CFTC Staff Urges Markets to Strengthen Volatility Controls

CFTC staff reminded designated contract markets ("DCMs") and derivatives clearing organizations ("DCOs") to maintain appropriate risk control mechanisms, including exchange-based pre-trade risk checks and immediate notifications to the Commission in the event of significant market disruptions.

In a joint staff advisory, the CFTC's Division of Market Oversight ("DMO") and Division of Clearing and Risk ("DCR") explained that volatility controls such as price bands, circuit breakers and daily price limits play a critical role in mitigating sudden market disruptions and preserving orderly price discovery during stressed trading conditions. Staff noted that these controls should be calibrated flexibly, tailored to specific markets and product characteristics, and must avoid unduly interfering with market functioning.

Staff emphasized that DCMs are obligated under CFTC Rule 38.250 ("Core Principle 4"), CFTC Rule 38.255 ("Risk controls for trading") and Rule 38.251(e)-(g) ("General Requirements") to implement market volatility controls and maintain appropriate risk control mechanisms. 

For DCMs, staff urged consideration of the FIA's September 2023 "Best Practices for Exchange Volatility Control Mechanisms," which outlines features of effective volatility management—such as transparency in control triggers, trade error policies and communication of changes to participants. Staff also pointed to recent guidance from the Global Markets Advisory Committee, which underscored the need for consistent, global standards in exchange risk protocols amid geopolitical and macroeconomic uncertainty.

For, DCOs, staff underscored that the functioning of volatility controls can affect pricing and risk management practices, especially during processes like variation settlement and margin recalibration. In cases where exchange prices are distorted by volatility mechanisms (e.g., daily limits or paused trading), DCOs were reminded they may invoke internal rules—such as CME Rule 813 ("Daily Settlement Price") —to assign alternative settlement prices reflective of economic conditions. Staff encouraged DCOs to communicate clearly with clearing members and market participants about such possibilities.