Financial Markets:

Active Oversight of Market Automation by SEC and CFTC Needed

IMTEC-91-21: Published: Apr 2, 1991. Publicly Released: Apr 2, 1991.

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GAO assessed the Securities and Exchange Commission's (SEC) and the Commodity Futures Trading Commission's (CFTC) oversight of automated futures and securities trading and post-trading systems.

GAO found that: (1) in response to several GAO reports and recommendations regarding various security and internal control weaknesses, SEC and CFTC took preliminary steps to oversee the development and operation of automated systems, but lacked the technical capabilities needed to control automation risks; (2) SEC disagreed with recommendations to establish such technical capability, citing that it was more cost-effective to rely on exchanges to self-monitor automation operations; and (3) CFTC agreed with the recommendations and took some steps to establish the technical capability, but noted that other priorities and limited resources could impede its efforts. GAO believes that: (1) until SEC and CFTC more aggressively establish the technical oversight capabilities to control automation risks, they cannot ensure that the nation's markets will continue to provide efficient, fair, and equitable treatment to participants; and (2) both SEC and CFTC need to keep their congressional oversight committees apprised of their efforts.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CFTC is in the process of hiring a technical expert to perform and oversee automated market system reviews. CFTC issued a vacancy announcement in October 1991, but did not select a candidate and plans to issue another announcement in March 1992. The CFTC task force created to establish market systems development and operations policies has not met in a year, and CFTC questions its necessity.

    Recommendation: The Chairmen, SEC and CFTC, should move to more aggressively establish the technical oversight capabilities to control the risk associated with automation. Such capabilities should include the needed technical expertise to establish policies governing the development and operation of market systems and perform and oversee technical reviews of automated trading and post-trading systems.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: In response to IMTEC-92-16, SEC replied that it has decided to increase substantially the size of its technical staff in the Office of Automation and International Markets. This expansion is intended to provide SEC with adequate resources to address its automation oversight responsibilities.

    Recommendation: The Chairmen, SEC and CFTC, should move to more aggressively establish the technical oversight capabilities to control the risk associated with automation. Such capabilities should include the needed technical expertise to establish policies governing the development and operation of market systems and perform and oversee technical reviews of automated trading and post-trading systems.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: CFTC is in the process of hiring technical staff to oversee exchanges' automated systems and does not intend to develop a timetable.

    Recommendation: The Chairmen, SEC and CFTC, should provide timetables for developing their technical capabilities to their agencies' congressional oversight committees.

    Agency Affected: Commodity Futures Trading Commission

  4. Status: Closed - Implemented

    Comments: SEC has not decided to develop such a timetable.

    Recommendation: The Chairmen, SEC and CFTC, should provide timetables for developing their technical capabilities to their agencies' congressional oversight committees.

    Agency Affected: United States Securities and Exchange Commission

 

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