ATS and SEF Platform Reviews
Alternative Trading System (ATS)
In addition to Regulation SCI, which brings qualified ATSs into scope, SEC Rule 301 requires registered ATSs to adhere to strict guidelines, which include:
- Capacity, integrity, and security of automated systems
- capacity estimates
- capacity stress testing
- system development and testing methodologies
- data center vulnerabilities
- contingency and disaster recovery plans
- Fair Access
- Examinations, Inspections and Investigations
- Data Protection
Furthermore, Rule 301 requires that an annual review be conducted to ensure the ATS remains in compliance. Jordan & Jordan will conduct a thorough review of the ATS’s current practices, processes, and procedures related to Rule 301 to determine the level of compliance; any gaps will be identified that may exist between the current and required states; recommendations will be provided to improve compliance.
- For an Alternative Trading System, Jordan & Jordan performed a thorough review of its current practices, policies, processes and procedures related to SEC Rule 301 ("Reg ATS") to determine its level of compliance with the Rule. For this client Jordan & Jordan reviewed their written supervisory procedures, system development and testing methodologies, capacity planning program, system security, and business continuity plan. Jordan & Jordan identified gaps existing between current and required states, and offered recommendations for improvement.
Swap Execution Facility (SEF)
With Interest Rate and Credit Default Swaps already “Made Available to Trade” (MAT) and the remaining OTC derivative instruments coming into scope by the end of 2015, SEFs must ensure that they are compliant with all US regulations. Currently only provisionally registered, SEFs can expect to come under additional scrutiny as they seek full registration with the CFTC. Generally, SEFs must ensure the following:
- Rulebook compliance with CFTC regulations (Core Principles, General Provisions, Part 17 of the Code of Federal Regulations)
- Validation that Rulebook is being followed in daily operations of the SEF
Jordan & Jordan has kept at the forefront of OTC derivatives reform. Having already validated existing SEFs technological compliance with CFTC rules, we are aware of the common gaps as well as industry market practices that are evolving. While the scope of our audit will vary from platform to platform, we will focus on:
- Risk Controls
- Trade Surveillance
- Data Storage and Management
- Trading System Order and Matching Functionality
- Entitlements and Data Protection
- Clearing and Reporting Functionality
- For a CFTC-registered Swap Execution Facility (SEF), Jordan & Jordan assessed the platform’s compliance with CFTC Core Principles and General Provisions. The review examined specific features and functions of the trading system, including business rules put in place to facilitate quotes, orders and trade executions, and the clearing and reporting of trades. Jordan & Jordan provided recommendations to enhance SEF compliance and bring technology in line with industry best practices.
SEC Rule 17a-4 and CFTC Rule 1.31 Compliance
SEC Rule 17a-4 and CFTC Rule 1.31 govern the recordkeeping and storage requirements for US registered broker dealers.
To meet the requirements of these rules, a firm may employ “electronic storage media" capable of the following:
- Preserve the records exclusively in a non-rewriteable, non-erasable format
- Verify automatically the quality and accuracy of the storage media recording process
- Serialize the original and, if applicable, duplicate units of storage media, and time-date for the required period of retention
- Create and store duplicate copies of records at a location separate from the original
- Create and maintain an audit trail available for examination
The addition of electronic media has opened the field to many products, services and solutions that can enhance compliance, but adds complications as firms’ compliance activities are overseen by technologists rather than compliance personnel.
Jordan & Jordan’s technology team has extensive experience in reviewing broker-dealers’ technology systems’ compliance with 17a-4 and 1.31. Many firms assume their recordkeeping requirements are in compliance, though SEC and CFTC language is very specific in how data must be stored and accessed. Our team can test your existing books and records storage to make sure it is compliant with SEC and CFTC regulations and provide technology and vendor recommendations that best suit your firm’s needs.
- For a provider of Cloud Computing, J&J completed a detailed analysis and review of their capability to provide broker-dealers the ability to store their books and records information in a manner compliant with the Securities and Exchange Commission (SEC) Regulation 17 CFR 240.17a-4 and CFTC Rule 1.31.