letter, at 1, 12; CFE NPRM Letter, 

at 1; CEWG NPRM Letter, at 2. 

20 ICE NPRM Letter, at 2. 

21See id. 

22AFR NPRM Letter, at 1–2; Better Markets 

NPRM Letter, at 2, 6, 9, 10–12; IATP NPRM Letter, 

at 1, 4, 8; Rutkowski NPRM Letter, at 1. 

23Better Markets NPRM Letter, at 2, 9. 

Subcommittee stated that it broadly 

supports the rulemaking.5 The 

Subcommittee also indicated support 

for how the Commission characterized 

the concepts of ‘‘electronic trading’’ and 

‘‘market disruption.’’ 6 However, the 

Subcommittee described the second part 

of the definition of ‘‘market 

disruption’’—i.e., disruption of the 

ability of other market participants to 

trade on the DCM on which the market 

participant is trading—as 

‘‘amorphous.’’ 7 The Subcommittee 

noted that it is difficult to define in 

advance whether or not a trade halt is 

disruptive.8 The Subcommittee stated 

‘‘a positive part of the principles-based 

approach’’ is that it allows the 

Commission and DCMs to define events 

in accordance with a principle as 

opposed to a list.9

The Subcommittee anticipated that 

many procedures and rules adopted by 

DCMs would be similar, but it is 

nevertheless important to allow for 

flexibility, given that DCM trading 

systems have different architectures and 

features.10 The Subcommittee 

concluded that flexibility allows for 

market resilience and best practices that 

will improve over time.11

C. Existing Part 38 Framework and the 

Risk Principles Proposal 

As discussed in the NPRM, the Risk 

Principles supplement existing DCM 

Core Principle 4 regulations in part 38, 

namely Commission regulations 

§§ 38.251 and 38.255.12 Existing 

Commission regulation § 38.251(c) 

requires each DCM to demonstrate an 

effective program for conducting realtime monitoring of market conditions, 

price movements, and volumes, in order 

to detect abnormalities and, when 

necessary, to make a good-faith effort to 

resolve conditions that are, or threaten 

to be, disruptive to the market.13 In 

addition, existing Commission 

regulation § 38.255 requires each DCM 

to establish and maintain risk control 

mechanisms to prevent and reduce the 

potential risk of price distortions and 

market disruptions, including, but not 

limited to, market restrictions that pause 

or halt trading in market conditions 

prescribed by the DCM.14

Building on the requirements under 

existing Commission regulation § 38.251 

to conduct real-time monitoring and 

resolve conditions that are disruptive to 

the market, the Risk Principles, together 

with the Acceptable Practices, require 

DCMs to take reasonable steps to 

prevent, detect, and mitigate material 

market disruptions or system anomalies 

associated with electronic trading. 

Existing Commission regulations do not 

fully and explicitly address the risks of 

market disruptions or system anomalies 

associated with electronic trading, and 

the Risk Principles fill those gaps by 

establishing exchange rule and risk 

control requirements, as well as 

notification requirements, explicitly 

applicable to electronic trading. 

Additionally, while there may be some 

overlap between the Risk Principles and 

existing Commission regulation 

§ 38.255, the Commission believes the 

Risk Principles are distinguishable from 

existing Commission regulation § 38.255 

because they focus on DCM rules, risk 

controls, and notification requirements, 

and are not limited to the application of 

risk controls as exists in regulation 

§ 38.255. The Commission also submits 

that the Risk Principles will provide 

greater certainty to DCMs regarding 

their obligations to address certain 

situations associated with electronic 

trading. 

D. Framework of This Final Rulemaking 

The proposed rulemaking was subject 

to a 60-day comment period, which 

closed on August 24, 2020. As noted 

above, the Commission received 13 

substantive comments and held one ex 

parte meeting.15 The following section 

addresses comments that generally 

apply to all three Risk Principles and 

Acceptable Practices. Comments that 

relate to individual Risk Principles and 

Acceptable Practices will be addressed 

in Section II.C–E. 

1. Principles-Based Approach 

In the NPRM, the Commission 

proposed a principles-based approach. 

The purpose of this approach was to 

provide DCMs with the flexibility to 

impose the most efficient and effective 

rules and pre-trade risk controls for 

market participants subject to the DCMs’ 

respective jurisdictions. The 

Commission believes that a principlesbased approach in connection with 

electronic trading requirements 

provides DCMs with flexibility to adapt 

and evolve with changing technologies 

and markets.16

a. Summary of Comments 

Most commenters, including CME, 

CFE, CEWG, FIA/FIA PTG, ICE, ISDA/ 

SIFMA, MFA, and Optiver supported a 

principles-based approach.17 In 

particular, FIA/FIA PTG, ISDA/SIFMA, 

and MFA noted that such an approach 

provides flexibility and takes into 

account future technological 

advances.18 Commenters also stated that 

the principles-based approach is 

preferable to the prescriptive nature of 

prior proposals.19 ICE supported the 

Commission’s view that each DCM 

should have discretion to identify 

market disruptions and system 

anomalies as they relate to the DCM’s 

market and participants’ trading 

activity.20 ICE stated that what 

constitutes a market disruption will not 

only vary from exchange to exchange, 

but also from market to market. 

Therefore, tolerance levels and 

thresholds must be set for each 

market.21

In contrast, AFR, Better Markets, 

IATP, and Rutkowski disagreed with the 

Commission’s principles-based 

approach, and asserted that the 

incentives of DCMs and public 

regulators are not fully aligned.22 Better 

Markets commented that the principles 

are too imprecise and unenforceable, 

and lack key definitions.23 IATP 

emphasized that principles-based rules 


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24 IATP NPRM Letter, at 1. 

25See id. at 8. 

26AFR NPRM Letter, at 1–2; Better Markets 

NPRM Letter, at 2, 6, 9, 10–12; Rutkowski NPRM 

Letter, at 1. 

27See supra note 25 at 2–5, 8. 

28See Order, CFTC Docket No. 19–19, at 3–5 

(Sept. 4, 2019), available at https://www.cftc.gov/ 

media/2396/enfoptionsclearingorder090419/ 

download. 

29 Id. at 2. The order stated the Commission found 

OCC had failed to comply with Core Principles in 

Section 5b(c)(2)(B), (D), and (I) of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’), and Commission 

regulations §§ 39.11(a) and (c), 39.13(a), (b), (f), and 

(g)(l) and (2), and 39.18(b)(l) and (e)(l). See id. at 

3–5. The Commission issued a press release 

regarding the enforcement action stating: ‘‘ ‘As this 

case shows, principles-based regulation does not 

mean lax oversight,’ said CFTC Chairman Heath P. 

Tarbert. ‘While clearing agencies have some 

discretion in crafting their risk management 

policies and procedures, those policies and 

procedures must be reasonable and take into 

consideration relevant risks.’ ’’ See Press Release, 

‘‘SEC and CFTC Charge Options Clearing Corp. with 

Failing to Establish and Maintain Adequate Risk 

Management Policies’’ (Sept. 4, 2019), available at 

https://www.cftc.gov/PressRoom/PressReleases/ 

8000-19. 

Additionally, in 2015, the Commission brought 

an enforcement action against TeraExchange LLC, a 

provisionally registered swap execution facility 

(‘‘SEF’’), for violations of Core Principles requiring 

SEFs to enact and enforce rules prohibiting certain 

types of trade practices, including wash trading and 

prearranged trading. See Press Release, ‘‘CFTC 

Settles with TeraExchange LLC for Failing to 

Enforce Prohibitions on Wash Trading and 

Prearranged Trading in Bitcoin Swap’’ (Sept. 24, 

2015), available at https://www.cftc.gov/ 

PressRoom/PressReleases/7240-15. 

30See Section II.A. 

31See NPRM at 42765. 

32FIA/FIA PTG NPRM Letter, at 4. See also CME 

NPRM Letter, at 1 (‘‘. . . the integrity and reliability 

of our markets are cornerstones of our business 

model—market participants choose to manage their 

risk on the CME Group Exchanges because we offer 

fair, efficient, transparent, liquid, and dynamic 

markets that are conducted and operated in 

accordance with the highest standards.’’; ICE NPRM 

Letter, at 2 (‘‘DCMs have proactively developed a 

substantial suite of risk controls, as well as 

financial, operational and supervisory controls to 

protect their markets and comply with existing 

regulations.’’). 

33Section 3(b) of the CEA. 7 U.S.C. 5(b). 

34The Commission notes that DCMs are already 

subject to Commission regulation § 38.850 (Core 

Principle 16, Conflicts of Interest), which requires 

DCMs to minimize conflicts of interest in the DCM’s 

decision-making process and establish a process for 

resolving those conflicts of interest. 17 CFR 38.850. 

35See Appendix B to Part 38—Guidance on, and 

Acceptable Practices in, Compliance with Core 

Principles, Core Principle 16 (Subparagraph (b)) 

(‘‘To comply with this Core Principle, contract 

markets should be particularly vigilant for such 

conflicts between and among any of their selfregulatory responsibilities, their commercial 

interests, and the several interests of their 

management, members, owners, customers and 

market participants, other industry participants, 

and other constituencies.’’). 

must be enforceable.24 IATP also 

asserted principles-based rules that the 

Commission cannot effectively 

supervise and enforce would surrender, 

not delegate, the Commission’s 

authority, and could legalize trading 

misconduct due to lack of resources.25

AFR, Better Markets, and Rutkowski 

further commented that the proposed 

regulations provide too much deference 

to DCMs and that the Commission failed 

to address conflicts of interest concerns 

that may impede DCM and selfregulatory organization (‘‘SRO’’) 

independence.26

Finally, IATP made several comments 

addressing the potential for market 

disruption caused by ‘‘idiosyncratic’’ 

events, and suggested further study on 

the impact of electronic trading on 

intraday price volatility.27

b. Discussion 

The Commission considered the 

comments and is adopting the 

principles-based approach to the Risk 

Principles as discussed in the NPRM. 

The Commission believes that a 

principles-based approach provides 

appropriate flexibility to allow DCMs to 

adopt and implement effective and 

efficient measures reasonably designed 

to achieve the objectives of the Risk 

Principles. The Commission submits 

that prescriptive rules may not be 

sufficiently flexible to enable DCMs to 

adopt appropriate measures for their 

particular market, and therefore, would 

not be as effective in preventing market 

disruptions or system anomalies. 

The principles-based nature of the 

Risk Principles does not mean they are 

unenforceable. The Risk Principles will 

be enforceable regulations that allow the 

Commission to require all DCMs to 

implement appropriate, reasonable risk 

controls and rules to prevent, detect, 

and mitigate market disruptions. The 

Commission has brought enforcement 

actions relating to violations of Core 

Principles set forth in Commission 

regulations. Recently, in 2019, the 

Commission brought an action against 

Options Clearing Corporation (‘‘OCC’’), 

a derivatives clearing organization 

(‘‘DCO’’), for violations of DCO Core 

Principles under part 39.28 In particular, 

the Commission determined ‘‘OCC 

failed to fully comply with the specified 

DCO Core Principles by failing to 

establish, implement, and enforce 

certain policies and procedures 

reasonably designed to (1) consider and 

produce margin levels commensurate 

with every potential risk and particular 

attribute of each relevant product 

cleared by OCC; (2) effectively measure, 

monitor and manage its credit exposure 

and liquidity risk; and (3) protect the 

security of certain of its information 

systems.’’ 29

While the final rules do not formally 

define terms such as ‘‘market 

disruption’’ or ‘‘electronic trading’’ in 

rule text, the Commission provided a 

general discussion of those terms in the 

NPRM. The Commission is providing 

additional clarity concerning relevant 

terms in this preamble, in order for 

DCMs and other market participants to 

have a sufficient understanding of how 

the Commission will interpret and 

enforce the Risk Principles.30 Further, 

by not defining the terms in a static 

way, the Commission intends to allow 

for DCMs’ application of the Risk 

Principles to evolve over time alongside 

market developments.31

The Commission believes that DCMs 

are incentivized to have risk controls to 

promote the integrity of their markets, 

and existing risk controls in place across 

DCMs indicate that they have 

implemented such measures. As FIA/ 

FIA PTG pointed out, ‘‘[a]ll market 

participants have a shared interest in 

strengthening risk controls. The 

interconnectedness of the listed 

derivatives markets means that all 

market participants are vulnerable when 

risk controls fail. It is no surprise, then, 

that the industry has worked diligently 

to enhance and extend risk controls over 

the years.’’ 32

The Risk Principles will require all 

DCMs to implement an appropriate 

standard for risk controls. DCMs are best 

positioned to determine what risk 

controls and rules are appropriate to 

prevent, detect, and mitigate disruptions 

on their respective markets. Permitting 

them to do so is consistent with 

Congressional intent to serve the public 

interests of the CEA ‘‘through a system 

of effective self-regulation of trading 

facilities . . . under the oversight of the 

Commission.’’ 33 Any conflict of interest 

concerns, where DCMs might prioritize 

profitability over reasonable controls, 

will be addressed through regular 

Commission oversight of DCMs, 

including examinations.34 For example, 

in an examination, Commission staff 

may consider whether a DCM is 

allocating sufficient financial and staff 

resources to the compliance function, 

the background and qualifications of the 

DCM’s regulatory oversight committee 

members and compliance officers, and 

any role non-compliance personnel 

might be taking in the DCM’s market 

monitoring and investigations 

processes.35

Regarding IATP’s comments, the 

Commission acknowledges that market 

risks, like the markets themselves, are 

always evolving. The principles-based 

approach provides DCMs with 

flexibility to address risks to markets as 

they evolve, including any idiosyncratic 

events. Prescriptive regulations may 


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36Staff of the Market Intelligence Branch, ‘‘Impact 

of Automated Orders in Futures Markets’’ (Mar. 

2019) at 4, 7, 13, available at https://www.cftc.gov/ 

MarketReports/StaffReports/index.htm. 

37See id. 

38See NPRM at 42763. 

39See id. at 42763 n.6. 

40See id. at 42764. 

41See id. at 42765. 

42CEWG NPRM Letter, at 3–4; FIA/FIA PTG 

NPRM Letter, at 3; Optiver NPRM Letter, at 1. 

43FIA/FIA PTG NPRM Letter, at 3. 

44Optiver NPRM Letter, at 1. 

45AFR NPRM Letter, at 1–2; Better Markets 

NPRM Letter, at 2, 6, 9, 10–12; IATP NPRM Letter, 

at 6–11; Rutkowski NPRM Letter, at 1. 

46CME NPRM Letter, at 2, 13. 

47CFE NPRM Letter, at 4. 

48CME NPRM Letter, at 13. 

49Better Markets NPRM Letter, at 9. 

50 IATP NPRM Letter, at 9. 

51 IATP NPRM Letter, at 11. 

52CEWG NPRM Letter, at 7. 

53 IATP NPRM Letter, at 4–5. 

54See id. 

55 IATP NPRM Letter, at 13. 

56 17 CFR 38.850. See also David Reiffen and 

Michel A. Robe, Demutualization and Customer 

Protection at Self-Regulatory Financial Exchanges, 

Journal of Futures Markets, Vol. 31, 126–164, Feb. 

2011 (in many circumstances, an exchange that 

maximizes shareholder (rather than member) 

income has a greater incentive to enforce 

aggressively regulations that protect participants 

from dishonest agents); and Kobana Abukari and 

Isaac Otchere, Has Stock Exchange Demutualization 

Improved Market Quality? International Evidence, 

Review of Quantitative Finance and Accounting, 

Dec 09, 2019, https://doi.org/10.1007/s11156-019- 

00863-y (demutualized exchanges have realized 

significant reductions in transaction costs in the 

post-demutualization period). 

57FIA/FIA PTG NPRM Letter, at 2. 

lack the flexibility to address such 

idiosyncratic events, while principlesbased regulations would provide DCMs 

with a framework through which they 

can change their rules and risk controls 

to address such unforeseen events. The 

Commission or industry organizations 

may conduct studies relevant to 

electronic trading in the future, and the 

Commission expects that the results will 

inform regulatory oversight of DCMs 

and enforcement of the Risk Principles. 

The Commission notes that the Division 

of Market Oversight produced a report 

in 2019 examining trading functionality 

across markets and found a consistent 

increase in the percentage of trading 

that was identified as ‘‘automated’’ 

relative to ‘‘manual.’’ 36 Further, the 

report also showed no general 

correlation (and in some instances an 

inverse correlation) between the 

increase in automated trading activity in 

these markets and daily volatility.37

2. Issues Related to a DCM-Focused 

Approach 

The Commission proposed the Risk 

Principles should focus specifically on 

DCMs.38 The NPRM stated the 

Commission will continue to monitor 

whether Risk Principles of this nature 

may be appropriate for other markets 

such as SEFs or foreign boards of trade 

(‘‘FBOTs’’).39 The Commission also 

encouraged the National Futures 

Association to evaluate whether it 

should provide additional supervisory 

guidance to its members.40 As noted in 

the NPRM, each DCM may have a 

different risk management program 

based on its unique business model and 

market, and this may result in some 

degree of differences in DCM rules 

implementing the Risk Principles.41

a. Summary of Comments 

CEWG, FIA/FIA PTG, and Optiver 

supported the Risk Principles’ focus on 

DCMs and addressed issues relating to 

DCM discretion in implementing the 

Risk Principles.42 FIA/FIA PTG stated 

that DCMs are the gatekeeper and 

overseer of electronic trading platforms 

and are therefore uniquely positioned to 

apply pre-trade controls uniformly to all 

participants and trading in their 

markets.43 Optiver similarly noted that 

each DCM has a unique technology 

stack on which its platform is built and 

must be afforded latitude to develop 

rules and risk controls.44 In contrast, 

AFR, Better Markets, IATP, and 

Rutkowski commented that the 

proposed regulations provide too much 

deference to DCMs, in allowing them to 

decide for themselves how to address 

prevention, detection, and mitigation of 

undefined market disruptions and 

system anomalies.45

CME stated the Risk Principles should 

apply to SEFs and FBOTs, in addition 

to DCMs.46 CFE stated any Commission 

assessments of DCM controls should be 

across all DCMs, and the Commission 

should not seek to hold all DCMs to 

what the larger DCMs may have in 

place.47 CME commented that each 

DCM may implement different rules and 

risk controls without harming market 

liquidity or integrity.48 In contrast, 

Better Markets commented that the Risk 

Principles ensure a lack of uniformity in 

DCM policies, procedures, and controls 

and potentially would punish 

responsible DCMs.49 Similarly, IATP 

asserted competition among DCMs for 

over-the-counter trading and for trading 

in new products, such as digital coins, 

could result in lax risk control design or 

updating under competitive pressures.50

IATP asked the Commission to explain 

why the lack of any uniform standard by 

which DCMs should develop rules and 

risk controls presents no risk of 

regulatory arbitrage or migration of 

market disruptions from one DCM to 

another.51

While the Risk Principles apply to 

DCMs, CEWG commented on their 

potential effect on market participants. 

In particular, CEWG requested the final 

rules clarify that market participants 

without access to source code used to 

operate trading systems would not be 

subject to DCM-imposed requirements 

to implement updates, test or monitor 

the operation of such software, or DCMimposed requirements under Risk 

Principle 3 to implement remediation 

measures for software.52

Finally, IATP commented that the 

Risk Principles indiscriminately apply 

to asset classes, financial speculators, 

and commercial hedgers.53 IATP further 

stated that the Commission should issue 

a term sheet for a study to investigate 

the feasibility of revising the 

demutualization rule to create tiers of 

DCMs with respect to physical and 

financial derivatives contracts, to which 

a rule on automated trading would 

apply.54 IATP also commented that the 

Commission should distinguish what 

additional pre-trade and post-trade risk 

controls the DCMs must maintain from 

what is required of futures commission 

merchants (‘‘FCMs’’) prescriptively.55

b. Discussion 

The Commission believes that a 

regulatory approach focusing on Risk 

Principles applicable only to DCMs is 

the correct approach. All participants 

and intermediaries have a responsibility 

to address the risks of electronic trading. 

However, trading occurs on DCM 

platforms and DCM-implemented rules 

and risk controls will be most effective 

in preventing, detecting, and mitigating 

system anomalies and market 

disruptions. As noted above, conflict of 

interest concerns will be addressed 

through regular Commission oversight. 

DCMs are subject to Commission 

regulation § 38.850 (Core Principle 16, 

Conflicts of Interest), which requires 

DCMs to minimize conflicts of interest 

in the DCM’s decision-making process 

and establish a process for resolving 

those conflicts of interest.56 The 

Commission believes that DCMs, and 

other market participants, do have an 

interest in maintaining market integrity, 

and this is evidenced through existing 

measures. In its comment, FIA/FIA PTG 

addressed DCM tools and procedures 

adopted to address electronic trading 

risk, including basic ‘‘fat finger’’ 

controls, dynamic price collars, kill 

switches, cancel-on-disconnect, drop 

copy feeds, and self-match prevention, 

as well as granular pre-trade controls to 

manage limits within a product group.57

FIA/FIA PTG noted that development of 


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58See id. 

59See NPRM at 42763 n.6. 

60CEWG NPRM Letter, at 7. 

61 17 CFR 38.151. 

62See NPRM 42762, 42764. 

63See NPRM 42762. 

64See id. 

65See id. 

66CME NPRM Letter, at 12–13; ICE NPRM Letter, 

at 3; Better Markets NPRM Letter, at 4–9. 67CME NPRM Letter, at 12–13. 68See id. at 7. 69See id. at 12. 70See id. at 12–13. 71See id. 72 ICE NPRM Letter, at 3. 73See id. 74See id. 75Better Markets NPRM Letter, at 4–9. 

risk control measures ‘‘has been an 

evolving, iterative process, with market 

participants, FCMs, technology vendors 

and DCMs working together to build the 

safeguards needed to protect our 

markets. After all, it is in everyone’s 

interest to have efficient, reliable 

markets.’’ 58

The Commission acknowledges 

IATP’s points concerning the possibility 

of creating different tiers of DCMs, and 

distinguishing controls required of 

DCMs from those required of FCMs. 

However, the Commission believes it is 

preferable to have the same regulations 

apply to all DCMs, and, in the 

enforcement of such regulations, 

recognize that each DCM has a unique 

market, technological infrastructure, 

and market participants. In addition, 

DCMs may require different controls 

from FCMs and the Commission will 

not specify particular required controls. 

This will serve the goal of ensuring that 

all DCMs, whatever their size or 

products, are subject to the same 

Commission regulations while allowing 

sufficient flexibility for each DCM to 

adopt risk controls and rules that are 

reasonably appropriate for its market. 

As noted in the NPRM, the 

Commission will continue to monitor 

whether Risk Principles of this nature 

may be appropriate for other markets 

such as SEFs or FBOTs.59 The 

Commission initially proposed the Risk 

Principles with a focus on DCMs due to 

their prominent nature in the futures 

market. Application of the Risk 

Principles to SEFs and FBOTs requires 

further study and consideration 

regarding the risks and unique attributes 

of those other markets, and the 

Commission expects to do so in the 

future to determine whether SEFs and/ 

or FBOTs should be subject to the Risk 

Principles or similar regulations. 

The Commission acknowledges that 

DCMs might implement different rules 

and risk controls given differences in 

their respective markets. Ongoing 

Commission oversight is expected to 

identify differences in DCM policies, 

procedures, and controls. Differences 

between and among DCMs would be 

acceptable under the Risk Principles so 

long as their policies, procedures, and 

controls are objectively reasonable. The 

Risk Principles will require DCMs to 

establish rules and risk controls 

reasonably designed to prevent, detect, 

and mitigate market disruptions, and 

this should, in turn, help prevent the 

migration of market disruptions from 

one DCM to another. 

