Jun 14, 2012
FPL updates risk guidelines to supplement regulation
FIX Protocol
Limited (FPL), the messaging standards body, has released its latest set of
guidelines for pre-trade risk controls, which it says are designed to complement
existing regulations.
The guidelines,
which were originally designed in spring 2011 by FPL’s Americas Risk Management
Working Group, cover pre-trade and intra-day risk control guidelines that
brokers can implement into their electronic trading platforms to help boost
market stability.
The latest
version includes recommendations for risk controls for futures and options,
further information for managing the risks associated with algorithmic and DMA
orders, information on how to control paused orders and details on exchange
mandated risk checks and best practice on how brokers should work with trading
venues.
John Goeller,
co-chair of the FPL Americas regional committee, and managing director, global execution services at Bank of America Merrill Lynch, said the new guidelines aim
to standardise workflows for different types of orders before they reach the
market.
“Industry
participants can use the document to explain why we need risk controls
and the functionality they should offer,” Goeller told theTRADEnews.com. “It’s all about knowing
who the client is and what their appropriate
limits should be. Workflows can also differ depending on the type of order,
i.e. algorithmic orders that work over a set time horizon compared to a DMA
order that goes straight to market.”
He added that
large investment banks that operate a multitude of electronic trading and
routing platforms could use the guidelines as a starting point to standardise
risk checks across the services they offer.
“There are also guidelines on
exchange provided risk controls and how these should work in conjunction with
the controls offered by brokers,” he said.
The focus on
pre-trade risk controls has intensified since the flash crash on 6 May 2010
when US markets plummeted in value before quickly rebounding because of an
algorithmic order that was sent to the market without appropriate limits. Since
then the Securities and Exchange Commission has banned firms from trading on
markets without pre-trade risk controls. European regulators also plan to shore
up the risks related to electronic trading in MiFID II, while securities
watchdog the European Securities and Markets Authority released its own
guidelines for automated trading at the beginning of last month.
Anish Puaar
+44 (0)20 7397 3817
anish.puaar@thetrade.ltd.uk