1

6351-01-P

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: (i) the implementation of exchange rules 

applicable to market participants to prevent, detect, and mitigate market disruptions and 

system anomalies associated with electronic trading; (ii) the implementation of exchangebased pre-trade risk controls for all electronic orders; and (iii) 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 will become effective on [INSERT DATE OF 

PUBLICATION IN THE FEDERAL REGISTER].
2

Compliance date: DCMs must be in full compliance with the requirements of this 

rule within 180 calendar days after the effective date.

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
3

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 

 1 Electronic 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.
4

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-ondisconnect, 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 Subcommittee stated that it broadly supports the rulemaking.5 The 

 2 FIA/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-GroupRA2006-5.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). 3 FIA/FIA PTG NPRM Letter, at 1.

4 Automated and Modern Trading Markets Subcommittee, “Discussion of the CFTC’s Proposed Rule on 

Electronic Trading Risk Principles,” (July 16, 2020) (“Subcommittee PowerPoint”), available at

https://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.html. 5 See July 16, 2020 TAC Meeting Transcript at 54:5.
5

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 

 6 As 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. 7 See July 16, 2020 TAC Meeting Transcript at 55:21-56:10. 8 See id. at 58:6-17. 9 See id. 

10 See id. at 6; July 16, 2020 TAC Meeting Transcript at 62:13-63:15. 11 See id. 12 See NPRM, supra note 1 at 42762.
6

demonstrate an effective program for conducting real-time 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 

 13 17 CFR 38.251(c). 14 17 CFR 38.255.
7

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 principles-based 

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 

 15 See supra note 1. 16 See NPRM at 42762. 17 CME 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.
8

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 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 self-regulatory 

organization (“SRO”) independence.26

 18 FIA/FIA PTG NPRM Letter, at 2-4; ISDA/SIFMA NPRM Letter, at 1; MFA NPRM Letter, at 1-2. 19 CME NPRM Letter, at 1, 12; CFE NPRM Letter, at 1; CEWG NPRM Letter, at 2. 20 ICE NPRM Letter, at 2. 21 See id. 22 AFR 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. 23 Better Markets NPRM Letter, at 2, 9. 24 IATP NPRM Letter, at 1. 25 See id. at 8. 26 AFR NPRM Letter, at 1-2; Better Markets NPRM Letter, at 2, 6, 9, 10-12; Rutkowski NPRM Letter, at

1.
9

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 

 27 See supra note 25 at 2-5, 8. 28 See Order, CFTC Docket No. 19-19, at 3-5 (Sept. 4, 2019), available at

https://www.cftc.gov/media/2396/enfoptionsclearingorder090419/download.
10

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 

 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. 30 See Section II.A. 31 See NPRM at 42765.
11

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 

 32 FIA/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.”).

33 Section 3(b) of the CEA. 7 U.S.C. 5(b). 34 The 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.
12

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 lack the flexibility to address such 

idiosyncratic events, while principles-based 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

 35 See 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 self-regulatory 

responsibilities, their commercial interests, and the several interests of their management, members, 

owners, customers and market participants, other industry participants, and other constituencies.”).

36 Staff 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. 37 See id.
13

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 

 38 See NPRM at 42763.

39 See id. at 42763 n.6. 40 See id. at 42764. 41 See id. at 42765. 42 CEWG NPRM Letter, at 3-4; FIA/FIA PTG NPRM Letter, at 3; Optiver NPRM Letter, at 1. 43 FIA/FIA PTG NPRM Letter, at 3. 44 Optiver NPRM Letter, at 1.
14

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 

 45 AFR 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. 46 CME NPRM Letter, at 2, 13. 47 CFE NPRM Letter, at 4. 48 CME NPRM Letter, at 13.

49 Better Markets NPRM Letter, at 9. 50 IATP NPRM Letter, at 9. 51 IATP NPRM Letter, at 11.
15

operation of such software, or DCM-imposed 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 posttrade 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 

 52 CEWG NPRM Letter, at 7. 53 IATP NPRM Letter, at 4-5. 54 See id. 55 IATP NPRM Letter, at 13.
16

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 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

 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 postdemutualization period).