The Commission acknowledges 

CEWG’s request that the final rules 

clarify that market participants without 

access to source code used to operate 

trading systems would not be subject to 

any DCM rules to implement updates, 

test or monitor the operation of such 

software, or DCM rules under Risk 

Principle 3 to implement remediation 

measures for software.60 While these 

points are reasonable, the Commission 

believes the extent to which market 

participants would be expected to 

implement software updates, tests, 

operation monitoring, or remediation 

measures should be left to individual 

DCM reasonable discretion. The 

Commission can envision unique 

arrangements involving market 

participant use of third-party software 

and therefore believes DCMs are the 

appropriate entity to adopt reasonable 

rules to govern those arrangements. The 

Commission notes that under existing 

Commission regulation § 38.151, DCMs 

must provide their members, persons 

with trading privileges, and 

independent software vendors with 

impartial access to their markets and 

services, including access criteria that 

are impartial, transparent, and applied 

in a non-discriminatory manner.61

3. Issues Related to Codification in Core 

Principle 4 and Overlap With Existing 

Commission Regulations 

The NPRM noted several areas where 

the Risk Principles may overlap with 

existing Commission regulations, 

including regulations related to the 

prevention of market disruptions and 

financial risk controls.62 The 

Commission explained that because 

DCMs have developed robust and 

effective processes for identifying and 

managing risks, both because of their 

incentives to maintain markets with 

integrity, as well as for purposes of 

compliance with existing Commission 

regulations, the Risk Principles may not 

necessitate the adoption of additional 

measures by DCMs.63 The Commission 

further stated that the proposed Risk 

Principles will result in DCMs 

continuing to monitor risks as they 

evolve along with the markets and make 

reasonable modifications as 

appropriate.64 Finally, the Commission 

proposed codifying the Risk Principles 

as part of Core Principle 4.65

a. Summary of Comments 

CME, ICE, and Better Markets asserted 

that the Risk Principles are redundant of 

existing regulations.66 In particular, 

CME commented that the Risk 

Principles overlap with existing 

regulations that require DCMs to have 

controls, tools, and rule sets to prevent 

and mitigate market and system 

disruptions.67 CME stated that its 

messaging controls, for example, are 

already arguably subject to Commission 

oversight pursuant to certain existing 

regulations under Core Principles 2 and 

4.68 CME suggested the Commission 

take an alternative approach of simply 

relying on existing regulations rather 

than adopting new ones.69 CME also 

addressed where in the part 38 

regulations the Risk Principles should 

be codified if adopted. CME suggested 

the Risk Principles be codified as part 

of Core Principle 2, particularly Risk 

Principle 1, because that Core Principle 

requires a DCM to adopt and implement 

rules.70 CME also pointed out that Core 

Principle 4 addresses manipulation, 

price distortion, and disruptions of the 

delivery or cash-settlement process and 

that a ‘‘market disruption’’ or ‘‘system 

anomaly’’ does not fit within those 

elements.71

ICE commented that the proposed risk 

principles largely duplicate existing 

Core Principle 4 guidance and 

acceptable practices.72 ICE suggested 

amending existing regulations, such as 

Commission regulation § 38.255, to refer 

to electronic trading, rather than create 

a new set of principles that may 

unintentionally conflict with or create 

duplicative and overlapping 

standards.73 ICE stated this would track 

the Commission’s approach to 

regulating financial risk controls in 

existing Commission regulation 

§ 38.607, which it believes has proven 

effective.74

Better Markets similarly commented 

that the proposed regulations are 

redundant of existing Commission 

regulations. Specifically, Better Markets 

pointed to Commission regulations 

§§ 38.157, 38.251(a), 38.255, 38.607, 

38.1050, and 38.1051, as well as Core 

Principle 4 guidance and acceptable 

practices.75 Better Markets stated the 

Risk Principles give the public the false 


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76See id. 

77See id. 

78See id. 

79See id. 

80CME NPRM Letter, at 4–7; CEWG NPRM Letter, 

at 4; FIA/FIA PTG NPRM Letter, at 3; ICE NPRM 

Letter, at 1; MFA NPRM Letter, at 2. 

81MFA NPRM Letter, at 2. 

82AFR NPRM Letter, at 2; Rutkowski NPRM 

Letter, at 2. 

83See NPRM at 42768. 

84NPRM at 42768. 

85The Commission notes that it does not intend 

or expect larger DCM pre-trade risk controls to be 

the standard for all DCMs, although there may be 

risk controls that are common to all DCMs. 

86NPRM at 42768. CME commented it has a 

vested interest in preserving the integrity of its 

markets, and has done so through market integrity 

controls such as order messaging throttles, price 

limits, automated port closures, kill switches, 

velocity logic controls and dynamic circuit 

breakers, as well as trade practice, disciplinary and 

administrative rules. CME NPRM Letter, at 4. ICE 

pointed out that prior to giving a participant access 

to its trading platform, ICE requires the participant 

to undergo conformance testing, which is designed 

to and has been successful in detecting system 

anomalies. ICE NPRM Letter, at 2. ICE additionally 

stated it has developed pre-trade risk controls, such 

as messaging throttles, interval price limits (price 

velocity collars), individual maximum order 

quantities, and order reasonability limits. See id. 

CFE commented it has extensive rule provisions 

that provide for risk controls applicable to all 

orders. CFE NPRM Letter, at 2. 

87NPRM at 42765. 

88See id. 

89See id. 

90See id. 

91See id. 

impression that the CFTC is taking 

meaningful regulatory action.76 Better 

Markets also considered the 

Commission’s distinction that the new 

principles are ‘‘anticipatory’’ to be 

unclear and possibly inaccurate.77

Better Markets further commented that 

existing Commission regulation § 38.255 

squarely focuses on risk controls for the 

prevention and mitigation of market 

disruptions.78 Better Markets stated that 

existing Commission regulation § 38.255 

and the proposed Risk Principles are so 

similar that it is unreasonable, if not 

deceptive, to finalize them under the 

pretext that the Commission is setting 

forth a new and improved electronic 

trading framework.79

CME, CEWG, FIA/FIA PTG, ICE, and 

MFA commented that DCMs already 

implement controls and address risks to 

their platforms.80 MFA believes the Risk 

Principles will help encourage DCMs to 

continue to monitor risks as they evolve 

along with the markets, and to make 

reasonable modifications as 

appropriate.81 AFR and Rutkowski 

disagreed, commenting that the NPRM 

does not contain any systematic analysis 

demonstrating that current DCM 

practices are effective in controlling the 

risks of market disruptions due to 

electronic trading.82

b. Discussion 

As noted in the NPRM, the Risk 

Principles supplement existing 

Commission regulations governing 

DCMs by directly addressing certain 

risks associated with electronic trading 

in Core Principle 4 and its 

implementing regulations, namely 

Commission regulations §§ 38.251 and 

38.255.83 Commission regulation 

§ 38.251(c) requires DCMs to conduct 

real-time monitoring and resolve 

conditions that are disruptive to the 

market. The Risk Principles supplement 

this regulation by specifically requiring 

actions by DCMs to prevent, detect, and 

mitigate market disruptions and systems 

anomalies. While the anticipatory 

nature of the Risk Principles (involving 

prevention, in addition to detection and 

mitigation) is not the only justification 

for these new rules, the Commission 

believes it is important to clarify that 

DCMs are obligated to do more than 

monitor and resolve disruptive 

conditions, as required by existing 

Commission regulation § 38.251. In 

particular, Risk Principle 1 specifically 

requires the adoption of exchange-based 

‘‘rules’’ that are reasonably designed to 

address electronic trading risk to the 

extent that such rules are not already in 

place. 

The NPRM further acknowledged that 

the Risk Principles largely overlap with 

Commission regulation § 38.255, which 

requires DCMs to ‘‘establish and 

maintain risk control mechanisms to 

prevent and reduce the potential risk of 

price distortions and market 

disruptions, including, but not limited 

to, market restrictions that pause or halt 

trading in market conditions 

prescribed’’ by the DCM.84 Compared to 

existing Commission regulation 

§ 38.255, the Risk Principles specifically 

address material market disruptions and 

system anomalies associated with 

electronic trading (e.g., excessive 

messaging that may materially limit 

participant access), not only market 

disruptions involving market halts or 

price distortions. 

The Commission disagrees with 

comments asserting the Risk Principles 

would be more appropriately 

implemented under Core Principle 2 

rather than Core Principle 4. Various 

regulations promulgated under Core 

Principle 4 already address market 

disruptions, including Commission 

regulations §§ 38.251(c) and 38.255. The 

Commission believes that the Risk 

Principles, each dealing with market 

disruptions, should likewise be codified 

under Core Principle 4. 

The Commission believes that it must 

do more than rely on existing 

regulations or add the words ‘‘electronic 

trading’’ to existing regulations. For this 

reason, the Commission notes that the 

final Risk Principles specifically will 

apply to electronic trading, thereby 

requiring adoption of a DCM rule (if not 

already implemented) and risk control 

and notification requirements regarding 

market disruptions, that is expected to 

ensure the development and 

implementation of reasonable measures 

to address the threat of market 

disruptions caused by electronic 

trading. The Commission expects that 

these Risk Principles will enhance the 

Commission’s ability to hold DCMs to a 

standard of reasonably-designed rules 

and appropriate risk controls, whether 

those rules and controls were already in 

place or are implemented pursuant to 

the Risk Principles.85

The NPRM noted several examples of 

exchange-based risk controls and 

several commenters elaborated further 

on these risk controls.86 The 

Commission continues to believe most 

DCMs already have effective controls in 

place to address electronic trading 

market disruptions. These Risk 

Principles will require DCMs to 

continue to implement such reasonable 

controls as markets and risks evolve. 

II. The Final Risk Principles 

A. Key Terms 

The NPRM stated that the Risk 

Principles focus on market disruptions 

or system anomalies associated with 

electronic trading activities.87 While not 

defined in the regulation text, the 

preamble broadly discussed the goals of 

the Risk Principles through these terms. 

The NPRM further stated by not 

defining the terms in a static way, the 

Commission intends that the 

application of the Risk Principles by 

DCMs and the Commission will evolve 

over time along with market 

developments.88 The NPRM stated that 

a general discussion of those terms in 

the context of today’s electronic markets 

would provide the public and, in 

particular, DCMs, guidance for applying 

the Risk Principles.89

1. Electronic Trading 

a. Proposal 

For purposes of this rulemaking, the 

Commission described electronic 

trading as encompassing a wide scope of 

trading activities, including all trading 

and order messages submitted by 

electronic means to a DCM’s electronic 

trading platform.90 This includes both 

automated and manual order entry.91


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92CME NPRM Letter, at 10. 93 ICE NPRM Letter, at 2, 3–4, 5. 94See id. 95See id. 96See id. 

97NPRM at 42765. 98See id. 99 ICE NPRM Letter, at 5–6; CME NPRM Letter, at 

3–4, 10–11; CEWG NPRM Letter, at 4, 5; MFA 

NPRM Letter, at 3; IATP NPRM Letter, at 6; Better 

Markets NPRM Letter, at 9, 10; MGEX NPRM Letter, 

at 1–2, 3. 100 ICE NPRM Letter, at 5. 101See id. 102See id. 103See id. 104See id. 105CEWG NPRM Letter, at 4. 

106CME NPRM Letter, at 10–11. 

107MFA NPRM Letter, at 3. 

108See id. 

109CME NPRM Letter, at 10–11. 

110 ICE NPRM Letter, at 5–6. 

111CME NPRM Letter, at 10–11. 

112See id. 

113 ICE NPRM Letter, at 6. 

114See id. 

115See id. 

116CEWG NPRM Letter, at 5. 

117See id. 

b. Summary of Comments 

CME and ICE addressed whether the 

Commission should modify its 

description of the term electronic 

trading. CME believed that the term was 

sufficiently clear.92 In contrast, ICE 

commented that the term is used in Risk 

Principles 1 and 2 to ‘‘include all 

trading and order messages submitted 

by electronic means to the DCM’s 

electronic trading platform, including 

both automated and manual order 

entry.’’ 93 ICE stated that the inclusion of 

‘‘trading’’ messages is unnecessary.94

Because participants only submit 

‘‘order’’ messages to the central limit 

order book and not trades, ICE believes 

that the term ‘‘electronic trading’’ 

captures off-facility transactions, such 

as exchange for related positions 

(‘‘EFRPs’’) and block transactions.95 ICE 

stated off-facility transactions are 

privately negotiated and have a low 

likelihood of disrupting the central limit 

order book.96

c. Discussion 

The Commission clarifies that the 

term ‘‘electronic trading’’ includes block 

and EFRP transactions, if such 

transactions are submitted electronically 

to the DCM’s trading platform. The 

Commission believes that DCMs should 

have reasonable discretion to decide 

what rules and controls—if any—should 

be applied to off-exchange transactions 

such as block trades and EFRPs under 

Risk Principles 1 and 2. The 

Commission expects DCMs to make 

such a determination based on: (a) The 

risk such off-exchange transactions will 

disrupt DCM platforms or markets; and 

(b) the rules and controls that would be 

most effective to address that risk. The 

Commission acknowledges that such 

trades are privately negotiated and 

currently may carry little risk of market 

disruption. However, it is unknown 

how much risk off-exchange trading will 

pose as markets evolve over time. In 

particular, off-exchange transactions 

could become increasingly electronic or 

automated, impact price formation and, 

consequently, pose greater risk to DCM 

markets. The Risk Principles allow DCM 

discretion in assessing this risk and how 

best to address it. 

2. Market Disruption and System 

Anomaly 

a. Proposal 

In the NPRM, the Commission stated 

it considers the term ‘‘market 

disruption,’’ for purposes of the Risk 

Principles, to generally mean an event 

originating with a market participant 

that significantly disrupts the: (1) 

Operation of the DCM on which such 

participant is trading; or (2) the ability 

of other market participants to trade on 

the DCM on which such participant is 

trading.97 For the purposes of the Risk 

Principles, ‘‘system anomalies’’ are 

unexpected conditions that occur in a 

market participant’s functional system 

that cause a similar disruption to the 

operation of the DCM or the ability of 

market participants to trade on the 

DCM.98

b. Summary of Comments 

ICE, CME, CEWG, MFA, IATP, Better 

Markets, and MGEX addressed whether 

the Commission should modify its 

description of the terms market 

disruption and system anomaly.99

ICE requested clarification on whether 

the term ‘‘significant’’ qualifies ‘‘market 

disruption.’’ 100 ICE also commented 

that the description of ‘‘market 

disruption’’ is overly broad, noting that 

the Commission uses the term to refer 

to an incident that disrupts the ability 

of other market participants to trade on 

the DCM.101 ICE asserted this could 

include a range of subjective 

interpretations and possibilities, 

including a disruption resulting in 

prices not reflective of market 

fundamentals.102 ICE commented that 

the term could also be interpreted to 

include entering orders in a disorderly 

manner, quote stuffing, causing illiquid 

markets where one would not occur 

otherwise, or causing the artificial 

widening of markets.103 ICE stated these 

scenarios could result from volatility 

but not a market disruption, and, 

because of the ambiguities in the Risk 

Principles, market participants may be 

reluctant to trade if pricing appears 

aberrant or erroneous.104 CEWG 

commented that the Commission should 

provide further high-level guidance 

with respect to events constituting 

‘‘market disruptions’’ or ‘‘system 

anomalies’’ to minimize the potential 

for regulatory uncertainty.105

CME commented that the term 

‘‘market disruption’’ is sufficiently 

clear.106 Similarly, MFA agreed with the 

Commission’s approach to defining 

‘‘market disruption,’’ which MFA 

believes focuses correctly on events 

impacting the operations of the DCM 

and/or the ability of other market 

participants to trade on the DCM, rather 

than the impact on trading of a single 

firm whose electronic trading was the 

source of the disruption.107 MFA also 

commented it supports that the Risk 

Principles allow a DCM to exercise 

discretion in identifying market 

disruptions and system anomalies as 

they relate to the DCM’s particular 

market and the trading activities of 

participants in that market.108

CME cautioned that no specific type 

of market halt should be considered a 

per se ‘‘market disruption’’ because 

some halts prevent and mitigate market 

disruptions.109 Similarly, ICE 

commented that an unscheduled trading 

halt caused by a market participant, 

which could not readily be attributed to 

market volatility or fundamental 

conditions in underlying or related 

markets, could constitute a market 

disruption.110 CME stated that the 

Commission should not characterize 

any specific period of latency as per se 

disruptive, because latency can occur 

due to bona fide market activity, or be 

based on a participant’s own system.111

CME stated that a fact-specific inquiry is 

necessary to determine if there has been 

a market disruption.112 Similarly, ICE 

stated that latency incorporates many 

factors outside a DCM’s processing of 

order messages.113 As such, the 

Commission should be cautious when 

interpreting latency as an indication of 

a market disruption.114 ICE stated it is 

more meaningful to quantify the impact 

on the market rather than to calculate a 

subjective impact to latency.115 CEWG 

commented that a disruptive event 

could have a significant impact on the 

market in one context, but not in 

another.116 For example, a one or two 

second delay in processing and 

execution may constitute a market 

disruption to automated trading firms 

but not to manual traders.117

CME commented regarding the 

preamble’s assertion that ‘‘system 

anomalies’’ are unexpected conditions 


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118CME NPRM Letter, at 3. 

119See id. 

120See id. 

121See id. 

122See id. 

123See id. 

124CME NPRM Letter, at 3–4. 

125See id. In particular, CME referenced 2011 

disciplinary actions involving the same trading 

firm, where an automated trading system 

malfunction prompted selling e-mini Nasdaq 100 

Index futures on the Chicago Mercantile Exchange, 

and another malfunction caused a rapid buying in 

oil futures on the New York Mercantile Exchange 

(‘‘NYMEX’’). 

126See id. (emphasis added). 

127See id. 

128 IATP NPRM Letter, at 6. 

129Better Markets NPRM Letter, at 9. 

130See id. at 10. Better Markets cited ‘‘the Flash 

Crash, recent WTI trading anomalies in the oil 

markets, and the Knight Capital meltdown’’ as 

examples demonstrating that electronic trading 

presents ‘‘varied, complex, and potentially 

extensive risks to market integrity, orderly trading, 

fair competition, and the price discovery process 

across the financial markets.’’ See id. at 3. 

131MGEX NPRM Letter, at 1–2. 

132See id. at 3. 

133CME NPRM Letter, at 3. 

134 ‘‘Reasonable discretion’’ shall be interpreted 

in the same manner as it has been used elsewhere 

in the Commission’s regulations. See, e.g., Part 38 

Core Principle 1, which provides that unless 

otherwise determined by the Commission by rule or 

regulation, a board of trade described in paragraph 

Continued 

that occur in a participant’s functional 

system ‘‘which cause a similar 

disruption to the operation of the DCM 

or the ability of market participants to 

trade on the DCM.’’ 118 CME stated one 

could interpret the preamble language to 

mean the disruptions to the DCM must 

be similar to the disruptions to the 

originating participant.119 CME 

suggested if the phrase ‘‘which cause a 

similar disruption’’ is actually referring 

to the Commission’s definition of 

‘‘market disruption’’ described earlier in 

the NPRM preamble, then the 

Commission should clarify 

accordingly.120

CME further commented that both 

definitions relate to the ability of other 

participants ‘‘to trade.’’ 121 CME stated 

that sections of the preamble reference 

participants’ inability to trade, engage in 

price discovery, or manage risk.122 CME 

asked the Commission to clarify 

whether it always means all three 

situations, or any of those situations.123

CME further commented that the 

Commission reconsider using the word 

‘‘ability.’’ 124 CME pointed out that not 

all the examples of market disruptions 

cited in the NPRM involved a 

disruption to the operation of the DCM 

and a participant being unable to trade, 

engage in price discovery, or manage 

risk.125 CME suggested that a clearer 

and more objective standard would be 

that the event ‘‘must significantly 

disrupt other participants’ access to the 

DCM.’’ 126 CME believes this standard 

captures the risks identified in the 

rulemaking and is something DCMs can 

typically identify on their own.127

IATP commented that the 

Commission grants too much discretion 

to DCMs to interpret the terms of the 

NPRM and to determine what is or is 

not a ‘‘market disruption’’ or ‘‘system 

anomaly’’ and whether to mitigate it.128

Better Markets commented that terms 

such as ‘‘significant’’ and ‘‘disruption’’ 

are ambiguous and will lead to 

divergent practices.129 Better Markets 

also commented that the Risk Principles 

provide essentially unfettered discretion 

to each DCM in terms of how to define 

market disruptions and system 

anomalies as they relate to their 

particular markets, and permitting 

differing definitions will undermine 

comparative analyses of market 

disruptions across exchanges.130

MGEX commented that the 

Commission should continue with its 

principles-based approach to broadly 

define ‘‘market disruption’’ and ‘‘system 

anomalies’’ associated with electronic 

trading and ensure the reasonableness 

standard is approached with ample 

discretion.131 MGEX considered the 

general definitions of ‘‘market 

disruption’’ and ‘‘system anomalies’’ 

stated in the NPRM to be acceptable, 

with the caveat that each DCM operates 

differently, and the Commission should 

recognize this during its rule 

enforcement reviews.132

c. Discussion 

The NPRM described a market 

disruption as an event originating with 

a market participant that significantly 

disrupts the operation of the DCM on 

which such participant is trading. The 

proposed regulation text for Risk 

Principle 3 expressly included the term 

‘‘significant,’’ while the regulation text 

for Risk Principles 1 and 2 did not. The 

Commission clarifies that the term 

‘‘market disruption,’’ for DCMs’ 

definitional and rule implementation 

purposes to satisfy Risk Principles 1 and 

2, refers specifically to disruptions that 

materially impact the proper 

functioning of a DCM’s trading platform. 

The term ‘‘market disruption’’ does not 

encompass disruptions that have only a 

de minimis effect on a DCM’s trading 

platforms or the ability of other market 

participants to trade, engage in price 

discovery, or manage risk. For example, 

a technical malfunction at a market 

participant might cause excessive 

messaging in a product before a DCM’s 

risk controls limit trading in that 

product. If the trading halt has a 

material impact on other market 

participants’ ability to trade in that 

product, then that would constitute a 

market disruption. However, if trading 

is only halted for a de minimis amount 

of time, and market participants can 

quickly resume trading in that product, 

that may not rise to the level of a 

material ‘‘market disruption’’ of the 

DCM’s trading platform for purposes of 

the Risk Principles. 

CME indicated that a specific 

disruption cited in the NPRM (namely 

a malfunction that prompted the selling 

of e-mini Nasdaq 100 Index futures on 

the Chicago Mercantile Exchange, and 

another malfunction that caused a rapid 

buying of oil futures on NYMEX) was 

not necessarily a ‘‘market disruption,’’ 

because the event did not disrupt the 

operation of the DCM or limit market 

participants’ ability to trade.133 The 

Commission acknowledges that DCMs 

will have some discretion to determine 

whether an event constitutes a market 

disruption for purposes of the Risk 

Principles. However, if the malfunctions 

described in the 2011 CME disciplinary 

actions were to cause a material change 

in price that deviated from prevailing 

market prices, and the DCMs were 

required to cancel numerous trades, the 

Commission would likely view such a 

scenario as a material market disruption 

that DCMs should have reasonable rules 

and risk controls in place to prevent, 

detect, and mitigate. The materiality of 

a market disruption would depend on, 

for example, in the context of trade 

errors, how quickly the DCM can correct 

erroneous prices, and how many 

contracts are affected. In the event of a 

market disruption involving a trading 

halt, materiality generally would 

depend on how quickly trading is able 

to resume. 

Under Risk Principle 3, DCMs only 

have to report market disruptions under 

Risk Principles 1 and 2 that are 

‘‘significant.’’ All significant market 

disruptions under Risk Principle 3 are 

also market disruptions under Risk 

Principles 1 and 2, but the converse is 

not true: Some market disruptions 

under Risk Principles 1 and 2 will not 

be sufficiently significant to trigger the 

reporting requirement under Risk 

Principle 3. Thus, the standard for a 

significant market disruption under Risk 

Principle 3 is higher than the standard 

for a market disruption under Risk 

Principles 1 and 2. The Commission 

emphasizes that DCMs have reasonable 

discretion to determine whether a given 

market disruption had a ‘‘significant’’ 

impact on the trading platform, so as to 

trigger Risk Principle 3 reporting.134


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(a) of this section shall have reasonable discretion 

in establishing the manner in which the board of 

trade complies with the core principles described 

in this subsection. 17 CFR 38.100 (emphasis added). 

135 Intentional or reckless acts of price 

manipulation, fraud, disruptive trading, wash sales, 

or pre-arranged trading, among others, are 

addressed through existing provisions, including, 

but not limited to, Sections 4b, 4c(a)(2), 4c(a)(5), 4o, 

and 9 of the CEA and Commission regulations 

§§ 1.38, 180.1, 180.2, 38.152, and 38.250. See 7 

U.S.C. 6b, 6c(a)(2), 6c(a)(5), 6o, 9; 17 CFR 1.38, 

180.1, 180.2, 38.152, 38.250. 

136NPRM at 42777. 

137 ICE NPRM Letter, at 2; MGEX NPRM Letter, 

at 2–3; CME NPRM Letter, at 4–5, 6, 13; Better 

Markets NPRM Letter, at 8; IATP NPRM Letter, at 

9. 

