Academic Paper Investigates Advantage for High-Frequency Traders in SEC Dissemination Process

Academic researchers from the University of Colorado and University of Chicago published a paper titled “Run EDGAR Run: SEC Dissemination in a High-Frequency World,” which finds that the delay between an SEC filing’s acceptance by the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) and its initial public availability on the SEC website, may provide an advantage to certain traders that pay a subscription fee for direct access.

According to the paper, while the delay is “relatively short,” with a median posting time of 36 seconds, prices, volumes, and spreads respond to the filing news beginning around 30 seconds before public posting. Therefore, the paper finds, some computer-driven market participants may be taking advantage of this posting delay.

The paper states that the findings “show that the SEC’s process for the dissemination of insider filings (and likely other types of filings as well) is not a level playing field.” The paper’s research is related to the recent literature on high-frequency trading, providing evidence that there are opportunities for certain traders to profit by trading on delays in the public dissemination of information.

In response to the findings, an SEC spokeswoman stated that the SEC is “conducting a thorough assessment of the dissemination process, including timing increments, and will make any system modifications that may be necessary to optimize the dissemination of information to investors and the markets.”

Lofchie Comment: Although the paper demonstrates a supposed “flaw” in the means by which the SEC disseminates information, this ought not be embarrassing to the SEC. Rather, the paper should be taken as evidence of just how difficult it is to perfectly control and transmit public information to all investors, given the increasing complexity of technology and the continuing rapidity of technological progress. Query: how would the SEC have dealt with a similar “flaw” had it occurred with a private market participant: by bringing an enforcement action or, as we have advocated, by using it as an industry-teaching experience?

If the SEC, or other U.S. regulators, treat each technological problem that occurs with a market participant as cause for an enforcement action, the result is that market participants have no incentive to share information as to problems that they discover. On the other hand, a regulatory culture that incentivizes the sharing of information as a response to technological problems may result in shared incentives to solve those problems.

See: Run Edgar Run: SEC Dissemination in a High-Frequency World” by Jonathan Rogers, Douglas Skinner, and Sarah Zechman.
See also: Wall Street Journal Article; New York Times Dealbook Article.


IOSCO Updates Information Repository for Central Clearing Requirements for OTC Derivatives

IOSCO released an update of its information repository for central clearing requirements for OTC derivatives, which provides regulators and market participants with consolidated information on the clearing requirements of different jurisdictions.

The repository sets out central clearing requirements on a product-by-product level, as well as any exemptions from them.  According to IOSCO, the intention of the repository is to assist authorities in their rulemaking and participants in complying with relevant regulations in the OTC derivatives market.

See: IOSCO Information Repositories; IOSCO Press Release.


British Regulators Launch “Fair and Effective Markets Review”

British regulators announced the launch of a consultation document to solicit views on fixed income, currency and commodity (“FICC”) markets. The consultation document is part of the Fair and Effective Markets Review (“FEMR”), which is led by Deputy Governor of the Bank of England Minouche Shafik, CEO of the Financial Conduct Authority (“FCA”) Martin Wheatley, and U.K. Treasury Director General of Financial Services Charles Roxburgh.

The document begins with an overview of a number of major trading and manipulation violations in FICC markets, including the manipulation of benchmarks in interest rates and foreign-exchange markets. The document uses a six-part framework to assess the most critical sources of vulnerability and identify potential solutions from the perspectives of structure and conduct:

  • structure: market microstructure, competition and market discipline, and benchmarks; and
  • conduct: standards of market practices, responsibilities, governance and incentives, and surveillance and penalties.

In a speech before the London School of Economics, Ms. Shafik announced the launch of the consultation document. According to Ms. Shafik, the primary aim of the FEMR is to “take stock” of the FICC markets and ensure that everything is being done to make them fair and efficient.

Two of the questions asked in the consultation document are these: whether some markets lack sufficient competition, and whether speedier electronic trading might benefit investors in certain thinly traded assets. Areas of concern discussed in the document include the following: (i) the way in which new issues of bonds are allocated between investors, (ii) the distinction between legitimate trading activity and market manipulation, and (iii) the lack of common standards for assessing whether a client is sufficiently sophisticated to invest in certain products.