57 FIA/FIA PTG NPRM Letter, at 2. 58 See id.
17

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 

 59 See NPRM at 42763 n.6.
18

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 

 60 CEWG NPRM Letter, at 7. 61 17 CFR 38.151. 62 See NPRM 42762, 42764. 63 See NPRM 42762.
19

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

 64 See id. 65 See id. 66 CME NPRM Letter, at 12-13; ICE NPRM Letter, at 3; Better Markets NPRM Letter, at 4-9. 67 CME NPRM Letter, at 12-13. 68 See id. at 7. 69 See id. at 12. 70 See id. at 12-13. 71 See id.
20

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 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

 72 ICE NPRM Letter, at 3. 73 See id. 74 See id. 75 Better Markets NPRM Letter, at 4-9. 76 See id. 77 See id. 78 See id. 79 See id.
21

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-

 80 CME 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.

81 MFA NPRM Letter, at 2. 82 AFR NPRM Letter, at 2; Rutkowski NPRM Letter, at 2. 83 See NPRM at 42768.
22

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

 84 NPRM at 42768.
23

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 

 85 The 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. 86 NPRM 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.

87 NPRM at 42765.
24

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 

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 

 88 See id.

89 See id.

90 See id.

91 See id.

92 CME NPRM Letter, at 10. 93 ICE NPRM Letter, at 2, 3-4, 5.

94 See id.
25

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 

 95 See id. 96 See id.
26

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 

 97 NPRM at 42765.

98 See 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. 101 See id. 102 See id.
27

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 

 103 See id. 104 See id. 105 CEWG NPRM Letter, at 4. 106 CME NPRM Letter, at 10-11. 107 MFA NPRM Letter, at 3. 108 See id.

109 CME NPRM Letter, at 10-11. 110 ICE NPRM Letter, at 5-6.
28

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 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 

 111 CME NPRM Letter, at 10-11. 112 See id. 113 ICE NPRM Letter, at 6. 114 See id. 115 See id. 116 CEWG NPRM Letter, at 5. 117 See id. 118 CME NPRM Letter, at 3.

119 See id.
29

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 

 120 See id. 121 See id. 122 See id. 123 See id. 124 CME NPRM Letter, at 3-4. 125 See 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”). 126 See id. (emphasis added). 127 See id. 128 IATP NPRM Letter, at 6.
30

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 principlesbased 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. 

 129 Better Markets NPRM Letter, at 9. 130 See 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. 131 MGEX NPRM Letter, at 1-2. 132 See id. at 3.
31

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 

 133 CME NPRM Letter, at 3.
32

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

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 

 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 (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).
33

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. 

 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.
34

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
35

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 pre-trade 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 

 136 NPRM 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.

139 See id.
36

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 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

 140 See id. 141 See id. 142 MGEX NPRM Letter, at 2-3. 143 CME NPRM Letter, at 4-5. 144 See id. at 6. 145 See id. at 6-7. 146 Better Markets NPRM Letter, at 8. 147 See id.
37

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 

 148 See id.

149 IATP NPRM Letter, at 9. 150 See id. 151 See id. 152 See NPRM at 42763.
38

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.
39

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

 153 NPRM at 42776. 154 CME NPRM Letter, at 5. 155 Id. at 5-6 (emphasis in original). 156 Better Markets NPRM Letter, at 10; MGEX NPRM Letter, at 2, 4. 157 Better Markets NPRM Letter, at 10.
40

MGEX commented that the Commission should ensure “rules,” as described in the 

NPRM, include non-rules 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

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, 

 158 MGEX NPRM Letter, at 2, 4. 159 CFE NPRM Letter, at 3. 160 Id. 161 Id. 162 CEWG NPRM Letter, at 7. 163 Id.
41

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 selfcertified 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 

 164 17 CFR 40.1(i). 165 Under 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). 167 See 17 CFR 40.5, 40.6.
42

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 exchangebased 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

 168 Part 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. 170 CFE NPRM Letter, at 1-2. 171 IATP NPRM Letter, at 10. 172 Id.
43

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 

 173 NPRM at 42767. 174 The 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). 175 See NPRM at 42767-68.
44

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 

Practices177 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 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 post-trade 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 

 176 See id. at 42768. 177 See Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance with Core 

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

178 CME NPRM Letter, at 14.

179 ICE NPRM Letter, at 7. 180 Id. at 8. 181 MGEX NPRM Letter, at 2.
45

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 exchange-based 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

 182 IATP NPRM Letter, at 10. 183 Id. 184 NPRM at 42767. 185 Id. at 42768. 186 See Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance with Core 

Principles, Core Principle 4 (Subparagraph (b)).
46

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 

 187 NPRM at 42769. 188 Better Markets NPRM Letter, at 2.
47

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

 189 Id. at 9.

190 Id. at 10.

191 CME NPRM Letter, at 8.

192 Id.

193 Id.

194 MFA NPRM Letter, at 3.

195 Id.

196 Id. at 4.
48

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 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 

