Electronic trading and order routing systems differ from traditional open outcry pit trading and manual order routing methods. Transactions using an electronic system are subject to the rules and regulations of the exchange(s) offering the system and/or listing the contract.
» Disclosure Statement
FIA Issues DMA Risk Recommendations (April 27, 2010)
The FIA has issued a report that recommends a number of principles for managing the risks in direct access to exchanges. This type of arrangement has become increasingly common among derivatives exchanges in many parts of the world. The report recommends that exchanges establish certain risk controls and apply those risk controls across all trading firms. This will ensure a level playing field in terms of the latency of trading and avoid creating competitive pressures among clearing firms and trading firms to reduce the latency of trading by applying fewer risk controls. The report was drafted by a working group consisting of representatives from derivatives exchanges, clearing firms and trading firms. The report is the latest in a series of FIA initiatives that promote best practices in the listed derivatives markets worldwide.
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FIA comments in response to IOSCO's report on Direct Electronic Access
The Futures Industry Association on May 26, 2009 submitted comments to the International Organization of Securities Commissions regarding its consultation paper on direct electronic access. The comments covered a number of issues, including minimum customer standards, the importance of legally binding agreements, the delegation of access privileges, customer identification, pre- and post-trade information, and risk systems and controls. The FIA highlighted some of the findings in its September 2007 joint study with the Futures and Options Association on risk controls, and emphasized that futures commission merchants rather than regulators are best situated to determine appropriate risk management for their business.
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FIA Publishes Survey of DMA Risk Management Practices
On Dec. 3, 2007, the Futures Industry Association published a six-page “profile” on the practices used by exchanges and futures commission merchants to monitor and manage the risks of clients that access exchanges directly. The paper summarized the practices in place at six exchanges: the Chicago Board of Trade, the Chicago Mercantile Exchange, Eurex, IntercontinentalExchange, Liffe and the New York Mercantile Exchange.
The paper also reviewed risk management practices in use among futures commission merchants, such as establishing access to the client’s own pre-trade risk controls and automating post-trade risk calculations. The FIA initiated the project in response to the growth of a type of direct market access that is significantly different, from a risk perspective, than traditional types of order routing access. In order to reduce latency and to have more control over their trading environment, a number of market-making firms, financial institutions, and funds wish to electronically access futures exchanges directly without passing through an FCM’s infrastructure. This makes traditional forms of pre-trade risk management less effective, and in response the industry has developed various methods for monitoring this type of trading activity and managing the associated risks.
Survey of DMA Risk Management Practices
For additional information about this type of direct market access and the associated risk management issues, see the following articles in
Futures Industry:
Pure Direct Market Access on the Rise
By Stephane DiTullio
http://www.futuresindustry.org/fi-magazine-home.asp?a=1080 Fast and Furious: Risk Management in a DMA Environment
By Nina Mehta
http://www.futuresindustry.org/fi-magazine-home.asp?a=1138 Clearing the Deck: CME Introduces “Drop Copy” Functionality
By Sarah Rudolph
http://www.futuresindustry.org/fi-magazine-home.asp?a=1203
