Global Financial Markets:

International Coordination Can Help Address Automation Risks

IMTEC-91-62: Published: Sep 20, 1991. Publicly Released: Sep 20, 1991.

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GAO reviewed how major and emerging securities and futures markets operating in the international marketplace use or plan to use automation for such market functions as order routing and execution, information dissemination, and clearance and settlement, focusing on: (1) the extent of automation; (2) potential automation risk; (3) regulatory oversight of automation; and (4) global coordination.

GAO found that: (1) most major and emerging financial markets have automated or plan to automate all or some of their market functions due to such considerations as efficiency, competition, and market expansion opportunities; (2) market officials say they are aware of automation risks and have taken steps to address such risks, but methods and degrees of addressing such risks vary widely; (3) oversight is limited and uneven and the roles of national regulators vary considerably; and (4) although several international organizations have projects under way that focus on selected aspects of automation, none are focusing on an overall approach to developing systematic, coordinated actions to address automation risks.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CFTC remains concerned that any effort to mandate more specific standards could stifle innovation in the competition for developing the most efficient trading mechanism. CFTC, however, continues to participate in global efforts to identify and address the challenges of automation to existing regulatory systems.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, SEC and CFTC, should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as IOSCO, G-30, and FIBV, to develop global principles and risk-management techniques to address automation risks and actively work with international markets to gain their acceptance and use.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: To date, international regulators have developed systems risk management based on the system itself and the rules of the applicable market. The IOSCO Working Group, chaired by CFTC, deliberately sought to avoid the impression it was developing or promoting specific "regulatory standards" other than the concerns which regulators should address in the context of their unique market practices.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, SEC and CFTC, should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as IOSCO, G-30, and FIBV to frame the global issues that should be addressed, to ensure that such areas as security, capacity, contingency planning, and independent technical reviews are addressed.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC agreed that IOSCO offers an appropriate forum for discussing such specific issues as capacity planning and disaster recovery. However, future actions taken by SEC will determine whether such a forum will be used.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, SEC and CFTC, should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as IOSCO, G-30, and FIBV to frame the global issues that should be addressed, to ensure that such areas as security, capacity, contingency planning, and independent technical reviews are addressed.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: International forums currently exist within which the automation issues identified by this report have been, and continue to be, addressed. Among the areas of common regulatory concern are the issues of security and system vulnerability, system access, and financial integrity. CFTC continues to participate in these forums.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as the International Organization of Securities Commissions (IOSCO), the Group of Thirty (G-30), and the Federation Internationale des Bourses de Valeurs (FIBV), to create an international forum to discuss and debate automation issues and risks.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: SEC agrees that market regulators in those countries that have developed as global equity markets that rely heavily on automated trading, information dissemination and clearance, and settlement systems should continue efforts to explore the development of regulatory principles regarding the risk that automated systems expose. SEC also agrees that IOSCO offers an appropriate forum for such issues.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as the International Organization of Securities Commissions (IOSCO), the Group of Thirty (G-30), and the Federation Internationale des Bourses de Valeurs (FIBV), to create an international forum to discuss and debate automation issues and risks.

    Agency Affected: Commodity Futures Trading Commission

  6. Status: Closed - Implemented

    Comments: SEC believes that market regulators in those countries that have developed as global financial markets that rely on automated trading, information dissemination, and clearance should continue to develop regulatory principles regarding the risks that automated systems expose.

    Recommendation: In order to foster dialogue in world financial circles and shape policies that can effectively deal with the risks associated with automation, the Chairmen, SEC and CFTC, should actively identify and take advantage of opportunities to address automation risks with the international financial community. This could be accomplished through existing organizations such as IOSCO, G-30, and FIBV, to develop global principles and risk-management techniques to address automation risks and actively work with international markets to gain their acceptance and use.

    Agency Affected: Commodity Futures Trading Commission

 

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