CAT to bring oversight benefits but implementation questions loom

At the SIFMA Tech 2014 conference in New York, industry executives discussed the benefits and concerns with the consolidated audit trail, with the consensus seeming to be that the additional data will provide greater oversight of markets, though implementation could be a challenge.

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At the SIFMA Tech 2014 conference in New York, industry executives discussed the benefits and concerns with the consolidated audit trail (CAT), with the consensus seeming to be that the additional data will provide greater oversight of markets, though implementation could be a challenge.

The CAT comes from Rule 613 adopted by the US Securities and Exchange Commission (SEC) in 2012, which calls for self-regulatory organisations (SROs), encompassing the 18 U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), to implement a database that collects and identifies every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all US markets. 

“A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate,” said then-SEC Chairman Mary Schapiro.

Ten companies are competing to build the system, which the SROs will vote on later this year, and which will likely start to operate in the first quarter of 2015. Bidders include organisations such as FINRA, IBM and SunGard. FINRA’s bid looks to build off their current system, the Order Audit Trail System (OATS), which is a similar system for equities, though of less scope such as not extending into options.

Deborah Mittelman, executive director at UBS Securities, noted at SIFMA Tech that a top industry concern is how CAT will be phased in and how the existing systems, like OATS, will be sunset. “The nightmare is all systems coexisting for a period of time,” she said.

Mittelman added that there is still plenty of discussion that could be had around what is the best way to rollout CAT. Yet there’s nothing like CAT to string together the front and middle office, she said, and the benefits could be extended even further if it were used as more of an industry utility, such as by leveraging the data collected for reporting needs, though that option seems less in the forefront.

Rob Stanich, associate partner, financial markets strategy and transformation, IBM, said that the industry and regulators' goals are aligned regarding CAT in the sense that everyone want safe, competitive markets, but the system needs to be implemented in a way that makes sense economically. Other panelists at SIFMA Tech noted that questions around cost still need to be resolved. Gerard Citera, managing director and associate general counsel at JP Morgan Chase, expressed concern that end investor would bear the ultimate cost, if the SROs passed the cost to broker-dealers who would then pass it on to investors.

On the other hand, UBS’s Mittleman said that using CAT for reporting could reduce costs, such as by eliminating the need for broker-dealers to submit blue sheets.

While several aspects of CAT still need to be worked out, it is clear that it will be an important project for monitoring the industry, as within five years of operation CAT is expected to be the world’s largest securities data repository with 21 petabytes of data.

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