SEC Proposes New Technology Standards for Key Market Participants


On March 7, 2013, the SEC proposed Regulation SCI (“Reg SCI”), which would replace existing voluntary standards applicable to securities exchanges, clearing agencies and certain other market participants with enforceable rules intended to better insulate trading markets from vulnerabilities posed by technology issues. Reg SCI addresses systems, compliance and integrity. The SEC believes the rule will protect investors and promote fair and orderly trading markets by assuring that all computer, network, electronic, technical, automated, or similar systems that impact trading markets (i) operate as intended, (ii) comply with all securities laws and regulations, and (iii) have adequate capacity, integrity, resiliency, availability, and security. The proposed rule targets those systems, whether in production, development, or testing, that directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance. The rule would formalize, build upon, and make mandatory many provisions of the SEC’s voluntary Automation Review Policy (ARP), which have developed since ARP’s was first published in 1989.

As currently drafted, the proposal applies only to SCI Entities, defined specifically as: self-regulatory organizations (SROs), certain large volume alternative trading systems (i.e., dark pools and electronic communications networks, defined in the proposal as “ATSs”), plan processors, and exempt clearing agencies (of which there is presently only one). SCI Entity SROs include all national securities exchanges registered under the Securities Exchange Act of 1934, as amended, registered securities associations, registered clearing agencies, and the Municipal Securities Rulemaking Board (MSRB). Most SROs have already been voluntarily following the ARP guidelines, with many also participating in the SEC’s ARP Inspection Program. ATSs, however, were not covered by ARP. ATSs would become SCI Entities if they: (i) have NMS stock dollar volume comparable to SROs covered by proposed Regulation SCI or (ii) trade non-NMS stocks, municipal securities, and corporate debt securities and play a significant role in the market for such securities. SCI Entity “plan processors” would include any SRO or securities information processor acting as an exclusive processor in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system (NMS) plan. The Commission is seeking comment on whether to extend the proposal’s reach to other entities.

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