Regarding governance and incentives, the document poses these questions: whether more can be done to improve the manner in which individuals are appraised and promoted, and whether firms need better safeguards against inappropriate staff moves and influence. Additionally, the document asks whether the competition between banks in the main wholesale markets is insufficient.

Responses to the consultation document are due by January 30, 2015 and should be sent by email to

Lofchie Comment: The tone of the review strongly suggests that market participants should expect more regulation, although the report does concede some of the potential negative effects of heavy and expensive regulation, including decreased liquidity.

See: FEMR Consultation Document; Ms. Shafik’s Speech; Bank of England Press Release; London School of Economics Press Release.


FRB Issues Final Rule Amending Regulation HH, Revises Policy on Payment System Risk

The Board of Governors of the Federal Reserve System (“FRB”) issued a final rule amending Regulation HH risk-management standards for financial market utilities that have been designated as systemically important by the Financial Stability Oversight Council, and over which the FRB has standard-setting authority pursuant to Dodd-Frank. The FRB also announced final revisions to Part I of the Federal Reserve Policy on Payment System Risk, which applies to financial market infrastructures more generally, including those that are operated by Federal Reserve Banks.

Key amendments to the rule and revisions to the policy include the following: (i) establishing separate standards to address credit and liquidity risk, (ii) new requirements for recovery and orderly wind-down planning, (iii) a new standard for general business risk, (iv) a new standard for tiered participation arrangements, and (v) heightened transparency and disclosure requirements.

The final rule and revised policy will become effective on December 31, 2014.

See: Text of the Final Rule; Policy on Payment System Risk; FRB Press Release.


FRB Approves Final Rule to Amend Capital Plan and Stress Test Rules (Fed. Reg.)

The Board of Governors of the Federal Reserve System’s final rule to amend capital planning and stress testing rules was published in the Federal Register.

The final rule adjusts the due date for bank holding companies (“BHCs”) with total consolidated assets of $50 billion or more to submit their capital plans and stress test results. For the 2015 capital plan cycle, such BHCs are required to submit capital plans on or before January 5, 2015, unchanged from prior years. For subsequent cycles beginning in 2016, participating BHCs will be required to submit their capital plans and stress testing results to the Federal Reserve on or before April 5.

The final rule is largely identical to the proposed rule but contains a few key adjustments made in response to public comments. In particular, the final rule adopts the existing limitation on a BHC’s ability to make capital distributions to the extent that the BHC’s actual capital issuances are less than the amount indicated in its capital plan.

The rule will become effective on November 26, 2014.

See: 79 FR 64026.
Related news: FRB Issues Final Rule to Modify for Capital Planning and Stress Testing Regulations (October 22, 2014); FRB, FDIC and OCC Release Supervisory Scenarios to Be Used in 2015 Capital Planning and Stress Testing Program (October 27, 2014).


FinCEN Issues Two Administrative Rulings Regarding Virtual Currency

FinCen issued two administrative rulings regarding proposed business models of two companies engaged in services relating to virtual currency. One company sought a ruling regarding its virtual currency payment system and the other sought guidance about a proposed virtual currency trading platform.

In the two rulings, FinCEN held that the proposed business activities of the companies seeking guidance required those companies to comply with all FinCEN regulations applicable to money transmitting businesses, even though both companies claimed that their particular platforms and systems did not fall within the definition of regulated activity.

See: Ruling on Virtual Currency Payment System; Ruling on Virtual Currency Trading Platform.


FRB, FDIC and OCC Release Supervisory Scenarios to Be Used in 2015 Capital Planning and Stress Testing Program

The Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) released economic and financial market scenarios that financial institutions will be required to use as part of the 2015 Capital Planning and Stress Testing Program. 

Section 165(i)(2) of the Dodd-Frank Act requires certain financial companies, including national banks and federal savings associations with at least $10 billion in total consolidated assets, to conduct annual stress tests. The FRB, FDIC and OCC coordinated the development of “adverse,” “severely adverse” and “baseline” supervisory scenarios, which incorporate economic variables such as growth, unemployment, exchange rates and interest rates, for use by covered financial institutions.

The Capital Planning and Stress Testing Program also includes the FRB’s Comprehensive Capital Analysis and Review (“CCAR”) of 31 bank-holding companies with at least $50 billion in total consolidated assets. Covered institutions will be required to apply the released supervisory scenarios to stress tests conducted pursuant to both Dodd-Frank and CCAR. Companies not subject to CCAR, such as state member bank subsidiaries of CCAR participants, will still apply the supervisory scenarios to Dodd-Frank stress tests. 