138 ICE NPRM Letter, at 2. 

139See id. 

140See id. 

141See id. 

142MGEX NPRM Letter, at 2–3. 

143CME NPRM Letter, at 4–5. 

144See id. at 6. 

Further, as to each Risk Principle, the 

Commission clarifies that the terms 

‘‘market disruption’’ and ‘‘system 

anomaly’’ are intended to capture 

scenarios where a participant’s ability to 

trade, engage in price discovery, or 

manage risk are materially impacted. All 

three scenarios do not have to occur for 

an event to be considered a market 

disruption or system anomaly. In 

addition, the Commission clarifies that 

‘‘system anomalies’’ are unexpected 

conditions that occur in a market 

participant’s functional system that 

cause a disruption to the operation of 

the DCM or the ability of market 

participants to trade on the DCM, 

engage in price discovery, or manage 

risk. The disruption on the DCM need 

not be similar in nature to the 

disruption in a participant’s system. 

The Commission understands that 

many examples of a market participant’s 

ability to trade on the DCM, engage in 

price discovery, or manage risk may 

involve the limitation of participant 

access to the DCM. However, the 

Commission declines to limit the 

definitions of ‘‘market disruption’’ or 

‘‘system anomaly’’ to a limitation of 

access, as there may be situations where 

market participants cannot engage in 

price discovery, regardless of whether 

they have access to the DCM. For 

example, a market participant may have 

access to trade in a particular product, 

but the product’s price has been 

impacted by inadvertent rapid selling or 

buying. 

The Commission believes the term 

‘‘market disruption’’ is not overly broad. 

While one commenter asserted that 

‘‘market disruption’’ could include 

various events that involve prices not 

reflecting market fundamentals, such as 

entering orders in a disorderly manner, 

quote stuffing, causing illiquid markets 

where one would not occur otherwise, 

or causing the artificial widening of 

markets, the Commission clarifies that 

intentionally or recklessly disruptive 

trading behavior is not meant to be 

within the scope of the Risk 

Principles.135 Rather, the focus of the 

Risk Principles is to address 

unintentional technological 

malfunctions that disrupt the operation 

of the DCM or the ability of market 

participants to trade, engage in price 

discovery, or manage risk. A situation 

where prices do not reflect market 

fundamentals is not sufficient, on its 

own, to constitute a material market 

disruption for purposes of the Risk 

Principles. 

The Commission agrees that no 

specific market halt should be 

considered a per se ‘‘market 

disruption,’’ because certain halts 

effectively prevent and mitigate market 

disruptions. Further, the Commission 

will not characterize any specific period 

of latency as per se disruptive due to the 

various causes of latency, not all of 

them relating to market disruptive 

events. The Commission emphasizes 

that DCMs have discretion in 

determining whether a trading halt is 

disruptive. 

In response to comments relating to 

DCM discretion, the Commission 

reiterates DCMs are best-positioned to 

assess the material market disruption 

and system anomaly risks posed by their 

markets and market participant activity, 

and to design appropriate measures to 

address those risks. However, while 

DCMs may differ in what they consider 

to be a ‘‘market disruption’’ or ‘‘system 

anomaly,’’ and whether and how to 

mitigate such an event, this is not 

unlimited discretion. The Commission 

will oversee and enforce the Risk 

Principles in accordance with an 

objective reasonableness standard. In 

other words, while a DCM has 

discretion to determine what rules and 

risk controls are appropriate, the 

Commission as part of its oversight 

responsibility will consider the 

objective reasonableness of those 

measures in light of the DCM’s 

products, volume, market participants 

and other factors, and how similarly 

positioned DCMs address similar risks. 

Due to differences among DCMs, the 

Commission acknowledges DCMs may 

have different determinations of what 

constitutes a ‘‘market disruption’’ or 

‘‘system anomaly.’’ In response to the 

comment from Better Markets, the 

Commission does not believe this will 

hinder any ‘‘comparative’’ analysis of 

market disruptions across exchanges. 

When assessing material market 

disruptions, the Commission will 

consider differences among DCM 

markets, technology, products, and 

market participants as part of its 

oversight. 

As to MGEX’s comment that each 

DCM operates differently, the 

Commission acknowledges that each 

DCM operates unique markets, with 

unique market participants, products, 

and technology. The Commission 

already takes this into account with 

respect to its routine oversight, 

including examinations. 

B. The Reasonableness Standard 

1. Proposal 

The Commission proposed 

Acceptable Practices to Risk Principles 

1 and 2, which provide that a DCM can 

comply with those principles by 

adopting rules, and subjecting all 

electronic orders to exchange-based pretrade risk controls, that are reasonably 

designed to prevent, detect, and mitigate 

market disruptions or system anomalies 

associated with electronic trading.136

2. Summary of Comments 

ICE, MGEX, CME, Better Markets, and 

IATP commented on the reasonableness 

standard.137 ICE supported the 

Commission’s approach to give DCMs 

reasonable discretion to adopt rules that 

prevent, detect, and mitigate market 

disruptions.138 ICE stated DCMs are 

best-positioned to adopt the rules, 

procedures, and system controls that fit 

their market and technology.139 ICE 

further commented that the proposed 

Acceptable Practice for Commission 

regulation § 38.251(e) provides DCMs 

with sufficient discretion to adopt the 

rules appropriate for their platform.140

ICE believes the supervisory obligations 

set out in exchange rules, along with 

requirements relating to disruptive 

trading practices, have been effective in 

preventing market disruptions.141

Similarly, MGEX commented that the 

Commission should accept that DCMs 

may differ in the rules they establish 

based on the unique and different 

markets and products, and DCMs must 

have discretion to ensure that the rules 

are ‘‘objectively reasonable’’ to address 

a market disruption or system 

anomaly.142

CME commented that the Commission 

should add ‘‘reasonably designed’’ to 

the regulation text, not just acceptable 

practices, just as it is in at least 40 other 

existing Commission regulations.143

CME believes this is especially 

important for Risk Principle 2, which 

requires controls to ‘‘prevent’’ system 

anomalies.144 CME stated that the word 

‘‘prevent’’ creates an impossible 


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145See id. at 6–7. 146Better Markets NPRM Letter, at 8. 147See id. 148See id. 149 IATP NPRM Letter, at 9. 150See id. 151See id. 152See NPRM at 42763. 153NPRM at 42776. 

154CME NPRM Letter, at 5. 

155 Id. at 5–6 (emphasis in original). 

156Better Markets NPRM Letter, at 10; MGEX 

NPRM Letter, at 2, 4. 

157Better Markets NPRM Letter, at 10. 

158MGEX NPRM Letter, at 2, 4. 

159CFE NPRM Letter, at 3. 

160 Id. 

161 Id. 

162CEWG NPRM Letter, at 7. 

163 Id. 

standard without a condition in the Risk 

Principle explicitly stating that the 

controls must be ‘‘reasonably 

designed.’’ 145

Better Markets commented that the 

Commission’s emphasis on DCM 

flexibility suggests confusion as to 

whether reasonableness is an objective 

or subjective standard.146 Better Markets 

believed the preamble to the final rules 

should state that the Risk Principles 

may require DCMs to do things 

differently if their pre-trade risk controls 

do not objectively satisfy the 

regulations.147 Better Markets also 

commented that the NPRM’s preamble 

set forth a ‘‘near presumption of 

reasonableness.’’ 148 Similarly, IATP 

commented that the preamble indicates 

it is unlikely the Commission will take 

any enforcement action against 

DCMs.149 IATP disagreed with the 

Commission’s statement that the Risk 

Principles will not result in enforcement 

actions based on strict liability.150 IATP 

stated that assuring DCMs that risk 

control failure will not result in 

enforcement action would signal to 

plaintiffs in a market disruption case 

that they would have to meet a high 

evidentiary standard.151

3. Discussion 

The Acceptable Practices will be 

adopted as proposed with the 

‘‘reasonably designed’’ standard. As 

stated in the NPRM, the Acceptable 

Practices for implementing the Risk 

Principles provide that DCMs shall have 

satisfied their requirements under the 

Risk Principles if they have established 

and implemented rules and pre-trade 

risk controls that are reasonably 

designed to prevent, detect, and mitigate 

market disruptions or system anomalies 

associated with electronic trading.152

‘‘Reasonably designed’’ means that a 

DCM’s rules and risk controls are 

objectively reasonable. As noted above, 

in assessing a DCM’s rules and risk 

controls, the Commission as part of its 

oversight responsibility will consider 

the objective reasonableness of those 

measures in light of the DCM’s 

products, volume, market participants 

and other factors, and how similarly 

positioned DCMs address similar risks. 

The Acceptable Practices are intended 

to provide DCMs with reasonable 

discretion to impose rules and risk 

controls to prevent, detect, and mitigate 

market disruption. Transferring the 

reasonableness standard to the 

regulation text is not necessary to allow 

DCM discretion to impose rules and 

controls appropriate to their own 

markets. 

In addition, the word ‘‘prevent,’’ 

when part of a reasonableness standard 

applicable through Acceptable 

Practices, does not create an impossible 

standard to achieve. Rules and controls 

implemented by DCMs need to be 

reasonable, as determined by an 

objective standard. Risk Principles 1 

and 2 do not require DCMs to ‘‘prevent’’ 

market disruptions and system 

anomalies in all circumstances. A goal 

of these Risk Principles is to provide 

DCMs with appropriate flexibility to 

take reasonably designed measures 

relevant to individual markets, and 

improve those measures as markets 

evolve. 

The Commission confirms that the 

reasonableness standard is an objective 

one and there is no presumption of 

reasonableness. While there are 

differences among DCMs, what one 

DCM may implement in terms of rules 

and controls to address material market 

disruptions may be relevant to assessing 

another DCM’s compliance. For 

example, if the Commission finds that a 

particular DCM is an outlier in terms of 

rules or controls, this may cause the 

Commission to inquire further whether 

there are legitimate reasons for the 

differences. 

The Commission confirms that DCMs 

may need to impose additional rules on 

their market participants, or implement 

additional controls, if their rules and 

controls do not objectively satisfy the 

Risk Principles. The Risk Principles are 

principles-based and allow for DCM 

discretion in compliance, but they are 

nevertheless enforceable regulations. 

Market participants should not interpret 

the Commission’s statements in this 

preamble to articulate any particular 

evidentiary standard in an enforcement 

action. 

C. Risk Principle 1 

1. Proposal 

In Risk Principle 1, the Commission 

proposed that a DCM must adopt and 

implement ‘‘rules’’ governing market 

participants subject to its jurisdiction to 

prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading.153

The Commission proposed that Risk 

Principle 1 (and the other Risk 

Principles) apply to all electronic 

trading. 

2. Rules Versus Controls and Other 

Procedures 

a. Summary of Comments 

Several commenters addressed Risk 

Principle 1’s requirement that DCMs 

implement ‘‘rules.’’ CME suggested Risk 

Principle 1 should focus on rules on 

participants and their conduct that are 

enforced through administrative or 

disciplinary processes; an example is 

CME Group’s Messaging Efficiency 

Policy.154 Other examples CME 

provided include trade practice and 

disciplinary rules and CME’s disruptive 

trading practices rule (Rule 575), which 

CME amended in 2020 to provide that 

it is a violation ‘‘for a participant to 

intentionally or recklessly engage in 

activity that has the potential to disrupt 

the systems of the Exchange.’’ 155

Better Markets and MGEX also 

commented on the term ‘‘rule.’’ 156

Better Markets stated the Commission 

should clarify that ‘‘rules’’ include 

internal policies, procedures, controls, 

advisories, and trading protocols 

contemplated in the broad definition in 

40.1.157 MGEX commented that the 

Commission should ensure ‘‘rules,’’ as 

described in the NPRM, include nonrules such as policies, procedures, 

protocols, and controls.158

CFE stated a DCM should be able to 

satisfy Risk Principle 1 through 

implementing internal systems, 

processes, and procedures, not just 

rules.159 For example, CFE commented 

a DCM may not want to publicly 

disclose how it monitors particular 

markets.160 CFE asserted requiring a 

DCM to describe in its rules how it 

monitors for market disruptions and 

system anomalies is administratively 

burdensome and may disincentivize a 

DCM from improving its systems.161

CEWG stated DCM rules adopted 

pursuant to Risk Principles 1 and 2 

should be subject to Commission 

approval under Commission regulation 

§ 40.5 or self-certification under 

Commission regulation § 40.6.162 CEWG 

asserted a transparent regulatory process 

would ensure that new DCM rules are 

appropriately tailored.163


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164 17 CFR 40.1(i). 

165Under part 40, a DCM’s filing of rules under 

Commission regulations §§ 40.5 or 40.6 shall be 

treated as public information, unless accompanied 

by a request for confidential treatment. See 17 CFR 

40.8(c). 

166 17 CFR 40.8(c). 

167See 17 CFR 40.5, 40.6. 

168Part 40 final rules, 75 FR 44776, 44782–83 

(July 27, 2011). The Commission further noted that 

it requires registered entities to provide a more 

detailed explanation and analysis of rules 

voluntarily submitted for Commission approval 

under the provisions of § 40.5. Id. at 44782. See also 

17 CFR 40.6(a)(7) (setting forth rule submission 

requirements). 

169 ICE NPRM Letter, at 3. 

170CFE NPRM Letter, at 1–2. 

171 IATP NPRM Letter, at 10. 

172 Id. 

173NPRM at 42767. 174The Commission has explained that all 

transactions executed on or through a DCM must be 

cleared through a Commission-registered DCO. See 

Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612, 36646 

(June 19, 2012). 175See NPRM at 42767–68. 176See id. at 42768. 

177See Appendix B to Part 38—Guidance on, and 

Acceptable Practices in, Compliance with Core 

Principles, Core Principle 4 (Subparagraph (b)). 

178CME NPRM Letter, at 14. 

179 ICE NPRM Letter, at 7. 

b. Discussion 

With respect to the comments 

addressing the scope of the term ‘‘rule’’ 

in Risk Principle 1, the Commission 

emphasizes that the term is intended to 

have the meaning set forth in part 40 of 

the Commission’s regulations. 

Specifically, the Commission clarifies 

that for purposes of Risk Principle 1 and 

the Acceptable Practices, the term 

‘‘rule’’ has the meaning set forth in 

existing Commission regulation 

§ 40.1(i), which provides that rule 

means any constitutional provision, 

article of incorporation, bylaw, rule, 

regulation, resolution, interpretation, 

stated policy, advisory, terms and 

conditions, trading protocol, agreement 

or instrument corresponding thereto, 

including those that authorize a 

response or establish standards for 

responding to a specific emergency, and 

any amendment or addition thereto or 

repeal thereof, made or issued by a 

registered entity or by the governing 

board thereof or any committee thereof, 

in whatever form adopted.164 This 

definition of ‘‘rule’’ is broad and can 

include policies, procedures, protocols, 

and controls that are not public.165 DCM 

policies and other internal procedures 

addressing market disruption risk could 

also satisfy Risk Principle 1. 

Commission regulation § 40.1(i) 

would require rules to be approved or 

self-certified pursuant to part 40 

regulations, though DCMs would be 

entitled to request confidential 

treatment pursuant to the procedures in 

Commission regulation § 40.8(c) with 

respect to such filings.166 In particular, 

under Risk Principle 1, a DCM would be 

required to submit rules to the 

Commission in accordance with either: 

(a) Commission regulation § 40.5, which 

provides procedures for the voluntary 

submission of rules for Commission 

review and approval; or (b) Commission 

regulation § 40.6, which provides 

procedures for the self-certification of 

rules with the Commission.167

The part 40 rule submission process 

will ensure that new rules that DCMs 

implement to address the risk of market 

disruption—including internal 

processes—will be subject to 

appropriate Commission review and 

oversight. With respect to selfcertifications, the Commission stated in 

the preamble to the part 40 final rules 

that the explanation and analysis of 

certified rules or rule amendments 

should be a clear and informative—but 

not necessarily lengthy—discussion of 

the submission, the factors leading to 

the adoption of the rule or rule 

amendment, and the expected impact of 

the rule or rule amendment on the 

public and market participants.168

3. Scope of Electronic Trading Subject 

to DCM Rules 

a. Summary of Comments 

Several commenters addressed the 

scope of orders and trades subject to 

Risk Principle 1. ICE supported 

requiring DCMs to subject all electronic 

orders to exchange-based pre-trade risk 

controls, because all persons that trade 

electronically have the potential to 

disrupt markets.169 CFE asked the 

Commission to clarify that under Risk 

Principle 1, DCMs may have rules 

governing market participants subject to 

the DCM’s jurisdiction that are 

applicable to a subset of market 

participants, as long as those rules apply 

to all electronic orders submitted to the 

DCM.170 IATP supported requiring 

DCMs to implement separate risk 

controls for cleared and uncleared 

trades.171 IATP asserted uncleared 

trades pose greater counterparty credit 

risks, so the Risk Principles should 

require post-trade risk controls to 

prevent post-trade contract defaults and 

other credit events.172

b. Discussion 

The Commission is adopting Risk 

Principle 1 as proposed, but clarifies 

that a DCM may have rules that apply 

to only a subset of market participants. 

The Commission understands that 

DCMs have markets with a broad range 

of market participants and trading 

patterns. The Commission believes that 

DCMs should have reasonable 

discretion to determine whether risk 

controls should be different for different 

types of trading activity. Indeed, it may 

not be advisable for a DCM to impose 

the same rules under Risk Principle 1 on 

all types of market participants and 

trading activity present on the DCM’s 

platforms. The Commission’s 

principles-based approach to the Risk 

Principles gives DCMs the flexibility to 

impose the most efficient and effective 

rules and pre-trade risk controls for 

their respective markets. The 

Commission believes Risk Principle 1 

will help ensure DCMs continue to 

monitor risks as they evolve along with 

the markets, and make reasonable 

changes as appropriate to address those 

evolving risks.173

In response to IATP’s comment 

supporting a separate set of risk controls 

on uncleared trades, the Commission 

notes that all transactions on or 

pursuant to the rules of a DCM must be 

cleared. As a result, any such separate 

set of risk controls would be on a null 

set of trades.174

D. Risk Principle 2—Risk Controls 

Listed in Part 38 

1. Proposal 

Risk Principle 2 requires DCMs to 

subject all electronic orders to 

exchange-based pre-trade risk controls 

to prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading. 

The Commission noted in the NPRM 

that certain existing provisions in part 

38 list appropriate DCM-implemented 

risk controls.175 For example, existing 

Commission regulation § 38.255 

mandates exchange-based risk controls 

to prevent and reduce the potential risk 

of market disruptions.176 In addition, 

existing Core Principle 4’s Acceptable 

Practices 177 list appropriate risk 

controls, and proposed Risk Principle 2 

does not change those Acceptable 

Practices. 

2. Summary of Comments 

CME, ICE, and MGEX agree with the 

Commission that the controls listed in 

existing acceptable practices are 

sufficient. CME stated the controls listed 

in the existing acceptable practices are 

effective at preventing or mitigating 

market disruptions, and the 

Commission should not list any others 

as part of proposed Commission 

regulation § 38.251(f).178 ICE 

commented there is not one set of risk 

controls that are most effective in 

preventing market disruptions.179 ICE 


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180 Id. at 8. 

181MGEX NPRM Letter, at 2. 

182 IATP NPRM Letter, at 10. 

183 Id. 

184NPRM at 42767. 

185 Id. at 42768. 

186See Appendix B to Part 38—Guidance on, and 

Acceptable Practices in, Compliance with Core 

Principles, Core Principle 4 (Subparagraph (b)). 

187NPRM at 42769. 

188Better Markets NPRM Letter, at 2. 

189 Id. at 9. 

190 Id. at 10. 

191CME NPRM Letter, at 8. 

192 Id. 

193 Id. 

194MFA NPRM Letter, at 3. 

195 Id. 

196 Id. at 4. 

197See Section II.A.2(c), discussing ‘‘significant’’ 

and ‘‘material.’’ In addition, in response to CME’s 

comment, a market disruption for purposes of all 

three Risk Principles requires impact to operation 

of the DCM or market participants. 

198See 17 CFR 38.1051(e). 

199See Core Principles and Other Requirements 

for Designated Contract Markets, supra note 174, at 

36657–58. 

200 Id. at 36658. 

further asserted the proposed 

Acceptable Practices for proposed 

Commission regulation § 38.251(f) and 

the guidance provided in existing 

Appendix B(b)(5) provide DCMs 

sufficient discretion to adopt 

appropriate risk controls.180 MGEX 

stated the controls outlined in existing 

Acceptable Practices for Core Principle 

2 are sufficient.181

In contrast, IATP commented that 

Risk Principle 2 should include posttrade risk controls to help protect 

market participants against credit events 

resulting from DCM negligence in the 

design, implementation and 

enforcement of its rules and risk 

controls.182 IATP stated this would 

follow the FIA recommendation on 

post-trade risk controls.183

3. Discussion 

The Commission is adopting Risk 

Principle 2 as proposed and is not 

adding specific controls to the 

regulation text or Acceptable Practices. 

As discussed in the NPRM, the purpose 

of Risk Principle 2 is to require DCMs 

to consider market participants’ trading 

activities when designing and 

implementing exchange-based risk 

controls to address market disruptive 

events.184 Risk Principle 2 provides 

clarity to DCMs that their exchangebased risk controls must address market 

disruptions caused by electronic 

trading, including those related to price 

movements as well as other events that 

impair market participants’ ability to 

trade.185

Consistent with the comments 

received from CME, ICE, and MGEX, the 

Commission believes the existing 

Acceptable Practices set forth in Core 

Principle 4 list appropriate risk controls. 

Specifically, the Acceptable Practices in 

existing Core Principle 4 list risk 

controls including pre-trade limits on 

order size, price collars or bands around 

the current price, message throttles, and 

daily price limits.186 The Commission 

declines to impose additional pre-trade 

or post-trade risk control requirements 

on DCMs. The Commission does not 

consider such requirements to be 

necessary or consistent with the 

Commission’s principles-based 

approach to the Risk Principles. 

E. Risk Principle 3 

1. Proposal 

The Commission proposed in Risk 

Principle 3 that a DCM must promptly 

notify Commission staff of a 

‘‘significant’’ disruption to its electronic 

trading platform(s) and provide timely 

information on the causes and 

remediation. 

In the NPRM, the Commission stated 

the required notification under Risk 

Principle 3 would take a form similar to 

current Commission regulation 

§ 38.1051(e) notification.187 Further, the 

Commission differentiated Risk 

Principle 3 from existing Commission 

regulation § 38.1501(e) by noting that, 

rather than addressing a DCM’s internal 

technological systems, Risk Principle 3 

addresses malfunctions of the 

technological systems of trading firms 

and other non-DCM market participants 

that cause disruptions of the DCM’s 

trading platform. 

In addition, the Commission asked 

commenters to describe circumstances 

in which it would be appropriate for a 

DCM to notify other DCMs about a 

significant market disruption on its 

trading platform(s). The Commission 

asked whether proposed Risk Principle 

3 should include such a requirement. 

2. ‘‘Significant’’ Standard 

a. Summary of Comments 

Better Markets, CME, and ICE 

believed the term ‘‘significant’’ in Risk 

Principle 3 is unclear. Better Markets 

asserted that expectations regarding 

timing and substance of reporting 

‘‘significant market disruptions’’ are 

imprecise and unenforceable.188 Better 

Markets stated DCMs must know what 

to report, where to report it, when to 

report it, and under what circumstances 

reporting is required.189 Better Markets 

further stated Risk Principle 3 fails to (i) 

provide a formal definition of market 

disruptions, (ii) indicate when 

disruptions cross the significance 

threshold, or (iii) identify the level of 

detail necessary to notify the CFTC 

sufficiently.190

CME stated that while Risk Principle 

3 appears to require impact to both the 

operation of the DCM and market 

participants, Risk Principles 1 and 2 

seem to require impact to operation of 

the DCM or market participants.191 CME 

also commented that to be subject to the 

notification requirement, Risk Principle 

3 provides a significant disruption must 

‘‘materially affect’’ the DCM and market 

participants.192 CME supported 

clarifying the distinction between 

‘‘significant’’ and ‘‘material.’’ 193

MFA and MGEX supported the use of 

the term ‘‘significant’’ in Risk Principle 

3. MFA believed the definition of 

‘‘significant’’ establishes a threshold for 

when notification is required and will 

promote meaningful reporting and 

oversight.194 MFA agreed that an 

internal disruption in a market 

participant’s own trading system 

‘‘should not be considered significant 

unless it causes a market disruption 

materially affecting the DCM’s trading 

platform and other market 

participants.’’ 195 MGEX believed that 

‘‘significant disruption’’ provides DCMs 

with discretion to interpret events in 

light of the unique nature of markets 

and products across DCMs and 

platforms.196

b. Discussion 

The Commission acknowledges the 

term ‘‘significant’’ could be susceptible 

to varying degrees of application based 

on a particular DCM’s business model 

and particular market. However, the 

Commission believes in practice Risk 

Principle 3 provides a workable 

standard for notifications.197 This has 

proven to be the case with respect to 

existing Commission regulation 

§ 38.1051(e), which requires DCMs to 

notify Commission staff of, among other 

things, ‘‘significant’’ system 

malfunctions.198 The Commission notes 

it originally proposed that DCMs must 

report to the Commission all system 

malfunctions under Commission 

regulation § 38.1051(e).199 In response, 

CME commented that such a 

notification requirement would be 

overly broad.200 The Commission 

considered CME’s comment and 

concluded that timely advance notice of 

all planned changes to address system 

malfunctions is not necessary and is 

revising the rule to provide that DCMs 

only need to promptly advise the 

Commission of all significant system 


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201 Id. (emphasis added). 

