SIFMA today announced it has published a new white paper, "Industry Recommendations for the Creation of a Consolidated Audit Trail (CAT)." This paper presents SIFMA's views on how the CAT system should be organized, provides key principles on operations, structure, governance, and scope, and outlines the industry vision of how the CAT system should be implemented and expanded.
"SIFMA supports the creation of an effective, efficient CAT system that will improve regulators' supervisory capabilities, thereby strengthening financial markets and enhancing trust and confidence in the financial industry," said Kenneth E. Bentsen, Jr., acting president and CEO. "Creating a CAT that captures the full lifecycle of trades is a massive undertaking that will require significant resources from the industry. This document is meant to provide our input on the best path forward."
"Establishing a CAT system that efficiently captures securities orders across all markets will provide regulators with an important new tool for monitoring trading activity," added Randy Snook, executive vice president, business policy and practices. "An effective CAT system will improve transparency in our markets, which is critical for building confidence in the financial system."
In its paper, SIFMA identified eight guiding principles for the development of a CAT system:
- Elimination of Duplicative Systems and Reporting;
- Appropriate Flexibility and Scalability;
- Centralized Administration;
- Public Transparency and Industry Engagement;
- Minimal Disruption to Existing Market and Business Practices;
- Reuse of Existing Assets and Standards;
- Data Security, Privacy and Consumer Protection; and
- Special Considerations for Options.
SIFMA utilized these principles to make specific recommendations on ten key topics that are vital to CAT implementation. Highlights of these recommendations include:
- Elimination of Other Rules and Systems – Eliminating legacy systems and rules will be a vital step towards creating an efficient and robust regulatory reporting regime. Examples of rules that could be eliminated include: OATS (FINRA), Electronic Blue Sheets (SEC), and Large Trader Reporting (SEC).
- Implementation Timeline – The proposed timeline should be modified to address specific concerns regarding the amount of time assumed for broker-dealers' internal systems build, internal systems testing, and industry-wide testing.
- Infrastructure – The CAT system will require top-quality infrastructure to support a large database populated with sensitive information, and to ensure firms are able to meet their reporting requirements. The paper offers guidance for data transmission, data security and privacy, error correction, testing and support.
- Governance – The industry should have adequate representation on any governance or advisory body within the governance framework. Administration of the CAT should be centralized under a single party.
- Customer ID – SIFMA supports the SRO's approach that would not require broker-dealers to obtain and store a unique CAT Customer ID from the CAT processor. Customer IDs should be determined as follows: date of birth plus social security number for individuals, and legal entity identifiers (LEIs) are preferred for entities, otherwise a tax identification code (TIC) should be used.
- Reporter ID – LEIs should be used for CAT Reporter identification.
- Linkages – The model for linking transactions together should follow the "daisy chain" model proposed by the SROs.
- Options – Given the unique characteristics of options transactions, exchanges are in a superior position to broker-dealers to provide options quote information to the CAT.
- Other Products – The CAT should be designed with multi-product expansion in mind from day one.
- Cost/benefit – Implementation of the CAT system will require tremendous resources from the industry. It is essential to design a system that is as efficient and streamlined as possible.
SIFMA's white paper was developed through iterative dialog with the SIFMA membership, representing a range of firm types, sizes and business models. The paper is co-authored by SIFMA and IBM, which was engaged as a consultant to this process. The full white paper is available here: http://www.sifma.org/issues/item.aspx?id=8589942773
