U.S. securities regulators voted Wednesday to establish consolidated audit trail requirements, which will allow regulators to track orders from inception through to execution.
A new rule approved today by the U.S. Securities and Exchange Commission (SEC) will require securities exchanges and the Financial Industry Regulatory Authority (FINRA) to jointly submit a comprehensive plan detailing how they would develop, implement, and maintain a consolidated audit trail that would collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.
Currently, each SRO uses its own audit trail system, there is no single database of data regarding orders and executions, and existing audit trail requirements vary significantly among markets.
“A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate,” said SEC chairman Mary Schapiro.
The SEC stresses that a consolidated audit trail will increase the data available to regulators investigating illegal activities such as insider trading and market manipulation; significantly improve their ability to reconstruct broad-based market events accurately; and, increase the ability of regulators to monitor overall market structure.
FINRA called the move “an important step that will enhance regulators’ ability to conduct surveillance of trading activity across multiple markets and perform market reconstruction and analysis.”
It also says it will work with the other self-regulatory organizations to submit a plan that, it says, “will help close the regulatory data gaps that exist today”, adding that it believes that comprehensive intermarket surveillance “is essential to ensuring the overall integrity of the U.S. securities markets and maintaining the confidence of investors in those markets.”
In Canada, the Investment Industry Regulatory Organization of Canada (IIROC) has already established a consolidated audit trail through its Surveillance Technology Enhancement Platform (STEP), which was launched in 2010.
The Securities Industry and Financial Markets Association (SIFMA) also approved of the move. SIFMA executive vice president, Randy Snook, noted that it endorses the creation of a centralized and comprehensive audit trail that “would enable the SEC and securities SROs to perform their monitoring, enforcement and regulatory activities more effectively.”
Snook also said that the revisions the SEC has made to its original proposal represents an improvement. “Most importantly, the SEC has moved away from a real-time reporting regime, in favor of a next day reporting scheme,” he said, adding that SIFMA believes “that this is a more manageable and cost-effective approach to this kind of system.”
The new rule becomes effective in 60 days. SROs are required to submit their plan to the SEC within 270 days. And, once it approves the plan, the SROs will be required to report the necessary data to the central repository within one year, and members of the SROs will be required to report within two years, although certain small broker-dealers will have up to three years to report the data.