International Standards Body Proposes Recommendations for Trading Venues on Managing Extreme Market Volatility

The International Organization of Securities Commissions has launched a consultation on proposed recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading. The consultation supports IOSCO’s objective of ensuring that markets are fair, efficient and transparent and focuses on automatic volatility interruptions and mechanisms to halt trading or reject orders.

In 2011, IOSCO published the report, “Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency.” The report included a recommendation for regulators to consider the extent to which trading venues should be required to have volatility control mechanisms in place to manage risks and prevent market disruption due to sudden price movements. Since the publication of the 2011 report, the markets have become more complex and interconnected due to technological advances. In addition, recent volatility events have impacted the securities markets, often with an event in one jurisdiction impacting the markets in another jurisdiction. For example, the “flash crash” on May 6, 2010 impacted the U.S. equity and futures markets as well as the Canadian equity market. As a result of all of these developments, IOSCO undertook a review of the measures used by trading venues and regulatory authorities to manage the impact of extreme volatility and preserve orderly trading with a view to assessing whether the 2011 recommendation should be enhanced.

IOSCO found that trading venues and regulatory authorities globally recognize the importance of volatility control mechanisms and is proposing eight recommendations to assist them in implementing those mechanisms. The recommendations cover, among others, the: (i) need to establish, monitor and maintain appropriate mechanisms during trading hours and to ensure that the mechanisms are appropriately calibrated; (ii) need for regulatory authorities to consider what information they may need to effectively monitor the overall framework in their jurisdiction; and (iii) communication of information by trading venues to their regulators, market participants and other trading venues, including issues that may occur where information is shared cross-border.

IOSCO is seeking feedback on the proposed recommendations. Responses should be provided by May 6, 2018.

View the consultation paper.