The global coordinating body for securities regulators has published a set of principles meant to guide regulators and market players in the provision of direct access to markets.

The Technical Committee of the International Organization of Securities Commissions published a final report on Friday setting out principles that are intended to guide markets, regulators and intermediaries in the provision of direct electronic access, information flow, and systems and controls.

The report notes that direct access presents risks to markets and intermediaries that could impact market integrity, including the ability of the market to maintain fair and orderly trading. Trading and credit risks are also key concerns, it says.

In particular, the report notes that allowing access outside of the control of market intermediaries challenges intermediaries’ traditional risk management processes, and may make rule compliance and monitoring more difficult, particularly concerning market manipulation and insider dealing. It may also create incentives for intermediaries/customers to seek execution advantages based on the type and geographic location of their connectivity arrangements, which raises potential fairness concerns. In addition, automated algorithmic trading raises issues of capacity and the potential need for rationing bandwidth, it notes.

The eight principles set out by IOSCO include setting out minimum customer standards; that there be legally binding contracts between the intermediary and the customer; the intermediary’s responsibility for trades; requirements for customer identification to facilitate market surveillance; pre- and post-trade transparency; and that there be adequate systems and controls for markets, intermediaries, and systems.

In addition to the principles, IOSCO says that regulators should retain the power to prohibit direct access, and to establish requirements including pre-trade controls and risk limits, and it says they should exercise oversight of the decisions made by clients, intermediaries and exchanges.

IE