As volatility continues to challenge global markets, U.S. regulators are sharpening their focus on the systems designed to prevent chaos. In a new advisory, the Commodity Futures Trading Commission (CFTC) reminded exchanges and clearinghouses of their obligations to manage sharp market swings with clear, disciplined measures.
The staff advisory, issued jointly by the CFTC’s Division of Clearing and Risk and the Division of Market Oversight, urges designated contract markets (DCMs) and derivatives clearing organizations (DCOs) to review and reinforce their existing market volatility controls.
Preventing Disorderly Trading
According to the watchdog, these measures are considered essential not only to prevent disorderly trading but also to maintain reliable price discovery in times of economic stress.
According to the CFTC, market volatility controls help reduce the risk of disruptions without halting activity altogether. While some practices have already been shaped by industry groups and advisory committees, the agency warned that those mechanisms must be continually assessed and properly applied, especially during times when DCOs are making critical decisions that affect broader markets.
“Market volatility controls can play an important role in mitigating market disruptions while supporting continued price discovery in stressed or volatile market conditions,” the regulator said.
“Best practices developed by DCMs, industry groups, CFTC advisory committees, and others can help to guide the derivatives industry towards effective volatility controls, in cases where volatility controls may be in effect at times critical to DCO decisions.”
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The advisory also called attention to the importance of clear communication with market participants. The CFTC advised clearinghouses to provide transparency to both clearing members and end users, particularly regarding how volatility controls may impact outcomes such as settlement prices.
Push for Transparency
The push for transparency comes as financial institutions and market operators navigate increasingly complex risk environments. Regulatory expectations now extend beyond mere compliance; they demand proactive, informed responses tailored to evolving market dynamics.
By reiterating these principles, the CFTC signals its intent to hold institutions accountable for maintaining robust protections in fast-moving conditions.