 197 See 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.

198 See 17 CFR 38.1051(e). 199 See Core Principles and Other Requirements for Designated Contract Markets, supra note 174, at 

36657-58. 200 Id. at 36658. 201 Id. (emphasis added).
49

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 e-mail 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

 202 CME NPRM Letter, at 16. 203 Better Markets NPRM Letter, at 10. 204 CME NPRM Letter, at 14-15. 205 Id. 206 Id. at 15. 207 CEWG NPRM Letter, at 5. 208 Id. at 6.
50

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

 209 ICE NPRM Letter, at 4. 210 Id. 211 Id. 212 CME NPRM Letter, at 15; ICE NPRM Letter, at 9. 213 ICE NPRM Letter, at 9. 214 CME NPRM Letter, at 15. 215 Id.
51

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 

 216 In response to ICE’s comment, see discussion at Section II.A.2(c) addressing “significant” and 

“material.”

217 See CME NPRM Letter, at 16.
52

“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 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.

 218 See Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18619 (Apr. 30, 1982). 
53

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 

 219 44 U.S.C. 3501 et seq.
54

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 exchange-provided risk controls that address 

potential price distortions and related market anomalies. Accordingly, it is possible that 
55

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 hours220 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.

 220 The 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. 221 The 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

x 48 = 816). 222 The Commission revised the number of potential respondent-DCMs to 17 in order to reflect the number 

of DCMs currently registered with the Commission. 
56

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 (Self-certification 

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.

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 

 223 See 17 CFR part 40.
57

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 

 224 See supra Section II.E. (discussion of the Risk Principle 3). 225 See CME NPRM Letter, at 8. 226 See id. 227 See id. 228 See id. at 9.
58

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 under-inclusive. 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 

 229 The 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. 230 The 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.
59

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 

 231 CME NPRM Letter, at 16.
60

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 realtime 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 events233 to be helpful in 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.

 232 Id. 233 “Velocity Logic” is addressed on CME’s website. Generally, it is “designed to detect market 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. 
61

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 425234 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 125235 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.

 234 Based 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. 235 The 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 x 5 = 0 and 25 x 5 = 125). 236 The 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 x 17 = 0 burden hours) and 2,125 hours (125 x 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.
62

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

 237 See 17 CFR part 38. 238 The 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 x 0 = 0 and 17 x 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 
63

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 

 

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). 240 See 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)).
64

rulemaking. The Commission also acknowledges and took into consideration qualitative 

comments with regard to the cost-benefit 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 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

 241 As discussed above, the Commission revised Risk Principle 3 to change the phrase “disruptions to” to 

“market disruptions on.” See supra Section II.E.
65

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 pretrade 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 
66

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 

 242 CME NPRM Letter, at 12-13; ICE NPRM Letter, at 3; Better Markets NPRM Letter, at 4-9. 243 CME NPRM Letter, at 7, 12-13. 244 See id. at 12; ICE NPRM Letter, at 3. 245 See id. 246 ICE NPRM Letter, at 9. 247 CME 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.

248 MFA NPRM Letter, at 2.

249 AFR NPRM Letter, at 2; Rutkowski NPRM Letter, at 2. 250 CME NPRM Letter, at 17.
67

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 

 251 See id.
68

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 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 

 252 See id. at 9.
69

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 

 253 See id. 254 See NPRM at 42772; CME NPRM Letter, at 17; ICE NPRM Letter, at 9.
70

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 

 255 May 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. 256 The 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).
71

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 x $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.

 257 May 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. 258 The 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.
72

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). 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 

 259 May 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. 260 The 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).
73

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). 
74

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 x $71.019) annually and the cost for additional 

 261 May 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. 262 The 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.

263 The 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.
75

reporting to a DCM to be no more than $9,555.00 (125 x $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 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

 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 $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.
76

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 exchange-based 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 

pre-trade 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
77

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 

 265 CME NPRM Letter, at 13.
78

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-thecounter 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 

 266 IATP NPRM Letter, at 11. 267 See id. at 9. 268 See id. at 10.

269 CFE NPRM Letter, at 4. 270 See id. 271 See Section III.D of this final rulemaking. 272 See NPRM at 42763 n.6. 273 See id. and Section I.D.2 of this final rulemaking.
79

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. 