202CME NPRM Letter, at 16. 

203Better Markets NPRM Letter, at 10. 

204CME NPRM Letter, at 14–15. 

205 Id. 

206 Id. at 15. 

207CEWG NPRM Letter, at 5. 

208 Id. at 6. 

209 ICE NPRM Letter, at 4. 

210 Id. 

211 Id. 

212CME NPRM Letter, at 15; ICE NPRM Letter, at 

9. 

213 ICE NPRM Letter, at 9. 

214CME NPRM Letter, at 15. 

215 Id. 

216 In response to ICE’s comment, see discussion 

at Section II.A.2(c) addressing ‘‘significant’’ and 

‘‘material.’’ 

217See CME NPRM Letter, at 16. 

malfunctions.201 Thus, similar to the 

‘‘significant’’ standard under Risk 

Principle 3, DCMs are already subject to 

a ‘‘significant’’ threshold for notification 

with respect to system safeguards rules. 

The Commission does not consider it 

appropriate or necessary to require 

DCMs to notify Commission staff of all 

market disruptions pursuant to Risk 

Principle 3, especially given that such a 

rule would be more burdensome on 

DCMs than a mandate that they report 

only ‘‘significant’’ market disruptions to 

the Commission. 

3. Notification Requirement 

a. Summary of Comments 

CME stated that it is unsure of the 

practical utility to the Commission of 

receiving notifications under Risk 

Principle 3, since the Commission 

already collects such information 

through other means.202 Better Markets 

asserted the CFTC should require part 

40 filings, as opposed to email 

notifications.203

CME asserted the distinction from 

Commission regulation § 38.1051(e) is 

clear; an incident could disrupt the 

trading platform without there having 

been a system malfunction on the 

platform.204 CME gave as an example an 

incident originating with a participant 

that causes a match engine to failover to 

backup.205 CME further stated both 

notification provisions could be 

triggered by an incident arising with a 

participant that causes both a market 

disruption and a system malfunction.206

CEWG stated Risk Principle 3 appears 

to apply a per se standard for reporting, 

which leaves market participants open 

to potential enforcement risk.207 CEWG 

asserted the Commission should revise 

Risk Principle 3 to require notifications 

only where disruptions result from 

grossly negligent or reckless conduct 

with respect to a market participant’s 

obligations to implement and maintain 

pre-trade risk controls, conduct due 

diligence or testing, as well as 

appropriate risk mitigation measures 

consistent with applicable DCM rules or 

accepted industry practices related to 

electronic trading activity.208

ICE recommended the Commission 

define what constitutes a ‘‘significant 

disruption’’ of a DCM trading platform 

and how it differs from a ‘‘market 

disruption,’’ e.g., whether a transient 

disruption, which temporarily results in 

prices not reflecting market 

fundamentals, would be reportable.209

ICE supported the Commission 

incorporating into Risk Principle 3 the 

requirement that a significant disruption 

be caused by a ‘‘malfunction of a market 

participant’s trading system.’’ 210 ICE 

asserted the addition of this language 

would help to differentiate the reporting 

obligations under Commission 

regulation § 38.1051(e).211

In response to the question in the 

NPRM asking if Risk Principle 3 should 

require a DCM to notify other DCMs of 

a significant market disruption, CME 

and ICE indicated Risk Principle 3 

should not include such a requirement. 

ICE stated current Appendix B(b)(5) 

provides guidance on coordinating risk 

controls for linked or related 

contracts.212 ICE asserted in 

circumstances of a significant market 

disruption, it would be prudent for such 

coordination to include notification to 

impacted markets, at least though a 

market alert.213 CME noted there are 

already real-time data feeds and other 

public sources that provide information 

on whether a DCM is experiencing a 

significant market disruption.214 CME 

further noted if this proposal is adopted, 

all DCMs will be required to report to 

the Commission, negating the need for 

notice between DCMs.215

b. Discussion 

The Commission is finalizing the 

notification requirement in Risk 

Principle 3 as proposed, with one 

clarification. In the NPRM, Risk 

Principle 3 referred to ‘‘significant 

disruptions to’’ a DCM’s platform(s). 

Consistent with Risk Principles 1 and 2, 

which use the term ‘‘market 

disruption,’’ the Commission is revising 

Risk Principle 3 to state a DCM must 

promptly notify Commission staff of any 

‘‘significant market disruptions on’’ its 

platform(s). The purpose of this revision 

is to clarify that the notification 

requirement in Risk Principle 3 applies 

to a subset of the market disruptions 

under Risk Principles 1 and 2, i.e., to 

those market disruptions that are 

‘‘significant.’’ Consistent with the 

comments received, the Commission is 

not including a requirement that a DCM 

notify other DCMs in the event of a 

significant market disruption.216

In response to comments questioning 

the utility of notifications,217 the 

Commission reiterates its view that the 

notification requirement under Risk 

Principle 3 will assist the Commission’s 

oversight and its ability to monitor and 

assess market disruptions across all 

DCMs. The Commission expects 

notification under Risk Principle 3 to 

take a similar form to the current 

notification process for electronic 

trading halts, cybersecurity incidents, or 

activation of a DCM’s business 

continuity-disaster recovery plan under 

Commission regulation § 38.1051(e). 

Specifically, the Commission would 

expect such notification to consist of an 

email containing sufficient information 

to convey the nature of the market 

disruption, and if known, its cause, and 

the remediation. 

In response to CEWG’s comment, the 

Commission declines to limit the 

notification requirement in Risk 

Principle 3 to instances of ‘‘grossly 

negligent’’ or ‘‘reckless’’ conduct. The 

Commission considers such qualifiers to 

be overly limiting and unduly 

burdensome on DCMs that would be 

required to determine whether conduct 

constitutes gross negligence or 

recklessness. In addition, the 

Commission reiterates that an email 

notification is the appropriate form of 

Risk Principle 3 notification. Requiring 

such notifications to be in the form of 

part 40 filings would be overly 

burdensome to exchanges given the 

Commission’s estimate of 0–25 

notifications per year. Moreover, in the 

context of significant market 

disruptions, prompt email notification 

is preferable to the inherently slower 

process of part 40 filings. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

entities, and to provide a regulatory 

flexibility analysis with respect to such 

impact. The regulations adopted in this 

final rulemaking will affect DCMs. The 

Commission previously determined that 

DCMs are not ‘‘small entities’’ for 

purposes of the RFA because DCMs are 

required to demonstrate compliance 

with a number of Core Principles, 

including principles concerning the 

expenditure of sufficient financial 


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218See Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18619 

(Apr. 30, 1982). 219 44 U.S.C. 3501 et seq. 

220The Commission estimates that final 

Commission regulation § 38.251(e) would require 

potentially 17 DCMs to make 2 filings with the 

Commission a year requiring approximately 24 

hours each to prepare. Accordingly, the total 

burden hours for each DCM would be 

approximately 48 hours per year. 

221The Commission estimates that the total 

additional aggregate annual burden hours for DCMs 

under final Commission regulation § 38.251(e) 

would be 816 hours based on each DCM incurring 

48 burden hours (17 × 48 = 816). 

222The Commission revised the number of 

potential respondent-DCMs to 17 in order to reflect 

the number of DCMs currently registered with the 

Commission. 

223See 17 CFR part 40. 

resources to establish and maintain an 

adequate self-regulatory program.218

The Commission received no comments 

on the impact of the rules described in 

the NPRM on small entities. Therefore, 

the Chairman, on behalf of the 

Commission, hereby certifies, pursuant 

to 5 U.S.C. 605(b), that the regulations 

adopted by this final rulemaking will 

not have a significant economic impact 

on a substantial number of small 

entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) imposes certain requirements 

on federal agencies, including the 

Commission, in connection with 

conducting or sponsoring any 

‘‘collection of information,’’ as defined 

by the PRA.219 Under the PRA, an 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid control 

number from the Office of Management 

and Budget (‘‘OMB’’). The PRA is 

intended, in part, to minimize the 

paperwork burden created for 

individuals, businesses, and other 

persons as a result of the collection of 

information by federal agencies, and to 

ensure the greatest possible benefit and 

utility of information created, collected, 

maintained, used, shared, and 

disseminated by or for the federal 

government. The PRA applies to all 

information, regardless of form or 

format, whenever the federal 

government is obtaining, causing to be 

obtained, or soliciting information, and 

includes required disclosure to third 

parties or the public, of facts or 

opinions, when the information 

collection calls for answers to identical 

questions posed to, or identical 

reporting or recordkeeping requirements 

imposed on, ten or more persons. 

The final rulemaking modifies the 

following existing collections of 

information previously approved by 

OMB and for which the Commission has 

received control numbers: (i) OMB 

control number 3038–0052, Core 

Principles and Other Requirements for 

DCMs (‘‘OMB Collection 3038–0052’’) 

and OMB control number 3038–0093, 

Provisions Common to Registered 

Entities (‘‘OMB Collection 3038–0093’’). 

The Commission does not believe the 

Risk Principles as adopted impose any 

other new collections of information 

that require approval of OMB under the 

PRA. 

The Commission requests that OMB 

approve and revise OMB control 

numbers 3038–0052 and 3038–0093 in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. 

1. OMB Collection 3038–0093— 

Provisions Common to Registered 

Entities 

Final Commission regulation 

§ 38.251(e) (‘‘Risk Principle 1’’) provides 

that DCMs must adopt and implement 

rules governing market participants 

subject to their respective jurisdictions 

to prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading. As 

provided in subparagraph (b)(6) of 

Appendix B to part 38, such rules must 

be reasonably designed to prevent, 

detect, and mitigate market disruptions 

or system anomalies associated with 

electronic trading. Any such rules a 

DCM adopts pursuant to Commission 

regulation § 38.251(e) must be submitted 

to the Commission in accordance with 

part 40 of the Commission’s regulations. 

Specifically, a DCM is required to 

submit such rules to the Commission in 

accordance with either: (a) Commission 

regulation § 40.5, which provides 

procedures for the voluntary submission 

of rules for Commission review and 

approval; or (b) Commission regulation 

§ 40.6, which provides procedures for 

the self-certification of rules with the 

Commission. This information 

collection is required for DCMs as 

needed, on a case-by-case basis. The 

Commission acknowledges that various 

DCM practices in place today may be 

consistent with Commission regulation 

§ 38.251(e), such as rules requiring 

market participants to use exchangeprovided risk controls that address 

potential price distortions and related 

market anomalies. Accordingly, it is 

possible that some DCMs would not be 

required to file new or amended rules to 

satisfy Risk Principle 1. 

Commission regulation § 38.251(e) 

amends OMB Collection 3038–0093 by 

increasing the existing annual burden 

by an additional 48 hours 220 for DCMs 

that would be required to comply with 

part 40 of the Commission’s regulations. 

As a result, the revised total annual 

burden under this amended collection 

would increase by 816 hours.221

Although the Commission believes that 

operational and maintenance costs for 

DCMs in Commission regulation 

§ 38.251(e) will incrementally increase, 

these costs are expected to be de 

minimis. 

The Commission has previously 

estimated the combined annual burden 

hours for both Commission regulations 

§§ 40.5 and 40.6 to be 7,000 hours. 

Upon implementation of final 

Commission regulation § 38.251(e), the 

Commission estimates that 17 

exchanges may each make two rule 

filings under Commission regulations 

§ 40.5 or § 40.6 per year for a total of 34 

submissions for all DCMs.222 The 

Commission further estimates that the 

exchanges may employ a combination of 

in-house and outside legal and 

compliance personnel to update existing 

rulebooks and it will take 24 hours to 

complete and file each rule submission 

for a total of 48 burden hours for each 

exchange and 816 burden hours for all 

exchanges. 

OMB Collection 3038–0093 was 

created to cover the Commission’s part 

40 regulatory requirements for 

registered entities (including DCMs, 

SEFs, DCOs, and swap data repositories) 

to file new or amended rules and 

product terms and conditions with the 

Commission.223 OMB Control Number 

3038–0093 covers all information 

collections in part 40, including 

Commission regulation § 40.2 (Listing 

products by certification), Commission 

regulation § 40.3 (Voluntary submission 

of new products for Commission review 

and approval), Commission regulation 

§ 40.5 (Voluntary submission of rules for 

Commission review and approval), and 

Commission regulation § 40.6 (Selfcertification of rules). Commission 

regulation § 38.251(e) adopted in this 

final rulemaking modifies the existing 

annual burden in OMB Collection 3038– 

0093, increasing the annual burden 

estimates in aggregate below: 

Estimated number of respondents: 17. 

Estimated frequency/timing of 

responses: As needed. 

Estimated number of annual 

responses per respondent: 2. 

Estimated number of annual 

responses for all respondents: 34. 

Estimated annual burden hours per 

response: 24. 

Estimated total annual burden hours 

per respondent: 48. 


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224See supra Section II.E. (discussion of the Risk 

Principle 3). 

225See CME NPRM Letter, at 8. 

226See id. 

227See id. 

228See id. at 9. 

229The NPRM cited events at CME DCMs, 

including a disciplinary action from 2011, as 

examples of DCMs policing electronic trading 

activities that may be detrimental to the DCM. 

230The Commission submits that a reportable 

event does not necessarily mean that a disciplinary 

case is required, but instead suggests that there has 

been a problem with the operation of the electronic 

trading platform that requires additional review and 

oversight. Accordingly, the notification of a 

significant market disruption would typically start 

a specific regulatory oversight process by the 

Commission—not establish the particular 

requirements that may or may not merit the 

bringing of a disciplinary action, as CME suggests. 

231CME NPRM Letter, at 16. 

232 Id. 

233 ‘‘Velocity Logic’’ is addressed on CME’s 

website. Generally, it is ‘‘designed to detect market 

Estimated total annual burden hours 

for all respondents: 816. 

2. OMB Collection 3038–0052—Core 

Principles and Other Requirements for 

DCMs 

Final Commission regulation 

§ 38.251(g) (‘‘Risk Principle 3’’) requires 

a DCM to promptly notify Commission 

staff of any significant market 

disruption on its electronic trading 

platform(s) and provide timely 

information on the cause and 

remediation of such disruption.224 Risk 

Principle 3 further requires that such 

notification contain sufficient 

information to convey the nature of the 

disruption, and if known, its causes, 

and remediation. The Commission 

recognizes that the specific cause of the 

market disruption and the attendant 

remediation may not be known at the 

time of the disruption and may have to 

be addressed in a follow-up email or 

report. This information collection will 

be required for DCMs as needed, on a 

case-by-case basis. 

The Commission received one 

comment regarding its PRA burden 

analysis in the preamble to the 

NPRM.225 CME in its comment letter 

asserted the operation of Risk Principle 

3 is unclear, and the Commission’s 

estimate of approximately 50 

notifications per year is ‘‘so far from 

what we would have anticipated being 

required under this proposal that it 

merits discussion.’’ 226 CME also 

indicated it questions ‘‘whether the 

Commission has an interpretation of 

‘significant disruption’ that is not 

reflected in its proposal’’ based on the 

apparent differences in notification 

estimates by the Commission and 

CME.227

CME further described that since 

2011, ‘‘the CME Group DCMs have 

brought approximately 59 disciplinary 

actions for electronic trading activity 

that may have disrupted markets or 

other participants.’’ 228 However, based 

on CME’s review of those disciplinary 

actions, the exchange only identified 

three cases that it believes could be 

considered to have caused a significant 

disruption to the operations of the DCM. 

CME did not in its comments explain 

how its estimate was determined or 

what criteria or standard was employed 

as part of this analysis. 

As described above, CME is using the 

number of actual disciplinary actions 

brought against market participants for 

disruptions that could be detrimental to 

the exchange as a ‘‘proxy’’ for the 

‘‘substantial disruption’’ standard set 

forth in Risk Principle 3. Without 

indicating what analysis it may have 

used or considered, CME asserted that 

only three disciplinary actions could be 

considered to have caused a significant 

disruption to the operations of CME.229

Although the Commission appreciates 

CME’s comments regarding the potential 

number of reportable events in 

connection with final Commission 

regulation § 38.251(g), the Commission 

does not believe the number of actual 

disciplinary cases brought by an 

exchange is an appropriate proxy for 

reportable market disruption events.230

The Commission notes that in many 

instances, basing the reportable event on 

whether it is subject to a formal 

disciplinary action would be underinclusive. In addition, what is a 

‘‘significant’’ market disruption on one 

exchange may differ from another, based 

on market participant differences, the 

exchange’s respective market structure, 

and the technology of the underlying 

exchange marketplace. 

The Commission submits that its 

original estimate of the reportable 

events under Commission regulation 

§ 38.251(g) may be too high for some 

exchanges. However, the Commission 

does not believe an estimate of three 

reportable events since 2011, based on 

the number of disciplinary actions in 

the past, is a reasonable proxy. 

Therefore, the Commission asserts that 

a range of reportable events between 0– 

25 may better reflect the potential 

number of reportable significant market 

disruption events for each DCM. The 

Commission is accordingly revising 

collection 3038–0052 to reflect the range 

of potential annual reportable events by 

each DCM to be between 0 and 25, 

reflecting the differences in DCM 

structure and operations and the market 

participants accessing those DCMs. 

In connection with the request for 

comment in the NPRM regarding 

whether the proposed information 

collections are necessary for the proper 

performance of Commission functions, 

CME stated it is ‘‘unsure of the practical 

utility to the Commission of receiving 

notifications from a DCM pursuant to 

draft Principle III. From a market 

oversight perspective, the Commission 

already (at least with the CME Group 

DCMs) collects information on these 

types of events through regular 

engagement and review of a DCM’s 

compliance with core principles.’’ 231

The Commission does not agree with 

CME’s assertion that the notification 

may serve no practical utility based on 

the assumption that the Commission 

collects this type of information from 

CME through regular engagement and 

review of CME’s compliance with core 

principles. As described above in 

Section II.E, the purpose of the 

notification requirement adopted in 

Commission regulation § 38.251(g) is for 

Commission staff to receive prompt 

notice of a market disruption impacting 

a DCM’s trading platform(s). This 

notification is intended to assist the 

Commission in its oversight of the 

derivatives markets with the ability to 

monitor and assess market disruptions 

across DCMs on a near real-time basis. 

CME’s argument that the current 

‘‘regular’’ engagement and review of 

CME’s compliance with core principles 

is sufficient for this purpose is not 

persuasive and would not provide the 

Commission with sufficient capability 

to address and monitor significant 

market disruptions on a near real-time 

basis. 

Additionally, CME further 

commented on the Commission’s 

request in the NPRM relating to whether 

there are ways to minimize the burden 

of the proposed collections of 

information on DCMs, including 

through the use of appropriate 

automated, electronic, mechanical, or 

other technological information 

collection techniques. In its comment to 

this request, CME indicated that it 

‘‘currently provides CFTC staff near 

real-time notifications of velocity logic 

events. We separately provide the CFTC 

a daily file containing information 

related to events that occur on the 

match engine (e.g., velocity logic events, 

circuit breakers, etc.). These types of 

automated reports or notifications are 

highly efficient and effective means to 

provide CFTC staff pertinent 

information.’’ 232 Although the 

Commission finds the daily file that 

CME voluntarily provides relating to 

velocity logic events 233 to be helpful in 


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movement of a predefined number of ticks either up 

or down within a predefined time.’’ Velocity Logic 

introduces a momentary suspension in matching by 

transitioning the futures instrument(s) and related 

options into the Pre-Open or Reserved/Pause State. 

See CME Velocity logic, available at https://

www.cmegroup.com/confluence/display/ 

EPICSANDBOX/Velocity+Logic. 

234Based on the annual aggregate range of 

potential notifications under final Commission 

regulation § 38.251(g) from 0 to 425 for all DCMs, 

the Commission estimates that the average annual 

aggregate notifications for all DCMs is 212.50 with 

the annual average number of notifications per 

DCM to be 13.28. 

235The Commission estimates that final 

Commission regulation § 38.251(g) would require 

potentially each DCM to make between 0 and 25 

reports with the Commission a year requiring 

approximately 5 hours each to prepare. 

Accordingly, the total burden hour range for each 

DCM would be between approximately 0 and 125 

hours per year (0 × 5 = 0 and 25 × 5 = 125). 

236The Commission estimates that the total 

aggregate annual burden hours for DCMs under 

final Commission regulation § 38.251(g) would be a 

range between 0 and 2,125 hours based on each 

DCM incurring between 0 hours (0 × 17 = 0 burden 

hours) and 2,125 hours (125 × 17 = 2,125 burden 

hours). Based on these estimates, the Commission 

has determined the annual average aggregate 

burden hours for all DCMs to be 1,062.50 burden 

hours and the annual average burden hour for each 

DCM to be 66.406 burden hours. 

237See 17 CFR part 38. 

238The Commission estimates that additional 

total aggregate annual recordkeeping burden hours 

for DCMs under Commission regulations §§ 38.950 

and 38.951 as a result of the final regulations under 

this rulemaking would be between 0 and 850 hours 

based on each DCM incurring between 0 and 50 

burden hours (17 × 0 = 0 and 17 × 50 = 850). These 

estimates are based on the range of notifications 

expected to be between 0–25 per DCM annually. 

The Commission estimates that each DCM would 

require 2 burden hours in connection with its 

recordkeeping obligations under Commission 

regulations §§ 38.950 and 38.951. Based on these 

estimates, the Commission also calculates the 

annual average aggregate recordkeeping burden 

hours for all DCMs to be 400 burden hours and the 

annual average recordkeeping burden hour for each 

DCM to be 25 burden hours. 

239 7 U.S.C. 19(a). 

240See existing Commission regulations 

§§ 38.250, 38.251, 38.255 and Appendix B to Part 

38—Guidance on, and Acceptable Practices in, 

Compliance with Core Principles, Core Principle 4 

(Subparagraph (b)). 

certain circumstances, the Commission 

believes that a uniform standard across 

DCMs relating to ‘‘reportable events’’ for 

significant market disruption events is 

necessary for its oversight and 

regulatory responsibilities under the 

CEA. For this reason, the Commission 

notes that the notification requirement 

is a foundational requirement of the 

current rulemaking that is expected to 

provide greater transparency and 

awareness to the Commission regarding 

market disruptions associated with 

electronic trading. 

The Commission has previously 

estimated the combined annual burden 

hours for part 38 to be 7,357.5 hours. 

Upon implementation of final 

Commission regulation § 38.251(g), the 

Commission estimates that OMB 

Collection 3038–0052 will be revised by 

increasing the number of annual 

responses by a range between 0 and 25 

notifications to Commission staff per 

year for a total range of between 0 and 

425 234 notifications for all DCMs. The 

Commission has also revised the 

number of potential respondent-DCMs 

to 17 in order to reflect the number of 

DCMs currently registered with the 

Commission. The Commission further 

estimates that the DCMs may employ a 

combination of in-house and outside 

legal and compliance personnel to 

review and prepare significant market 

disruption event notifications to 

Commission staff and it will take 

approximately 5 burden hours to 

prepare each notification resulting in a 

range of burden hours between 0 and 

125 235 for each event notification across 

DCMs and a total range of between 0 

and 2,125 burden hours annually for all 

notifications to Commission staff 

required for all DCMs.236 Although the 

Commission believes that operational 

and maintenance costs for DCMs in 

Commission regulation § 38.251(g) will 

incrementally increase, these costs are 

expected to be de minimis. 

