SIFMA's White Paper is Significant for its Support of this Enormous Regulatory Undertaking - No Small Admission.

[ by Howard Haykin ]

The Consolidated Audit Trail (CAT) system is derided by some as being too expensive, as having a completion date that's too far off, and for having alternatives that are far less expensive and easier to implement.  Notwithstanding those concerns, SIFMA offers its views on this multi-billion dollar regulatory wish-list project - delving into such areas as:

• how a CAT system should be organized;
• key principles on operations, structure, governance and scope;
• the industry vision of how the CAT system should be implemented and expanded.

Industry Recommendations for the Creation of a Consolidated Audit Trail (CAT).   SIFMA's White Paper is significant simply because SIFMA supports the efforts of the SEC and other regulators to create an effective, efficient oversight system.  SIFMA industry members view CAT as something that can beneficially strengthen regulation of financial markets.  Capturing the full lifecycle of trades - including customer account information - is a massive undertaking that requires significant input and resources from the industry, and thus needs offers considerable recommendations.

SIFMA's Underlying Principles and Categories of Specific Recommendations.   SIFMA identifying the following 8 guiding principles for the development of a CAT system:

1. Elimination of Duplicative Systems and Reporting;
2. Appropriate Flexibility and Scalability;
3. Centralized Administration;
4. Public Transparency and Industry Engagement;
5. Minimal Disruption to Existing Market and Business Practices;
6. Reuse of Existing Assets and Standards;
7. Data Security, Privacy, and Consumer Protection; and
8. Special Considerations for Options.

These principles, in turn, give way to its specific recommendations that are grouped within 10 topics vital to CAT implementation:  

1. Elimination of Other Rules and Systems
2. Implementation Timeline
3. Infrastructure
4. Governance
5. Customer ID
6. Reporter ID
7. Linkages
8. Options
9. Other Products
10. Cost/Benefit

Note about SIFMA's white paper:  Developed through iterative dialog with the SIFMA membership, representing a range of firm types, sizes and business models. SIFMA co-authored the paper with IBM, that served as a consultant to this process.

Executive Summary.   CAT was launched via SEC Rule 613 of Regulation NMS under the Securities Act of 1934 (“Exchange Act”).  Approved on 8/1/12, the rule requires "national securities exchanges and national SROs to submit a national market system (“NMS”) plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets from the time of order inception through routing, cancelation, modification, or execution.” 

Currently, the deadline for SRO submissions is 12/6/13.

Once completed, the CAT system is intended to provide regulators with a searchable database enabling them to accurately identify the beneficial owner of an order or trade, and to follow the order through the entire trade lifecycle - from origination through routing, modification, cancelation, or execution - recorded on an industry-wide synchronized clock, down to millisecond or finer increments.  A CAT NMS plan will feature:

• A newly created central repository for reportable events submitted by participants.  
• Submissions will be required by 8 am ET on T+1.
• Tagged reportable events will be stored in a linked fashion, allowing regulators to accurately follow an order through its entire lifecycle from generation through routing, modification, cancelation, or execution.
• Unique, cross-market identifiers for B/Ds and exchanges will be recorded for every reportable event.
• Unique, cross-market identifiers for customers or advisers that have trading discretion for customer accounts.
• All clocks used by SROs and their members will be synchronized and measured in milliseconds or finer increments.

For further details, go to:   [SIFMA 96pp White Paper, 3/28/13].

In part 2, we'll conclude the Executive Summary by referring to the 8 Guiding Principles and the Key Dependencies related to each.