2010 Comment Letters
|Date:||March 25, 2010|
|Topic:||Risk Management Controls for Brokers or Dealers with Market Access|
The Federal Reserve Bank of Chicago’s Financial Markets Group appreciates the opportunity to provide comments on the Securities and Exchange Commission’s new Rule 15c3-5 that addresses issues related to high frequency trading and unfiltered sponsored access.
In the past decade, the convergence of decimalization, advances in technology, and algorithmic trading have placed pressures on trade intermediaries and exchanges to reduce the latency of both trade entry and quotation receipt. This high frequency trading environment has, in turn, created demand for unfiltered sponsored access and co-location services from high frequency trading firms.
On the whole, high frequency trading would appear to be beneficial to our financial markets, as evidenced by tighter bid/offer spreads and greatly increased speeds of execution. Tighter bid/offer spreads have been attributed to high frequency trading activity in the academic literature. Furthermore, it is noted in the Commission’s recent Concept Release on Equity Market Structure, the average execution time of small immediately executable orders went from 10. seconds in 2005 to 0.7 seconds in 2009. This is undoubtedly due at least in part, to the liquidity provided by high frequency trading activity. In addition, we note that high frequency trading was not, to our knowledge, a source of problems during the recent market turmoil.
That being said, the competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response. This letter presents our perspective on appropriate methods for controlling risks inherent in a high frequency trading environment in order to maintain fair and orderly markets.
Prepared by David Marshall, Carol Clark, Richard Heckinger and John McPartland.
2007 Comment Letters
|Date:||March 15, 2007|
|Topic:||Intraday Liquidity Management and Payment System Risk Policy|
|Description:||The Federal Reserve Bank of Chicago submitted a public comment on the Board of Governors' Consultation Paper on Intraday Liquidity Management and Payment System Risk Policy (Docket No. OP-1257) on March 15, 2007. The Consultation Paper noted that banks frequently delay the release of large-value Fedwire payments until late in the day, raising operational and systemic risk concerns. The Bank's comment focused upon reports that Fedwire payments associated with the settlement of exchange-traded derivatives contracts, which are both systemically important and time-sensitive, have been routinely delayed. In preparing the comment, Bank staff analyzed confidential settlements data and was able to corroborate for the first time in a systematic way anecdotal reports of delay. The comment letter pointed out that late-in-the-day bunching of settlement payments could have adverse consequences during periods of financial turmoil, an additional reason for the Board's expressed policy concerns. To address these concerns, the Bank endorsed changes to the Federal Reserve's Payments System Risk policy that would result in the reduction or elimination of daylight overdraft charges for fully collateralized overdrafts. President Moskow submitted the comment letter on behalf of the Bank, together with a staff commentary prepared by Carol Clark, David Marshall, and Robert Steigerwald from the Financial Markets Group. Nicholas Buchholz and Victor Lubasi provided valuable assistance in the preparation of the letter.|
2004 Comment Letters
|Date:||June 8, 2004|
|Topic:||Recommendations for Central Counterparties|
|Description:||The Bank for International Settlements' (BIS) Consultative Report of the Task Force on Securities Settlement Systems entitled Recommendations for Central Counterparties set out comprehensive standards for the design, operation, and oversight of securities settlement systems that utilize a central counterparty (CCP) in the clearing and settlement of financial transactions. With Chicago as the home for a number of important exchanges and commercial banks that provide settlement services to market participants, the Federal Reserve Bank of Chicago (FRBC) has a special interest in the formulation of such standards. In its response, FRBC indicated that it believes, on balance, the recommended standards are sufficiently comprehensive and flexible to be useful for their intended purpose. The FRBC response also suggests certain revisions concerning the scope and application of the recommendations that it believes would be helpful. The submission includes a letter from President Moskow accompanied by a paper authored by an interdisciplinary team that included Richard Lamm, John McPartland, Tara Rice, and Robert Steigerwald.|
2001 Comment Letters
|Date:||November 16, 2001|
|Topic:||Policy Statement on Payments System Risk-- Potential Longer-Term Policy Direction|
|Description:||The Board requested comment on the benefits and drawbacks of various policy options that it is evaluating as part of a potential longer-term direction for its payments system risk ("PSR") policy. In a letter written by President Moskow, the Chicago Federal Reserve Bank indicated its support for ex ante monitoring against credit limits while it recognized and addressed universal real-time monitoring issues related to the processing of automated clearing house transfers and payments. In addition, the Bank also expressed its belief that a multi-tier pricing structure for daylight overdrafts should be adopted, recommending that there be no (or only a nominal) charge for daylight overdrafts to the extent that they are fully collateralized. Changes to the net debit cap levels for depository institutions that have access to Reserve Bank provided intraday credit were also supported. President Moskow's letter was accompanied by a paper authored by Eve Boboch, Richard Lamm, Jerry Nick, Ralph Schnackel, and Robert Steigerwald.|
|Date:||August 1, 2001|
|Topic:||Payments System Risk (Collateral)|
|Description:||The Board of the Federal Reserve System recently adopted an interim policy statement permitting depository institutions with self-assessed net debit caps to incur daylight overdrafts in excess of their net debit cap levels by pledging collateral to the Federal Reserve. The Board has requested comment upon all aspects of the interim policy statement. The Federal Reserve Bank of Chicago chose to comment on questions regarding the benefits and drawbacks of allowing depository institutions with self-assessed net debit caps to pledge collateral for additional daylight overdraft capacity and on whether the interim policy would cause institutions to pledge additional capital to the Federal Reserve. The attached letter from Michael Moskow, President and Chief Executive Officer, incorporates research prepared by Richard Lamm and Robert Steigerwald.|
|Date:||May 31, 2001|
|Topic:||New Basel Capital Accord|
|Description:||The Basel Committee on Banking Supervision issued a request for comment on a more detailed capital adequacy framework to replace the 1998 Accord. The Federal Reserve Bank of Chicago responded to questions regarding credit risk, risk mitigation, and operational risk. The comment paper was authored by Robert Bliss, Doug Evanoff, Jon Frye, Jeffrey Kvistad, Catharine Lemieux, Jim Moser, and Robert Steigerwald.|
|Date:||April 9, 2001|
|Topic:||Joint Recommendations for Securities Settlement Systems|
|Description:||The IOSCO (International Organization of Securities Commissions) has developed the Objectives and Principles of Securities Regulation, and the CPSS (Committee on Payment and Settlement Systems) of the central banks of the Group of Ten Countries has just produced the final version of the Core Principles for Systematically Important Payment Systems. Building on this work, the CPSS and the IOSCO are now aiming to contribute further to this process by jointly developing recommendations for securities settlement systems, to improve the safety and efficiency of these systems. The Chicago Reserve Bank supports these efforts. In addition to continued endorsement of the Bank's September 2000 comments regarding the CPSS report, this letter expresses Chicago's agreement with the approach the Joint Task Force took in its recommendations regarding assets used to settle the cash leg of securities transactions. William Bergman, James Moser, Richard Lamm, and Robert Steigerwald contributed to the attached response from Michael Moskow, President and Chief Executive Officer of the Federal Reserve Bank of Chicago.|