Consolidated Audit Trail

SEC Blames SRO’s for Slow CAT Rollout

Consolidated Audit TrailThe Consolidated Audit Trail (CAT) is behind schedule and the Securities and Exchange Commission (SEC) is blaming the Self-Regulatory Organizations (SROs), including FINRA, the Financial Regulatory Authority.

Jay Clayton, Chairman of the SEC, was on Capitol Hill testifying in front of the Senate Banking Committee on December 11, 2018.

In a wide ranging written opening statement, Clayton touched upon CAT and why it is behind schedule.

“Under the CAT NMS Plan, the self-regulatory organizations (SROs)—the national securities exchanges and FINRA—are responsible for developing and implementing the CAT and were required to begin reporting data to the CAT by November 15, 2017.  The SROs missed that deadline.” Clayton said. “While the CAT has now begun receiving equity and options data with limited functionality, the SROs remain out of compliance with the CAT NMS Plan today.

“The SROs are making some progress, but the development and implementation process remains slow and cumbersome due largely to what I believe are project governance and project management issues experienced by the SROs.  While, pursuant to SEC staff requests, the SROs recently set forth a revised timeline with detailed milestones, more recently Thesys (the plan processor) informed the SROs that it does not plan to deliver full functionality of CAT’s first phase in accordance with these milestones.  The SROs have reported to our staff that they currently expect to deliver the first phase of CAT (which, again, was required to be delivered by November 15, 2017) by March 31, 2019.  We remain frustrated with failure of the SROs to meet their obligations and the delays in the development of the CAT.”

What is CAT?

The SEC’s implementation of CAT is approximately six years in the making, beginning with Rule 613, first created in 2012.

Here’s some background from FINRA. “SEC Rule 613 requires FINRA and the national securities exchanges to jointly submit a National Market System (NMS) plan detailing how they would develop, implement and maintain a consolidated audit trail that collects and accurately identifies every order, cancellation, modification and trade execution for all exchange-listed equities and options across all U.S. markets.”

What is NMS, National Market System?

The NMS is “the system for equity trading and order fulfillment in the U.S. It consists of trading, clearing, depository, and quote distribution functions. The NMS governs the activities of all formal U.S. stock exchanges and the Nasdaq market.” According to the website, Investopedia.

CATs Purpose

CAT will “enable exchanges, the Financial Industry Regulatory Authority, Inc. (FINRA, and together, the SROs – self-regulatory organizations) and the U.S. Securities and Exchange Commission (SEC) to more efficiently track securities trading activity throughout U.S. markets by collecting how orders are processed, and trades executed.”

FINRA – Financial Industry Regulatory Authority

At least, that’s how it has been billed. Thus far, there has been nothing but delays.

Emails to FINRA were forwarded to the media relations department of the CAT NMS Plan, which is overseeing the project; those emails were left unreturned.

Sherrod Brown
Sherrod Brown, Democratic Senator from Ohio

Senator Brown on Leveraged Corporate Debt

Sherrod Brown is a Democratic Senator from Ohio, and the Ranking Member, or head of the minority, on the Senate Banking Committee.

He raised concerns about increasing leveraged corporate debt.

“We should be looking at the record levels of risky corporate debt and leveraged loans: how that debt is packaged in collateralized loan obligations (CLOs). The complex securities that allow investors to trade pools of loans.” Brown said in his opening remarks. “The Fed and the OCC are looking at bank’s exposure to leveraged loans, but they say their risks are manageable and they are not worried. We’ve heard that one before; it was a little over ten years ago before the economy came crashing down.”

If this sounds familiar, it is because the talking points match remarkably a diatribe that fellow Democrat from Massachusetts Elizabeth Warren articulated when Senator Warren was questioning the Fed’s Head of Regulation, Randal Quarles, last month during another hearing by the same committee.

“This market looks a lot like the sub-prime mortgage market looked pre-2008. The loans are badly underwritten, with minimal protections, like sub-prime mortgages, these loans are being packaged up and sold to investors as collateralized loan obligations, or CLOs, which spread the risk throughout the system, which take the lender off the hook for originating a bad loan, and these loans have adjustable rates.” Warren said during that hearing.

What is a CLO?

Collateralized Loan Obligations, or CLOs, pool mid and large size business loans together and securitize that debt into a bond.

They are traded over the counter; Brown noted further, “Leveraged lending, CLO investors include hedge funds, mutual funds, other market participants under SEC oversight. As the shadow banking market plays a larger role in leveraged lending, watchdogs can’t just focus on the big banks; it’s your job to worry when there’s nothing to worry about.”

“A decade ago regulators in the Bush administration failed the country and the price was enormous,” Brown said, once again echoing a point Warren made in the previous hearing.