What will SEC rejection relating to Consolidated Audit Trail delay mean?
On November 15, 2017, regulators rejected a request from participants of the Consolidated Audit Trail (CAT) to delay by a year the start of a far-reaching new market surveillance system.¹
About a week earlier on November 6, 2017, some of the major participants in the CAT system, to monitor trading in the U.S. equity market, requested that the implementation date be delayed. The operating committee of the CAT had said that the exchanges and Self-Regulatory Organizations (SROs) were discussing with the Securities and Exchange Commission (SEC) an extension for the various phases of the implementation of the CAT.² On November 8, 2017, the Securities Industry and Financial Markets Association (SIFMA) also requested a delay in the CAT compliance deadline, issuing a statement from Executive Vice President, Randy Snook, saying, “Specific challenges with the current plan that must be addressed include a governance structure that does not give the industry a meaningful voice, a rushed implementation schedule that is simply not feasible, and proposals to eliminate duplicative regulatory reporting systems that are not sufficiently aggressive.”³ The SIFMA letter also expressed material concerns over CAT data security after a data breach at an unrelated reporting system at the SEC earlier in October.4
What this means
Any delay would have been significant as this CAT project has been eight years in the making. After the 2010 crash, in which almost $1 trillion in value disappeared from the stock market within minutes, before an equally rapid and spectacular comeback, it took months to collect the data to diagnose what caused the rapid shifts. The introduction of CAT would enable a much speedier result.5
This SEC decision means that exchanges and SROs will begin reporting data to the CAT database on November 15, 2017, and will begin using it for market surveillance as of January 15, 2018. On May 15, 2018 broker-dealers are mandated to report customer data, with large brokers also required to report trade data on this date.6 Questions were raised as to whether these deadlines could be met, as well as where the funding would come from. The SEC has tasked the exchanges with creating rules for CAT, but banks, brokers and other traders have complained about the fee structure being overly burdensome.7
In addition to the exchanges and SIFMA, Representative Jeb Hensarling, (R., Texas) Chairman of the House Financial Services Committee, had pressured SEC Chairman Jay Clayton to postpone the CAT launch, or scale back its content, after it was disclosed in September that hackers accessed a key SEC system.8
SIFMA in its request for a delay asked the SEC to, “Consider that once completed, the CAT would be the world’s largest data repository for securities transactions. Every day the system would ingest 58 billion recordsꟷorders, executions and quotes for the equities and options marketsꟷand maintain data on over 100 million customer accounts and their unique customer information. At least 3,000 individual users would have access to this information.”9 In an environment of increasing cyber risk, SIFMA’s Randy Snook urged the SEC “…to study the costs and benefits to determine if the collection, storage, and use of personally- identifiable information (PII) is necessary.”10
The rejection of the request for a delay by the SEC means that the exchanges are required to feed trading data into the CAT on November 15, 2017, under the SEC rule passed in 2016, and non-compliance could result in action from the regulator.11 In turning them down, Chairman Jay Clayton said that talks with participants in recent days had been “constructive,” but that he was “not in a position to support the issuance of the requested relief on the terms currently proposed.”12 He did however address heightened concerns over cybersecurity brought by SIFMA and other participants, and said that the SEC was evaluating whether the CAT needed to include personally identifiable information.13
1. “SEC Rejects Last-Minute Push to Delay Stock Surveillance System,” Bloomberg Markets, November 14, 2017. Access at: https://www.bloomberg.com/news/articles/2017-11-15/sec-rejects-last-minute-push-to-delay-u-s-stock-trade-database
2. “Calls for delay on CAT,” Financial Times, November 6, 2017. Access at: https://www.ft.com/content/741e4418-ce61-3902-ba69-74de3cfe38af
3. “SIFMA Requests Delay in CAT in Light of Ongoing Concerns,” SIFMA, November 8, 2017. Access at: https://www.sifma.org/resources/news/sifma-requests-delay-in-cat-in-light-of-ongoing-concerns/
5. “Exchanges in talks with U.S. SEC to delay new audit system: sources,” Reuters, October 26, 2017. Access at: https://www.reuters.com/article/us-sec-data-cat/exchanges-in-talks-with-u-s-sec-to-delay-new-audit-system-sources-idUSKBN1CV38W
8. “U.S. Exchanges Said to Be Seeking Last-Minute Delay of Trading Database Project,” The Wall Street Journal, November 10, 2017. Access at: https://www.wsj.com/articles/u-s-exchanges-said-to-be-seeking-last-minute-delay-of-trading-database-project-1510355200?cx_testId=16&cx_testVariant=cx&cx_artPos=0&cx_tag=collabctx&cx_navSource=newsReel
9. “SIFMA Requests Delay in CAT in Light of Ongoing Concerns,” SIFMA, November 8, 2017. Access at: https://www.sifma.org/resources/news/sifma-requests-delay-in-cat-in-light-of-ongoing-concerns/
11. “SEC Rejects Last-Minute Push to Delay Stock Surveillance System,” Bloomberg Markets, November 14, 2017. Access at: https://www.bloomberg.com/news/articles/2017-11-15/sec-rejects-last-minute-push-to-delay-u-s-stock-trade-database
Newsletter Author: Venetia Woo, Mairi Bryan
Newsletter Contact Person: Mairi Bryan
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