See: FRB Press Release; FDIC Press Release; OCC Press Release


Otmar Issing on Germany in the FT…

Former ECB Board Member and Honorary Committee Member at Bretton Woods 2014 Otmar Issing penned a thoughtful piece in the FT on why arguments for Germany to prime the fiscal pump are faulty in Blame Germany for bad policies, not its reluctance to spend more.

The story is especially noteworthy as France and the European Commission continue to lock horns regarding the budget for 2015 (see Paris defends budget amid EU irritation).  Prime Minister Manuel Valls noted that “We decide the budget.”   On speculation that the commission will demand a review, he noted… “That’s not the way it happens. France should be respected. It’s a big country.”

FSB Publishes Guidance on Resolution of Non-Bank Financial Institutions and Systemically Important Insurers

The Financial Stability Board (“FSB”) reissued the Key Attributes of Effective Resolution Regimes for Financial Institutions (“Key Attributes Document”), incorporating additional guidance on the FSB’s application to non-bank financial institutions and on arrangements for information sharing.

The Key Attributes Document was adopted by the FSB in October 2011, and set out twelve essential features that should be part of the resolution regimes of all jurisdictions. The 2014 version of the Key Attributes Document incorporates additional guidance that elaborates on information sharing for resolution purposes and sector-specific guidance for insurers, financial market infrastructures, and the protection of client assets in resolution.

The newly adopted guidance documents have been incorporated as annexes into the 2014 version of the Key Attributes Document. No changes were made to the twelve key attributes of October 2011, which the FSB stated “remain the umbrella standard for resolution regimes covering financial institutions of all types…”

The FSB addressed further guidance for the identification of the critical functions and critical shared services for systemically important insurers. This guidance “should assist national authorities in implementing the recovery and resolution planning requirements set out in the [Key Attributes Document] and in the policy measures of the International Association of Insurance Supervisors (IAIS) for globally systemically important insurers (G-SIIs).”

Comments and responses to questions set out in the consultative document should be submitted by December 15, 2014.

Lofchie Comment: The report raises serious questions about the extent of government discretion in the event of major institution failure. Under the report, the authority of the government to exercise discretion potentially begins with the point in time at which the government decides that it is free to act. In this regard, the report (at page 6) says that “Resolution [by the government] should be initiated when a firm is no longer viable or likely to be no longer viable, and has no reasonable prospect of becoming so. . . ” [Emphasis supplied.] This is inherently a judgment call. In exercising such discretionary authority, the report says that “The resolution authority and its staff should be protected against liability for action taken and omissions in good faith . . . ” That is, the resolution authority would be protected even if its actions did not have a reasonable basis, so long as they were sincere in their decision-making. Proving insincerity is a difficult task.

It should be a concern to all that the government seems to be moving so steadily and in so many areas to resolution regimes where final decisions are discretionary, rather than rule-based.

See: Key Attributes of Effective Resolution Regimes for Financial Institutions; FSB Press Release for Key Attributes Document; FSB Press Release for Consultation on G-SII Guidance.


CPMI and IOSCO Issue Report on Recovery of Financial Market Infrastructures

The Committee on Payments and Market Infrastructures (“CPMI”) and IOSCO issued a report titled, “Recovery of Financial Market Infrastructures,” which provides guidance to financial market infrastructures, such as central counterparties, on how to develop plans to enable them to recover from threats to their viability and financial strength. The report additionally provides guidance to relevant authorities in carrying out their responsibilities associated with the development and implementation of recovery plans.

The report supplements the CPSS and IOSCO “Principles for Financial Market Infrastructures” published in April 2012, and is consistent with the “Key Attributes of Effective Resolution Regimes for Financial Institutions” of the Financial Stability Board.

Lofchie Comment: It’s becoming obvious that clearing corporations, which are the most important of the “financial market infrastructure” operations, are not magical amulets against systemic risk. Indeed, it is now abundantly clear that they create centralized risks that are not readily understood and for which the regulators are not fully prepared. See, e.g., JPMorgan Issues Paper on Resolution Plan for Central Clearing Parties (October 6, 2014).

See: Recovery of Financial Market Infrastructures; Bank for International Settlements Press Release.