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NFA requests comments on proposed notice regarding automated order routing systems

Technology has altered almost every facet of the futures industry, including the traditional order-routing process. The proliferation of new automated order-routing systems (AORS) prompted the CFTC to ask NFA to develop some industry-wide standards for the new systems. NFA's Board assigned this task to the Special Committee to Review Technology. Specifically, the Board asked the Committee to develop standards relating to security, capacity, and controls for AORSs.

On August 31, NFA distributed a proposed Interpretive Notice (Notice) regarding AORSs, and requested comments by September 28. NFA has since extended the comment period to November 15.

Associate General Counsel Kathryn Camp describes the reasoning behind the Board's decision to develop these new guidelines: "Firms know how to supervise telephone orders because they have been doing it for a long time. But because these AORSs are new, they raise some new issues."

Camp adds that the Notice recognizes that supervisory standards don't change with the medium used, but the way those standards are applied may be affected by technology. "The same standards and obligations that apply to taking orders over the phone also apply to taking orders over an AORS. The Board felt it would be helpful to provide Members with guidance on how those standards apply specifically when you're taking orders over an AORS."

While the Notice requires Members to have supervisory procedures in place, it isn't specific about what those must be so that each Member has some flexibility to design procedures that are tailored to its own situation.

"The Notice is designed to try to achieve a middle ground between one-size-fits-all requirements that mandate specific technology and guidelines that are so vague as to be meaningless," says Camp.

The Notice addresses several issues related to AORSs, including security, capacity and credit and risk management controls.

Security
The Notice states that Members who accept orders should adopt and enforce written procedures reasonably designed to protect the reliability and confidentiality of orders and account information at all points during the order-routing process. Members should have procedures addressing authentication of users, encryption of information, firewalls, periodic testing of the AORS's security systems, and system administration.

Capacity
On the subject of capacity, the Notice provides that members should adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient delivery of customer orders and reporting of executions. These procedures should cover capacity reviews, disaster recovery and redundancies, and advance disclosure to customers of both potential systems problems and alternative procedures for customers to use if problems occur. If a Member represents that it maintains a particular capacity or performance level, it should take the measures necessary to achieve that level.

The procedures should also be reasonably designed to handle customer complaints about order delivery and reporting in a timely manner.

Credit and Risk Management Controls
In connection with credit and risk management controls, the Notice states that Members should adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers. In particular, the procedures should address pre-execution and post-execution controls and how to determine which controls apply to a particular customer, fat-finger protections, special considerations for authorizing use of direct access systems, and on-going review of the controls imposed.

The Committee that drafted this Notice is composed of representatives from all areas of the industry involved in order-routing, including FCMs, exchanges, end users and third party vendors. The Committee also sought input from industry trade organizations and NFA's FCM, IB and CPO/CTA Advisory Committees.

After the comment deadline has passed, the Committee will consider all the comments and make its recommendations to the Executive Committee and the Board.

The text of the entire Notice is available at NFA's web site: www.nfa.futures.org/news/newsNotice.asp?ArticleID=237. Copies of the Notice can also be obtained by calling NFA's Information Center at (800) 621-3570.

Comments should be sent to Kathryn Camp, Associate General Counsel, and should be received by November 15, 2001. They can be filed by e-mail at: kcamp@nfa.futures.org, via fax at (312) 781-1523, or by mail at National Futures Association, 200 West Madison St., Ste 1600, Chicago, IL 60606. Questions can be directed to Kathryn at the above e-mail address, by telephone at (312) 781-1393.

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