The Municipal Securities Rulemaking Board is urging the Securities and Exchange Commission to give it more time to comply with proposed rules that would require it to develop, test, maintain and monitor the technological systems that are integral to its operations as well as clarification about the extent to which the rules would apply.
The board made the request in a 41-page comment letter on the Systems Compliance and Integrity (SCI) rules the SEC proposed on March 7.
Those proposed rules, which would replace a current voluntary compliance program, would require self-regulatory organizations, certain alternative trading systems, plan processors and exempt clearing agencies to have comprehensive policies and procedures in place surrounding their technological systems to insulate the markets from vulnerabilities posed by systems issues that could arise.
Currently there are no rules governing the automated systems of SROs and national securities exchanges. Instead for the past two decades, most of them have voluntarily adhered to a set of principles articulated in the SEC’s Automation Review Policy (ARP) and participated in an ARP Inspection Program.
The SEC felt enforceable rules should be adopted to replace this voluntary system as high-speed automated trading and alternative trading systems have heightened the potential for a technological problem to broadly impact the markets. The SEC cited the Mary 6 flash crash, the systems issues that arose during the initial public offering of Facebook stock, and the closing of U.S. markets in response to Superstorm Sandy, as examples.
The proposed SCI rules would apply to 44 “SCI entities,” including the MSRB. The board is one of 15 SCI entities that have never participated in the SEC’s ARP, which is focused on trading, clearance and settlement, as well as order routing systems that the MSRB’s systems do not support.
The MSRB described its market transparency and disclosure systems for the SEC and noted that “submitters to these various ‘systems’ consist of both municipal securities dealers, which the board regulates, and muni issuers and borrowers, which it does not.
In its comment letter, the MSRB said that while it “has adopted its own rigorous policies and procedures” and would fully support strengthening them, some aspects of the proposed SCI rules “should be clarified or modified” and their scope should be “more narrowly tailored or, in the alternative, … implemented … in multiple phases.”
The board told the SEC, “the MSRB and other SCI entities that do not participate in the ARP should be provided a meaningful transition period, in addition to any transition period provided to those SCI entities that participate in the ARP, in order to come into full compliance with Regulation SCI in an orderly and effective manner.”
The MSRB said it and other SCI entities that have not taken part in the ARP should be viewed as voluntary participants during this transition period, “which should last for at least one full year to permit a measured transition to full compliance during the course of a complete annual cycle.”
The board also wants clarification on such issues as whether market data systems would both data-drive and document-based systems.