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U.S. SEC to propose rules to tackle trading glitches
March 7, 2013 / 6:00 PM / 5 years ago

U.S. SEC to propose rules to tackle trading glitches

WASHINGTON, March 7 (Reuters) - U.S. securities regulators were poised to propose new rules on Thursday that would require exchanges and clearing agencies 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 proposal requires exchanges, clearing agencies and trading platforms to put in place some procedures and to meet certain technological requirements.

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.

“There’s not much difference between failing to have a business continuity plan and having a plan that you’re not confident enough to use,” SEC Commissioner Luis Aguilar said last month in advocating for the rule proposal unveiled Thursday.

“It is not enough to have the false comfort of a business continuity program on paper. It is critically important for entities to robustly test their contingency plans and be prepared to use them.”

The SEC’s proposal, if ultimately adopted, would replace a long-time voluntary standard known as “automation review policies” or ARP.

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.

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