SIFMA AMG provided comments to the U.S. Securities and Exchange Commission (SEC) on the Funding Proposal for the consolidated audit…
July 31, 2023
By electronic mail to [email protected]
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: File Number 4-698: Joint Industry Plan; Order Instituting Proceedings to Determine Whether to Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail (June 16, 2023)
The Financial Information Forum (“FIF”)1 and the Securities Industry and Financial Market Association (“SIFMA”)2 appreciate the opportunity to comment on the Order Instituting Proceedings (the “Order”) published by the Securities and Exchange Commission (the “Commission”) on June 16, 2023 to determine whether to approve or disapprove an amendment to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or the “Plan”).3 The amendment (the “Amendment”) proposes a revised funding model for the Consolidated Audit Trail (“CAT”) referred to as the “Executed Share Model”.4 This letter is focused on the magnitude of CAT costs, including the level of CAT costs relative to what was projected in the CAT NMS Plan and the recent annual increases in CAT costs.
The following are some of the key points discussed in this letter:
- It is important to address rising CAT costs, which currently have no legal limit or mechanism for control that is being implemented.
- It is important to address three distinct categories of CAT costs: costs for operating the CAT system (we refer to these as “CAT operating costs”); internal firm costs; and firm workflow changes required to comply with CAT reporting requirements.
- The CAT operating costs projected for 2023 significantly exceed the costs estimated in the CAT NMS Plan. More specifically, the CAT operating costs projected for 2023 are approximately 5.2 (or 520%) times the costs projected in the CAT NMS Plan.5
- The annual increases in CAT operating costs during the past three years of 73.2%, 27.3% and 27.0%, respectively, are not sustainable over the long-term.6
- Recent actions and decisions taken by the Commission to mandate additional processing and reporting requirements for CAT will lead to acceleration of these unsustainable annual cost increases.7
- The actions and decisions by the Commission to mandate additional processing requirements that will accelerate the current CAT cost increases include the following:
- Requiring that the CAT Plan Participants assign an interim CAT Order ID by T+1 at noon8
- Requiring that the CAT Plan Participants reassign CAT Order IDs for all corrected data received after T+59
- Requiring that the CAT Plan Participants link CAT transaction data with SIP data10
- Requiring that the online targeted query tool (a tool developed by the CAT Plan Processor and used by Commission and CAT Plan Participant surveillance personnel to query the CAT database) (the “OTQT”) return results within 1 minute for all trades and related lifecycle events for a specific Customer or CAT Reporter11
- Requiring the CAT Plan Participants to measure on a monthly basis, using benchmark queries, the time it takes to provide results to users from OTQT searches that are run concurrently with up to 300 user queries.12
- The actions and decisions by the Commission to mandate new reporting requirements that will accelerate the current CAT cost increases include the following:
- Requiring CAT reporting of verbal (unstructured) activity, where the verbal activity does not represent orders as defined under the CAT NMS Plan
- Requiring that non-executable RFQ responses be reported to CAT, where these RFQ responses are not orders as defined under the CAT NMS Plan
- Requiring that request messages be reported to CAT, where these request messages are not a type of event that is reportable under Rule 613
- Requiring that order recipients report rejections to CAT, where these rejections are not a type of event that is reportable under Rule 613
- Requiring an order sender to report order recipient (venue) port settings, where this will result in an inferior audit trail being made available to surveillance personnel
- Requiring that firms provide linkage of representative to customer orders and linkage of order fulfillments to representative and principal orders, where firms do not maintain this linkage in their existing systems.
- The Commission’s decisions have the most impact on CAT costs, but the Commission does not have any process to effectively manage CAT costs.
- There is a lack of transparency about CAT operating costs. The largest CAT operating cost item for 2023 is cloud hosting services ($176,248,699), representing 74.5% of CAT operating costs, but no further detail is provided.
