Trade bodies criticise SEC’s plan for consolidated audit trail

The CAT “poses new dangers” to investors according to investment managers’ association.

The US Securities and Exchange Commission’s plans for its consolidated audit trail (CAT) for securities markets — which the SEC wants up and running in 2017 — have been criticised in comment letters from two leading trade associations.

Described as “the largest financial IT project of all time”, the idea of a the giant data repository for data on stock orders and quotes on US exchanges was first proposed in the wake of the 2010 flash crash. The idea was that the CAT could be monitored by regulators in order to identify the source of market disorder.

Earlier this year, with bidders for the construction of the project narrowed down to three the SEC invited comments. See our story here.

In response, the Investment Company Institute (ICI), which represents thousands of US fund management groups, has warned this week that the “treasure trove” of data in the CAT will be irresistible to criminals. The Securities Industry and Financial Markets Association (SIFMA), which represents broker-dealers and other trading firms, has meanwhile stated in its comment letter to the SEC that there is a danger the CAT will duplicate existing systems for managing trade data.

In its comment letter, the ICI says that it supports the objectives of the CAT but: “We believe the CAT poses new dangers to registered funds and their shareholders … Essentially, the CAT will contain information concerning position information and trading strategy for all registered funds and other entities active in the U.S. equity and options markets. This treasure trove of order and execution information has tremendous commercial value, and we are gravely concerned that cyber criminals and others will seek to access and use it for their personal gain to the detriment of funds and their shareholders.”

The Institute added that predatory traders or cyber criminals could use CAT data to construct fund position information or reverse engineer fund trading strategies, enabling them to replicate fund portfolios or, front-run fund trading decisions. Read the ICI comment here.

SIFMA ’s comment letter also makes clear that the Association’s members support the development of the CAT. However, SIFMA also stated that: “The CAT Plan does not offer concrete steps for the elimination of existing systems that will be obviously duplicative of the CAT – such as FINRA’s OATS system – and instead would give the SROs several years to conduct an analysis before being required to eliminate redundant systems.”

SIFMA also said that the currently plans for the CAT, drawn up principally by 18 securities exchanges, will pass the: “Vast majority of CAT-related costs to broker-dealers without providing any detailed analysis or justification.”  Read the SIFMA comment letter here.

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