[about 15 minutes after meeting start]... 80, which requires that AT persons implement certain risk controls. Regulation 1.80 would require AT persons to implement pre-trade risk controls, order cancellation systems and other measures reasonably designed to prevent market disruption caused by an algorithmic trading malfunction. The required pretrade risk controls are maximum order method frequency and maximum execution frequency per unite time, order price parameters, and maximum order size limits. The regulation would also require order cancellation systems with ability to immediately disengage algorithmic tradeing and prevent submission of new orders. Consistent with comments received in response to the concept release, proposed 1.80 provides market participants latitude in the design of required controls and in fact requires only a small number of specific controls that the Commission understands of already widely implemented by likely AT persons. PROT posed regulation does not mandate specific limits, calibrations or even vendor technologies that AT persons must use in implementing the required controls. With respect to clearing member FCMs, reg AT proposes new regulation 1.82 to require clearing FCMs to implement pretrade risk and other controls with respect to their AT person customer. Proposed 1.82 requires that clearing FCMs implement the same types of pretrade and other risk controls described above with respect to AT persons. The location of the pretrade and other risk controls that would be required of clearing FCMs varies according to whether orders from AT person customer are placed through DEAn or intermediated by clearing FCM. In the case of algorithmic trading orders submitted through DEA, the pretrade and other risk controls would be established by and located at the VCM, but be controlled or calibrated by the clearing FCM. For nonDEAn algorithmic trading order the controls would not reside at the VCM. The clearing FCM itself would establish the pretrade risk and other controls with respect to such orders. Finally, as to risk control requirementos VCMs, reg AT includes new regulation 40.20, that would require VCM to establish pretrade and other risk control designed to address the risks that may arise from algorithmic trading on the VCM. The controls required of VCM in regulation 40.20 are similar to those required of AT persons and proposed 1.80 and of clearing member FCMs in 1.82. Regulation 40.20 also would require pretrade risk controls and order cancellation capabilities for orders that do not originate from algorithmic trading. Reg AT would address the development, monitoring and compliance of ATSs. Proposed regulation 1.81 requires AT persons to adopt written policies for developing, testing and monitoring their ATS'ss. Taken together the goal of requirements standardize set of principles in order to reduce the operational risk of ATSs. To provide two examples of these procedures, regulation 1.81 would require AT persons to implement written policies and procedures for the development and testing of ATSs, so as to better identify coding errors and other problems that could arise in lie of trading. Regulation 1.81 would also require each AT person to implement written policies and procedures to designate and train staff responsible for algorithmic trading. >> In addition to provisions described by Marilee Dahlman regarding pretrade and other risk controls, reg AT includes several important initiatives addressing transparency, market make SXER trading incentive programs and self-trading on DCF. Each has come in greater focus through increased auto MAGSZ of market and market participants. With respect to transparency, reg AT would codify two important requirements, first, the proposed rules amend existing Commission regulations to enhance transparency around the design and operation of VCM electronic matching platforms. Existing Commission regulation 38.401 requires VCM to disclose to Commission and the public, information regarding the rules and specifications of their electronic matching platforms. PROT posed amendments 38.401 would clarify DCM include disclosure of known attribute of platform, materially impact market participant orders. This could include for example, attributes that impact time or priority of an order, or attributes that impact dissemination of market data or confirmation to market participants. Second, reg AT require DCMs to provide commission and the public with additional information regarding their market make SXER trading incentive programs. Again, build og existing Commission requirements, proposed regulation 40.25 would require DCMs to provide information regarding eligibility criteria, program payments or benefits and market participants obligations pursuant to market maker or trading incentive program. The proposed rules would also require DCMs to implement SXLS procedure reasonably designed to prevent payment of program benefits for trades between accounts that are known to the DCM as being under comment ownership. With respect to self trading, reg AT focusos transparence and he prevention. The proposed rules require new regulation 40.23, that DCMs apply tools reasonably designed to prevent self trading. PROT posed rule define self trading as matching of