OMB Collection 3038–0052 was 

created to cover regulatory requirements 

for DCMs under part 38 of the 

Commission’s regulations.237 OMB 

Control Number 3038–0052 covers all 

information collections in part 38, 

including Subpart A (General 

Provisions), Subparts B through X (the 

DCM core principles), as well as the 

related appendices thereto, including 

Appendix A (Form DCM), Appendix B 

(Guidance on, and Acceptable Practices 

in, Compliance with Core Principles), 

and Appendix C (Demonstration of 

Compliance That a Contract Is Not 

Readily Susceptible to Manipulation). 

Commission regulation § 38.251(g) 

adopted in this final rulemaking 

modifies the existing annual burden in 

OMB Collection 3038–0052 for 

complying with certain requirements in 

Subpart E (Prevention of Market 

Disruption) of part 38, as estimated in 

aggregate below: 

Estimated number of respondents: 17. 

Estimated frequency/timing of 

responses: As needed. 

Estimated number of annual 

responses per respondent: 0–25. 

Estimated number of annual 

responses for all respondents: 0–425. 

Estimated annual burden hours per 

response: 5. 

Estimated total annual burden hours 

per respondent: 0–125. 

Estimated total annual burden hours 

for all respondents: 0–2,125. 

Estimated aggregate annual 

recordkeeping burden hours: 0–850.238

C. Cost-Benefit Considerations 

1. Introduction 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.239

Section 15(a) further specifies that the 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

The baseline for the consideration of 

costs and benefits in this final 

rulemaking is the monitoring and 

mitigation capabilities of DCMs, as 

governed by rules in current part 38 of 

the CFTC’s regulations. Under these 

rules, DCMs are required to conduct 

real-time monitoring of all trading 

activity on their electronic trading 

platforms and identify disorderly 

trading activity and any market or 

system anomalies.240

The Commission recognizes that the 

final electronic trading risk principles 

rules may impose additional costs on 

DCMs and market participants. The 

Commission has endeavored to assess 

the expected costs and benefits of the 

final rulemaking in quantitative terms, 

including PRA-related costs, where 

possible. In situations where the 

Commission received quantitative data 

related to the cost-benefit estimates 

proposed in the NPRM, the Commission 

included them in the cost-benefit 

considerations of this final rulemaking. 

The Commission also acknowledges and 

took into consideration qualitative 

comments with regard to the costbenefit estimates in the NPRM. When 

the Commission is unable to quantify 

the costs and benefits, the Commission 

identifies and considers the costs and 

benefits of the final rules in qualitative 

terms. 

a. Summary of the Rule 

As discussed in more detail in the 

preamble above, after considering 

various comments submitted by the 

commenters, the Commission decided 


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241As discussed above, the Commission revised 

Risk Principle 3 to change the phrase ‘‘disruptions 

to’’ to ‘‘market disruptions on.’’ See supra Section 

II.E. 

242CME NPRM Letter, at 12–13; ICE NPRM Letter, 

at 3; Better Markets NPRM Letter, at 4–9. 

243CME NPRM Letter, at 7, 12–13. 

244See id. at 12; ICE NPRM Letter, at 3. 

245See id. 

246 ICE NPRM Letter, at 9. 

247CME NPRM Letter, at 4–7; CEWG NPRM 

Letter, at 4; FIA/FIA PTG NPRM Letter, at 3; ICE 

NPRM Letter, at 1; MFA NPRM Letter, at 2. 

248MFA NPRM Letter, at 2. 

249AFR NPRM Letter, at 2; Rutkowski NPRM 

Letter, at 2. 

250CME NPRM Letter, at 17. 251See id. 

on a principles-based approach and to 

give discretion to each DCM in terms of 

how to define precisely market 

disruptions and system anomalies as 

they relate to their particular markets. 

As a result, each DCM will have the 

flexibility to tailor the implementation 

of the rules to best prevent, detect, and 

mitigate market disruptions or system 

anomalies in their respective markets. 

This flexibility should mitigate the cost 

and burden associated with DCMs’ 

implementation of the Risk Principles. 

Therefore, the Commission adopts the 

following specific Risk Principles and 

associated Acceptable Practices 

applicable to DCM electronic trading as 

proposed.241

i. Commission Regulation § 38.251(e)— 

Risk Principle 1 

Commission regulation § 38.251(e)— 

Risk Principle 1—provides that a DCM 

must adopt and implement rules 

governing market participants subject to 

its jurisdiction to prevent, detect, and 

mitigate market disruptions or system 

anomalies associated with electronic 

trading. 

ii. Commission Regulation § 38.251(f)— 

Risk Principle 2 

Commission regulation § 38.251(f)— 

Risk Principle 2—provides that a DCM 

must subject all electronic orders to 

exchange-based pre-trade risk controls 

to prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading. 

iii. Commission Regulation 

§ 38.251(g)—Risk Principle 3 

Commission regulation § 38.251(g)— 

Risk Principle 3—provides that a DCM 

must promptly notify Commission staff 

of a significant market disruption on its 

electronic trading platform(s) and 

provide timely information on the 

causes and remediation. 

iv. Acceptable Practices for Commission 

Regulations §§ 38.251(e) and (f) 

The Acceptable Practices provide 

that, to comply with Commission 

regulation § 38.251(e), a DCM must 

adopt and implement rules that are 

reasonably designed to prevent, detect, 

and mitigate market disruptions or 

system anomalies associated with 

electronic trading. To comply with 

Commission regulation § 38.251(f), the 

Acceptable Practices provide that the 

DCM must subject all electronic orders 

to exchange-based pre-trade risk 

controls that are reasonably designed to 

prevent, detect, and mitigate market 

disruptions or system anomalies. 

2. Costs 

a. Costs of Adjustments to Existing 

Practices 

i. Summary of Comments 

A number of commenters commented 

on the existing practices of DCMs. CME, 

ICE, and Better Markets asserted that the 

Risk Principles are redundant of 

existing regulations.242 In particular, 

CME commented that the Risk 

Principles overlap with existing 

Commission regulations, specifically 

regulations promulgated under Core 

Principles 2 and 4.243 CME and ICE 

suggested relying on or amending 

existing regulations, specifically 

Commission regulation § 38.255.244 ICE 

stated that this would track the 

Commission’s approach to regulating 

financial risk controls in Commission 

regulation § 38.607, which has proven 

effective.245 ICE also stated that the 

DCMs could face confusion and 

potential costs while determining an 

appropriate notification standard and 

updating existing regulations could help 

with these costs.246

CME, CEWG, FIA/FIA PTG, ICE, and 

MFA commented that DCMs already 

implement controls and address risks to 

their platforms.247 MFA believes the 

Risk Principles will help encourage 

DCMs to continue to monitor risks as 

they evolve along with the markets, and 

to make reasonable modifications as 

appropriate.248

AFR and Rutkowski disagreed with 

the assertion that current DCM practices 

are effective in achieving what the Risk 

Principles aim to achieve.249

CME had two direct comments 

regarding the cost estimates presented 

in the NPRM. First, CME commented 

that the Commission should identify the 

specific types of software enhancements 

and additional data fields associated 

with the 2,520 staff hours included in 

the proposed rulemaking.250 Second, 

CME commented that the Commission’s 

estimate of 50 significant market 

disruptions described in the PRA 

section of the NPRM is too high, and 

added that CME determined it had only 

three significant market disruptions in 

the last decade across four DCMs based 

on the number of formal disciplinary 

cases brought by the DCM for electronic 

trading activity that may have disrupted 

markets or other participants.251

The Commission did not receive 

comments on other costs associated 

with adjusting existing practices, such 

as costs associated with recordkeeping 

or with the need for an additional 

compliance officer. 

ii. Discussion 

The Commission acknowledges the 

Risk Principles supplement existing 

regulations, namely Commission 

regulations §§ 38.251 and 38.255, with 

some potential overlap. The 

Commission believes the intended goals 

of the Risk Principles cannot be solely 

achieved by adding the words 

‘‘electronic trading’’ to existing 

regulations. To the extent that the Risk 

Principles are already covered by 

existing regulations as many 

commenters suggested, then the 

Commission does not expect much, if 

any, additional costs to be associated 

with the Risk Principles. While the 

Commission acknowledges that DCMs 

could face potential costs while 

determining an appropriate notification 

standard, the Commission expects 

DCMs to be already collecting most, if 

not all, required information to make 

such a determination. As a result, the 

Commission expects such costs to be 

minimal. Some commenters also 

disagreed with the assumption that 

existing DCM practices are effective in 

achieving what the Risk Principles aim 

to achieve. To the extent this might be 

the case, the Commission believes 

DCMs will accordingly experience some 

additional costs related to the 

regulations, but the risks associated 

with market disruptions or system 

anomalies associated with electronic 

trading will decrease in financial 

markets. The Commission expects the 

Risk Principles will minimize the risks 

associated with market disruptions or 

system anomalies associated with 

electronic trading to a greater degree 

than the existing regulations, while at 

the same time minimizing the 

additional cost burdens of 

implementation due to the existence of 

current DCM practices that are expected 

to be consistent with the Risk 

Principles. 

As to CME’s comment on requiring 

more detail with regard to potential 

software enhancements that might be 

required, the Commission provides a 


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252See id. at 9. 

253See id. 

254See NPRM at 42772; CME NPRM Letter, at 17; 

ICE NPRM Letter, at 9. 

255May 2019 National Industry-Specific 

Occupational Employment and Wage Estimates, 

NAICS 523000—Securities, Commodity Contracts, 

and Other Financial Investments and Related 

Activities, available at https://www.bls.gov/oes/ 

current/naics4_523000.htm. 

256The Commission’s estimated appropriate wage 

rate is a weighted national average of mean hourly 

wages for the following occupations (and their 

relative weight): ‘‘computer programmer—industry: 

securities, commodity contracts, and other financial 

investment and related activities’’ (25 percent); 

‘‘project management specialists and business 

operations specialists—industry: securities, 

commodity contracts, and other financial 

investment and related activities’’ (25 percent); 

‘‘Software and Web Developers, Programmers, and 

Testers—industry: securities, commodity contracts, 

and other financial investment and related 

activities’’ (25 percent); and ‘‘Software Developers 

and Software Quality Assurance Analysts and 

Testers—industry: securities, commodity contracts, 

and other financial investment and related 

activities’’ (25 percent). 

257May 2019 National Industry-Specific 

Occupational Employment and Wage Estimates, 

NAICS 523000—Securities, Commodity Contracts, 

and Other Financial Investments and Related 

Activities, available at https://www.bls.gov/oes/ 

current/naics4_523000.htm. 

258The Commission’s estimated appropriate wage 

rate is a weighted national average of mean hourly 

wages for the following occupations (and their 

relative weight): ‘‘compliance officer—industry: 

securities, commodity contracts, and other financial 

investment and related activities’’ (50 percent); and 

‘‘lawyer—legal services’’ (50 percent). Commission 

staff chose this methodology to account for the 

variance in skill sets that may be used to 

accomplish the collection of information. 

more detailed breakdown of the 2,520 

staff hours below. 

In addressing CME’s comment on the 

estimated annual number of significant 

market disruptions, the Commission 

believes that CME’s use of the number 

of formal disciplinary cases brought in 

connection with electronic trading that 

may have disrupted markets or other 

market participants as a ‘‘proxy’’ for 

significant market disruptions may 

underestimate the actual number of 

significant market disruptions. More 

specifically, while CME states that it has 

brought approximately 59 disciplinary 

actions for potential market disruptions 

involving electronic trading activity 

since 2011, CME identified just three of 

these cases to have potentially caused a 

significant market disruption.252

However, CME does not provide any 

information or analysis on how it 

arrived at its estimate of three 

significant market disruptions. The 

Commission notes that each DCM may 

interpret ‘‘significant’’ disruption in a 

different manner based on differences in 

market structures, market participants, 

and the technology utilized by the DCM. 

As stated above, the Commission 

believes that the number of relevant 

disciplinary cases brought by a DCM 

could be under-inclusive of the number 

of potential reportable market 

disruption events and may not be an 

appropriate proxy for the number of 

market disruptions reportable under 

Commission regulation § 38.251(g). 

However, the Commission also 

acknowledges that, based on CME’s 

comment and further consideration, the 

Commission’s original estimate of 50 

annual significant market disruptions 

per DCM might be too high. 

Accordingly, the Commission has 

updated its estimate of the annual 

number of reportable market disruption 

events to be 25 or less (between 0–25) 

for each DCM as described below.253

iii. Costs 

Consistent with the NPRM and 

comments received, current risk 

management practices of some DCMs 

may be sufficient to comply with the 

requirements of Commission regulations 

§§ 38.251(e) through 38.251(g), in which 

case expected costs are expected to be 

minimal.254 However, some DCMs may 

have to adjust some of their existing 

practices to comply with the 

regulations. 

The Commission believes that DCMs 

may have to update their software to 

enable them to capture more efficiently 

additional information regarding 

participants subject to their jurisdiction 

to implement rules adopted pursuant to 

Commission regulation § 38.251(e). The 

Commission acknowledges that the 

additional information required to be 

collected may be different for each DCM 

because the specific rules each DCM 

might need to adopt and implement 

pursuant to Commission regulation 

§ 38.251(e) will be different, and also 

because the existing information 

collection protocols already in place at 

each DCM are not likely to be the same. 

The Commission expects, among other 

things, the required information to be 

collected include the trader 

identification for order entry, the means 

by which traders connect to the 

exchange’s platform, or any required 

statistics of order message traffic 

attributable to an electronic trader. 

The Commission expects the design, 

development, testing, and production 

release of a required software update to 

take 2,520 staff hours in total. The 

Commission expects 360 hours of that 

total to be used for establishing 

requirements and design, 1,280 hours to 

be used for development, 720 hours for 

testing, and 160 hours for production 

release. To calculate the cost estimate 

for changes to DCM software, the 

Commission estimates the appropriate 

wage rate based on salary information 

for the securities industry compiled by 

the Department of Labor’s Bureau of 

Labor Statistics (‘‘BLS’’).255 Commission 

staff arrived at an hourly rate of $70.76 

using figures from a weighted average of 

salaries and bonuses across different 

professions contained in the most recent 

BLS Occupational Employment and 

Wages Report (May 2019), multiplied by 

1.3 to account for overhead and other 

benefits.256 Commission staff chose this 

methodology to account for the variance 

in skillsets that may be used to plan, 

implement, and manage the required 

changes to DCM software. Using these 

estimates, the Commission would 

expect the software update to cost 

$178,313 per DCM. The Commission 

acknowledges that this is an estimate 

and the actual cost of such a software 

update would depend on the current 

status of the specific DCM’s information 

acquisition capabilities and the amount 

of additional information the DCM 

would have to collect as a result of 

Commission regulation § 38.251(e). To 

the extent that a DCM currently or 

partially captures the required 

information and data through its 

systems and technology, these costs 

would be lower. 

The Commission acknowledges that 

any additional rules resulting from 

Commission regulation § 38.251(e) are 

required to be submitted pursuant to 

part 40. The Commission expects a DCM 

to take an additional 48 hours annually 

(two submissions on average per year, 

24 hours per submission) to submit 

these amendments to the Commission. 

In order to estimate the appropriate 

wage rate, the Commission used the 

salary information for the securities 

industry compiled by the BLS.257

Commission staff arrived at an hourly 

rate of $89.89 using figures from a 

weighted average of salaries and 

bonuses across different professions 

contained in the most recent BLS 

Occupational Employment and Wages 

Report (May 2019) multiplied by 1.3 to 

account for overhead and other 

benefits.258 The Commission estimates 

this indirect cost to each DCM to be 

$4,314.72 annually (48 × $89.89). To the 

extent a DCM currently has in place 

rules required under Commission 

regulation § 38.251(e), these costs would 

be incrementally lower. 

The Commission can envision a 

scenario where a DCM might also need 

to update its trading systems to subject 

all electronic orders to exchange-based 

pre-trade risk controls to prevent, 

detect, and mitigate market disruptions 

or system anomalies as required by 

Commission regulation § 38.251(f). 


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259May 2019 National Industry-Specific 

Occupational Employment and Wage Estimates, 

NAICS 523000—Securities, Commodity Contracts, 

and Other Financial Investments and Related 

Activities, available at https://www.bls.gov/oes/ 

current/naics4_523000.htm. 

260The Commission’s estimated appropriate wage 

rate is a weighted national average of mean hourly 

wages for the following occupations (and their 

relative weight): ‘‘computer programmer—industry: 

securities, commodity contracts, and other financial 

investment and related activities’’ (25 percent); 

‘‘project management specialists and business 

operations specialists—industry: securities, 

commodity contracts, and other financial 

investment and related activities’’ (25 percent); 

‘‘Software and Web Developers, Programmers, and 

Testers—industry: securities, commodity contracts, 

and other financial investment and related 

activities’’ (25 percent); and ‘‘Software Developers 

and Software Quality Assurance Analysts and 

Testers—industry: securities, commodity contracts, 

and other financial investment and related 

activities’’ (25 percent). 

261May 2019 National Industry-Specific 

Occupational Employment and Wage Estimates, 

NAICS 523000—Securities, Commodity Contracts, 

and Other Financial Investments and Related 

Activities, available at https://www.bls.gov/oes/ 

current/naics4_523000.htm. 

262The Commission’s estimated appropriate wage 

rate is a weighted national average of mean hourly 

wages for the following occupations (and their 

relative weight): ‘‘computer programmer—industry: 

securities, commodity contracts, and other financial 

investment and related activities’’ (25 percent); 

‘‘compliance officer—industry: securities, 

commodity contracts, and other financial 

investment and related activities’’ (50 percent); and 

‘‘lawyer—legal services’’ (25 percent). Commission 

staff chose this methodology to account for the 

variance in skill sets that may be used to 

accomplish the required reporting. 

263The Commission’s estimated appropriate wage 

rate is the mean hourly wages for ‘‘database 

administrators and architects.’’ Commission staff 

chose this methodology to account for the variance 

in skill sets that may be used to accomplish the 

collection of information. 

264 In calculating this cost estimate for reporting, 

the Commission estimates the appropriate annual 

wage for a compliance officer based on salary 

information for the securities industry compiled by 

the BLS. Commission staff used the annual wage of 

Depending on the extent of the update 

required, the Commission anticipates 

the design, development, testing, and 

production release of the new trading 

system to take 8,480 staff hours in total, 

which the Commission expects to be 

covered by more than one employee. To 

calculate the cost estimate for updating 

a DCM’s trading systems, the 

Commission estimates the appropriate 

wage rate based on salary information 

for the securities industry compiled by 

the BLS.259 Commission staff arrived at 

an hourly rate of $70.76 using figures 

from a weighted average of salaries and 

bonuses across different professions 

contained in the most recent BLS 

Occupational Employment and Wages 

Report (May 2019) multiplied by 1.3 to 

account for overhead and other 

benefits.260 Commission staff chose this 

methodology to account for the variance 

in skill sets that may be used to plan, 

implement, and manage the required 

update to a DCM’s trading system. Using 

these estimates, the Commission would 

expect the trading system update to cost 

$600,036 to a DCM. The Commission 

emphasizes that this is an estimate and 

the actual cost could be higher or lower. 

The cost may also vary across DCMs, as 

each DCM has the flexibility to apply 

the specific controls that the DCM 

deems reasonably designed to prevent, 

detect, and mitigate market disruptions 

or system anomalies. In addition, the 

Commission further notes that to the 

extent a DCM currently or partially has 

in place pre-trade risk controls 

consistent with proposed Commission 

regulation § 38.251(f), these costs would 

be incrementally lower. 

Commission regulation § 38.251(g) 

requires a DCM promptly to notify 

Commission staff of a significant market 

disruption on its electronic trading 

platform(s) and provide timely 

information on the causes and 

remediation. The Commission expects 

that there may be incremental costs to 

DCMs from Commission regulation 

§ 38.251(g) in the form of analysis 

regarding which disruptions could be 

significant enough to report, maintain, 

and archive the relevant data, as well as 

the costs associated with the act of 

reporting the disruptions. The 

Commission currently expects every 

DCM to have the necessary means to 

communicate with the Commission 

promptly, and therefore, does not expect 

any additional communication costs. 

The Commission expects DCMs to incur 

a minimal cost in determining what a 

significant market disruption could be 

and preparing information on its causes 

and remediation. The Commission does 

not expect this cost to be significant, 

because the Commission believes DCMs 

should already have the means 

necessary to identify the causes of 

market disruptions and have plans for 

remediation. To the extent that 

complying with Commission regulation 

§ 38.251(g) requires a DCM to incur 

additional recordkeeping and reporting 

burdens, the Commission estimates 

these additional recordkeeping 

requirements to be no more than 50 

hours per DCM per year, and the 

additional reporting requirements to 

require no more than 125 hours per 

DCM per year (five hours per report and 

an estimated 25 reports additionally per 

DCM). 

The Commission acknowledges 

CME’s comment indicating that based 

on its review and analysis, CME 

believes to have had only three 

significant market disruptions in the 

past decade across its four DCMs. The 

Commission appreciates the information 

provided and recognizes that the 

number of times a DCM might have to 

identify and report significant market 

disruptions pursuant to Commission 

regulation § 38.251(g) may vary greatly 

across DCMs. The Commission 

acknowledges that the frequency of such 

reporting could theoretically be less 

than one in any given year for an 

exchange. 

In calculating the cost estimates for 

recordkeeping and reporting, the 

Commission estimates the appropriate 

wage rate based on salary information 

for the securities industry compiled by 

the BLS.261 For the reporting cost, 

Commission staff arrived at an hourly 

rate of $76.44 using figures from a 

weighted average of salaries and 

bonuses across different professions 

contained in the most recent BLS 

Occupational Employment and Wages 

Report (May 2019) multiplied by 1.3 to 

account for overhead and other 

benefits.262 In calculating the cost 

estimate for recordkeeping, the 

Commission staff arrived at an hourly 

rate of $71.019 using figures from the 

most recent BLS Occupational 

Employment and Wages Report (May 

2019) multiplied by 1.3 to account for 

overhead and other benefits.263 The 

Commission estimates the cost for 

additional recordkeeping to a DCM to be 

no more than $3,550.95 (50 × $71.019) 

annually and the cost for additional 

reporting to a DCM to be no more than 

$9,555.00 (125 × $76.44) annually. As 

discussed above, certain DCMs might 

have no additional relevant market 

disruptions to report some years, which 

would translate to a zero cost estimate 

of additional reporting and 

recordkeeping for those years for those 

DCMs. 

To the extent that DCMs would need 

to update their rules and internal 

processes to comply with Commission 

regulations §§ 38.251(e) through 

38.251(g) and the associated Acceptable 

Practices, the Commission expects some 

DCMs also may need to update or 

supplement their compliance programs, 

which would involve additional costs. 

However, the Commission does not 

expect these costs to be significant. The 

Commission believes some DCMs may 

need to hire an additional full-time 

compliance staff member to address the 

additional compliance needs associated 

with the regulation. Assuming that the 

average annual salary of each 

compliance officer is $94,705, the 

Commission estimates the incremental 

annual compliance costs to a DCM that 

needs to hire an additional compliance 

officer to be $119,340.264 However, the 


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$91,800, which reflects the average annual salary 

for a compliance officer contained in the most 

recent BLS Occupational Employment and Wages 

Report (May 2019), and multiplied it by 1.3 to 

account for overhead and other benefits. 

265CME NPRM Letter, at 13. 

266 IATP NPRM Letter, at 11. 

267See id. at 9. 

268See id. at 10. 

269CFE NPRM Letter, at 4. 270See id. 271See Section III.D of this final rulemaking. 272See NPRM at 42763 n.6. 273See id. and Section I.D.2 of this final 

rulemaking. 

Commission notes that the exact 

compliance needs may vary across 

DCMs, and some DCMs may already 

have adequate compliance programs 

that can handle any rule updates and 

internal processes required to comply 

with Commission regulations 

§§ 38.251(e) through 38.251(g), and 

therefore the actual compliance costs 

may be higher or lower than the 

Commission’s estimates. 

b. Cost of Periodically Updating Risk 

Management Practices 

i. Summary of Comments 

The Commission did not receive any 

comments associated with the need 

periodically to update risk management 

practices. 

ii. Costs 

The Commission expects the trading 

methods and technologies of market 

participants to change over time, 

requiring DCMs to adjust their rules 

pursuant to Commission regulation 

§ 38.251(e) and adjust their exchangebased pre-trade risk controls pursuant to 

Commission regulation § 38.251(f) 

accordingly. As trading methodologies 

and connectivity measures evolve, it is 

expected that new causes of potential 

market disruptions and system 

anomalies could surface. To that end, 

the Commission believes full 

compliance would require a DCM to 

implement periodic evaluation of its 

entire electronic trading marketplace 

and updates of the exchange-based pretrade risk controls to prevent, detect, 

and mitigate market disruptions or 

system anomalies, as well as updates of 

the appropriate definitions of market 

disruptions and system anomalies. 

