Glitch prevention plan may offer exchanges future regulation clues


The nation's top stock exchanges agreed to measures to strengthen infrastructure that will likely impact future regulations, says one industry consultant. In particular, the Securities and Exchange Commission's controversial Regulations Systems Compliance and Integrity (Reg SCI) may be influenced by terms of the plan.

"I view the announcement on Tuesday as an interim step before the SEC's Reg SCI," says Jim Myers, a senior manager of business consulting with Sapient.

The SEC released the proposed regulations known as Reg SCI in March for public comment. The proposed rules--which would replace the voluntary standards and controls for exchange technology currently in place--were criticized by industry members as extremely costly and cumbersome to implement.

In September, SEC officials met with representatives of the nation's exchanges to discuss ways to strengthen market infrastructures following a series of technology-related disruptions. At that meeting, SEC Chairman Mary Jo White gave exchange operators 60 days to propose ways to further secure the market. The plan announced by exchanges last week was the answer to that deadline. While the outline was not directly related to Reg SCI, Myers expects it to impact the final version of Reg SCI because it covers all the same issues as the proposed regulation.

In addition, Myers notes the original Reg SCI proposal does not address specific issues affecting exchanges with the same detail exchanges were asked for in their own plan. For that reason, Myers expects the exchanges' proposals on issues like kill switches, securing securities information processor pricing pipelines and coordinating collaborative industry-wide testing to be adopted by the SEC.

"If you listen to what the SEC is saying, it seems like Reg SCI will codify what the exchanges come up with," Myers says. "As exchanges come up with fixes and kill switches and plans for how to back up SIPS, I think that will end up getting codified into what the final regulation ends up being."

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