SROs lay out audit trail timetable

By Philip Porado | January 30, 2006 | Last updated on January 30, 2006
3 min read

To a busy securities firm, June of 2008 is a long way away. But to that firm’s IT staff, it’s the blink of an eye.

A request for proposals soliciting vendor bids for development of the Trade Reporting and Electronic Audit Trail Standards (TREATS) will go out soon, Investment Dealers Association vice president for sales compliance and registration Larry Boyce told an SRO conference in Toronto this week. A vendor will be chosen by June, after which the timeline for firms to start delivering audit trail information electronically to regulators will be firmed up.

It’s planned to have firms deliver electronic order data on listed equities by June 2008 and for fixed income products in December ’08. That will be followed by electronic data delivery for over-the-counter equities in July 2009 and exchange-traded derivatives in September ’09.

Maureen Jensen, RS’s eastern region vice president for market regulation, noted electronic trading is worldwide and that other countries already have systems like TREATS in place. Canada is behind this trend and needs to catch up, she said, adding increased emphasis on compliance standards is driving the need for audit trail information to be available to regulators. “With [alternative trading systems] ATSs coming on-stream, we’re going to need this so we can look at best execution across markets,” Jensen said.

TREATS will call upon securities firms to send regulators information about the lifecycle of an order — from the time it’s placed, to the time it’s completed at an exchange. This will include time stamps, keyed to synchronized clocks, to document every phase of the order’s lifecycle. Currently, firms record some of this information by hand and some electronically.

That, said Jensen, means the data is somewhat disconnected and hard for regulators to match with order-flow information sent by trading centres. The patchwork nature of the data means regulators are currently sending more requests for information to firms than they will once TREATS is implemented. The automated audit trail system will let RS and others “focus on true issues and not phantom issues,” she said. TREATS also will allow regulators to see if orders are executed all at once, or pieced out, and whether they leave Canadian exchanges for execution in the U.S., or overseas.

Boyce noted existing regulations call for audit trail data to be supplied to regulators but that there is an exemption for compliance until the end of 2006. The exemption will likely be extended based on how long it takes to develop and complete the transition to TREATS.

Fionnuala Martin, a senior industry consultant at BMO Nesbitt Burns, advised firms to start budgeting for the IT expenses — and time — necessary to put TREATS systems in place. She said many legacy systems in use at firms were developed from the stock exchange out and so are not designed to capture order information for reporting purposes. Industry representatives have been working with the SROs to develop a single reporting model, so separate reports don’t have to be generated for each regulator. There also will be a single connection between the firm and all the regulators, to reduce costs.

Boyce noted regulators have also narrowed the scope of what must be reported through TREATS. He said decisions were made to drop reporting requirements for mutual funds, over the counter derivatives and exempt products. Investment funds have also been placed outside the TREATS scope for now, although that may change down the road, he said.

So far, firms in Canada are being spared the turbulence experienced by U.S. securities firms during National Association of Securities Dealer’s introduction of its Order Audit Trail System (OATS) during the late 1990s. OATS was conceived in the wake of the 1997 Nasdaq market scandal and the program was implemented in phases based on firm size. The bulk of the transition was concluded by 2000, although rules to implement the third phase, which covered sole proprietorships and other very small firms, were only approved by the SEC last September.

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Philip Porado