Therefore, rules imposed as a result of 

Commission regulations §§ 38.251(e) 

through 38.251(g) would need to be 

flexible and fluid, and potentially 

updated as needed, which may involve 

additional costs. Moreover, such rule 

changes would result in a cost increase 

associated with the rise in the number 

of rule filings that DCMs would have to 

prepare and submit to the Commission. 

c. Costs to Market Participants 

i. Summary of Comments 

The Commission did not receive any 

comments associated with costs to 

market participants. 

ii. Costs 

The Commission can envision a 

situation where the rules adopted by 

DCMs as a result of Commission 

regulation § 38.251(e) change frequently, 

and market participants would need to 

adjust to new rules frequently. While 

these adjustments might carry some 

costs for market participants, such as 

potential added delays to their trading 

activity due to additional pre-trade 

controls, the Commission expects these 

changes to be communicated to the 

market participants by DCMs with 

enough implementation time so as to 

minimize the burden on market 

participants and their trading strategies. 

Moreover, to the extent a DCM’s policies 

and procedures require market 

participants to report changes to their 

connection processes, trading strategies, 

or any other adjustments the DCM 

deems required, there could be some 

cost to the market participants. Finally, 

market participants may feel the need to 

upgrade their risk management practices 

as a response to DCMs’ updated risk 

management practices driven by the 

Risk Principles. The Commission 

recognizes that part of the costs to 

market participants might also come 

from needing to update their systems 

and potentially adjust the software they 

use for risk management, trading, and 

reporting. These costs may be somewhat 

mitigated to the extent market 

participants currently comply with 

DCM rules and regulations regarding 

pre-trade risk controls and market 

disruption protocols. 

d. Regulatory Arbitrage 

i. Summary of Comments 

The Commission received a number 

of comments regarding the possibility of 

competition and regulatory arbitrage. 

CME commented that the greatest risk 

for regulatory arbitrage is between 

DCMs and SEFs or FBOTs.265 Also, 

IATP commented that the Commission 

should clarify why it considers 

regulatory arbitrage between DCMs 

unlikely to happen.266 IATP also noted 

that the competition among DCMs for 

over-the-counter trading and for trading 

in new products, such as digital coins, 

could result in lax risk control design or 

lax updating of controls under 

competitive pressures.267 IATP also 

mentioned the difference in competitive 

pressures for cleared and uncleared 

trades.268 Finally, CFE expressed 

concern that if the Commission 

compares all DCMs to a baseline of 

controls, which are prevalent across 

DCMs, there may be an expectation for 

smaller DCMs to adhere to the risk 

control standards of larger DCMs.269

This could become a barrier to entry for 

smaller DCMs.270

ii. Discussion 

As outlined the in the NPRM and in 

the discussion of antitrust 

considerations below,271 the 

Commission acknowledges the 

theoretical possibility of regulatory 

arbitrage occurring as a result of the 

Risk Principles but does not expect it to 

materialize.272 As discussed in the 

NPRM and Section I.D.2 of this final 

rulemaking, the Commission will 

continue to monitor whether Risk 

Principles of this nature may be 

appropriate for other markets such as 

SEFs or FBOTs.273

The Commission acknowledges there 

are differences in products and market 

participants across DCMs, and DCMs 

might implement different rules and 

risk controls given differences in their 

respective markets. It is important to 

note that ongoing Commission oversight 

will identify whether the differences in 

DCM rules and risk controls are due to 

differing contracts being offered for 

trading, competitive pressure, or 

regulatory arbitrage, and whether there 

are resulting issues that must be 

addressed. 

iii. Costs 

The principles-based regulations offer 

DCMs the flexibility to address market 

disruptions and system anomalies as 

they relate to their particular markets 

and market participants’ trading 

activities. Similarly, DCMs are also 

given the flexibility to decide how to 

apply the requirements associated with 

regulations in their respective markets. 

This flexibility could result in 

differences across DCMs, potentially 

contributing to regulatory arbitrage. For 

example, DCMs’ practices could differ 

in the information collected from 

market participants; the rules applied to 

prevent, detect, and mitigate market 

disruptions or system anomalies; and 

the intensity of pre-trade controls. The 

parameters for establishing market 

disruptions or system anomalies could 

be defined differently by the various 

DCMs, which might lead to differing 

levels of exchange-based pre-trade risk 

controls. 


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274AFR NPRM Letter, at 2. 

275CME NPRM Letter, at 1, 12, 16; CFE NPRM 

Letter, at 1; CEWG NPRM Letter, at 2; FIA/FIA PTG 

NPRM Letter, at 2–4; ICE NPRM Letter, at 2, 9; 

ISDA/SIFMA NPRM Letter, at 1–2; MFA NPRM 

Letter, at 1–2; Optiver NPRM Letter, at 1. 

276CME NPRM Letter, at 1, 12; CFE NPRM Letter, 

at 1; CEWG NPRM Letter, at 2; FIA/FIA PTG NPRM 

Letter, at 2–4; ISDA/SIFMA NPRM Letter, at 1; MFA 

NPRM Letter, at 1–2. 

277AFR NPRM Letter, at 1–2; Better Markets 

NPRM Letter, at 2, 6, 9, 10–12; IATP NPRM Letter, 

at 1, 4, 8; Rutkowski NPRM Letter, at 1. 

278AFR NPRM Letter, at 1–2; Better Markets 

NPRM Letter, at 2, 6, 9, 10–12; Rutkowski NPRM 

Letter, at 1. 

The Commission acknowledges that 

to the extent there is potential for 

market participants to choose between 

DCMs, those DCMs with lower 

information collection requirements and 

potentially less stringent pre-trade risk 

controls could appear more attractive to 

certain market participants. All or some 

of these factors could create the 

potential for market participants to 

move their trading from DCMs with 

potentially more stringent risk controls 

to DCMs with less stringent controls, 

which could cost certain DCMs 

business. While the Commission 

recognizes that this kind of regulatory 

arbitrage could cause liquidity to move 

from one DCM to another, potentially 

impairing (or benefiting) the price 

discovery of the contract with reduced 

(or increased) liquidity, the Commission 

does not expect this to occur with any 

frequency. First, the Commission notes 

that liquidity for a given contract in 

futures markets tends to concentrate in 

one DCM. This means that futures 

markets are less susceptible to this type 

of regulatory arbitrage. Second, while an 

individual DCM decides the exchangebased pre-trade risk controls for its 

markets, those risk controls must be 

effective. The Commission does not 

believe that differences in the 

application of the Risk Principles across 

DCMs would be substantial enough to 

induce market participants to switch to 

trading at a different DCM, even if there 

were two DCMs trading similar enough 

contracts. For example, DCMs currently 

apply various pre-trade controls to 

comply with Commission regulation 

§ 38.255 requirements for risk controls 

for trading, but the Commission does 

not have any evidence that DCMs 

compete on pre-trade controls. The 

Commission expects DCMs to approach 

the setting of their rules and controls to 

comply with the Risk Principles in a 

similar manner. 

3. Benefits 

a. Minimize Disruptive Behaviors 

Associated With Electronic Trading and 

Ensure Sound Financial Markets 

i. Summary of Comments 

While not a direct comment, AFR 

stated that the NPRM does not offer a 

systematic assessment of the current 

costs of the types of electronic 

disruptions addressed by the Risk 

Principles.274

ii. Discussion 

The Commission acknowledges that 

no such costs were present in the NPRM 

and it considers such analysis not 

quantitatively feasible. However, the 

Commission considers market 

disruption costs to be substantial and 

the Commission expects that these 

regulations will minimize the frequency 

of market disruptions and their 

associated costs. The Commission 

believes this to be an important benefit 

to DCMs and market participants 

through ensuring a sound financial 

marketplace. 

iii. Benefits 

The Commission believes that the 

Risk Principles are crucial for the 

integrity and resilience of financial 

markets, as they would ensure that 

DCMs have the ability to prevent, 

detect, and mitigate most, if not all, 

disruptive behaviors associated with 

electronic trading. Commission 

regulation § 38.251(e) requires DCMs to 

adopt and implement rules governing 

market participants subject to their 

jurisdiction such that market 

disruptions or system anomalies 

associated with electronic trading can 

be minimized. This would allow 

markets to operate smoothly and to 

continue functioning as efficient 

platforms for risk transfer, as well as 

allowing for healthy price discovery. 

The Commission expects Commission 

regulation § 38.251(f) to subject all 

electronic orders to a DCM’s exchangebased pre-trade risk controls. The 

Commission expects this to benefit the 

markets as well as the market 

participants sending orders to the 

DCMs. First, by preventing orders that 

could cause market disruptions or 

system anomalies through exchangebased pre-trade risk controls, 

Commission regulation § 38.251(f) 

allows the markets to operate orderly 

and efficiently. This benefits traders in 

the markets, market participants 

utilizing price discovery in the markets, 

as well as traders in related markets. 

Second, Commission regulation 

§ 38.251(f) provides market participants 

sending orders to a DCM with an 

additional layer of protection through 

the implementation of exchange-based 

pre-trade risk controls. If an 

unintentional set of messages were to 

breach the risk controls of FCMs and 

other market participants, Commission 

regulation § 38.251(f) could prevent 

those messages from reaching a DCM 

and potentially resulting in unwanted 

transactions. This benefits the market 

participants, as well as their FCMs, by 

saving them from the obligation of 

unwanted and unintended transactions. 

Commission regulation § 38.251(g) 

ensures that significant market 

disruptions will be communicated to 

the Commission staff promptly, as well 

as their causes and eventual 

remediation. The Commission believes 

Commission regulation § 38.251(g) will 

benefit the markets and market 

participants by strengthening their 

financial soundness and promoting the 

resiliency of derivatives markets by 

allowing the Commission to stay 

informed of any potential market 

disruptions effectively and promptly. If 

needed, the Commission’s timely action 

in the face of market disruptions could 

help markets recover faster and stronger. 

Finally, Commission regulations 

§§ 38.251(e) through 38.251(g) are likely 

to benefit the public by promoting 

sound risk management practices across 

market participants and preserving the 

financial integrity of markets so that 

markets can continue to fulfill their 

price discovery role. 

b. Value of Flexibility Across DCMs 

i. Summary of Comments 

Most commenters, including CME, 

CFE, CEWG, FIA/FIA PTG, ICE, ISDA/ 

SIFMA, MFA, and Optiver supported a 

principles-based approach, which 

allows flexibility in the implementation 

of the regulations across DCMs.275 Many 

commenters noted they prefer the 

principles-based approach to the 

prescriptive nature of prior proposals 

and that such an approach provides 

flexibility and takes into account future 

technological advances.276

In contrast, AFR, Better Markets, 

IATP, and Rutkowski disagreed with the 

principles-based approach, and asserted 

that the incentives of DCMs and public 

regulators are not fully aligned.277 AFR, 

Better Markets, and Rutkowski 

commented that the Risk Principles 

provide too much deference to DCMs 

and the Commission failed to address 

conflicts of interest concerns that may 

impede the independence of DCMs and 

SROs.278

ii. Discussion 

The Commission believes a 

principles-based approach of Risk 

Principles allows flexibility to DCMs. 

Through this flexible approach, DCMs 

can shape the adoption and 


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Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2069 

279See 17 CFR 38.850–51. 

280Conflicts of interest are also discussed in the 

antitrust considerations section of this final rule. 

See Section III.D below. 

implementation of their rules to 

effectively prevent, detect, and mitigate 

risks associated with electronic trading 

in their markets. Additionally, this 

flexibility will also allow DCMs to 

adjust their rules accordingly to respond 

to future changes in their markets. 

Without such flexibility, DCMs would 

need to comply with prescriptive rules 

that may not be as effective in 

preventing, detecting, and mitigating 

market disruptions and system 

anomalies and that may involve higher 

costs to market participants as well as 

potential higher compliance costs. 

The Commission notes Core Principle 

16 in part 38 requires DCMs to establish 

and enforce rules addressing potential 

conflicts of interest.279 Furthermore, as 

also mentioned in the preamble, any 

conflict of interest concerns, where 

DCMs might prioritize profitability over 

reasonable controls, will be addressed 

through regular Commission oversight 

of DCMs.280

iii. Benefits 

The Commission believes that DCMs 

have markets with different trading 

structures and participants with varying 

trading patterns. It is possible that 

market participant behavior that one 

DCM considers a major risk of market 

disruptions could be of less concern to 

another DCM. The Commission’s 

principles-based approach to 

Commission regulations §§ 38.251(e) 

and 38.251(f) allows DCMs the 

flexibility to impose the most efficient 

and effective rules and pre-trade risk 

controls for their respective markets. 

The Commission believes such 

flexibility, including through the 

Acceptable Practices, benefits DCMs by 

allowing them to adopt and implement 

effective and efficient measures 

reasonably designed to achieve the 

objectives of the Risk Principles. 

Without such flexibility, DCMs would 

need to comply with prescriptive rules 

that may not be as effective in 

preventing, detecting and mitigating 

market disruptions and system 

anomalies and that may potentially 

involve higher compliance costs. 

c. Direct Benefits to Market Participants 

i. Summary of Comments 

The Commission did not receive any 

comments associated with benefits to 

market participants. 

ii. Benefits 

Commission regulation § 38.251(e) 

requires DCMs to adopt and implement 

rules that are reasonably designed to 

prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading. In 

addition, Commission regulation 

§ 38.251(f) requires DCMs to subject all 

electronic orders to exchange-based pretrade risk controls that are reasonably 

designed to prevent, detect, and mitigate 

market disruptions or system anomalies 

associated with electronic trading. This 

approach will assist in preventing, 

detecting, and mitigating market 

disruptions and system anomalies and 

thus protect the effectiveness of 

financial markets to continue providing 

the services of risk transfer and price 

transparency to all market participants. 

Moreover, the Commission believes that 

requiring DCMs to implement these 

DCM-based rules and risk controls 

could incentivize market participants 

themselves to strengthen their own risk 

management practices. 

d. Facilitate Commission Oversight 

i. Summary of Comments 

The Commission did not receive any 

comments associated with benefits to 

Commission oversight. 

ii. Benefits 

The Commission believes the 

implementation of the Risk Principles 

will facilitate the Commission’s 

capability to monitor the markets 

effectively. Moreover, Commission 

regulation § 38.251(g) will result in 

DCMs informing the Commission 

promptly of any significant market 

disruptions and remediation plans. The 

Commission believes this will allow it 

to take steps to contain a disruption and 

prevent the disruption from impacting 

other markets or market participants. 

Thus, the Risk Principles will facilitate 

the Commission’s oversight and its 

ability to monitor and assess market 

disruptions across all DCMs. 

Finally, the Commission expects that 

the Risk Principles will better 

incentivize DCMs to recognize market 

disruptions and system anomalies and 

examine remediation plans in a timely 

fashion. 

4. 15(a) Factors 

a. Protection of Market Participants and 

the Public 

Commission regulations §§ 38.251(e) 

through 38.251(g) are intended to 

protect market participants and the 

public from potential market 

disruptions due to electronic trading. 

The rules are expected to benefit market 

participants and the public by requiring 

DCMs to adopt and implement rules 

addressing the market disruptions and 

system anomalies associated with 

electronic trading, subject all electronic 

orders to specifically-designed 

exchange-based pre-trade risk controls, 

and promptly report the causes and 

remediation of significant market 

disruptions. All of these measures create 

a safer marketplace for market 

participants to continue trading without 

major interruptions and allow the 

public to benefit from the information 

generated through a well-functioning 

marketplace. 

b. Efficiency, Competitiveness, and 

Financial Integrity of DCMs 

The Commission believes that 

Commission regulations §§ 38.251(e) 

through 38.251(g) will enhance the 

financial integrity of DCMs by requiring 

DCMs to implement rules and risk 

controls to address market disruptions 

and system anomalies associated with 

electronic trading. However, the 

Commission also acknowledges that 

market participants’ efficiency of 

trading might be hindered due to 

potential latencies that may occur in the 

delivery and routing of orders to the 

matching engine as a result of additional 

pre-trade risk controls. In addition, the 

Commission can envision a scenario 

where the flexibility provided to DCMs 

in designing and implementing rules to 

prevent, detect, and mitigate market 

disruptions and system anomalies, and 

the differences between the updated 

pre-trade risk controls and existing DCM 

risk control rules, could potentially lead 

to regulatory arbitrage between DCMs. 

To the extent that there are significant 

differences in those practices set by 

competing DCMs, market participants 

might choose to trade in the DCM with 

the least stringent rules if competing 

DCMs offer the same or relatively 

similar products. The Commission 

acknowledges that competitiveness 

across DCMs might be hurt as a result. 

However, as discussed above, the 

Commission does not believe that 

differences in the application of the Risk 

Principles across DCMs would be 

substantial enough to induce market 

participants to switch to trading at a 

different DCM, even if there were two 

DCMs trading similar enough contracts. 

c. Price Discovery 

The Commission expects price 

discovery to improve as a result of 

Commission regulations §§ 38.251(e) 

through 38.251(g), especially due to 

improved market functioning through 

the implementation of targeted pre-trade 

risk controls and rules. The Commission 


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281 7 U.S.C. 19(b). 

282 IATP NPRM Letter, at 9. IATP noted, among 

other things, that ‘‘trading in new products, such as 

digital coins, could result in lax risk control design 

or lax updating of controls under competitive 

pressures.’’ 

283 Id. 

284See NPRM at 42765. IATP commented that ‘‘If 

one DCM pursues competitive advantage by 

developing risk controls and rules that market 

participants perceive to be less costly to implement 

and/or to give them a competitive advantage in 

trading, the Commission believes the DCM seeking 

such a competitive advantage to comply with the 

Principles, provided that the DCM rules and risk 

controls are not inherently unreasonable.’’ IATP 

NPRM Letter, at 11. IATP believes that, in 

connection with its comments regarding the 

potential competitive concerns of the Electronic 

Risk Principles Rule, the Commission should 

document and explain how ‘‘allowing each DCM to 

develop and enforce its own rules and risk controls 

presents no possibility of regulatory arbitrage 

among DCMs.’’ See id. 

285See AFR NPRM Letter, at 1. See also 

Rutkowski NPRM Letter, at 1. Mr. Rutkowski’s 

comment largely adopts the arguments set forth in 

the AFR comment. 

286See AFR NPRM Letter, at 1. 

287 Id. 

288 Id. 

289See Better Markets NPRM Letter, at 11. In 

particular, Better Markets noted that ‘‘[e]xchanges 

face conflicts of interest between maximizing profit 

and shareholder value and diminishing trading 

volumes through meaningful limits on certain 

electronic trading practices. With competitive 

pressures and revenues at stake, one exchange is 

unlikely to be a first mover and absorb the costs and 

rancor of market participants in implementing risk 

controls and related measures that its competitors 

may, for market share reasons, postpone 

indefinitely. That is why a federal baseline set of 

controls and regulations—revisited as often as is 

necessary to ensure responsible innovation—must 

be applied to all DCMs.’’ Id. 

expects the new regulations to assist 

with the prevention and mitigation of 

market disruptions due to electronic 

trading, leading markets to provide 

more stable and consistent price 

discovery services. However, as noted 

above, adoption and implementation of 

rules pursuant to Commission 

regulation § 38.251(e) and pre-trade risk 

controls implemented by DCMs 

pursuant to Commission regulation 

§ 38.251(f) could be different across 

DCMs. As a result, the improvements in 

price discovery across DCMs’ markets 

are not likely to be uniform. 

d. Sound Risk Management Practices 

The Commission expects Commission 

regulations §§ 38.251(e) through 

38.251(g) to help promote and ensure 

better risk management practices of both 

DCMs and their market participants. 

The Commission expects DCMs and 

market participants to focus on, and 

potentially update, their risk 

management practices. Additionally, the 

Commission believes that the 

requirement for DCMs to notify 

Commission staff regarding the cause of 

a significant market disruption to their 

respective electronic trading platforms 

would also provide reputational 

incentives for both DCMs and their 

market participants to focus on, and 

improve, risk management practices. 

e. Other Public Interest Considerations 

The Commission does not expect 

Commission regulations §§ 38.251(e) 

through 38.251(g) to have any 

significant costs or benefits associated 

with any other public interests. 

D. Antitrust Considerations 

Section 15(b) of the CEA requires the 

Commission to ‘‘take into consideration 

the public interest to be protected by the 

antitrust laws and endeavor to take the 

least anticompetitive means of 

achieving the purposes of this Act, in 

issuing any order or adopting any 

Commission rule or regulation 

(including any exemption under section 

4(c) or 4c(b)), or in requiring or 

approving any bylaw, rule, or regulation 

of a contract market or registered futures 

association established pursuant to 

section 17 of this Act.’’ 281 The 

Commission believes that the public 

interest to be protected by the antitrust 

laws is generally to protect competition. 

In the NPRM, the Commission 

preliminarily determined that the Risk 

Principles proposal is not 

anticompetitive and has no 

anticompetitive effects. The 

Commission then requested comment 

on (i) whether the proposal is 

anticompetitive and, if so, what the 

anticompetitive effects are; (ii) whether 

any other specific public interest, other 

than the protection of competition, to be 

protected by the antitrust laws is 

implicated by the proposal; and (iii) 

whether there are less anticompetitive 

means of achieving the relevant 

purposes of the CEA that would 

otherwise be served by adopting the 

proposal. 

The Commission does not anticipate 

that the Risk Principles rulemaking will 

result in anticompetitive behavior, but 

instead, believes that the principlesbased approach to DCM electronic 

trading does not establish a barrier to 

entry or a competitive restraint. As 

noted above, the Commission 

encouraged comments from the public 

on any aspect of the proposal that may 

have the potential to be inconsistent 

with the antitrust laws or 

anticompetitive in nature. The 

Commission received three comments 

asserting that the proposed rules may 

potentially impact competition through 

the existence of ‘‘regulatory arbitrage’’ 

and one comment regarding the 

competitive impact of potential risk 

control assessments to a baseline of risk 

controls that are prevalent and effective 

across DCMs. 

IATP commented that ‘‘DCMs 

compete for market participant trades, 

so competitive pressures could reduce 

DCM verification of market participant 

compliance with DCM requirements for 

market participant risk control.’’ 282

IATP focused on the potential 

competitive pressures that could 

potentially occur with respect to noncleared transactions, stating that these 

transactions should ‘‘post higher initial 

margin and maintain higher variation 

margin than cleared trades.’’ 283 IATP 

disagreed with the Commission’s belief 

in the NPRM that a lack of uniformity 

between DCMs’ rules and risk controls 

does not render a particular DCM’s rules 

or risk controls per se unreasonable.284

AFR commented that the 

Commission’s proposal rejected the 

more active regulatory approach to 

electronic trading taken in the nowwithdrawn Regulation AT and, instead, 

delegates the core elements of electronic 

trading oversight to for-profit exchanges 

under a principles-based approach.285

AFR criticized the Commission’s 

principles-based approach regarding the 

regulation of electronic trading on 

DCMs, stating that it disagrees with the 

core assumption underlying the 

principles-based approach that the 

incentives of DCMs ‘‘are fully aligned 

with those of public regulators in 

limiting speculative and trading 

practices that could threaten market 

integrity.’’ 286 The basis of AFR’s 

comment is that DCMs are 

‘‘economically dependent on the order 

flow provided by large traders and are 

in direct competition with other venues 

to capture that order flow.’’ 287 As a 

result, AFR argues that this dependence 

on order flow creates a conflict of 

interest whereby DCMs may 

accommodate the interests of large 

brokers and traders even though there 

may be risks to market integrity. AFR 

further believes that conflict of interest 

requires significant public regulatory 

oversight of DCM market practices, 

stating that ‘‘[p]ure self-regulation is not 

enough.’’ 288

Better Markets similarly commented 

that permitting DCMs to determine the 

types of risk controls to deter and/or 

prevent market disruptions is inherently 

conflicted due to competitive 

pressures.289 In commenting regarding 

the potential competitive issues in 

connection with the Risk Principles, 

Better Markets cited the Commission’s 

statement in the NPRM that noted the 

potential for regulatory arbitrage due to 


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290Better Markets specifically stated that ‘‘The 

CFTC acknowledges this regulatory arbitrage 

concern but minimizes such concerns due to a 

belief that ‘‘differences in the application of the 

proposed regulation across DCMs would [not] be 

substantial enough to induce market participants to 

switch to trading at a different DCM, even if there 

were two DCMs trading similar enough contracts.’’ 

