24/7 Trading: CFTC’s Blueprint for Continuous Derivatives Trading and Resilient Regulation?

An ongoing debate for US derivative markets has been the potential benefits and drawbacks of continuous trading. This debate has sparked fresh interest in recent weeks as recently, on April 21st, the Commodity Futures Trading Commission (CFTC) sought public comment on the prospect of 24/7 trading and clearing for listed derivatives. This forward-looking proposal could lead to continuous trading, with breaks only on certain public holidays, bringing unprecedented changes to global financial markets.

A Step Beyond Equity Markets’ Aspirations

As an ongoing topic of debate, this is not the first proposal that has looked to alter trading hours. Major US equity exchange operators have previously floated the idea of 24/5 trading, allowing continuous operations from Monday to Friday.

This CFTC’s exploration, however, goes further, challenging market participants to imagine trading without pauses and to address the complexities that such a model would entail.

Potential Benefits: Real-Time Responses

A key benefit often brought up by proponents of continuous trading would be the ability to address geopolitical events as they unfold. Investors and risk managers would no longer need to wait for Globex to reopen on Sunday afternoon (US time) to react to impactful events. A round-the-clock US derivatives market would ensure swift responses, potentially offering more stability in turbulent times. However, the full implications—whether positive or negative—remain uncertain and will only become clear with time.

What the Regulators are Saying: The CFTC’s Request for Comment (RFC)

The CFTC’s RFC raises critical questions about system resilience, market integrity and regulatory compliance under a continuous trading model. Highlights from the RFC include:

• Market Integrity and Surveillance: The need for robust surveillance systems to combat abusive trading practices like front-running, wash trading and other manipulative activities.
• Operational Resilience: Maintaining resilience through governance frameworks, adaptable exchange staffing models and advanced technologies to ensure compliance with the Commodity Exchange Act and Commission Regulations.
• Technology and Capacity Planning: Developing surveillance systems capable of detecting anomalous activities under varying trading conditions and liquidity levels.
• Coordination Across Service Providers: Managing operations during thinly staffed hours, including collaboration with service providers and third parties.

Implications for Market Participants

While the CFTC’s initiative is still in the exploratory phase, its call for public input, coupled with equity exchanges’ previous proposal of a 24/5 model, signals a clear shift in the direction of continuous trading. This move would require members of the US derivatives trading ecosystem—designated contract markets (DCMs), swap execution facilities (SEFs), and beyond—to start adapting their operations to align with this potential industry shift.

Although implementation may be years away, the noise surrounding this concept suggests that this may no longer a question of “if,” but “when.” Stakeholders should begin preparing for a world of non-stop trading and clearing, ensuring they are ready to tackle the challenges and seize the opportunities this bold move will bring.

Challenges for Compliance Teams

As compliance teams struggle with budgetary constraints and increasing workloads, a proposed change of extended, and even potentially, continuous trading hours, would only add to existing departmental challenges.

To offset these current challenges, and prepare teams for future scenarios, many financial institutions have begun leveraging advanced financial markets compliance solutions to aid in the analysis of growing trade volumes and trade-related communication.

End-to-end compliance solutions offering Holistic Conduct Surveillance, Communication Surveillance and Behavioral Insights permit teams to automate tedious analytical processes that can lead to bottlenecks and inefficient compliance programs.

Final Thoughts

As we stand at the cusp of a potential transformation in global finance, the future of continuous trading in listed derivatives presents both opportunities and challenges.

Whether this development ultimately proves beneficial or not will depend on the solutions and safeguards put in place to support it.