The SEC granted approval to the Consolidated Audit Trail (CAT), but the regulator still didn't appropriately address how quickly old systems should be retired.
Yet another box has been ticked on the never-ending checklist en route to the Consolidated Audit Trail (CAT).
On Tuesday, the US Securities and Exchange Commission (SEC) voted to approve the national market system (NMS) plan for the CAT, an audit trail that will track trading activity for the US equity and options markets.
This is the latest in a long line of small steps the CAT has taken toward implementation. It was conceived in 2010 and given the green light by the SEC in 2012, and Tuesday's announcement may actually be the first sign of light at the end of the tunnel.
Self-regulatory organizations (SROs) now have two months to pick a plan processor to build the CAT. Currently, there are three firms left vying for that honor: FIS (which last year acquired SunGard, which made the initial bid), Thesys Technologies, and the Financial Industry Regulatory Authority (Finra).
Still, despite the perceived progress, there is still at least one giant issue that needs to be addressed.
To ask for that kind of tech spend from the industry, but not give them the opportunity to save some money by ending reporting to out-of-date systems is just asking for trouble.
One of the biggest questions consistently brought up when discussing the CAT is around duplicative reporting. The point of the CAT is to give regulators the opportunity to reconstruct market events and offer a better view of when firms are trying to manipulate the market.
In order to do this, the CAT needs to compile a massive amount of data—so much, in fact, it will likely be one of the biggest databases in the financial markets, storing roughly four petabytes of data a year.
Gathering that much information means some platforms firms currently need to report to for regulatory purposes will become obsolete. The most obvious of these is Finra's Order Audit Trail System (OATS).
Originally, the SEC said firms will be required to continue reporting to OATS two-and-a-half years after the CAT is up and running. Naturally, many felt this was far too long. Dave Emero, a vice president at Goldman Sachs, was very vocal during a panel at the Securities Industry and Financial Markets Association (Sifma) Ops conference this spring.
"The concept of having to run something like OATS for up to two-and-a-half years after you've started to report to CAT is just unfathomable from my perspective. The expense, the challenge of doing that, the waste of infrastructure, people, support and duplicative reporting for anything like that period of time to me seems totally unacceptable with a plan like this," Emero said. "I think there definitely needs to be a little bit more creativity behind the thought process around allowing the retirement of OATS much sooner than contemplated by the plan."
Time to Retire
The SEC says it addressed these concerns by accelerating the deadline for SROs to submit proposals to stop reporting to systems that are obsolete due to the CAT.
However, all the SEC has done is allow SROs to file rule change proposals for duplicative rules and systems within six months of the plan's approval. "These proposals would provide that the retirement of any duplicative rules and systems would be effective when the CAT data meets minimum standards of accuracy and reliability," the SEC said in a statement.
That still leaves the regulator a lot of flexibility to force firms to continue to report to OATS and the CAT, which is ridiculous. The Commission estimates the CAT will cost the industry $2.4 billion initially and $1.7 billion annually. That's not chump change. To ask for that kind of tech spend from the industry, but not give them the opportunity to save some money by ending reporting to out-of-date systems is just asking for trouble.
The CAT has taken long enough to get up and running. Firms will be a lot more willing to play ball if they know there is at least a silver lining to this entire project.
I can see this issue getting particularly sticky if Finra isn't selected as the CAT's plan processor. I've written about this before, but Finra stands to lose a lot of money if it's not selected as the plan processor and has to retire OATS. It will no doubt want it to remain operational as long as possible as Finra looks to create additional revenue streams. The SEC is leaving the door open for this to get dragged out.
I give credit to the SEC for addressing many of the issues brought up in comment letters about the CAT. Still, I think a harder stance on duplicative reporting is required if it wants the full cooperation of the industry.
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