The Securities and Exchange Commission agreed Thursday to propose a rule that would require self-regulatory agencies, including the Municipal Securities Rulemaking Board, and other entities to meet new technology standards that would better insulate the financial markets from technological disruptions or failures.
The four SEC commissioners voted unanimously to move forward with the proposed rule, called Regulation SCI, an acronym for systems, compliance and integrity.
“The rule would require entities essential to the smooth functioning of the U.S. securities markets to have comprehensive policies and procedures regarding their technological systems,” SEC chairman Elisse Walter said at the meeting to consider whether to propose the rule.
It would “help to ensure that our U.S. securities markets are better insulated from disruption from technology failures and deficiencies in controls by requiring that significant market venues are held to enhanced and more explicit technology and control standards,” she added.
Walter said the rule would also apply to alternative trading systems, plan processors and exempt clearing agencies.
The SEC noted in a release that securities markets rely more heavily than ever on technology and that high-speed automated trading on national securities exchanges and ATS’ heighten the potential that a technology problem will broadly affect the markets.
There currently are no mandatory rules governing the systems of SROs like the MSRB and Financial Industry Regulatory Authority, said the SEC.
For ten years, SROs and other entities have followed voluntary principles set out in the SEC’s Automation Review Policy, and participated in an inspection program.
Regulation SCI would establish a formal regulatory framework that would require the MSRB and other entities to carefully design, develop, test, maintain and surveil systems integral to their operations, Walter said. The rule would require them to provide system disruption notifications to the SEC and others.
Walter said in a Feb. 19 speech that Regulation SCI has roots in the “Black Monday” incident 25 years ago, when investors overwhelmed technology systems during the day’s massive sell off.