The Securities and Exchange Commission has approved a new blueprint for the governance of the consolidated tapes produced for US equities, together with an aggressive timetable for its implementation. But industry observers say it is highly unlikely that full implementation of the plan is achievable within the regulator’s 12-month deadline.

On August 6, the SEC quietly approved a modified version of what it has dubbed the CT Plan, which effectively consolidates the three plans that currently govern the two Securities Information Processors, the US public feeds for exchange-listed equities market data.

The SEC ordered the exchanges and the Financial Industry Regulatory Authority—collectively known as the self-regulatory organizations, or SROs—to come up with this plan, which forms part of its wider efforts to modernize the Sips. Perhaps the most important of the SEC’s August 6 modifications was the inclusion of an implementation timetable for the plan, which was lacking in its draft form but demanded by market data consumers.

“So, you’ll just have the one plan, but you still have three underlying subsystems that, presumably over time, become a unified system. That doesn’t happen in 12 months—there’s just no way on God’s green earth,” says Shane Swanson, senior analyst in market structure and technology at Greenwich Associates.

Under the SEC’s timetable, the CT Plan must be up and running a year from its effective date, on August 6, 2022. In the approved plan, the regulator also identified certain actions that need to be completed in the intervening year and assigned deadlines to them, too.

“The most important thing that came out of this [modified plan] were the timelines. They’re quite aggressive in that the effective date is the date of the commission’s approval, which was August 6. So, the staged implementation starts from that date, and 12 months on from then, the LLC must be operative,” Swanson says.

“The commission breaks out all the pieces that must occur in that timeline. This is what the industry wanted and was advocating for,” he says. 

The CT Plan will take the form of a limited liability company (LLC) registered in Delaware. Within two months of the effective date, the LLC must form an operating committee to govern it, comprised of a balance of SRO and non-SRO voting representatives, including market participants.

“The commission went to great lengths to ensure that non-SRO voting members would have a meaningful role as full members of the operating committee. Several provisions of the plan that were formerly the decision of just the SROs are now the decision of the full operating committee,” says Manisha Kimmel, chief policy officer at market data infrastructure provider MayStreet. Kimmel was formerly a senior policy advisor at the SEC.

Once the committee is formed, it also must adhere to a series of deadlines. For one, it must set the fees it will charge subscribers to Sip data. Businesses like MayStreet will be watching out for this fee schedule so that they can build their business cases and offer services as competing consolidators under the SEC’s related infrastructure rule.

The operating committee must also enter into agreements with the processors operating under the existing plans—NYSE’s Securities Industry Automation Corporation and Nasdaq—and contract a new independent administrator. It must also approve all necessary policies and procedures to facilitate the implementation of the CT Plan.

These actions will all involve non-SRO voting representatives, Kimmel says.

The SROs are required to provide regular updates on the implementation’s progress. “The SROs also have to put out quarterly public reports on the plan, so everybody in the industry gets to see where we are as we go through the process. I do think that’s healthy: sunshine is the best disinfectant. And if there are issues or concerns, they’ll come up quickly,” Swanson says.

Tall order 

It’s difficult to believe, however, that the SROs and, later, the operating committee, can accomplish all their mandated tasks in only a year, Swanson says. “The commission is saying this is going to go live within a year, and here are all the pieces that must converge for that to happen. I think the real question on everyone’s mind is still, ‘When does it actually occur?’”

He continues: “Even with the reasonable assumption that the SROs do everything they can to put this on the front burner, and put all their resources together: they get the operating committee selected; they get the fee schedule filed; the SEC then acts as quickly as it needs to with all the comment letters that will come in—and, trust me, there’s going to be a boatload—the SROs select the vendor contract and the administrator; they have everything developed and tested—all the documentation, the billing, the audit function, and the policies and procedures are in place …. Even if all this happens smoothly, can that be ready to go 12 months from last Friday? And even if it can, is the industry ready for it?”

It’s not clear how disruptive these changes will be to market data consumers, or whether the Sips’ underlying technology will be different, Swanson adds. “Or is it just the billing practices that are going to change? As opposed to getting billed from the three separate entities that you have today, you’ll get billed by one, but it’ll maybe have three line items. What are the intricacies of that?”

Deadline tussle

During the period from October 2020 to August 6 this year, when the plan was subject to a notice-and-comment period, industry representatives said hard deadlines were necessary to ensure the CT Plan wasn’t delayed indefinitely. Some commenters said that without the incentives of such deadlines, the SROs would have no reason to implement the plan at all. The larger exchanges view the SEC’s modernization efforts as an existential threat to their businesses, and as unnecessary, since, they say, the current Sips perform extremely well.

In their comment letters, like the one NYSE submitted in November, the big exchanges said many of the plan’s details remain too unclear for deadlines to be attached to them, particularly tight ones. There is still substantial confusion about how the CT Plan will interact with the infrastructure rule, they wrote. Nor is it clear how the proposed plan could include deadlines when so many unregulated entities must agree to provide services in order for it to become operational.

Comment letters said it would be impossible, for instance, to find and contract a plan administrator within the SEC’s timetable. Some pointed to the difficulties in finding an administrator during the Consolidated Audit Trail project.

The SEC, however, said that it “does not view the circumstances to be analogous. In the case of the Cat National Markets System Plan, the SROs were tasked with implementing the first-ever consolidated audit trail for equities trading, a complex NMS system without precedent. Here, by contrast, the operating committee will be conducting a request-for-proposal process to select an administrator to perform functions with which market participants, whether SROs or market data consumers, have extensive familiarity.”

The commission insisted that, overall, its timetable doesn’t underestimate the time needed to implement the CT Plan, adding that it wants the plan up and running as soon as possible since it is a critical piece of the Sip modernization initiative.

However, the SEC doesn’t spell out that it will refuse to grant extensions to the CT Plan’s implementation deadline. In analogous regulatory actions, the regulator has explicitly stated that such extensions would not be granted.

Legal threat

The exchanges have already sued the SEC over the plan and the infrastructure proposal. In oral arguments in May, NYSE and Nasdaq argued that the regulator was overstepping its authority with the order that led to the creation of the CT Plan. The court ruled in June that it was too early for the exchanges to challenge the proposal, as it was not yet a final action that could be reviewed by the court.

Industry sources would not be drawn on whether more legal action will disrupt the SEC’s timeline for implementing the CT Plan, but they believe such legal action is likely. In a blog post, MayStreet’s Kimmel noted that the exchanges re-filed their lawsuit in April, anticipating the dismissal.

Swanson says: “I would assume the SROs will ask for some sort of injunctive relief. Whether or not they get that is another matter. They must show the likelihood of success on the merits [of their case], and that is a pretty high burden of proof. They haven’t been as successful in this round of things as they were previously.”

In 2020, the large exchanges won a legal battle with the SEC over market data fees. 

“It’s a tricky question, because the SEC has proposed all of this as modifications to the CT Plan, and the SROs are arguing that some of these changes are outside the SEC’s authority,” Swanson says.