Better Markets NPRM Letter, at 11. See also NPRM 

at 42774. 

291See id. 

292See NPRM at 42775 and Section III.C.4 of this 

final rulemaking. 

293Section 3(b) of the CEA. 7 U.S.C. 5(b). 

294CEA section 5(d)(19), 7 U.S.C. 7(d)(19) and 17 

CFR 38.1000. 

295 17 CFR 38.200 and 17 CFR 38.250. 

296See David Reiffen and Michel A. Robe, 

Demutualization and Customer Protection at SelfRegulatory Financial Exchanges, Journal of Futures 

Markets, supra note 56, at 126–164, Feb. 2011; 

Kobana Abukari and Isaac Otchere, Has Stock 

Exchange Demutualization Improved Market 

Quality? International Evidence, supra note 56. 

297NPRM at 42768. 

298CFE NPRM Letter, at 4. 

299See Commission regulation § 38.1000 (Core 

Principle 19, Antitrust Considerations). 

300Section 3(b) of the CEA, 7 U.S.C. 5(b). 

301 7 U.S.C. 5(d)(4). This DCM Core Principle 

focusing on the prevention of market disruption 

requires that the board of trade shall have the 

capacity and responsibility to prevent 

manipulation, price distortion, and disruptions of 

the delivery or cash-settlement process through 

market surveillance, compliance, and enforcement 

practices and procedures, including—(A) methods 

for conducting real-time monitoring of trading; and 

(B) comprehensive and accurate trade 

reconstructions. 

the principles-based nature of the 

requirements.290 With respect to this 

competitive issue, Better Markets noted 

that those DCMs with lower information 

collection requirements and less 

stringent pre-trade risk controls could 

appear more attractive to certain market 

participants and could facilitate certain 

market participants to move trading 

among DCMs, thereby costing certain 

DCMs business.291

As noted in the NPRM and the 

preamble of these final rules, the 

Commission is aware that DCMs may 

have conflicting and competing interests 

in connection with the oversight of 

electronic trading.292 However, the 

Commission does not believe that 

differences in the application of the Risk 

Principles across DCMs would be 

substantial enough to induce market 

participants to switch to trading at a 

different DCM. 

The commenters essentially argued 

that the more prescriptive regulatory 

approach to electronic trading taken in 

the withdrawn Regulation AT proposal 

is preferable to the Risk Principles 

approach that ‘‘delegates’’ elements of 

electronic trading oversight to for-profit 

exchanges. As support for their 

argument, commenters focused on the 

inherent conflict of self-regulation 

whereby a for-profit entity is also tasked 

with performing a certain degree of 

regulatory oversight over its 

marketplace. The Commission notes the 

Congressional intent to serve the public 

interests of the CEA ‘‘through a system 

of effective self-regulation of trading 

facilities . . . under the oversight of the 

Commission.’’ 293 DCMs have significant 

incentives and obligations to maintain 

well-functioning markets as selfregulatory organizations that are subject 

to specific regulatory requirements. 

Specifically, the DCM Core Principles 

require DCMs to, among other things, 

refrain from adopting any rule or taking 

any action that results in any 

unreasonable restraint of trade and 

imposing material anticompetitive 

burdens.294 In addition, DCM Core 

Principles also require DCMs to surveil 

trading on their markets to prevent 

market manipulation, price distortion, 

and disruptions of the delivery or cashsettlement process.295 Several academic 

studies, including one concerning 

futures exchanges and another 

concerning demutualized stock 

exchanges, also support the conclusion 

that exchanges are able both to satisfy 

shareholder interests and meet their 

self-regulatory organization 

responsibilities.296

As noted above in Section III.C.3, CFE 

expressed concern that smaller DCMs 

could over time be expected to adopt 

and implement the same pre-trade risk 

controls in place at the larger DCMs 

which could, therefore, impact 

competition and diversity. CFE is 

specifically concerned about the 

statement in the NPRM regarding 

assessment of risk controls comparing 

‘‘all DCMs to a baseline of controls on 

electronic trading and electronic order 

entry that are prevalent and effective 

across DCMs.’’ 297 CFE further asserted 

that ‘‘what is in place at the larger DCMs 

and DCM groups should not simply 

become the de facto standard for what 

all DCMs must employ.’’ 298

The Commission reiterates that the 

Risk Principles are intended to provide 

DCMs with the flexibility to adopt those 

pre-trade risk controls reasonably 

designed to prevent, detect, and mitigate 

market disruptions or system anomalies 

associated with electronic trading. As a 

result, the Commission does not intend 

or expect larger DCM pre-trade risk 

controls to be the standard for all DCMs, 

although there may be risk controls that 

are common to all DCMs. As noted in 

the CFE comments, it is not the 

Commission’s intent to effectively 

impose on all DCMs those risk controls 

that are in place at larger DCMs. 

The Commission also believes that 

these competitive concerns raised by 

commenters are mitigated because: (i) 

DCMs are required to submit any 

proposed rules under Commission 

regulation § 38.251(e) to the 

Commission for review under part 40 of 

the Commission’s regulations; and (ii) 

DCMs are required pursuant to the DCM 

Antitrust Core Principle to refrain from 

adopting any rule or taking any action 

that results in any unreasonable 

restraint of trade and imposing material 

anticompetitive burdens.299

Accordingly, the Commission has 

determined that the Risk Principles 

serve the regulatory purpose of the CEA 

to deter and prevent price manipulation 

or any other disruptions to market 

integrity.300 In addition, the 

Commission notes that the Risk 

Principles implement additional 

purposes and policies set forth in 

section 5(d)(4) of the CEA.301 The 

Commission has considered the final 

rules and related comments, to 

determine whether they are 

anticompetitive, and continues to 

believe that the Risk Principles will not 

result in any unreasonable restraint of 

trade, or impose any material 

anticompetitive burden on trading in 

the markets. 

List of Subjects in 17 CFR Part 38 

Commodity futures, Designated 

contract markets, Reporting and 

recordkeeping requirements. 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 1. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376. 

■ 2. In § 38.251, republish the 

introductory text and add paragraphs (e) 

through (g) to read as follows: 

§ 38.251 General requirements. 

A designated contract market must: 

* * * * * 

(e) Adopt and implement rules 

governing market participants subject to 

its jurisdiction to prevent, detect, and 

mitigate market disruptions or system 

anomalies associated with electronic 

trading; 

(f) Subject all electronic orders to 

exchange-based pre-trade risk controls 

to prevent, detect, and mitigate market 

disruptions or system anomalies 

associated with electronic trading; and 

(g) Promptly notify Commission staff 

of any significant market disruptions on 


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2072 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 

1 Giuseppe Tomasi di Lampedusa, The Leopard 

(Everyman’s Library Ed. 1991) at p. 22. 

2Frank, Julieta and Philip Garcia, ‘‘Bid-Ask 

Spreads, Volume, and Volatility: Evidence from 

Livestock Markets,’’ American Journal of 

Agricultural Economics, Vol. 93, Issue 1, p. 209 

(January 2011). 

3Terrence Henderschott, Charles M. Jones, and 

Albert K. Menkveld, ‘‘Does Algorithmic Trading 

Improve Liquidity?’’ Journal of Finance, Volume 66, 

Issue 1, p. 1 (February 2011). 

4Esen Onur and Eleni Gousgounis, ‘‘The End of 

an Era: Who Pays the Price when the Livestock 

Futures Pits Close?’’, Working Paper, Commodity 

Futures Trading Commission Office of the Chief 

Economist. 

5Futures Industry Association, ‘‘A record year for 

derivatives’’ (March 5, 2019), available at https://

www.fia.org/articles/record-year-derivatives. 

6Regulation Automated Trading; Withdrawal, 85 

FR 42755 (July 15, 2020). 

7Commodity Exchange Act, Section 3(b), 7 U.S.C. 

3(b). 

its electronic trading platform(s) and 

provide timely information on the 

causes and remediation. 

■ 3. In appendix B to part 38, under 

‘‘Core Principle 4 of section 5(d) of the 

Act: PREVENTION OF MARKET 

DISRUPTION,’’ add paragraph (b)(6) to 

read as follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

* * * * * 

Core Principle 4 of section 5(d) of the Act: 

PREVENTION OF MARKET DISRUPTION 

* * * 

(b) * * * 

(6) Market disruptions and system 

anomalies associated with electronic trading. 

To comply with § 38.251(e), the contract 

market must adopt and implement rules that 

are reasonably designed to prevent, detect, 

and mitigate market disruptions or system 

anomalies associated with electronic trading. 

To comply with § 38.251(f), the contract 

market must subject all electronic orders to 

exchange-based pre-trade risk controls that 

are reasonably designed to prevent, detect, 

and mitigate market disruptions or system 

anomalies. 

* * * * * 

Issued in Washington, DC, on December 

10, 2020, by the Commission. 

Robert Sidman 

Deputy Secretary of the Commission. 

NOTE: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to—Electronic Trading 

Risk Principles Voting Summary 

Chairman’s and Commissioners’ 

Statements 

Appendix 1—Voting Summary 

On this matter, Chairman Tarbert and 

Commissioners Quintenz, Stump, and 

Berkovitz voted in the affirmative. 

Commissioner Behnam voted in the negative. 

Appendix 2—Supporting Statement of 

Chairman Health P. Tarbert 

The mission of the CFTC is to promote the 

integrity, resilience, and vibrancy of U.S. 

derivatives markets through sound 

regulation. We cannot achieve this mission if 

we rest on our laurels—particularly in 

relation to the ever-evolving technology that 

makes U.S. derivatives markets the envy of 

the world. What is sound regulation today 

may not be sound regulation tomorrow. 

I am reminded of the paradoxical 

observation of Giuseppe di Lampedusa in his 

prize-winning novel, The Leopard: ‘‘If we 

want things to stay as they are, things will 

have to change.’’ 1

While the novel focuses on the role of the 

aristocracy amid the social turbulence of 19th 

century Sicily, its central thesis—that 

achieving stability in changing times itself 

requires change—can be applied equally to 

the regulation of rapidly changing financial 

markets. 

Today we are voting to finalize a rule to 

address the risk of disruptions to the 

electronic markets operated by futures 

exchanges. The risks involved are significant; 

disruptions to electronic trading systems can 

prevent market participants from executing 

trades and managing their risk. But how we 

address those risks—and the implications for 

the relationship between the Commission 

and the exchanges we regulate—is equally 

significant. 

The Evolution of Electronic Trading 

A floor trader from the 1980s and even the 

1990s would scarcely recognize the typical 

futures exchange of the 21st Century. The 

screaming and shouting of buy and sell 

orders reminiscent of the film Trading Places 

has been replaced with silence, or perhaps 

the monotonous humming of large data 

centers. Over the past two decades, our 

markets have moved from open outcry 

trading pits to electronic platforms. Today, 

96 percent of trading occurs through 

electronic systems, bringing with it the price 

discovery and hedging functions 

foundational to our markets. 

By and large, this shift to electronic trading 

has benefited market participants. Spreads 

have narrowed,2 liquidity has improved,3

and transaction costs have dropped.4 And the 

most unexpected benefit is that electronic 

markets have been able to stay open and 

function smoothly during the COVID–19 

lockdowns. By comparison, traditional open 

outcry trading floors such as options pits and 

the floor of the New York Stock Exchange 

were forced to close for an extended time. 

Without the innovation of electronic trading, 

our financial markets would almost certainly 

have seized up and suffered even greater 

distress. 

But like any technological innovation, 

electronic trading also creates new and 

unique risks. Today’s final rule is informed 

by examples of disruptions in electronic 

markets caused by both human error as well 

as malfunctions in automated systems— 

disruptions that would not have occurred in 

open outcry pits. For instance, ‘‘fat finger’’ 

orders mistakenly entered by people, or fully 

automated systems inadvertently flooding 

matching engines with messages, are two 

sources of market disruptions unique to 

electronic markets. 

Past CFTC Attempts To Address Electronic 

Trading Risks 

The CFTC has considered the risks 

associated with electronic trading during 

much of the last decade. Seven years ago, a 

different set of Commissioners issued a 

concept release asking for public comment 

on what changes should be made to our 

regulations in light of the novel issues raised 

by electronic trading. Out of that concept 

release, the Commission later proposed 

Regulation AT. For all its faults, Regulation 

AT drove a very healthy discussion about the 

risks that should be addressed and the best 

way to do so. 

Regulation AT was based on the 

assumption that automated trading, a subset 

of electronic trading, was inherently riskier 

than other forms of trading. As a result, 

Regulation AT sought to require certain 

automated trading firms to register with the 

Commission notwithstanding that they did 

not hold customer funds or intermediate 

customer orders. Most problematically, 

Regulation AT also would have required 

those firms to produce their source code to 

the agency upon request and without 

subpoena. 

Regulation AT also took a prescriptive 

approach to the types of risk controls that 

exchanges, clearing members, and trading 

firms would be required to place on order 

messages. But this list was set in 2015. In 

effect, Regulation AT would have frozen in 

time a set of controls that all levels of market 

operators and market participants would 

have been required to place on trading. Since 

that list was proposed, financial markets 

have faced their highest volatility on record 

and futures market volumes have increased 

by over 50 percent.5 Improvements in 

technology and computer power have been 

profound. Of course, I commend my 

predecessors for focusing on the risks that 

electronic trading can bring. But times 

change, and Regulation AT would not have 

changed with them. Consequently, our 

Commission formally withdrew Regulation 

AT this past summer.6

An Evolving CFTC for Evolving Markets 

In withdrawing Regulation AT, the CFTC 

has consciously moved away from 

registration requirements and source code 

production. But in voting to finalize the Risk 

Principles, the CFTC is committing to 

address risk posed by electronic trading 

while strengthening our longstanding 

principles-based approach to overseeing 

exchanges. 

The markets we regulate are changing. To 

maintain our regulatory functions, the CFTC 

must either halt that change or change our 

agency. Swimming against the tide of 

developments like electronic markets is not 

an option, nor should it be. The markets exist 

to serve the needs of market participants, not 

the regulator. If a technological change 

improves the functioning of the markets, we 

should embrace it. In fact, one of this 

agency’s founding principles is that CFTC 

should ‘‘foster responsible innovation.’’ 7

Applying this reasoning alongside the 


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Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2073 

8Tarbert, Heath P., ‘‘Rules for Principles and 

Principles for Rules: Tools for Crafting Sound 

Financial Regulation,’’ Harv. Bus. L. Rev., Vol. 10 

(June 15, 2020), available at https://www.hblr.org/ 

volume-10-2019-2020/. 

9CFTC Staff conduct regular examinations and 

reviews of our registered entities, including 

exchanges and clearinghouses. As part of those 

examinations and reviews, Staff may identify issues 

of material non-compliance with regulations as well 

as recommendations to bring an entity into 

compliance. Ultimately, however, the Commission 

itself must accept an examination report or rule 

enforcement review report before it can become 

final, including any findings of non-compliance. 

Likewise, Staff are asked to make recommendations 

regarding license applications, reviews of new 

products and rules, and a variety of other 

Commission actions, although ultimate authority 

lies with the Commission. 

10Tarbert, at 11–17. 

11 Di Lampedusa, at 22. 

overarching theme of The Leopard leads us 

to a single conclusion: As our markets 

evolve, the only real course of action is to 

ensure that the CFTC’s regulatory framework 

evolves with it. 

The Need for Principles-Based Regulation 

So then how do we as a regulator change 

with the times while still fulfilling our 

statutory role overseeing U.S. derivatives 

markets? I recently published an article 

setting out a framework for addressing 

situations such as this.8 I believe that 

principles-based regulations can bring 

simplicity and flexibility while also 

promoting innovation when applied in the 

right situations. Such an approach can also 

create a better supervisory model for 

interaction between the regulator and its 

regulated firms—but only so long as that 

oversight is not toothless. 

There are a variety of circumstances in 

which I believe principles-based regulation 

would be most effective. Regulations on how 

exchanges manage the risks of electronic 

trading are a prime example. This is about 

risk management practices at sophisticated 

institutions subject to an established and 

ongoing supervisory relationship. But it is 

also an area where regulated entities have a 

better understanding than the regulator about 

the risks they face and greater knowledge 

about how to address those risks. As a result, 

exchanges need flexibility in how they 

manage risks as they constantly evolve. 

At the same time, principles-based 

regulation is not ‘‘light touch’’ regulation. 

Without the ability to monitor compliance 

and enforce the rules, principles-based 

regulation would be ineffective. Principlesbased regulation of exchanges can work 

because the CFTC and the exchanges have 

constant interaction that engenders a degree 

of mutual trust. The CFTC—as overseen by 

our five-member Commission—has tools to 

monitor how the exchanges implement 

principles-based regulations through reviews 

of license applications and rule changes, as 

well as through periodic examinations and 

rule enforcement reviews. 

Monitoring compliance alone is not 

enough. The regulator also needs the ability 

to enforce against non-compliance. 

Principles-based regimes ultimately give 

discretion to the regulated entity to find the 

best way to achieve a goal, so long as that 

method is objectively reasonable. To that 

end, the CFTC has a suite of tools to require 

changes through formal action, escalating 

from denial of rule change requests, to 

enforcement actions, to license revocations. 

The CFTC consistently needs to address the 

effectiveness and appropriateness of these 

levers to make sure the exchanges are 

meeting their regulatory objectives. And 

given that exchanges will be judged on a 

reasonableness standard, it must be the 

Commission itself—based on a 

recommendation from CFTC staff 9—who 

ultimately decides whether an exchange has 

been objectively unreasonable in complying 

with our principles. 

Final Rule on Risk Principles for Electronic 

Trading 

This brings us to today’s finalization of the 

Risk Principles that were proposed in June of 

this year. The final rule, which we are 

adopting by-and-large as proposed, centers 

on a straightforward issue that I think we can 

all agree is important for our regulations to 

address. Namely, the Risk Principles require 

exchanges to take steps to prevent, detect, 

and mitigate market disruptions and system 

anomalies associated with electronic trading. 

The disruptions we are concerned about 

can come from any number of causes, 

including: (i) Excessive messages, (ii) fat 

finger orders, or (iii) the sudden shut off of 

order flow from a market maker. The key 

attribute of the disruptions addressed by the 

Risk Principles is that they arise because of 

electronic trading. 

To be sure, our current regulations do 

require exchanges to address market 

disruptions. But the focus of those rules has 

generally been on disruptions caused by 

sudden price swings and volatility. In effect, 

the Risk Principles expand the term ‘‘market 

disruptions’’ to cover instances where market 

participants’ ability to access the market or 

manage their risks is negatively impacted by 

something other than price swings. This 

could include slowdowns or closures of 

gateways into the exchange’s matching 

engine caused by excessive messages 

submitted by a market participant. It could 

also include instances when a market 

maker’s systems shut down and the market 

maker stops offering quotes. 

As noted in the preamble to the final rule, 

exchanges have worked diligently to address 

emerging risks associated with electronic 

trading. Different exchanges have put in 

place rules such as messaging limits and 

penalties when messages exceed filled trades 

by too large a ratio. Exchanges also may 

conduct due diligence on participants using 

certain market access methods and may 

require systems testing ahead of trading 

through those methods. 

It is not surprising that exchanges have 

developed rules and risk controls that 

comport with our Risk Principles. The 

Commission, exchanges, and market 

participants have a common interest in 

ensuring that electronic markets function 

properly. Moreover, this is an area where 

exchanges are likely to possess the best 

understanding of the risks presented and 

have control over how their own systems 

operate. As a result, exchanges have the 

incentive and the ability to address the risks 

arising from electronic trading. Principlesbased regulations in this area will ensure that 

exchanges have reasonable discretion to 

adjust their rules and risk controls as the 

situation dictates, not as the regulator 

dictates. 

The three Risk Principles encapsulate this 

approach. First, exchanges must have rules to 

prevent, detect, and mitigate market 

disruptions and system anomalies associated 

with electronic trading. In other words, an 

exchange should take a macro view when 

assessing potential market disruptions, 

which can include fashioning rules 

applicable to all traders governing items such 

as onboarding, systems testing, and 

messaging policies. Second, exchanges must 

have risk controls on all electronic orders to 

address those same concerns. Third, 

exchanges must notify the CFTC of any 

significant market disruptions and give 

information on mitigation efforts. 

Importantly, implementation of the Risk 

Principles will be subject to a reasonableness 

standard. The Acceptable Practices 

accompanying the Risk Principles clarify that 

an exchange would be in compliance if its 

rules and its risk controls are reasonably 

designed to meet the objectives of preventing, 

detecting, and mitigating market disruptions 

and system anomalies. The Commission will 

have the ability to monitor how the 

exchanges are complying with the Principles, 

and will have avenues to sanction noncompliance. 

Framework for Future Regulation 

I hope that the Risk Principles we are 

adopting today will serve as a framework for 

future CFTC regulations. Electronic trading 

presents a prime example of where 

principles-based regulation—as opposed to 

prescriptive rule sets—is more likely to result 

in sound regulation over time. Through 

thoughtful analysis of the regulatory 

objective we aim to achieve, the nature of the 

market and technology we are addressing, the 

sophistication of the parties involved, and 

the nature of the CFTC’s relationship with 

the entity being regulated, we can identify 

what areas are best for a prescriptive 

regulation or a principles-based regulation.10

In the present context, a principles-based 

approach—setting forth concrete objectives 

while affording reasonable discretion to the 

exchanges—provides flexibility as electronic 

trading practices evolve, while maintaining 

sound regulation. In sum, it recognizes that 

things will have to change if we want things 

to stay as they are.11

Appendix 3—Supporting Statement of 

Commissioner Brian D. Quintenz 

I support today’s final rule requiring 

designated contract markets (DCMs) to adopt 

rules that are reasonably designed to prevent, 

detect, and mitigate market disruptions or 

system anomalies associated with electronic 

trading. It also requires DCMs to subject all 

electronic orders to pre-trade risk controls 

that are reasonably designed to prevent, 

detect and mitigate market disruptions 

having a ‘‘material’’ effect on its participants 


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2074 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 

1Meeting of the TAC on March 27, 2019, 

Automated and Modern Trading Markets 

Subcommittee Presentation, transcript and webcast 

available at, https://www.cftc.gov/PressRoom/ 

Events/opaeventtac032719. 

2Meeting of the TAC on Oct. 3, 2019, Automated 

and Modern Trading Markets Subcommittee 

Presentation, https://www.cftc.gov/PressRoom/ 

Events/opaeventtac100319. 

3 Id. 

1Regulation Automated Trading, Proposed Rule, 

80 FR 78824 (Dec. 17, 2015); Supplemental 

Regulation AT NPRM, 81 FR 85334 (Nov. 25, 2016). 

2Rostin Behnam, Commissioner, CFTC, 

Dissenting Statement of Commissioner Rostin 

Behnam Regarding Electronic Trading Risk 

Principles (June 25, 2020), https://www.cftc.gov/ 

PressRoom/SpeechesTestimony/ 

behnamstatement062520b. 

3The Commission’s Office of the Chief Economist 

has found that over 96 percent of all on-exchange 

futures trading occurred on DCMs’ electronic 

trading platforms. Haynes, Richard & Roberts, John 

S., ‘‘Automated Trading in Futures Markets— 

Update #2’’ at 8 (Mar. 26, 2019), available at https:// 

www.cftc.gov/sites/default/files/2019-04/ATS_2yr_

Update_Final_2018_ada.pdf. 

4See Findings Regarding the Market Events of 

May 6, 2010, Report of the Staffs of the CFTC and 

SEF to the Joint Advisory Committee on Emerging 

Regulatory Issues (Sept. 30, 2010), available at 

http://www.cftc.gov/ucm/groups/public/@otherif/ 

documents/ifdocs/staff-findings050610.pdf. 

5See SEC Press Release No. 2013–222, ‘‘SEC 

Charges Knight Capital With Violations of Market 

Access Rule’’ (Oct. 16, 2013), available at http://

www.sec.gov/News/PressRelease/Detail/ 

PressRelease/1370539879795. 

