SEC’S Stein Says Audit Trail Not Coming Anytime Soon

The much ballyhooed consolidated audit trail (CAT) isn’t coming to the market any time soon, according to one regulator.

Say it ain’t so Joe.

Can you hear the Bronx cheer from the marketplace watchdogs, regulators and those who feel the equity market is broken and needs the audit trail soon?

In remarks given at the recent 2015 SIFMA Operations Conference & Exhibit, Securities and Exchange Commissioner Kara Stein told attendees that the CAT has been hamstrung by administrative obstacles that have halted its development. Thus, building the audit trail is a ways off.

“The project won’t be completed soon,” Stein told conference attendees. “Implementation of the CAT project remains years away.”

On July 11, 2012, the SEC voted to adopt Rule 613 under Regulation NMS requiring the national securities exchanges and national securities associations listed below (collectively, the SROs) to submit an NMS plan to the SEC to create, implement, and maintain a consolidated audit trail.

The need for a new CAT is rooted in the May 2010 “Flash Crash” whereas regulators didn’t have enough information to properly and speedily recreate the events leading up to the market meltdown. Much like an aircraft’s “black box,” CAT will allow regulators and others to examine specific details of a market event, such as the “flash crash,” understand it and draft rules and policies to mitigate future events.

The market’s self-regulatory organizations have developed the plan and submitted it to the SEC pursuant to Rule 613. An amended CAT NMS Plan was filed on February 27, 2015.

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A plan processor for the CAT has already been selected and six bidders have been reported as vying to build the system. A price tag of $53 million has been talked as the initial cost of building the audit trail.

Randy Snook, executive vice president at SIFMA added that the CAT will require tremendous resources from the industry as it will track the full lifecycle of all trading activities.

“SIFMA supports the CAT concept as regulators need the data to enhance their efforts to reconstitute market dislocation and monitor insider trading and market manipulation,” Snook said. “However, in order for the CAT to be truly efficient, we must see the elimination of older systems that become redundant and the system itself needs to be cost efficient for both the regulators and the regulated.”

He added that SIFMA planned to stay actively engaged as the CAT process moves forward.

“Our members are reviewing the proposed CAT NMS plan closely and will submit the industry’s views on governance, funding, data security, plans for eliminating redundant systems, and a workable implementation schedule,” he said. This is certainly an area where the expertise of operations professionals will be needed to share their insight and help ensure a smooth transition from existing regulatory reporting systems to the CAT.”