Securities and Exchange Commission
Open Meeting on CAT
Wednesday, April 27, 2016
Key Topics & Takeaways
- Approval of Publishing for Comment: The Commission voted unanimously to approve publishing for comment the proposed NMS plan to create, implement and maintain a CAT.
- Administration: Hsu explained that the CAT would be run by a limited liability company whose operating committee would comprise all the SROs. He said there would also be an advisory committee with members to include broker-dealers, investors, and persons with “significant regulatory experience” to advise on implementation, operation and administration.
- Costs: Flannery also discussed the costs of the system, and said the primary driver of costs would be faced by broker-dealers reporting data. However, he estimated that the annual costs to the industry will be comparable to current costs as existing systems are retired.
Securities and Exchange Commission Chair Mary Jo White
In her opening remarks, White said the creation of the Consolidated Audit Trail (CAT) would be a major milestone in helping the Securities and Exchange Commission (SEC) to oversee the evolving securities markets. She stated that the CAT will strengthen the SEC’s regulation, examination and enforcement efforts and help regulators who face challenges in overseeing complex markets being transformed by technology. Currently, she commented, regulators lack access to a comprehensive database of timely and accurate information, but the CAT will meet this need.
White said the success of the CAT will require the cooperation of all stakeholders, including investors, exchanges, the Financial Industry Regulatory Authority (FINRA), broker-dealers, other trading venues, technology provides and clearing organizations. She recognized the contributions of members of the Development Advisory Group, which included 24 firms and three associations, including SIFMA.
Turning to the plan, White noted that the proposal includes details on the operations of the CAT, procedures to ensure the timeliness, accuracy and security of data, and provisions relating to governance. She said public comment will be particular helpful in the areas of data accuracy and data security.
Stephen Luparello, Division of Trading and Markets
Luparello noted that the process of developing the CAT began with the Commission’s adoption of Rule 13 of Regulation NMS, which called on the self-regulatory organizations (SROs) to draw upon their own expertise to develop a plan. He noted that the proposal provides that the CAT will be managed by the SROs through a jointly-owned limited liability company, with input from an advisory committee, after the SROs themselves have chosen a plan processor to build and maintain the system.
Luparello added that public comments will be critical to ensuring that the plan outlines a robust and workable framework. He said the SEC’s staff would assess all comments and develop a recommendation for the Commission later this year.
David Hsu, Assistant Director, Division of Trading and Markets
Hsu offered more detail on the proposed plan, under which the CAT would be run by a limited liability company whose operating committee would comprise all the SROs. He said there would also be an advisory committee with members to include broker-dealers, investors, and persons with “significant regulatory experience” to advise on implementation, operation and administration.
The plan, Hsu explained, would require SROs and broker-dealers to report to a central repository certain information on all orders and quotes upon origination, routing and execution, with the data expected to be recorded contemporaneously with the order event and time stamped. He added that the SROs and the SEC would have direct access to the information contained in the central repository and have the ability to conduct “complex queries.” Additionally, Hsu said the proposal establishes data security requirements regarding connectivity, data transfer, storage, access, encryption and personally-identifiable information and that the plan processor also would be responsible for developing a comprehensive information security program. He added that the proposal also includes a plan to eliminate rules and systems that would be rendered duplicative by the establishment of the CAT.
Mark Flannery, Division of Economic and Risk Analysis
Flannery lauded the CAT for being the first comprehensive system to allow for timely, readily available and accurate reporting of material information to regulators that would improve their ability to oversee the securities markets and to monitor overall market structure and operations. He said he believed these improvements will significantly benefit investors and the integrity of the market, which would in turn increase capital formation, liquidity and price efficiency. Flannery also discussed the costs of the system, and said the primary driver of costs would be faced by broker-dealers reporting data. However, he estimated that the annual costs to the industry will be comparable to current costs as existing systems are retired.
Commissioner Kara Stein
Stein, in her statement, stressed the importance of the CAT to ensuring the integrity of markets. She said the need for such a system has been proven “over and over again” by episodes of volatility, and she lamented that it took regulators four months to reconstruct and analyze these events before CAT. She said the CAT would allow for a clear and timely picture of what is happening in markets. Stein also praised the CAT’s potential added value in developing SEC policies and approaches that could be based on real data.
Stein voiced concern with the proposal, however, for allowing reporting entities’ clocks to be out of sync by as much as 50 milliseconds, commenting that this would make the time stamps for orders unreliable and leave the SEC unable to reconstruct what happens during market disruptions like the Flash Crash of May 6, 2010. She added that many market participants depend on clocks with far lower tolerances for inaccuracy. She also expressed concern that the plan proposes a maximum error rate of five percent.
Commissioner Michael Piwowar
In his comments, Piwowar said that he is “happy” to support the publication of the CAT NMS plan and related economic analysis. He added that the SEC, in collaboration with the SROs, is taking measured strides for the ultimate goal of inducing a “new and incredibly powerful” regulatory tool. Piwowar noted three areas of particular interest: 1) whether expectations about eliminating redundant systems such as OATS are realistic; 2) the risks of reporting certain personally-identifiable information (PII) and safeguards to be put in place; and 3) given that the CAT will be an “incredibly costly endeavor,” analysis of the proposal should be informed by data and comments on costs and of the plan.
The Commission voted unanimously to approve publishing for comment the proposed NMS plan to create, implement and maintain a CAT.
For more information on this meeting, please click here.
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