SEC Rule 613 Consolidated Audit Trail
National Market System (“NMS”) plan
The Financial Industry Regulatory Authority and the national securities exchanges (collectively, "SROs") held an NMS Plan Industry Event in New York on October 15 and 16, 2012 to discuss Securities and Exchange Commission ("SEC") Rule 613 – Consolidated Audit Trail ("Rule 613" or the "Rule"), including its purpose, timeline, and implementation issues. We anticipate that the market participants to be impacted by Rule 613 will include: Broker-Dealers (both retail and institutional), Asset Management Firms (including mutual funds, hedge funds, and insurance companies), Financial Intermediaries (including vendors and technology service providers), Exchanges/Self-Regulatory Organizations and Asset Servicing Groups (including banks, custodial firms and fund administrators).
This paper provides an overview of key aspects of Rule 613 Requirements, the SROs' action plan to address those requirements and anticipated challenges that may have legal and compliance, risk, operations, trading, finance, and technology implications.
Overview of Rule 613 requirements1
The SEC issued Rule 613 under Regulation NMS that requires the SROs to submit an NMS Plan (“Plan”) to create, implement, and maintain a Consolidated Audit Trail (“CAT”) by April 26, 2013 (i.e., 270 days after the Rule was enacted). In developing the Plan, the SROs need to consider the feasibility, costs and benefits of alternatives to meet the requirements of the Rule.
A primary purpose of the CAT is to address the lack of consolidated information available to regulators, which could enhance regulators’ abilities to better monitor and track trading activity, and in turn, identify problematic trading activity in the market. Among other requirements, the Rule requires submission of all orders and quotes; this represents a change in the current practice for quotes where only Best Bid/Offers are tracked. The SROs will consider feedback from industry groups in the development of the CAT Plan. The Rule provides flexibility for the SROs to evaluate different options for implementing the CAT and eliminating data redundancy.
According to the Rule, the initial Plan submitted by the SROs must cover all secondary market transactions in NMS stocks and options and must examine the feasibility, costs and benefits of including primary market transactions in NMS securities. Within six months of the effective date of the Plan, the SROs must provide an “expansion document” that will outline how securities that are not NMS securities can be incorporated in the CAT.
The Rule also calls for the creation and maintenance of a central repository which should be accessible by all regulators, capture all events in the life cycle of an order, and include a linkage among them. All orders originated by a financial services firm to facilitate the execution of trades, regardless of the capacity in which the financial services firm is acting with respect to the order(s), must be reported to the CAT. Specifically, the Rule calls for the development of a mechanism to track the identity of account holders and persons authorized to trade for an account; establishes reporting deadlines and requires the Plan submitted to specify a maximum error rate to be tolerated by the central repository and to describe the basis for selecting such maximum error rate. The Rule also calls for the implementation of new or enhanced surveillance systems that are reasonably designed to make use of the information contained in the consolidated audit trail.
SROs action plan2
Representatives of the SROs have been meeting regularly to address the requirements of the CAT and have created five working groups to focus on the following aspects of the plan: Plan Governance, Technical, Industry Outreach and Input, Cost, and Funding and CAT Expansion.
Detailed requirements to be developed for key components of the CAT include:
Broker-Dealer order information — Requirements of the CAT include consideration of the following elements: the creation of unique customer identifiers, an analysis of how existing market participant identifiers can be used, the creation and maintenance of detailed customer information, and the reporting of order information including linkages within a single firm, across various firms, and with the exchanges.
Exchange data — A CAT Reporter ID needs to be established and maintained for each exchange, as well as for exchange members, and there has to be a linkage between broker dealers' orders and exchange orders. Currently, there is no uniformity in identifiers used by broker-dealers. A secure mechanism for data transmission to the CAT processor also needs to be established. Consideration should be made as to whether certain data is currently available to the exchanges and whether those exchanges can report certain data elements on behalf of their members (e.g., quotes).
CAT Processor and Central Repository — The creation of the CAT Processor and Central Repository will result in an unprecedented volume of data that will have to be processed.3 Challenging factors that need to be considered are: data ingestion, processing, storage and security; provision of data to regulators; reporting entity support mechanism, and enforcement of maximum reporting error requirements.
NMS plan anticipated challenges and other considerations4
One of the biggest challenges of the CAT is the Customer Identification Requirement. The Rule defines a customer as the account holder(s)/beneficial owner(s) of an account at the broker originating the order and anyone from whom the broker-dealer is authorized to accept trading instructions if different from the account holder(s). Each customer is required to have a unique identifier (“Customer ID”) that must be recorded contemporaneously with the event and reported as part of the original receipt or origination of the order by 8 A.M. the next business day. In situations where there are multiple customers associated with an order, all Customer-IDs must be reported. In addition, information of sufficient detail to identify the customer must be reported to the CAT. The SROs are contemplating the number of Customer ID fields that should be allowed and whether to house the detailed information in a separate database that can be linked to the CAT. Such information will need to be validated, and a mechanism put in place to facilitate the maintenance of the database (e.g., account updates, address changes).
At this time, the SROs anticipate that the responsibility to obtain a unique customer identifier will belong to the broker dealer with the CAT reporting obligation. They are considering whether existing identifiers such as Legal Entity Identifiers can be used. However, there are currently no existing unique identifiers for retail clients other than social security numbers, which are fraught with data security and privacy issues. The SROs are also considering whether the Customer ID of the person placing the trade should be flagged, i.e., capture ID and role, so that account holders can be distinguished from persons with trading authorizations in situations in which both parties are different.
Specific technical details regarding the Plan are still being analyzed by the SROs. Some of the additional considerations include how data from reporting entities will be transmitted to, and processed by, the CAT processor, how data will be validated and corrected, the technology support, and security protocols required. The SROs hope to use information gathered during the development of a detailed Request for Proposal (“RFP”), which is designed for the purposes of selecting the CAT processor, and receive input from industry participants in the upcoming months. This will also provide more information to address the cost benefit analysis to be included in the Plan.
Finally, the SROs are focused on analyzing the Rule to determine and evaluate its overall impact. They have established a website www.catnmsplan.com specifically to provide information to the public on the development of the Plan.
SEC Rule 613 implementation timeline
To learn more please contact:
Deloitte & Touche LLP
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Deloitte & Touche LLP
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Deloitte & Touche LLP
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Adetokunbo “Toks” Olabisi
Deloitte & Touche LLP
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1 Summarized from SEC Rule 613 – Consolidated Audit Trail (http://www.sec.gov/rules/fi nal/2012/34-67457.pdf) and SEC Rule 613- Consolidated Audit Trail (CAT) SRO NMS Plan Industry Event October 15 and 16, 2012 presentation (http://www.catnmsplan.com/web/groups/catnms/@catnms/documents/catnms/p189514.pdf).
2 Summarized from SEC Rule 613- Consolidated Audit Trail (CAT) SRO NMS Plan Industry Event October 15 and 16, 2012 presentation (http://www.catnmsplan.com/web/groups/catnms/@catnms/documents/catnms/p189514.pdf. 3 According to information obtained from Bloomberg, the approximate average daily volume of trades for equities, year to date as of October 2012 is 6.5 billion trades. 4 Summarized from SEC Rule 613 – Consolidated Audit Trail (http://www.sec.gov/rules/final/2012/34-67457.pdf) and SEC Rule 613- Consolidated Audit Trail (CAT) SRO NMS Plan Industry Event October 15 and 16, 2012 presentation (http://www.catnmsplan.com/web/groups/catnms/@catnms/documents/catnms/p189514.pdf).
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