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 
80

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 exchange-based 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 

 274 AFR NPRM Letter, at 2.
81

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 exchange-based 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 exchange-based 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 
82

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 
83

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 

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

 275 CME 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. 276 CME 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. 277 AFR 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. 278 AFR NPRM Letter, at 1-2; Better Markets NPRM Letter, at 2, 6, 9, 10-12; Rutkowski NPRM Letter, at 

1.
84

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

 279 See 17 CFR 38.850-51. 280 Conflicts of interest are also discussed in the antitrust considerations section of this final rule. See

Section III.D below.
85

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 pre-trade 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 
86

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 specificallydesigned 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
87

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 expects the new regulations to assist with the prevention and mitigation of 
88

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) 
89

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 principles-based 

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.

 281 7 U.S.C. § 19(b).
90

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 non-cleared 

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 now-withdrawn 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 

 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. 284 See 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. 285 See 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. 
91

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 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 pretrade risk controls could appear more attractive to certain market participants and could 

 286 See AFR NPRM Letter, at 1. 287 Id. 288 Id.

289 See 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. 290 Better 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.
92

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 forprofit 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 wellfunctioning markets as self-regulatory 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 

 291 See id.

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

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

294 CEA section 5(d)(19), 7 U.S.C. 7(d)(19) and 17 CFR 38.1000.
93

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.

 295 17 CFR 38.200 and 17 CFR 38.250.

296 See David Reiffen and Michel A. Robe, Demutualization and Customer Protection at Self-Regulatory 

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. 

297 NPRM at 42768.

298 CFE NPRM Letter, at 4.
94

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:

 299 See Commission regulation § 38.1000 (Core Principle 19, Antitrust Considerations). 300 Section 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.
95

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 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 its 

electronic trading platform(s) and provide timely information on the causes and 

remediation. 

3. In Appendix B to Part 38—Guidance on, and Acceptable Practices In, 

Compliance with Core Principles, 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

* * * * *
96

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 regulation 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 regulation 

38.251(f), the contract market must subject all electronic orders to exchange-based pretrade 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
97

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 

 1 Giuseppe Tomasi di Lampedusa, The Leopard (Everyman’s Library Ed. 1991) at p. 22. 
98

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

 2 Frank, 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). 3 Terrence Henderschott, Charles M. Jones, and Albert K. Menkveld, “Does Algorithmic Trading Improve 

Liquidity?” Journal of Finance, Volume 66, Issue 1, p. 1 (February 2011). 4 Esen 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.
99

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 

 5 Futures Industry Association, “A record year for derivatives” (March 5, 2019), available at 

https://www.fia.org/articles/record-year-derivatives.
100

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 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 

 6 Regulation Automated Trading; Withdrawal, 85 FR 42755 (July 15, 2020).

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

8 Tarbert, 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/.
101

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. Principles-based 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 
102

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 

staff9—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 

 9 CFTC 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 noncompliance 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.
103

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. 

Principles-based 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 
104

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 non-compliance.

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—

 10 Tarbert, at 11-17.
105

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

 11 Di Lampedusa, at 22.
106

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 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
107

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 principles-based 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
108

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

 1 Meeting 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. 2 Meeting of the TAC on Oct. 3, 2019, Automated and Modern Trading Markets Subcommittee 

Presentation,

https://www.cftc.gov/PressRoom/Events/opaeventtac100319. 3 Id.
109

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 

proposal2 that I strongly support thoughtful and meaningful policy that addresses the 

ever-increasing 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 

 1 Regulation Automated Trading, Proposed Rule, 80 FR 78824 (Dec. 17, 2015); Supplemental Regulation 

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

2 Rostin Behnam, Commissioner, CFTC, Dissenting Statement of Commissioner Rostin Behnam Regarding 

Electronic Trading Risk Principles (June 25, 2020), 

https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement062520b. 3 The 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. 4 See 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.
110

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 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 

 5 See 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. 6 For 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. 7 See 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-in-runawaytrading-algorithms-11572377375. 8 Id. 9 Id. at 6.
111

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 

 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. 11 See 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. 12 See 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/tokyo-stock-market-glitch.html.
112

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? 

 13 Id. 14 See “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/software-glitch-halts-trading-onaustralias-stock-exchange-to-reopen-tuesday-idUSKBN27W020. 15 Id. 16 See Behnam, supra note 2. 17 Final Rule at 4.
113

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 

 18 See Behnam, supra note 2.
114

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 
115

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 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 

 1 CEA Section 3, 7 U.S.C. 5.
116

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 selfregulation 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 
117

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 

 1 In addition, 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. 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. 
118

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 

 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. 

3 Risk Principle 3 is codified in new Commission regulation 38.251(g).
119

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 

Commission-regulated 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 

 4 As 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.”
120

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 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. 
121

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.