On April 27, 2016, the Securities and Exchange Commission (SEC) released a proposal for public comment to create a comprehensive centralized database that would include data for every transaction completed in the US equity and options markets. The database will be known as the Consolidated Audit Trail, commonly referred to as “CAT.”1

The proposal for CAT falls within the NMS (National Market System) plan that has been under development since July 2012, when the SEC adopted Rule 613 requiring self-regulatory organizations (SROs) to jointly create a plan for a CAT platform.

Rule 613 was adopted in response to increasing volume, speed, and fragmentation of electronic markets, with a limited view of trading activity. The rule’s intent was to help prevent market crises such as the Flash Crash of 2010,2 where a sell order of $4 billion in futures contracts caused a cascade of automated selling and a market crash of 600 points.

In concept, CAT will track every stock quote, order and trade, including when and where the transactions occur, the brokers who handle them, and the customers they represent. According to SEC Chair Mary Jo White, this is meant to provide regulators with the ability “to conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct.”3

Managing Implementation Risk for the CAT

Originally, CAT was meant to receive data in real time. However, due to technology hurdles and the cost of building real-time feeds from SROs and broker-dealers to the CAT, the original plan has been revised, with data submitted by 8am the following day.4

Even without real-time reporting capabilities, the NMS plan will be a massive undertaking, creating what some consider the largest database system ever assembled. The central repository database will need to house in excess of 50 billion pieces of information each day from 20 SROs and approximately 1800 broker-dealers. CAT must also provide analytics powerful enough to sift through the entire markets’ trade records to find market irregularities and disruptions.5

Bidders for the CAT contract are bringing massive data management architectures that include the large cloud services providers.6

Rich Data, Enhanced Analysis

CAT is the next generation of orders and executions tracking and the planned successor to Order Audit Trail System (OATS) Trade reporting. It will bring centralization and enhanced data coverage intended to facilitate regulators’ cross-market analysis, removing the need to capture and merge large volumes of disparate data from different entities.  Some of the key requirements for CAT include:7

  • A “plan processor” that will build and maintain a central repository
  • SROs and broker-dealers that will be required to submit a predefined set of data points including:
    • A unique identifier for the customer submitting the order
    • An identifier for the broker-dealer, receiving, originating, routing, or executing the order
    • The date and time of the order event
    • The security symbol, price, size, order type, and other material terms
  • Data must be timestamped with a minimum granularity of one millisecond
  • Initial maximum accepted error rate is 5% with a phased approach to lower the error rate to 1%
  • The plan processor will be responsible for data security requirements including connectivity, data transfer, encryption, storage, access, breach management, and personally identifiable information (PII)
  • Trade Allocation reporting will be provided separate from the Trade records

The High Cost of Transparency

It is preliminarily estimated that the cost for CAT implementation will be $2.4BN. The majority of these costs will be incurred in-house at the broker-dealers for technology and infrastructure build. The $2.4BN estimate also includes $92MM spent on the CAT database, with this cost shared across the SROs and broker-dealers in fees paid in accordance with the Exchange Act.8

Current annual costs for OATS-related regulatory reporting and surveillance are around $1.7BN across the industry. The plan anticipates there would be a period of duplicative reporting for the broker-dealers between CAT and OATS for approximately 2-3 years, with ongoing costs during this period estimated at $3.4BN per year. Once OATS is retired, CAT cost is estimated at $1.7 BN to operate annually across SROs and broker-dealers, including $134MM estimated annual cost for the CAT database. 9

Implementation Timeline

The NMS plan was formally submitted on February 27, 2015, and has since gone through three amendments with the latest submission on March 29, 2016.  Once approved, the implementation schedule is as follows:10

Requirement Due
SROs required to select the plan processor from the remaining bidders Within two months
SROs required to begin reporting data Within one year
Large broker-dealers required to begin reporting data Within two years
Small broker-dealers required to begin reporting data Within three years

Take-away for Clients

Consolidated Audit trail will require significant changes to current US trade transactions reporting capabilities. Financial Institutions’ (FIs’) regulatory programs should emphasize cost-effective improvements. Below, we highlight two key areas where Accenture can help clients prepare for CAT.

1.  High Quality Reporting. Attention is needed to design for high quality, timely, low error rate CAT reporting. An impact assessment would help frame this work, with focus on:

  • New data requirements introduced by CAT over OATS, and impact for trading or booking systems modifications
    • Alignment of CAT efforts with any required preparation for MiFID II-MiFIR (Markets in Financial Instruments Directive II-Markets in Financial Instruments Regulation) transaction reporting efforts (with MiFIR currently set for January 2018)11
  • Innovation that may reduce cost and improve accuracy of CAT reporting through technologies like Block Chain

2.  Toward Predictive Trade Surveillance. As regulators’ view of data increases, their analytical toolsets will enable scrutiny and detection of errors or regulatory breach at a whole new depth and speed of discovery. FI’s Compliance functions should invest smartly in this capability. This work could be framed as part of a compliance wide initiative, or could start with CAT. Work would include:

  • Analysis of current surveillance investigation practices and how they could be adapted into a predictive trade surveillance framework
  • Setting priorities for surveillance analytics
  • Identification of data science tools, models, and skills needed for implementation
  • Requirements to harness CAT data alongside existing data sources
  • A rapid prototype utilizing the Accenture Insights Platform for priority analytics

For further information on this topic, please read Accenture’s thought piece “Getting Surveillance Right: Protecting Banks’ Reputation and Profitability.”12

Conclusions

The Consolidated Audit Trail is an ambitious undertaking in a crowded field of regulatory imperatives. FI’s who look for synergies across requirements such as CAT and MiFIR, among others, will be better able to manage the overall spend while also innovating in areas such as surveillance, where innovation can yield benefits in managing human and technology risks.

References

  1. “SEC Seeks Public Comment on Plan to Create a Consolidated Audit Trail,” US Securities and Exchange Commission, Press release, April 27, 2016. Access at: https://www.sec.gov/news/pressrelease/2016-77.html
  2. “What caused the flash crash? CFTC, DOJ weigh in,” CNBC, April 21, 2015. Access at: http://www.cnbc.com/2015/04/21/what-caused-the-flash-crash-cftc-doj-weigh-in.html
  3. Ibid
  4. “Consolidated Audit Trail (CAT) Resource Center,” SIFMA. Access at: http://www.sifma.org/issues/legal,-compliance-and-administration/consolidated-audit-trail-(cat)/overview/
  5. “Release No. 34-77724; File No. 4-698,” Securities and Exchange Commission, Rues for NMS, Securities and Exchange Commission, April 27, 2016. Access at: https://www.sec.gov/rules/sro/nms/2016/34-77724.pdf
  6. “It’s Google vs. Amazon to create the biggest database in history,” CNBC, April 27, 2016. Access at: http://www.cnbc.com/2016/04/26/its-google-vs-amazon-to-create-the-biggest-data-base-in-history.html
  7. Ibid
  8. Ibid
  9. Ibid
  10. Ibid
  11. “Markets in financial instruments: Negotiations to start on one-year delay,” European Council – Council of the European Union, Press Release, April 28, 2016. Access at: http://www.consilium.europa.eu/en/press/press-releases/2016/04/28-markets-financial-instruments/
  12. “Getting Surveillance Right: Protecting Banks’ Reputation and Profitability”, Accenture, January 2015. Access at:https://www.accenture.com/ca-en/insight-getting-surveillance-right-protecting-banks-reputation

Newsletter Author: Nancy Andrews Turbé, Samantha Cramer, Michael Kim

Newsletter Contact Person: Nghi Pham

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

Disclaimer

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

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