orders for accounts that have common beneficial ownership or under common control as known by the DCM identified to it by market participants. In response to public comments on the concept release, PROT posed rules allow DCMs to exertion discretion and design and implementation of self-trade prevention tools. For example, DCMs have latitude to prevent self trade between accounts under common ownership if such trades were originated by independent decision-makers. While allowing for such permitted self trade, the rules would require DCM quarterly statistics regarding amount of permitted self trading occur og markets. Finally, help ensure reg AT remains current as markets and trading technology evolve, the proposed rules leverage the role of registered future associations, such as NFAn and the Commission oversight regime. Reg AT require new regulation 170.18 that all AT persons become members of RFA. PROT posed rules further require RFAs to consider membership rules addressing algorithmic trading for each category of member in RSA. Taken together provisions allow RFA to supplement reg AT in the future in response to industry developments. Mr. Chairman and members of the Commission this concludes staff's presentation of regulation Automated Training. We note that the Notice of Proposed Rulemaking includes over 160 questions on almost every aspect of PROT posal. Reg AT would be open for 90-day comment period and all comments and responses are highly welcomed. Thank you very much for your time and for your attention, we would be happy to answer questions you may have for us. >> Timothy Massad: Thank you, Sebastian, Marilee Dahlman and everyone on the team for those informative presentations. To begin the Commission's discussion and consideration of this rulemaking, I will now entertain motion to adopt PROT posed rule as presented by the staff. >> So moved. >> Is there a second? >> Second. >> Okay. Let me begin then. We'll each have time for questions or further statements. I don't have questions, I will make comments, I will be issuing a written statement in support of the rule. Or PROT posal, let me just say I strongly support the proposal, I think it contains number of common sense risk controls that I believe recognize the benefits that automated trading has brought to the markets while seeking to protect against the possibility of break down and disruption that can come with it. I think the multi level approach having controls at the exchange, clearing member and the trading firm level is the right one. I also believe the proposal does a good job of reflecting industry best practices and devising standards principles based and not overly prescriptive in this regard, I will just note the release we are issuing today is close to 500 pages. The rule itself is 19 pages. The 465 pages, of course, include preamble, 150 questions, which I think appear twice. The cost benefit considerations, the paperwork reduction act analysis, the regulatory flexibility analysis,all very important elements, the rule itself is 19 pages. I look forward to hearing from market participants and members of the public. I want to highlight a couple features of the rule. The first is the registration requirement for appropriations traders who access the market directly and who engage in algorithmic trading on regulated exchanges. Ensure all those with electronic access to markets complying with pretrade risk controls, testing and other requirements. Among the questions asked, whether there are additional characteristics of algorithmic terms that should be taken into consideration for registration purposes and should all firms trading through direct electronic access be required to register, even if they are not using algorithmic trading. Many requirements we are proposing as staff noted for trading firms -- by many firms, including larger firms, we know however faulty algorithm regardless of size can potentially cause significant problem. As a result, we have proposed standards applicable regardless of size or similar attribute of trading firm. We are cognizant of the importance of establishing effective standard without creating barrier to entry for small firms, therefore, I look forward to public comment on whether requirements we are proposing for trading firms should vary in any way, depending on size or activity level. We've also proposed certain risk controls at the clearing member futures Commission merchant level with respect to customers engaged in algorithmic trading. FCMs play critical role in overall risk management and I support requirements we are proposing today to help achieve effective multi-layer approach. But I look forward to public comment on whether any aspects of those required controls that may pose undue burden on clearing member FCMs or that are unnecessary for reducing RIVENG associated with algorithmic trading. We asked about what technological development would be required by clearing members to comply with requirements of this proposal. I've said often tis very important we have robust clearing member industry and that all customers, particularly smaller ones, are able to access markets effectively and efficiently. So we want to make sure this proposal is consistent with achieving that objective. It is important we