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UPDATE 1-U.S. SEC proposes rules to tackle trading glitches
03/07/2013 Email this story  |  Printable Version

(Adds details, vote, comments from SEC's Walter, Aguilar)

By Sarah N. Lynch

WASHINGTON, March 7 (Reuters) - U.S. securities regulators proposed new rules on Thursday that would require exchanges, clearing agencies and other kinds of trading platforms to be better prepared to handle major market disruptions spurred by issues such as technology glitches or hurricanes.

Thursday's proposal has been in the works for well over a year at the U.S. Securities and Exchange Commission. But the rule-writing was put on the fast track last August after Knight Capital nearly went bust due to a software glitch that led to $440 million in losses.

The SEC's four commissioners unanimously agreed to put the plan out for comment, saying the rules are critical to preventing market disruptions that can unnerve investors.

"While it is not possible to prevent every technological error each market participant may commit, as the overseer of our securities markets, it is the commission's responsibility to ensure that our regulations are designed to minimize their impact on our markets and ultimately investors," said SEC Chairman Elisse Walter.

The proposal requires roughly 44 different entities including exchanges, clearing agencies and trading platforms known as "alternative trading systems" that meet certain volume thresholds to establish procedures to ensure the capacity, integrity, security and resiliency of their systems.

The plan calls for these groups to notify the agency about problems with or changes to technology systems, to designate individuals or firms to participate in testing business continuity and disaster recovery plans at least once a year, and to give SEC staff access to systems so they can monitor compliance, according to an SEC fact sheet.

The Knight debacle is just one incident in a string of high-profile technology errors that plagued the markets in 2012, from Nasdaq's botched handling of Facebook's initial public offering, to problems that forced BATS Global Markets to withdraw its own company's IPO.

Then, in October, the stock market shut down for two days during Superstorm Sandy despite contingency plans, in part because of lingering concerns about potential malfunctions.

The SEC's proposal, if adopted, would replace a long-time voluntary standard known as "automation review policies" or ARP.

In replacing voluntary guidelines with rules, it means the SEC would be able to take enforcement action against violators. However, the proposal also outlines a safe harbor that firms can follow to help give them some legal protection.

The SEC first developed ARP following the 1987 market crash. ARP sets forth guidance for exchanges, some alternative trading systems and for clearing agencies to help ensure their systems are stable, secure and have the capacity to deal with glitches that could send markets into a tailspin.

Still, not everyone on the commission on Thursday was fully satisfied that the draft proposal is robust, despite the unanimous vote to put it out for comment.

SEC Commissioner Luis Aguilar, a Democrat, said he is worried the proposal does not mandate compliance with a specific set of standards, and offers instead only a set of model policies.

He also said he does not like how the plan provides a "safe harbor" that would protect firms and their employees as long as they have policies that are reasonably designed to comply with the rules.

"An unprecedented safe harbor in a rule that does not require clear, identifiable, and meaningful standards, and that does not require policies and procedures to be reviewed by an independent third party and certified by senior officers, will result in a rule proposal that falls short of its goal," Aguilar said. (Reporting by Sarah N. Lynch; additional reporting by Emily Stephenson; Editing by Bernadette Baum, Bernard Orr)


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