SEC: Regulation SCI Automation Review Compliance

Exactpro - Tellefsen - White Papers - SEC: Regulation SCI Automation Review Compliance

Meeting the demanding new requirements imposed upon firms by SEC Regulation SCI is a key issue for many firms, especially in the areas of independent systems testing and certification. Tellefsen and Company, L.L.C. (Tellefsen) and Exactpro Systems, LLC (Exactpro) have announced a marketing partnership in which the two firms will collaborate to provide key industry constituents with market structure consulting, financial technology infrastructure testing and software quality assurance testing services. Tellefsen is a management consulting firm founded in 1984 to provide counsel and professional services to meet the growing needs of the financial services industry. The firm’s management and staff have a wealth of experience in regulatory compliance and U.S. market infrastructure (exchanges, ATS, dark pools, etc.). One of Tellefsen's core competencies consists in assisting firms with their regulatory compliance requirements through technology analysis, planning, testing, and evidencing.

Exactpro is a rapidly growing quality assurance services firm specializing in market infrastructure. Exactpro provides both functional and non-functional testing services to global exchanges, dark pools and clearing houses, using a range of sophisticated in-house-built testing and evidencing tools.

John Rapa, President and CEO of Tellefsen, indicates: 'The implementation of Reg SCI is another example of market regulations where market participants must provide evidence of their comprehensive infrastructure testing, policies and procedures and market oversight compliance. We are delighted to team up with Exactpro, whom we know from other customer engagements. We are very impressed by their capabilities, diligence and effectiveness in planning, executing and evidencing tests that prove regulatory compliance'.

Iosif Itkin, Co-Founder of Exactpro, says: 'Our firm has a great set of tools and services that we believe can help clients meet Regulation SCI in a cost effective manner. We are very conversant with this domain and are delighted to be working with Tellefsen on this; our two firms' capabilities are entirely complementary'.

Systems | Compliance | Integrity

SEC Regulation SCI - Systems Compliance and Integrity

  • On November 19, 2014 the SEC adopted new rules to require certain key market participants to have comprehensive policies and procedures in place surrounding their technology (Reg SCI).
  • Regulation SCI under the Securities Act of 1934 ('Systems Compliance and Integrity') replaces the current voluntary ARP compliance program with rules whose violation may be the subject to enforcement actions.
  • SROs, selected alternative trading systems (ATS), plan processors, and exempt clearing agencies are required to design, develop, test, maintain, and oversee their mission-critical systems.
  • The rules require them to ensure that their core technology meets certain standards, conduct regular business continuity testing, and provide certain notifications in the event of systems disruptions, intrusions and other events.
  • High-profile technical glitches in the securities markets including those that arose during the 2010 Flash Crash, the initial public offerings of Facebook and BATS Global Markets as well as the Knight Capital trading incident have illustrated that investors can be at risk when technology fails, and confidence in the markets can falter.
  • The market closures following Hurricane Sandy in 2012 also highlighted the importance of having a robust market technology infrastructure.
  • These events, subsequent discussions and commentary from a cross section of market participants have helped shape the development of the new rulemaking.
  • The new regulations will present challenges to the Chief Technology Officer and especially the Chief Compliance Officer, who is responsible for the creation and enforcement of reasonable supervisory procedures related to the implementation and maintenance of applicable HW/SW/NW technologies and infrastructure.
  • While these responsibilities are far from a routine compliance skill set, Reg. SCI is a continuation of a trend by the SEC of placing increased responsibility on compliance with respect to policies and procedures for implementing and maintaining various types of technology.
  • For the past two decades, SROs have followed a voluntary set of principles articulated in the SEC's Automation Review Policy and participated in what is known as the ARP Inspection Program.
  • Reg SCI now supersedes this (see final rulemaking in the Federal Register: https://www.federalregister.gov/documents/2014/12/05/2014-27767/regulation-systems-compliance-and-integrity)

Reg SCI - Final Rulemaking

The rulemaking was largely adopted as proposed, with the following revisions and exceptions:

  • The proposed 30-day advance reporting requirement was changed to quarterly.
  • The Direct Access requirement which would have required SCI Entities to provide SEC staff with remote or on-site access to SCI Systems was not adopted.
  • Safe Harbor protection from liability is limited to those individuals who reasonably discharge their responsibilities under Reg SCI.
  • Senior management involved in the annual Reg SCI review will be required to certify that they have implemented policies and procedures reasonably designed to ensure compliance with the rulemaking.

Reg SCI Is Designed to Ensure

  • Core technology of national securities exchanges, self-regulatory organizations, significant alternative trading systems, clearing agencies, and plan processors meets certain standards.
  • That these entities conduct regular business continuity testing with their members or participants. That they provide certain notifications regarding systems disruptions, intrusions and other types of systems issues.
  • The probability of technology problems is reduced, and key entities are well-positioned to take appropriate, corrective action when problems occur.

Reg SCI - Applicability

  • The proposed rule would apply to 'SCI Entities' such as:
    • Self-regulatory organizations (the registered national securities exchanges, registered clearing agencies, FINRA, and MSRB).
    • Alternative Trading Systems that exceed the specified volume thresholds (SCI ATS).
    • Disseminators of market data under certain National Market Systems plans ('plan processors').
    • Certain clearing agencies exempt from SEC registration.
  • It would apply primarily to the systems of SCI Entities that are core to the functioning of the securities markets, such as those that directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance.
  • The SEC anticipates that 14 ATSs will be required to be compliant.
  • It is unknown whether other business systems such as a shared drive system or phone system are within the scope.