achieve proper balance between controls and measures at the exchange clearing member and trading firm level. We will seek efficiency and avoid conflicting or unnecessary requirements among those controls. On this and many other issues, public comments will be very helpful. Let me just conclude by saying I support the proposal as an important step to ensure we are meeting our responsibility to put forth common sense regulation that will minimize the potential for problems that may aright from auto mated trading. I wish to thank the their excellent work. I would like to open the floor to allow Commissioners to ask questions or make comments. First to Commissioner Bowen. >> Sharon Bowen: Thank you. I, too, submitted a statement for your review, I want to highlight a concern that I have that we may not be asking enough about registrant's, particularly for them to submit information section 1.83A. We've all read accounts about firms going to Silicon Valley and colleges to recruit. I think it would be helpful to ask a little bit more about the adequacy of training of employees and so I would hope that with final regulation that we would expand the scope of some of the questions that we would be asking these firms to certify on an annual basis. >> Commissioner Giancarlo. >> Christopher Giancarlo: Thank you, Chairman. I'd like to ask a few questions, PRABs Sebastian, of you. My understanding is currently the Commission or justice Department may only obtain source code from market participant pursuant to subpoena or consent of that party, is that correct? >> Sebastian Pujol: Good morning, Commissioners, to the extent the records are maintained by the certain category of registrants under 1.31, the Commission has authorization potentially under commodity exchange act section 4G, as well as under regulation 1.31, for inspection of records, there is difference between CFTC staff's investigative rights and abilities to obtain copies of information if necessary and of course that is going to be in furtherance of staff's responsibilities to evaluate compliance with the commodity exchange act and the regulations. Separately, the Department of Justice to the extent that records are available for inspection under 1.31, the Department of Justice can inspect can otherwise inspect certain records set forth in regulations. And then -- to the -- >> Excuse me, records I understand, records are records of past activities, but source code intellectual of market participants that would require subpoena or be obtained similarly in the way you are describing? >> So I think during the course of the comment period, there will be some articulation and questions, comments raised about the nature and scope of 1.31 and how far into transactions or records you would be otherwise entitled to reach as part of regular inspection authority, certainly if there is subpoena that is involved, that would be pursuant to whatever authorization issues in connection with the subpoena. >> Christopher Giancarlo: Sure. Neither of us are technologist, but basic technology would say software algorithm is different than a record, one is an operating system, protocol, another one is record of historical or current events. I think there is a distinction when you're asking for information that concerns positions of market participant, but then that is different than an algorithm that would show what in the event of certain future events that market participant would be -- what positions they would take in the event of certain events in the future. Are you saying that subject to interpretation? However? >> Vince McGonagle: I appreciate the comment and question about what is approach of recordkeeping responsibility and whether a record is actually electronic file and if so, does that reach the source code. I think further analysis under 1.31 would tease out the applicability of the books and records requirements there is provision in connection with reg AT, that would treat the Source Code as book and record pursuant to 1.31, so I do think that potentially calls in the right to inspection. >> Do you know whether the sec has right to obtain source code or algorithms from their registrant? >> We have looked at measures the SCF has done that are in parallel to Reg AT. I'm not aware of measures within that particular sort of channel, but I don't know whether SEC authority more broadly allow them to treat this as record. >> Christopher Giancarlo: Certainly the law of international accountancy would treat algorithm software as intellectual property and not as books and records, do you know of any other Federal agency that has the right to obtain intellectual property of registrants without a subpoena? Does the Food and Drug Administration, for example, have the right to obtain Coca-Cola's special formula without a subpoena? >> Sebastian Pujol: So I appreciate that question and I would say that I'm not an expert in that area of the law, so I'm not able to address that, but for system safeguards, for example, expectation is that the Commission oversight responsibility that we would have the ability to again ensure that there is compliance with the commodity exchange act and the regulations recognize that there are significant issues with respect to proprietary information and