SROs Agree on Preliminary Recommendations to Strengthen Critical Market Infrastructure (with Clearfield Comment)

Equities and options markets' self-regulatory organizations ("SROs") came to a general agreement with the SEC on certain recommendations and preliminary implementation timetables regarding the ongoing development of collective plans to strengthen the resilience, performance, disaster recovery capability and governance of the critical infrastructure of the U.S. capital markets.

SROs such as FINRA, BATS Global Markets, NYSE Euronext, NASDAQ, MIAX Options, the International Securities Exchange, the Chicago Board Options Exchange and others have been working collaboratively to develop critical safeguards for the markets in response to a September 12, 2013 meeting between leaders of the equities and options exchanges. Specific details of the SROs' proposals will be presented in subsequent SRO rule filings and NMS Plan Amendments and will be subject to public comment and SEC approval. The multi-pronged proposals address each of the following areas:

• improvement of the Securities Information Processor ("SIP");
• critical infrastructure items, such as regulatory messaging, the open and close of the markets, and initial public offerings;
• core principles for halting and resuming the equities and options market;
• trade-break rules; and
• a consensus on "kill switch" functionality to prevent risk and disruption in the markets.

Clearfield Comment: The SEC should be praised for using its authority to encourage competing critical marketplace participants, including exchanges, regulators and the DTCC, to cooperate and to harmonize their rules and approaches to technology systems to encourage stability. Those critical operators are also doing a good thing by coming together with competitors to design a better overall financial system for the benefit of the investing public.At the same time, the SEC and the SROs should be open and clear as to the challenges inherent in implementing stable and robust technology platforms. In general, rules cannot easily impose resiliency, especially when the rules must take into account the market's rather extensive legacy technology and regulatory frameworks. Adding resiliency to an existing system is a challenging proposition, especially when there are so many cooks in the kitchen.

Chris Clearfield is a principal at System Logic, an independent consulting firm that helps organizations manage issues of risk and complexity. Link here to see his other writings.

See: FINRA News Release.Related news: SEC Chairperson Mary Jo White Issues Statement at Exchange Leaders Meeting Regarding Technology of Market Infrastructure (September 12, 2013).