- Commission Rule 613 mandates that the CAT NMS Plan include “The detailed estimated costs for creating, implementing, and maintaining [emphasis added] the consolidated audit trail …”13 In the adopting release for CAT, the Commission writes that “a fulsome discussion” [emphasis added] of the estimated costs to SROs and their members “will aid the Commission in its evaluation of whether to approve the NMS plan and in conducting its own analysis of the costs and benefits of the NMS plan.”14
- Based on Rule 613 and the CAT adopting release, additional processing or reporting requirements proposed by the Commission — where the costs were not considered in connection with the Commission’s approval of the CAT NMS Plan — should require a CAT NMS Plan amendment.
1 FIF (www.fif.com) was formed in 1996 to provide a centralized source of information on the implementation issues that impact the securities industry across the order lifecycle. Our participants include broker-dealers, exchanges, back office service bureaus, and market data, regulatory reporting and other technology vendors in the securities industry. Through topic-oriented working groups, FIF participants focus on critical issues and productive solutions to technology developments, regulatory initiatives, and other industry changes.
2 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).
3 Securities Exchange Act Release No. 34-97750 (June 16, 2023), 88 FR 41142 (June 23, 2023) (Order Instituting Proceedings to Determine Whether to Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail).
4 Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail regarding CAT Funding Model (Mar. 13, 2023), available at https://catnmsplan.com/sites/default/files/2023-03/3.13.23-Amendment-to-CAT-NMS-Plan-CAT-Funding-Model.pdf.
5 The CAT financial and operating budget for 2023 projects total expenditures of $236.7 million. Consolidated Audit Trail, LLC, 2023 Financial and Operating Budget (Mar. 28, 2023), available at https://www.catnmsplan.com/sites/default/files/2023-03/03.28.23-CAT-Q1-2023-Budget.pdf (“CAT Q1 2023 Budget”). The Commission, in its approval order for the CAT NMS Plan, projects that annual costs for operating the CAT system will range between $36.5 million and $55 million. Securities Exchange Act Release No. 34-79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (Order Approving the National Market System Plan Governing the Consolidated Audit Trail) (“CAT NMS Plan Approval Order”), at 84854. Dividing $236.7 million by the mid-point of the range projected by the Commission in its approval order ($45.75 million) means that CAT costs for 2023 are expected to be 5.2 (or 520%) times what the Commission projected when it approved the CAT NMS Plan.
7 In certain cases (for example, with respect to reporting certain verbal activity to CAT), the Commission has acted through Commission Orders. Securities Exchange Act Release No. 90405 (Nov. 12, 2020), 85 FR 73544 (Nov. 18, 2020) (Order Granting a Temporary Conditional Exemption Pursuant to Section 36 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 608(e) of Regulation NMS Under the Exchange Act, Relating to the Reporting of Certain Activities on the Floor of National Securities Exchanges and Certain Activities by Industry Members Off Exchange Floors, as Required by Section 6.4(d) of the National Market System Plan Governing the Consolidated Audit Trail) (“Initial Verbal Activity Exemption”). In other cases (for example, with respect to reporting non-executable RFQ responses to CAT), the Commission has not taken formal action and the staff of the Commission has orally communicated the Commission’s position to industry representatives and/or the CAT Plan Participants. With respect to these oral communications, it is not clear whether the position stated represents the position of the Commission staff or the Commission. Since this is not known to industry members, for purposes of this letter we refer to these actions and statements as actions and statements of the Commission.
8 See Brief in Support of Motion for Partial Stay of Order 34-90688, Before the United States Securities and Exchange Commission, In the Matter of the: Order Granting Temporary Conditional Exemptive Relief Pursuant to Section 36 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and Rule 608(e) of Regulation NMS Under the Exchange Act, Relating to Certain Requirements of the National Market System Plan Governing the Consolidated Audit Trail (Feb. 14, 2021) (“688 Brief”), at 5-9.
11 See Brief in Support of Motion for Partial Stay of Order 34-90689, Before the United States Securities and Exchange Commission, In the Matter of the: Order Granting Temporary Exemptive Relief, Pursuant to Section 36 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and Rule 608(e) of Regulation NMS Under the Exchange Act, From Section 8.1.1 and Section 8.1.2 of Appendix D of the National Market System Plan Governing the Consolidated Audit Trail (Feb. 14, 2021) (“689 Brief”), at 6-9.