the need to maintain confidentiality and the balance for regulatory responsibilities and so I think, you know, as we propose MPRM, looking for comment with respect to access to and utilization of this information and furtherance of our responsibilities. >> Christopher Giancarlo: Let's say that this proposal goes forward as you would interpret it and we have this right to say obtain intellectual property algorithms, source code without a subpoena, presumably to special call process, do we have the capabilities here at the Commission to actually do anything with that source code? Can we interpret it? Do we know how to read it? What would we do with it? >> The -- so the ability to pull in the information, you know, on an as-needed basis would have to be evaluated as needed. The nature of request does the coding methodology, is it consistent? Is it generating trading activity that is in violation of the act and the regs? So I would, you know, be in close coordination with the Division of Enforcement, for example, to the extent that they undertook inquiry, have relevant expertise to evaluate cabin and ensure security of information. We also, you know, discussed the fact of inspection, so inspection doesn't mean transfer, doesn't need to mean transfer, the ability to go to the facility and get further information about how that code is being utilize side one of the aspects of regulation 1.31. So I would say that we don't in all instances, would require that source code be transferred over and also, as I mentioned earlier, in looking at oversight from the CFTC perspective, it's in furtherance of our obligations under the act and the reg. So whether there would be some nature and scope of the review of that source code would have to be determined through the Division of Market Oversight with interaction with other divisions to the extent they thought it was important to regulatory responsibility. >> Christopher Giancarlo: Vince, I understand we have the right to inspect, but to obtain the source code. >> Exactly. That is exactly correct, Commissioner. >> Christopher Giancarlo: If we were to obtain the source code, it is unfortunate, but I don't think the Federal government or regulatory agencies have great deal of credibility with the American public in terms of ability to maintain confidentiality of intellectual property and data. How comfortable or what assurance consist we give the public if we do obtain source code from market participants that source code will remain safe and out of the hands of not just competitors, but cyber threats to the market place? >> Commissioner, I certainly appreciate the XHIGSZary responsibility to be ever vigilent with respect to the obligations that it seeks to discharge. We routinely receive confidential information as part of the regular business practices of this organization and we would need to be ever vigilant with respect to those responsibilities. >> Christopher Giancarlo: Thank you. Thank you, Vince. Let me close by thanking the team for their hard work on this. Wife gone into this issue because I do think it is probably one of the more critical elements THF proposal. I continuing is something that merits thoughtful consideration by the public and certainly an area where I will be looking carefully. We did a little bit of research in the small amount of time we had, can't find other precedent Federal for agencies obtaining since TEF market participant. Be interested in the public commentos that and weeks and months to come to educate better on that. Thank you. >> Timothy Massad: Anything else? >> Just follow-up, certainly the confidentiality of information is always a key requirement of the law, as well as a thing we always must keep our eyes on. There is plenty of commercially sensitive information, I think that, we get in the course of our oversight activity and our supervision activity. And I'm certainly happy to look further at the rules' implication with respect to source code, but I think it's -- I'm not sure that I see that there's a difference in qualitatively, if you will, given we are constantly receiving all sorts of confidential and highly commercially sensitive information. As to our ability to analyze an algorithm, I've said repeatedly that we need to invest more in IT, to enhance our systems generally given the electronification and increasing automation of the markets, but I think given the out standing work of enforcement division in looking at matters involving spoofing and so forth, I'm -- I would expect they've done plenty of analysis of algorithms and deconstruction of algorithms in their case. If there's no other questions, I would again like to thank the staff for their work and presentations today. Having concluded the discussion, would any Commissioner like to make further statement before we proceed to vote? All right. If so then, the Commissioners prepared to vote, if so, Mr. Kirkpatrick, call the rule. >> The motion now before the Commission is on the adoption of Notice of Proposed Rulemaking on regulation Automated Training. Commissioner Giancarlo? >> Aye. >> Commissioner Giancarlo, aye. >> Commissioner bowen? >> Sharon Bowen: I >> Commissioner bowen, Aye. >> Chairman Massad. >> Aye. >> Chairman Massad, aye. The aye's have three and no's have zero.