CAT 'Tsar' May be Required to Break Gridlock

The Consolidated Audit Trail (CAT), an ambitious program meant to track trading activity in US equities and listed options, was meant to go live in November 2017 for self-regulatory organizations (SROs)—the US trading venues that comprise the committee charged with overseeing the operation of the system, which is being built by Thesys Group. However, participants requested exemptive relief from the US Securities and Exchange Commission (SEC) shortly before this deadline, saying it would not be ready for some years to come.

The SEC denied that relief but has not acted since that date, despite the fact that the entire industry is now technically out of compliance with one of its rules. Participants are largely understood to be following their revised work plan in lieu of further regulatory guidance. However, the work has not proceeded quickly.

This is, say bank staff and former staffers at the SEC, largely because decisions about the direction for the CAT are made by committee, but its participants are naturally coming at problems with differing agendas and problems. The lack of a guiding hand, such as the SEC, makes the process a laborious one.

“I think the problem is that this was handed out to the SROs as a collaborative, democratic process, and they all have different agendas, they all have their own ideas about how they want their data to be used and how they want to use others’ data,” said Tom Sporkin, a partner at Washington, DC-based law firm Buckley Sandler, and a former staff attorney at the SEC who worked on the original CAT rules. “Now this is all going to be in a repository, and they’re all going to have surveillance obligations, so for the first time you’re going to have one exchange getting a view into what’s going on at another.”

The key to ensuring that decisions get made quickly, Sporkin said, was for the SEC to step and physically be in the room. Part of this might mean doing something that it has long said it is willing to do but has so far held off on appointing—an official whose job it is to make decisions in committee when the SROs can’t or won’t.

“This might be that one time where the SEC needs to step up and appoint what they’ve threatened, which is a CAT tsar,” he said. “That’s always been out there in the ether, a CAT tsar to sit in this room and make decisions on behalf of the SROs if they can’t make those decisions themselves.”

Sporkin and others quoted in this article were speaking on a webcast, held on April 25 by WatersTechnology, to discuss issues surrounding the CAT. Others, including Joshua Beaton, the CAT program manager and an executive director at Morgan Stanley, agreed with Sporkin’s assessment.

“I wholeheartedly agree that there’s a governance issue at the heart of the uncertainties we’re facing,” he said. “From a slightly more practical perspective, there have been a number of working groups that have been kicked off to address questions that have been raised about the draft of the plan we’ve seen. My observation has been that so far the SROs have been very slow to take that guidance and to clarify for Thesys CAT what some of these questions should be—and some of them are really fundamental sorts of questions.”

The SEC did not respond to a request for comment. Spokespeople for the CAT NMS Plan, the committee which runs the program, said previously that it “remains committed” to building the CAT.

Choke Points

Nathan Call, director of regtech solutions at vendor FIS, which was one of the original bidders to run the CAT before Thesys ultimately won the process, said that “it’s going to take more of an affirmative effort by the SEC to get in that room for there to be significant, much-more-prompt progress in this process.”

“Reg NMS creates a fairly healthy maintenance committee, and decisions are made by committee, but when we try to put together a large project like this there needs to be somebody at the top who makes decisions, and once the road starts to choke, they can push things forward,” he said.

He added that uncertainty around the implementation dates for the projects was one of the key concerns he heard from clients—large broker-dealers, for instance, are due to begin reporting this November under the original timeline, even though SROs have not begun their reporting yet.

“I think that until we arrive at a governance situation which is more streamlined, we’re going to be in a situation where things move a lot slower than we might hope they would,” Morgan Stanley’s Beaton added.

Correction (May 8): This story has been updated to clarify the past comment from the CAT NMS Plan.