CONSOLIDATED AUDIT TRAIL (CAT) – A REAL OPPORTUNITY

The Securities Exchange Commission (SEC) Rule 613 requires the timely collection of securities transaction executed in US markets.  In addition to the SEC, CAT is being created with the active collaboration of the registered exchanges and FINRA which are commonly known as Self Regulatory Organizations (SRO). The first step focuses on the reporting of US National Market Securities (NMS), which includes listed equities and options.

Though a driver of this effort is the “Flash Crash of 2010” I believe that it reflects the regulators realization that they need to be more proactive in gathering timely data on all transactions flowing through the US infrastructure. Logically they are starting with trade data, which are currently dispersed across multiple markets. There are a still number of open issues that remain to be addressed by the regulators but I am confident that the other participant’s interests and concerns will be addressed to the benefit of the industry.

Though this effort requires substantial efforts to develop and implement, it is a real opportunity to bring the industry into the 21^st century. In addition it should provide an opportunity to sunset or eliminate various trade reporting systems that provide similar data to specific regulators. Also, I believe that this data collected by a central source may, in the future, provide other benefits to the industry as well.

            Do you believe that there is real value in this new rule?

                        If so, what are the benefits? If not, why not?

                                    If not, what the alternatives to meeting the regulatory needs?

COLLATERAL MANAGEMENT OR MIS-MANAGEMENT……

Depending on the level of preparation, it could be either of the above. Traditionally collateral management was a back office function with little or no impact on the front office. But the Dodd-Frank Act (DFA), European Market Infrastructure Regulation (EMIR) and Basel III require participants to collateralize trades and other transactions.

Broker-dealers have been collateralizing clearing and guarantee funds for many years. But buy-side firms, such as hedge funds and other fund managers, have not had the same experience. They will now be required pledge collateral to support their transactions. If they don’t have appropriate or sufficient collateral they will need their custodians or clearing brokers to locate the needed collateral.

This requires custodians, clearing brokers and industry service organizations to enhance their services. As such it is a new source of revenue to industry service organizations and a new cost for their clients.

Electronic interfaces among the industry service organizations as well as investor will be critical to ensure that transactions are collateralized at minimal costs.

            What are the critical issues facing your firm?

                        How will you optimize the collateral you have?

                                    What are the available alternatives to improve collateral?