In other FinTech news, FINRA is sending out report cards and Cinnober lands a key deal in Japan.
The SEC voted late last month to move ahead with the final phase of the consolidated audit trail (CAT) project, part of a proposed national market system (NMS) plan to “create a single, comprehensive database that would enable regulators to efficiently track all trading activity in the U.S. equity and options market,” officials say.
The plan, submitted jointly by the self-regulatory organizations (SROs) via SEC Rule 613 of Regulation NMS, will be open for public comment before it takes effect.
SEC Chair Mary Jo White says in a prepared statement that the proposed CAT plan is “a major market structure milestone” that will help regulators “conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct,” according to SEC officials.
“The proposed NMS plan details the methods by which SROs and broker-dealers would record and report information, including the identity of the customer, resulting in a range of data elements that together provide the complete lifecycle of all orders and transactions in the U.S. equity and options markets,” according to the SEC. The CAT proposal “also sets forth how the data in the CAT would be maintained to ensure its accuracy, integrity and security.”
The NMS plan also includes “a detailed preliminary economic analysis of the proposal, which includes a discussion of the economic effects, including costs of the creation, implementation and maintenance of the CAT as proposed by the SROs,” say SEC officials.
The CAT NMS plan is intended to apply to NMS securities and over-the-counter equity securities, officials say. The CAT database would include various stages in the lifecycle of an order such as “origination, routing, modification/cancellation, and execution.”
The SROs and broker-dealers would be required to submit certain information about the order to the central repository, such as:
- A unique identifier, provided by the broker-dealer, for the customer submitting the order;
- An identifier, provided by the SRO, for the broker-dealer receiving, originating, routing, or executing the order;
- The date and time of the order event;
- And the security symbol, price, size, order type, and other material terms of the order.
Public comment on the CAT proposal should be received by the SEC within 60 days of its publication in the Federal Register, officials say.
Randy Snook, executive vice president, business policies and practices, at financial services industry advocacy group SIFMA, said in a statement that CAT will be “a critical industry utility” that it will review.
“In the almost six years since the SEC first proposed the creation of a CAT, cyber threats have increased in frequency and sophistication,” Snook says. “It is essential that the CAT have robust protections for the massive volume of sensitive transaction data it will track and store, which will include personally identifiable information (PII), including social security numbers, for every person with a brokerage account.”
Snook adds that redundant systems will have to be replaced. “There must be a commitment to promptly eliminate systems such as FINRA’s Order Audit Trail System (OATS), the Electronic Blue Sheet (EBS) system, and the Large Trader reporting requirements,” he says.
FINRA Takes On Spoofing and Layering
The Financial Industry Regulatory Authority (FINRA) is making available to member firms its “first monthly cross-market equities supervision report cards,” intended to help firms “identify and halt spoofing and layering activity,” say officials at the regulator.
Layering refers to entering limit orders with “the intended effect of moving the market to obtain a beneficial execution on the other side of the market,” FINRA officials say. “Spoofing refers to entering orders to entice other participants to join on the same side of the market at a price at which they would not ordinarily trade, and then trading against the other market participants’ orders.”
To stop these practices, the regulator is “marshaling its ability to look across trading at different firms and markets to bring that information to bear in the fight against layering and spoofing,” says Richard Ketchum, FINRA chairman and CEO. “These types of manipulation take advantage of other investors and harm public confidence in market integrity. We expect that the firms will use the data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”
The report cards will be sent to firms where FINRA “identifies potential spoofing or layering by the firm or entities to which the firm is providing market access,” officials say. “The reports provide a summary of the identified market activity, detailed information about the exceptions, and trends in such trading over the preceding six months. The report cards do not reflect conclusions that violations have occurred; rather they indicate potential problems that need to be reviewed.”
“Bad actors look to mask their activity by trading across multiple markets or firms, which for any individual firm may be hard to detect,” said Tom Gira, executive vice president of market regulation at FINRA. “We are leveraging our cross-market data and employing sophisticated automated surveillance technology to flag suspicious trading patterns so that firms can add that data to their own surveillance and supervisory processes and take appropriate action to address the activity even before FINRA can complete a formal investigation.”
Gira adds that the reports to the firms are a preventive compliance measure that will operate in parallel with FINRA’s own surveillance process. “FINRA will continue its current practice of investigating suspected manipulation and, where appropriate, taking enforcement action or referring the activity to the Securities and Exchange Commission if the market participants in question are outside of FINRA’s jurisdiction,” he says.
The report cards are “the first in a planned series focusing on cross-market manipulation,” and join an existing array of report cards to firms covering such areas as trade reporting, best execution, audit trail reporting and Regulation NMS compliance, FINRA officials say.
JPX Exchange Group to Use Cinnober for Risk Monitoring
Exchanges group JPX, created via the merger of the Tokyo Stock Exchange Group and the Osaka Securities Exchange, has chosen Cinnober for risk monitoring across the Japanese market of equities, bonds, futures, options, credit default swaps and interest rate swaps, officials say.
The news follows an announcement earlier this year that JPX picked Cinnober for the clearing of the exchange’s listed derivatives market, officials add.
The new risk monitoring solution, “customized and partially based on the risk module in the TRADExpress RealTime Clearing platform,” will provide JPX with cross-asset risk monitoring and stress testing, back testing and Value at Risk (VaR), officials say. The solution will enable JPX to serve global standards and trends across all products.
“The real-time clearing of listed derivatives, paired with sophisticated risk monitoring across all asset classes, are important milestones in our next generation clearing system,” says Hiroyuki Shibuya, chief information officer of JPX, in a prepared statement. “This will take our services to the next level and strengthen our position in a global and very competitive market.”
Cinnober provides clearing and risk management solutions to exchanges and clearinghouses such as Brazilian BM&FBOVESPA, the British LME Clear, DGCX in Dubai, and the South African JSE.
“We’re truly proud of our collaboration with JPX on the modernization of the Japanese post-trade markets. The partnership has now been expanded to include a highly-innovative risk management solution, which underlines the great start we’ve made on this journey,” says Veronica Augustsson, CEO of Cinnober in a statement. “Building an improved, safer, and even more efficient Japanese market, using new, cutting-edge technology, will give JPX a solid and global competitive advantage.”
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