The Impact of Reg SCI

It's tough to get a good feel for the impact a regulation might have when it was passed less than two months ago. And while it's still early days when it comes to Regulation Systems Compliance and Integrity (Regulation SCI), which looks to strengthen the US securities markets' systems compliance and integrity, there is no doubt that it will have an effect.

For Emmanuel Doe, president of Interactive Data's trading solutions group, one of the biggest questions is a common one among new regulations: How can one remain compliant in the most economical way?

A lack of exact details regarding Reg SCI's requirements makes it difficult to put a definitive number on the cost of remaining compliant under this newest regulation, but with the possibility of investments having to be made across multiple stacks of technology, it likely won't be inexpensive.

Doe says the regulation could have a ripple effect on the entire market. While Reg SCI only pertains to self-regulatory organizations (SROs), some alternative trading systems (ATSs), plan processers and certain clearing agencies, everyone will have to help bear the cost of remaining compliant.

"They're not non-for-profit organisations, so consequently they still have a bottom line to maintain," Doe tells Sell-Side Technology. "As a result, the questions they need to consider are how can extra feeds be generated? How can extra fees be leveraged ─ and to whom ─ in order to cover the additional regulatory-mandated technology costs which are necessary to keep pace?"

Outages seriously impact exchanges' ability to generate revenue and the effect lingers for weeks after an incident. -- Jim Myers

Needed Standardization or Busy Work

The regulation could have big benefits in the long term, though. According to Doe, Regulation SCI could create some standardization when it comes to the technological stacks and platforms. The high costs of reconstructing one's infrastructure to meet the regulation may lead to a few systems rising above the rest.

This, in turn, will help to decrease costs across the entire industry.

"There is a significant amount of cost in the industry that is being born by the fact that many systems don't talk to one another in the same way," Doe says. "I believe the benefit of this is that the backbone of financial data, financial systems and financial trading capabilities will start to drive fewer anomalies and maybe three or four core systems that everyone rallies around and supports."

Jim Myers, senior manager of business consulting for trading and risk management at Sapient Global Markets, sees Regulation SCI as more of a reactionary measure on behalf of the US Securities and Exchange Commission (SEC) that will lead to more busy work than anything else.

When a system suffers an issue a report will have to be written about it. Policies and procedures will also have to be written up for review by the SEC.

The fact the regulation included coordinated, system-wide testing is something that caught Myers' eye. He's also interested to see what lessons can be learned from the SEC by analyzing the data they receive from Reg SCI.

Really Necessary?

At the end of the day, though, Myers says exchanges are already trying to do everything possible to avoid a crash. Myers spoke about one exchange that had an outage for half-a-day and needed a month to get back to the same level of market share it had prior to the crash.

All of this leads Myers to believe the impact of the regulation will be marginal at best.

"The vast majority of regulation I don't think is going to make a significant impact because all exchanges have a robust quality and assurance function in-house. They have a robust software development lifecycle in place," Myers tells Sell-Side Technology. "They all understand that it is not in their best interest to have a day that they go down for six hours. Outages seriously impact exchanges' ability to generate revenue and the effect lingers for weeks after an incident."

The Bottom Line
· As is the case with many new regulations, one of the biggest initial questions is how those affected will pay to remain compliant.
· Industry members are torn on the impact of Reg SCI. Some see it as leading to better standardization across the markets. Others think it will simply lead to more paperwork.