6For a list of volatility events between 2014 and 

2017, see the International Organization of 

Securities Commissions (‘‘IOSCO’’) March 2018 

Consultant Report on Mechanisms Used by Trading 

Venues to Manage Extreme Volatility and Preserve 

Orderly Trading (‘‘IOSCO Report’’), at 3, available 

at https://www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD607.pdf. 

7See Osipovich, Alexander, ‘‘Futures Exchange 

Reins in Runaway Trading Algorithms,’’ Wall Street 

Journal (Oct. 29, 2019), available at https://

www.wsj.com/articles/futures-exchange-reins-inrunaway-trading-algorithms-11572377375. 

8 Id. 

9 Id. at 6. 

and to provide prompt notice to the 

Commission in the event the platform 

experiences any material market disruptions 

that meet a higher threshold of being 

‘‘significant’’. 

I believe all DCMs have already adopted 

regulations and pre-trade risk controls 

designed to address the risks posed by 

electronic trading. As I have noted 

previously, many—if not all—of the risks 

posed by electronic trading are already being 

effectively addressed through the market’s 

incentive structure, including exchanges’ and 

firms’ own self-interest: DCMs through their 

interest in operating markets with integrity, 

and firms through their interest in not 

exposing their or their customers’ funds to 

huge losses in a matter of minutes through 

algorithmic operational error. Both exchanges 

and firms have been leaders in implementing 

best practices around electronic trading risk 

controls. Therefore, today’s final rule merely 

codifies principles underlying existing 

market practice of DCMs to have reasonable 

controls in place to mitigate electronic 

trading risks. 

Significantly, the final rule puts forth a 

principles-based approach, allowing DCM 

trading and risk management controls to 

continue to evolve with the trading 

technology itself. As we have witnessed over 

the past decade, risk controls are constantly 

being updated and improved to respond to 

market developments. In my view, these 

continuous enhancements are made possible 

because exchanges and firms have the 

flexibility and incentives to evolve and hold 

themselves to an ever-higher set of standards, 

rather than being held to a set of prescriptive 

regulatory requirements which can quickly 

become obsolete. By adopting a principlesbased approach, the final rule provides 

exchanges and market participants with the 

flexibility they need to innovate and evolve 

with technological developments. DCMs are 

well-positioned to determine and implement 

the rules and risk controls most effective for 

their markets. Under the rule, DCMs are 

required to adopt and implement rules and 

risk controls that are objectively reasonable. 

The Commission would monitor DCMs for 

compliance and take action if it determines 

that the DCM’s rules and risk controls are 

objectively unreasonable. Importantly, the 

Appendix to the final rule points out that a 

DCM will be held to a standard of 

reasonableness and not to how other DCMs 

implement the rule. Any horizontal review 

across DCMs of rules or risk controls would 

only inform objectively unreasonable 

determinations, not create a baseline set of 

specific risk controls that become de-facto 

regulatory requirements. 

The Technology Advisory Committee 

(TAC), which I am honored to sponsor, has 

explored the risks posed by electronic trading 

at length. In each of those discussions, it has 

become obvious that both DCMs and market 

participants take the risks of electronic 

trading seriously and have expended 

enormous effort and resources to address 

those risks. 

For example, at one TAC meeting, we 

heard how the CME Group has implemented 

trading and volatility controls that 

complement, and in some cases exceed, eight 

recommendations published by the 

International Organization of Securities 

Commissions (IOSCO) regarding practices to 

manage volatility and preserve orderly 

trading.1 At another TAC meeting, the 

Futures Industry Association (FIA) presented 

on current best practices for electronic 

trading risk controls.2 FIA reported that 

through its surveys of exchanges, clearing 

firms, and trading firms, it has found 

widespread adoption of market integrity 

controls since 2010, including price banding 

and exchange market halts. FIA also 

previewed some of the next generation 

controls and best practices currently being 

developed by exchanges and firms to further 

refine and improve electronic trading 

systems. The Intercontinental Exchange (ICE) 

also presented on the risk controls ICE 

currently implements across all of its 

exchanges, noting how its implementation of 

controls was fully consistent with FIA’s best 

practices.3 These presentations emphasize 

how critical it is for the Commission to adopt 

a principles-based approach that enables best 

practices to evolve over time. 

I believe the final rule issued today adopts 

such an approach and provides DCMs with 

the flexibility to continually improve their 

risk controls in response to technological and 

market advancements. Because this rule 

allows for flexible implementation and 

effectively places that burden on the market 

participants with the most aligned and 

motivated interests, I believe this rule will 

stand the test of time and serve as a paradigm 

of the CFTC’s mission statement: Sound 

regulation that promotes the integrity, 

resilience, and vibrancy of the U.S. 

derivatives market. 

Appendix 4—Dissenting Statement of 

Commissioner Rostin Behnam 

I would like to start by thanking DMO staff 

for their tireless work on this rule. While the 

Risk Principles are short, that is not reflective 

of the work that has been done by staff to 

produce them. This is the same DMO staff 

that worked on the much broader 

‘‘Regulation AT’’,1 and I appreciate all of 

their work over many years. 

Last June, I stated in my dissent to the 

Electronic Trading Risk Principles proposal 2

that I strongly support thoughtful and 

meaningful policy that addresses the everincreasing use of automated systems in our 

markets.3 The proposal regarding Electronic 

Trading Risk Principles did not achieve this. 

Far from utilizing over a decade of 

experiences that should have profoundly 

shaped how we address operational risks that 

are consistently unpredictable and have 

wide-ranging impacts, today’s final rule 

changes only a single word from the proposal 

aimed at codifying the status quo. 

Accordingly, I respectfully dissent. 

A little over ten years ago, on May 6, 2010, 

the Flash Crash shook our markets.4 The 

prices of many U.S.-based equity products, 

including stock index futures, experienced 

an extraordinarily rapid decline and 

recovery. In 2012, Knight Capital, a securities 

trading firm, suffered losses of more than 

$460 million due to a trading software coding 

error.5 Other volatility events related to 

automated trading have followed with 

increasing regularity.6 In September and 

October 2019, the Eurodollar futures market 

experienced a significant increase in 

messaging.7 According to reports, the volume 

of data generated by activity in Eurodollar 

futures increased tenfold.8 A lesson of these 

events is that under stressed market 

conditions, automated execution of a large 

sell order can trigger extreme price 

movements, and the interplay between 

automated execution programs and 

algorithmic trading strategies can quickly 

result in disorderly markets.9

Recent events further amplify that in 

increasingly interconnected markets, which 

are informed by growing access to real-time 

data and information, we do not always 

know how and where the next market stress 

event will materialize. This past April 20, the 

May contract for the West Texas Intermediate 

Light Sweet Crude Oil futures contract (the 

‘‘WTI Contract’’) on the New York Mercantile 

Exchange settled at a price of -$37.63 per 

barrel. The May Contract’s April 20 negative 


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Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2075 

10 Interim Staff Report, Trading in NYMEX WTI 

Crude Oil Futures Contract Leading Up to, on, and 

around April 20, 2020 (Nov. 23, 2020), https://

www.cftc.gov/PressRoom/PressReleases/8315-20. 11See Platt and Stafford, ‘‘Trading Outages Strike 

Again for US Retail Brokers,’’ Financial Times (Dec. 

7, 2020), available at https://www.ft.com/content/ 

cb99dc6f-a73e-41af-91fb-21a4aa606265. 12See Dooley, Ben, ‘‘Tokyo Stock Market Halts 

Trading for a Day, Citing Glitch,’’ The New York 

Times (Sep. 30, 2020), available at https://

www.nytimes.com/2020/09/30/business/tokyostock-market-glitch.html. 13 Id. 14See ‘‘Software Glitch Halts Trading on 

Australia’s Stock Exchange, to Reopen Tuesday,’’ 

Reuters (Nov. 15, 2020), available at https://

www.reuters.com/article/us-asx-trading/softwareglitch-halts-trading-on-australias-stock-exchangeto-reopen-tuesday-idUSKBN27W020. 15 Id. 

16See Behnam, supra note 2. 

17Final Rule at 4. 

18See Behnam, supra note 2. 

settlement price was the first time the WTI 

Contract traded at a negative price since 

being listed for trading 37 years ago. 

While the unusual fact that the price went 

significantly negative grabbed the headlines, 

the precipitousness of the price move was 

every bit as significant. The price dropped 

more than $39 between 2:10 and 2:30 p.m. 

on April 20. Overall, the price dropped 

$58.05 from the open of trading to its low on 

April 20, breaking its historical relationship 

with other petroleum-based contracts 

including the Brent Crude futures contract. 

The WTI price moved more in 20 minutes 

than it does most years. A contract that had 

never experienced a 10% move in a single 

day fell by more than 300% in a brief 20- 

minute period. All of the contributing factors 

have yet to be accounted for, but one thing 

is certain—these were stressed market 

conditions. An already oversupplied global 

crude oil market was hit with an 

unprecedented reduction in demand caused 

by the COVID–19 pandemic.10 Under 

stressed market conditions, automated 

trading has the potential to quickly make an 

already volatile situation even worse. 

Technology glitches have continued to 

impact our markets. Just yesterday, a large 

retail broker that was significantly impacted 

by the events of April 20 suffered a 

significant failure in data storage.11 Recent 

technology glitches overseas have hampered 

our international colleagues as well, 

handcuffing markets for extended periods of 

time without clear explanation. In Japan this 

past September, the Tokyo Stock Exchange 

shut down for a day due to technical glitches 

in equities trading.12 Luckily, this glitch 

happened to coincide with all other Asian 

markets being closed and occurred the day 

after the first Presidential debate. But this 

only emphasizes the outsized impact that a 

technical issue could have during volatile 

market conditions. One can imagine what 

would have happened if the glitch had 

occurred the day before, during the leadup to 

the debate.13

Just last month, Australia’s stock exchange 

lost an entire day of trading due to a software 

problem impacting trading of multiple 

securities in a single order.14 This discrete 

issue was enough to lead to inaccurate 

market data that necessitated shutting down 

the exchange for an entire trading day.15

As we consider today’s final rule, there is 

a tendency to think that something is better 

than nothing, and that today’s risk 

principles—if nothing else—demonstrate the 

Commission’s belief that mitigating 

automated trading risk is important. 

However, I continue to question whether 

these Risk Principles improve upon the 

status quo, or even do anything of marginal 

substance relative to the status quo.16

The preamble seems to go to great lengths 

to make it clear that the Commission is not 

asking DCMs to do anything. The preamble 

states at the very outset that the 

‘‘Commission believes that DCMs are 

addressing most, if not all, of the electronic 

trading risks currently presented to their 

trading platforms.’’ 17 The preamble presents 

each of the three Risk Principles as ‘‘new’’, 

but then goes on to describe all of the actions 

already taken by DCMs that meet the 

principles. If the appropriate structures are in 

place, and we have dutifully conducted our 

DCM rule enforcement reviews and have 

found neither deficiencies nor areas for 

improvement, then is the exercise before us 

today anything more than creating a box that 

will automatically be checked? 

The only potentially new aspect of these 

Risk Principles is that the preamble suggests 

different application in the future, as 

circumstances change. As I said in regard to 

the proposal, the Commission seems to want 

it both ways: We want to reassure DCMs that 

what they do now is enough, but at the same 

time the new risk principles potentially 

provide a blank check for the Commission to 

apply them differently in the future.18

We do not know what the next external 

event to stress market conditions will be, but 

one likely possibility is climate change. In 

establishing new rules for automated trading, 

I would have liked the Commission to have 

taken a more fulsome look at both the events 

of April 20, the COVID–19 pandemic more 

broadly, and the potential impacts of climate 

change on our automated markets. The 

recently published Interim Staff Report on 

the events of April 20 provides a stark 

example of what can happen to automated 

markets under times of economic stress. 

The April 20 price plummet triggered both 

dynamic circuit breakers and velocity logic— 

exactly the type of risk controls discussed in 

the proposal that preceded the Electronic 

Trading Risk Principles proposal, commonly 

referred to as ‘‘Regulation AT.’’ Regulation 

AT was formally withdrawn at the 

Chairman’s direction and without my 

support. Further troubling, it was withdrawn 

before Commission staff had any meaningful 

opportunity to consider whether and how the 

risk controls in either Regulation AT or the 

Electronic Trading Risk Principles as 

proposed performed during trading around 

April 20. There was arguably no better test 

case, and yet we charged forward without 

looking back. If the risk controls were 

effective, we should consider whether more 

specific risk controls along these lines should 

be part of the Electronic Trading Risk 

Principles, in order to be certain that all 

DCMs are prepared to maintain orderly 

trading during such a confluence of events. 

If they are not, we should consider whether 

stronger risk controls are necessary. 

I also think the Risk Principles would be 

improved if they were informed by a 

consideration of the possible impacts of 

climate change. The preamble states ‘‘The 

principles-based approach provides DCMs 

with flexibility to address risks to markets as 

they evolve, including any idiosyncratic 

events.’’ Referring to events such as climate 

change as ‘‘idiosyncratic’’ downplays their 

impact and places regulators and DCMs in a 

purely reactive posture. While we cannot 

know for certain what the next external event 

that causes stressed market conditions will 

be, that does not mean that we should remain 

idle until it hits. As we will continue to 

experience unanticipated and unprecedented 

events that will impact our markets and the 

larger U.S. economy, I am concerned that a 

policy of simply checking a box will do 

nothing more than shield DCMs from public 

scrutiny and fault for the fallout. 

So often we hear that the markets have 

evolved from a technological and innovative 

standpoint at an exponential rate as 

compared to their regulators. Rulemakings 

like this provide our greatest opportunity to 

proactively close that gap. We need to be 

proactive. Being proactive means studying 

the incidents of the past, like the Flash Crash, 

Knight Capital, and most recently April 20 so 

that we can recognize the precursors of 

events to come. Instead of just reacting, we 

can predict, prepare for, and possibly prevent 

the next crisis event. 

Again, while there is a temptation to 

advance this rule under the theory that 

something is better than nothing, in this case 

I do not think that the final rules add 

anything at all beyond the opportunity to 

take a victory lap. In other words, the theme 

in this case is that nothing is better than 

something. I believe that we can, and should, 

do better. Therefore, I cannot support today’s 

final rule. 

Appendix 5—Supporting Statement of 

Commissioner Dawn D. Stump 

As I observed when we proposed these risk 

principles last summer, it is a simple fact that 

the markets we regulate have become 

increasingly electronic (much like everything 

else in our modern lives). The rulemaking 

that we are now adopting appropriately 

recognizes that market infrastructure 

providers have already implemented a host 

of measures pursuant to our existing 

regulations and their own self-regulatory 

responsibilities to account for the associated 

risks that inherently come with the 

development of electronic trading. I do not 

want our adoption of additional Commission 

risk principles regarding electronic trading 

on designated contract markets (‘‘DCMs’’) to 

be taken as an indication that adequate 

attention is not being paid—or that 

insufficient resources are being invested—by 

the exchanges to address the lessons that 

have already been learned and applied over 

many years as electronic trading has become 

more prevalent in these markets. 

I also want to stress the significance of the 

often-overlooked direction we have received 

from Congress in Section 3 of the Commodity 


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2076 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 

1CEA Section 3, 7 U.S.C. 5. 

1 In addition, Risk Principle 2 requires DCMs to 

subject all electronic orders to exchange-based pretrade risk controls to prevent, detect, and mitigate 

market disruptions or system anomalies associated 

with electronic trading. Risk Principle 2 overlaps 

with existing Commission regulations, including 

§ 38.255, which requires DCMs to ‘‘establish and 

maintain risk control mechanisms to prevent and 

reduce the potential risk of price distortions and 

market disruptions.’’ DCMs should help drive an 

effective implementation of Risk Principle 2 by 

carefully examining their existing pre-trade risk 

controls and ensuring that such controls are fit for 

the types of market participants, technologies, and 

trading practices prevalent on their markets. 

2 I appreciate the concerns raised by some 

commenters that the Risk Principles may be 

imprecise, difficult to enforce, or provide too much 

deference to DCMs. As discussed below, the Final 

Rule helps mitigate some of these concerns by 

emphasizing that the Risk Principles are an 

objective standard and enforceable rules subject to 

Commission oversight. The Commission will be 

able to monitor DCMs’ compliance with the Risk 

Principles through its DCM rule enforcement 

review program, as well as other oversight activities 

including review of new rule certifications, review 

of market disruption notifications received 

pursuant to Risk Principle 3, market surveillance, 

and other oversight tools. 

3Risk Principle 3 is codified in new Commission 

regulation 38.251(g). 

4As I articulated in my statement when the Risk 

Principles were first proposed, the Dodd-Frank Act 

amended the Commodity Exchange Act to make 

clear that a DCM’s discretion with respect to core 

principle compliance is circumscribed by any rule 

or regulation that the Commission might adopt 

pursuant to a core principle. In today’s Final Rule, 

the Commission is requiring DCMs to adopt and 

implement rules and pre-trade risk controls that are 

‘‘reasonably designed to prevent, detect, and 

mitigate market disruptions or system anomalies 

associated with electronic trading.’’ 

Exchange Act (‘‘CEA’’).1 Section 3(a) sets out 

Congress’s finding that the transactions 

subject to the CEA are affected with a 

national public interest. Then, in Section 

3(b), Congress stated that it is the purpose of 

the CEA to serve this public interest ‘‘through 

a system of effective self-regulation of trading 

facilities, clearing systems, market 

participants and market professionals under 

the oversight of the Commission.’’ 

I support adopting these electronic trading 

risk principles as an appropriate exercise of 

the Commission’s oversight that Congress 

expects from us, as stated in Section 3(b) of 

the CEA. While, as noted, I do not question 

the exchanges’ diligence in addressing the 

risks in electronic trading on their platforms, 

I am comfortable incorporating these 

principles into our existing rule set in order 

to make clear that DCMs must continue to 

monitor these risks as they evolve along with 

the markets, and make reasonable 

modifications as appropriate. 

Importantly, though, I also support the 

principles-based approach of these final 

rules. This approach recognizes that the 

front-line responsibility for preventing, 

detecting, and mitigating material risks posed 

by electronic trading rests with the exchanges 

themselves. The exchanges are best 

positioned to execute this responsibility 

because they have the best knowledge of the 

trading that occurs on their own markets. At 

the same time, this approach serves the 

public interest through a system of effective 

self-regulation of trading facilities—precisely 

as Congress directed in its statement of 

purpose in Section 3(b) of the CEA. 

I thank and commend the Staff for the time 

and energy they have put into the 

preparation of this rulemaking, and for the 

thoughtful consideration they have given to 

these issues over the course of the past 

several years. 

Appendix 6—Statement of 

Commissioner Dan M. Berkovitz 

I support today’s final rule on Electronic 

Trading Risk Principles (‘‘Final Rule’’). The 

Final Rule addresses market disruptions 

associated with electronic trading through 

limited requirements applicable directly to 

designated contract markets (‘‘DCMs’’) and 

indirectly to DCM market participants. It is 

an incremental step that can enhance the 

safety and soundness of electronic trading on 

U.S. exchanges. I look forward to the 

continuing evolution of trading in our 

markets, and to the Commission’s steady 

engagement with the technology and risk 

controls of modern trading to determine 

whether more may be needed in the future. 

I am able to support the Final Rule because 

it recognizes the role of both DCMs and 

market participants in preventing and 

mitigating market disruptions, as well as the 

ultimate responsibility and authority of the 

Commission to oversee the actions of our 

market infrastructures and market 

participants. The Final Rule codifies three 

‘‘Risk Principles,’’ including new 

requirements in Risk Principle 1 that DCMs 

implement rules governing their market 

participants to prevent, detect, and mitigate 

market disruptions and system anomalies.1

This provision, codified in Commission 

regulation 38.251(e), speaks directly to new 

risk-reducing practices and may be the most 

helpful of the three Risk Principles. 

Market participants originate, place, and 

manage orders on DCMs though an array of 

systems that vary in sophistication and 

automation. Experience teaches that errors in 

the design, testing, implementation, 

operation, or supervision of such systems by 

a single market participant can lead to 

cascading effects that disrupt an entire 

market and the ability of all market 

participants to engage in price discovery and 

risk mitigation. Accordingly, it is crucial that 

market participants, DCMs, and the 

Commission implement and enforce the Risk 

Principles in meaningful ways going 

forward.2

The Commission’s efforts in this regard 

may be aided by Risk Principle 3, which 

requires DCMs to ‘‘promptly notify 

Commission staff of any significant market 

disruptions’’ and ‘‘provide timely 

information on the causes and 

remediation.’’ 3 I support Commission efforts 

to remain up-to-date as technologies evolve, 

new potential sources of market disruptions 

arise, and best practices for safeguarding 

markets are developed. Information provided 

to the Commission through Risk Principle 3 

will strengthen the Commission’s daily 

oversight of DCMs, and help educate the 

Commission and its staff as to the most 

effective risk-reducing measures. 

I am also able to support the Final Rule 

because it recognizes and preserves the 

Commission’s authority to interpret and 

enforce the standards in the Risk Principles, 

and because it clarifies that Risk Principles 

1 and 2 are intended to address any type of 

market disruption arising from market 

participants or electronic orders that 

materially affects electronic trading. I thank 

the Chairman for working with my office to 

achieve these enhancements to the Final 

Rule. 

The Final Rule includes Acceptable 

Practices in Appendix B to part 38 providing 

that a DCM can comply with Risk Principles 

1 and 2 through rules and pre-trade risk 

controls that are ‘‘reasonably designed’’ to 

prevent, detect, and mitigate market 

disruptions and system anomalies. While 

legitimate concerns have been raised that 

these terms could lend themselves to 

excessive disputes over interpretation, the 

Final Rule makes clear that they are subject 

to an objective standard and Commission 

oversight. It notes specifically that ‘‘[t]he 

Commission will oversee and enforce the 

Risk Principles in accordance with an 

objective reasonableness standard[,]’’ and 

that the Risk Principles are ‘‘enforceable 

regulations.’’ 4 I am pleased that the Final 

Rule clearly articulates the seriousness with 

which the Commission will monitor and 

enforce the Risk Principles. 

The Final Rule also makes clear that while 

Risk Principle 3 addresses ‘‘significant’’ 

market disruptions, Risk Principles 1 and 2 

include the broader set of ‘‘material’’ 

disruptions. As stated in the Final Rule, ‘‘the 

standard for a significant market disruption 

under Risk Principle 3 is higher than the 

standard for a market disruption under Risk 

Principles 1 and 2.’’ Markets and market 

participants will benefit from the 

Commission’s decision to resolve this 

potential ambiguity in the proposed rule and 

to implement a rigorous standard for Risk 

Principles 1 and 2. 

Today’s Final Rule addresses an issue that 

has remained open in the Commission’s 

books for far too long. Electronic trading is 

no longer a new technology in Commissionregulated markets, and it has not been new 

for many years. The Risk Principles are a 

circumscribed but important first step in 

ensuring that the Commission’s rules keep 

pace with technological changes underlying 

derivatives trading. The Commission must 

now proceed to full, effective 

implementation of the Risk Principles and to 

oversight of DCMs’ own implementations. I 

support these efforts, combined with 

continued vigilance to determine whether 

additional steps may be needed in the future. 

In the preamble to the Final Rule, the 

Commission stresses the potential benefits of 

the principles-based approach embodied in 

the Risk Principles. My support for the 

principles-based approach in this particular 

rulemaking, however, should not be 

interpreted as an endorsement of such a 

broad principles-based approach in other 

circumstances, or foreclose my support for 

more prescriptive measures should they 

become necessary with respect to risk 


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Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2077 

controls. Although the markets overseen by 

the Commission have benefitted from the 

flexibility of a principles-based approach in 

a number of areas, in other circumstances a 

more prescriptive approach has provided the 

market with needed clarity and certainty. 

The appropriate choice or balance between 

prescriptive regulations and principles-based 

regulations will depend upon the 

circumstances being addressed by those 

regulations. 

Whether this rulemaking will fully 

accomplish its objectives will depend to a 

large extent upon the diligence and 

commitment to its implementation by DCMs 

and market participants. If DCMs and market 

participants comprehensively adopt and 

maintain industry best practices to prevent, 

detect, and mitigate market disruptions and 

system anomalies, as well as develop and 

implement measures to address emerging 

issues as they arise, then further prescriptive 

action by the Commission may not be 

necessary. 

I thank the staff of the Division of Market 

Oversight for their work to address a number 

of my concerns with the Final Rule, as well 

as their overall work on the Final Rule. 

[FR Doc. 2020–27622 Filed 1–5–21; 11:15 am] 

BILLING CODE 6351–01–P 


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