(Adds details, vote, comments from SEC's Walter, Aguilar)
By Sarah N. Lynch
WASHINGTON, March 7 U.S. securities regulators
proposed new rules on Thursday that would require exchanges,
clearing agencies and other kinds of trading platforms 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 SEC's four commissioners unanimously agreed to put the
plan out for comment, saying the rules are critical to
preventing market disruptions that can unnerve investors.
"While it is not possible to prevent every technological
error each market participant may commit, as the overseer of our
securities markets, it is the commission's responsibility to
ensure that our regulations are designed to minimize their
impact on our markets and ultimately investors," said SEC
Chairman Elisse Walter.
The proposal requires roughly 44 different entities
including exchanges, clearing agencies and trading platforms
known as "alternative trading systems" that meet certain volume
thresholds to establish procedures to ensure the capacity,
integrity, security and resiliency of their systems.
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.
The SEC's proposal, if adopted, would replace a long-time
voluntary standard known as "automation review policies" or ARP.
In replacing voluntary guidelines with rules, it means the
SEC would be able to take enforcement action against violators.
However, the proposal also outlines a safe harbor that firms can
follow to help give them some legal protection.
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.
Still, not everyone on the commission on Thursday was fully
satisfied that the draft proposal is robust, despite the
unanimous vote to put it out for comment.
SEC Commissioner Luis Aguilar, a Democrat, said he is
worried the proposal does not mandate compliance with a specific
set of standards, and offers instead only a set of model
He also said he does not like how the plan provides a "safe
harbor" that would protect firms and their employees as long as
they have policies that are reasonably designed to comply with
"An unprecedented safe harbor in a rule that does not
require clear, identifiable, and meaningful standards, and that
does not require policies and procedures to be reviewed by an
independent third party and certified by senior officers, will
result in a rule proposal that falls short of its goal," Aguilar
(Reporting by Sarah N. Lynch; additional reporting by Emily
Stephenson; Editing by Bernadette Baum, Bernard Orr)