SEC Open Meeting on CAT NMS Plan

Securities and Exchange Commission

Open Meeting

Tuesday, November 15, 2016 

Key Topics & Takeaways

  • Approval: The Commission voted 3-0 to approve the proposed Consolidated Audit Trail (CAT) National Market System (NMS) Plan.
  • Modifications to the CAT: The Commission modified several provisions of the CAT NMS Plan in response to public comment and recommendations from the SROs. The modifications included strengthening data security requirements, tightening clock synchronization standards, enhancing governance, and accelerating the deadline to retire regulatory data reporting systems. 

Participants

Opening Statement

Securities and Exchange Commission Chair Mary Jo White

Securities and Exchange Commission (SEC) Chair Mary Jo White, in her statement, stated that the staff

recommendation to adopt the proposed Consolidated Audit Trail (CAT) National Market System (NMS) Plan would provide regulators with “state of the art” technology. She noted that the CAT is designed to improve essential audit trail information by providing a comprehensive, centralized database of timely and accurate information about all orders entered and trades executed across the U.S. securities markets, for both equities and options. Additionally, she stated that its benefits include improved ability to do market research, reconstruct market events, and monitor market behavior. 

White indicated that several modifications to the proposed CAT NMS were made, including more robust security standards, tighter clock synchronization requirements, enhanced governance structure, changes to the Alternative Trading System (ATS) funding calculation, a shortened deadline for retirement of duplicative systems, and the requirement of annual written assessments be provided to the Commission. 

Staff Presentation

Stephen Luparello, Director of the Division of Trading and Markets, noted the amendments to the proposed CAT NMS Plan included those to data security, which the Commission takes “very seriously.” He said that while the Commission would not be subject to the data security requirements under the NMS Plan, the Commission was forming a steering committee to establish data security policies and procedures that are comparable to those outlined in the CAT NMS Plan. 

David Hsu, Assistant Director, Division of Trading and Markets, stated that the plan should be adopted as amended. He indicated that the amendments to the plan include enhancing the structure of the Advisory Committee. He further noted that that the plan will require data be encrypted at transit and rest, compliance with the NIST framework, and multifactor authentication be employed. He stated that with respect to funding, that the CAT NMS Plan had been amended to address the ATS double counting issue. Additionally, he noted that the timeframe for the analysis for the retirement of duplicative systems had been reduced to six months, and that the self-regulatory organizations (SROs) apply more stringent clock synchronization standards. Lastly, he noted that the amended NMS Plan requires that written assessments and reports be provided to the Commission annually. 

Amy Edwards, Assistant Director of the Division of Economic Risk Analysis, acknowledged that with respect to the potential economic effects of the CAT NMS Plan, broker-dealers collectively would be faced with the greatest costs. She noted that while there would likely be duplicative reporting costs in the short-term, broker-dealers’ costs in the long run will be similar to what they are now. 

Commissioner Statements

Commissioner Kara Stein, in her statement, thanked the staff for its work and stated that the CAT would improve the equity markets by giving the SEC a clear view of what is happening, and is essentially the “Hubble Telescope” for the securities markets. She noted that for the CAT to be effective, it must be accurate, complete, accessible, and timely, and that the governance of the CAT must be fair and must appropriately address participants’ conflicts of interest. She stated that the amended Plan addresses some of these issues.  However, she indicated that the CAT NMS Plan amendments do not go far enough, particularly with respect to clock synchronization and the failure to require the use of legal entity identifiers (LEI). Lastly, she noted that the amended CAT NMS Plan is only the beginning, and that whether it is effective will depend largely how it is implemented going forward. 

Commissioner Michael Piwowar, in his statement, indicated that there were several issues with the original proposal. However, he was pleased that the amended CAT NMS Plan had been “refined substantially” and, for example, addressed concerns related to the retirement of duplicative systems and data security. He stated that without changes to data security, he may have “paused” before supporting the proposal. However, he noted that that amended CAT NMS Plan addresses those concerns and he supports it as amended. 

Vote

The Commission voted 3-0 if favor of the amended CAT NMS Plan. 

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