Securities Regulation Daily SEC grants exemptions to SROs from certain consolidated audit trail requirements
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Wednesday, March 2, 2016

SEC grants exemptions to SROs from certain consolidated audit trail requirements

By Jacquelyn Lumb

The SEC has granted the request of the 18 registered national securities exchanges and FINRA for exemptions from certain reporting requirements in their development of a consolidated audit trail (CAT). The CAT national market plan, filed with the SEC on September 30, 2014, requires every member of a national securities exchange or national securities association to record and electronically report to the Central Repository details about every order and reportable event. The SROs’ exemptive request relates to options market maker quotes, customer IDs, CAT reporter IDs, linking executions to specific subaccount allocations on allocation reports, and time stamp granularity (Release No. 34-77265, March 1, 2016).

CAT plan. The SEC adopted Rule 613 on January 11, 2012 to require the exchanges to jointly submit a national market system plan to implement and maintain the CAT. The rule establishes the minimum requirements for the plan, including its operation and administration, data recording and reporting, clock synchronization and time stamps, the Central Repository, surveillance, compliance, and expansion to other securities and transactions.

More flexible approach. The SROs concluded that they needed additional flexibility in certain of the minimum requirements in order to develop a more efficient and cost-effective approach to the CAT. The SEC was persuaded to provide more flexibility in the areas requested so that alternative approaches could be included in the CAT NMS plan, which will be subject to notice and comment. The SEC has not concluded that the proposed approaches are more efficient and effective than those in Rule 613, according to the exemptive order, but believes they are within a permissible range of alternatives available to the SROs.

Market maker quotes. The SROs’ proposed approach to market maker quotes would require only options exchanges, but not options market makers, to report information to the Central Repository regarding options market maker quotations. The information that would be submitted by options market makers under Rule 613 would be largely identical to the information submitted by the options exchanges, according to the SROs, and this duplicative reporting would substantially increase the costs.

Customer IDs. Rather than report customer IDs to the Central Repository upon the original receipt or origination of an order, the SROs proposed a customer information approach in which each broker-dealer would be required to assign a unique firm-designated identifier to each trading account. The broker-dealers would submit an initial set of information to the Central Repository to identify the customer which would include the account type, effective date, customer’s name, address, date of birth, tax ID or social security number, the individual’s role in the account, the legal entity identifier, and the large trader ID, if applicable.

Using the firm’s designated ID and the other information reported to the Central Repository, the plan processor would then assign a unique ID to each customer. Under this approach, all broker-dealers would not be reporting the same ID for the customer as required under Rule 613. The customer ID generated by the plan processor would remain with the Central Repository. It would not be sent back to the broker-dealers.

Reporter IDs. Rule 613 requires that the CAT reporter ID of the broker-dealer or the customer ID of the person giving a modification or cancellation instruction be reported to the Central Repository. The exemption would allow CAT reporters to advise whether a modification or cancellation instruction was given by the customer associated with the order or was initiated by the broker-dealer or the exchange associated with the order.

The SROs also requested that that broker-dealers be allowed to report an effective date rather than the date an account was opened in limited circumstances.

Evaluation of exemptions. The CAT NMS plan has not yet been published for public comment. The SEC will determine whether the additional flexibility sought by the SROs is necessary or appropriate after weighing public comments, the completion of an economic analysis, and a full assessment of the plan.

The release is No. 34-77265.

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