SCI Entities - Requirements

  • Establish policies and supervisory procedures relating to the capacity, integrity, resiliency and security of its technology systems.
  • Ensure its systems operate in the manner intended, including in compliance with relevant federal securities laws and rules.
  • Take timely corrective action in response to systems disruptions, systems compliance issues and systems intrusions.
  • Notify and provide the SEC with detailed information when such systems issues occur, systems intrusions, and when there are material changes in its systems. Written notices of 'SCI Events' will be reported to members and market participants and filed electronically to the SEC on Form SCI.
  • Inform its members or participants about certain systems problems and provide information about the systems and market participants affected by the problem and the progress of corrective action.
  • Provide quarterly notice to the SEC of any material system changes, including completed, ongoing and planned material changes to SCI systems and the security of indirect SCI systems, during the prior, current and subsequent calendar quarters.
  • Conduct an annual review of its compliance with Regulation SCI, and submit a report of the annual review to its senior management and the SEC.
  • Plan and engage in annual business continuity and disaster recovery testing.
  • Designate certain individuals or firms to participate in the testing of its business continuity and disaster recovery plans, and coordinate such testing with other entities on an industry- or sector-wide basis.
  • Demonstrate systems testing, test results and related capabilities to SEC staff on-site during inspections.
  • The SEC has granted Safe Harbor protection from liability to individuals within SCI Entities who reasonably discharge their Reg SCI compliance responsibilities under their policies, procedures and controls.
  • Reg SCI is effective 60 days after publication in the Federal Register, and SCI Entities must comply with the requirements within 9 months of the effective date.
  • ATSs that satisfy volume threshold levels for the first time will be granted an additional 6 months from that time to comply.
  • SCI Entities will have 21 months from the effective date to comply with the industry or sector wide BC/DR testing requirement.

Policies, Procedures and Reporting

  • Reg SCI entities need to ensure their written policies and procedures are up to date.
  • Problem tracking systems must actively capture problems, problem identification, cause/effect and resolution.
  • Regular reporting to the SEC is required:
    • Ad-hoc incident reporting
    • Quarterly reports of planned and material system changes
    • Annual Reg SCI Review

Reg SCI Testing and Oversight

  • Reg SCI entities need a comprehensive testing regimen in order to be compliant.
  • Functional and non-functional testing of applicable Reg SCI ecosystems.
  • Comprehensive test regimens for quality assurance, regression, capacity, stress, failover/recovery, user acceptance etc.
  • Development and maintenance of a test repository and active analysis of production data.
  • Need for industry insight and domain market structure expertise in the design, planning and execution of industry test initiatives.
  • Independent test execution, oversight and reporting.
  • Assistance with preparation of annual Reg SCI compliance report to SEC.

Exactpro Systems Company Overview

Build Software to Test Software

Exactpro is a specialist firm focused on functional and non-functional testing of systems that process wholesale financial products for exchanges, market infrastructures, banks and financial firms worldwide. It is a US company, registered and headquartered in San Rafael, California, with four QA & development centres in Russia and sales support in the UK. Incorporated in 2009 with the staff of 10, this independent company has experienced phenomenal growth as satisfied clients return for more services.

Exactpro Systems Existing Customers Include:

  • Several major stock exchange & ATS clients with low latency trading platforms

  • A market leading Equities dark pool

  • Several post trade clearing houses

  • A leading SEF

  • A leading global derivatives (financial and commodities) broker

  • A significant commodity exchange and its clearing arm

  • A major investment bank specializing in emerging markets

  • A global equities broker offering program and single name execution

  • A software provider of adaptive trading technologies for international buy- and sell-side firms

Exactpro is 100% focused on systems that process financial products, with particular focus on electronic trading, and is highly effective in all of these aspects of quality assurance.

Exactpro's Bespoke Test Automation Suite

  • ClearTH

  • Minirobots

  • Dolphin

  • Shsha

  • Load Injector

  • Sailfish

Tellefsen and Company Overview

  • TCL has a market structure practice and core competency and depth of experience in assisting exchanges, clearing houses and ATS in complying with regulatory guidelines.

  • TCL has conducted numerous technology reviews for clients in the last several years, including investment management firms, ATS, clearing houses and exchanges.

  • TCL has also counseled and guided our clients through the preparation for regulatory designation reviews and inspections by the CFTC, FINRA and the SEC.

  • TCL's mission-critical systems expertise includes trading systems, market data dissemination, clearing, risk management and market surveillance components.

TCL's Market Structure, Compliance and Automation Review Expertise

  • Experience with prior client assignments has included the development of testing, compliance documentation and procedures for trading and operations management, including:

    • Business impact analysis

    • Business continuity management

    • Capacity planning

    • Systems development methodology

    • Acceptance testing

    • Configuration and release management

    • Network management

    • Problem management/problem tracking

    • Information and physical security

    • Failover, stress and capacity testing

  • TCL brings unique market insight and market microstructure experience to client assignments. The development and audit of business continuity plans, systems failover and fallback testing strategies and plans are a core competency of our firm, as is systems quality assurance and acceptance testing. TCL has been providing independent test oversight and test results attestation to various exchanges, clearing houses and numerous market participants.

How Does This Apply to Regulation SCI

Experienced people with great tools that can hit the ground running, testing and providing evidence in a cost effective fashion.