Headaches Over Large Trader Reporting

Terry Flanagan

SEC program would require broker-dealers to report execution times at individual account level.

The Large Trader Reporting regimes unveiled by the Securities and Exchange Commission and Commodity Futures Trading Commission will entail extensive modifications to the systems used by both institutions and broker-dealers.

For financial industry technology vendors and their clients, the SEC’s Large Trader Reporting Regime is a technically feasible but logistically daunting regime.

The SEC has described the recordkeeping and reporting provisions of the large trader reporting rule as “modest,” requiring little more than enhancing the existing Electronic Blue Sheets (EBS) system for broker-dealers to add two new data field (i.e., LTID and execution time of the trade) and requiring that transaction records be available for reporting on a next-day basis.

However, the enormous logistics effort to file, create unique IDs, map and store this information will challenge the industry at a time when technology budgets and headcounts are under considerable pressure.

Under current market structure, reporting brokers face challenges in obtaining execution times for large traders because of the complexities that exist in processing and settling trades, according to a letter submitted by Sifma.

These challenges are particularly acute for the average pricing of client allocations representing multiple executions, which in all cases don’t trace execution information at the individual account level. There does not exist a mechanism for communication of execution times between executing and clearing brokers.

“The rule requires that execution time be reported upon request to the SEC for large traders, but clearing firms use aggregated information and can’t easily provide execution times,” said Jess Haberman, chief operating officer at Fidessa (U.S.).

The SEC is finalizing its Consolidated Audit Trail proposal, which will collect and consolidate detailed information about orders entered and trades executed on any exchange or OTC venue for equities and options.

The Large Trader reporting requirements are intended to address the near-term need for access to more information about large traders and their activities.

“The Large Trader rule was meant to be an interim rule with limited costs, but way it’s written could entail tremendous costs,” said Haberman.

As part of the implementation of Dodd-Frank, the CFTC has expanded its Large Trader Reporting program by requiring clearing members and swap dealers to report physical commodity swap and swaption positions.

The final rules require regular position reporting and recordkeeping by clearing organizations, clearing members and swap dealers for any principal or counterparty accounts containing physical commodity swaps or swaptions that meet or exceed a “reportable position” threshold set by the CFTC.

“The compliance dates with the CFTC’s Large Trader Reporting are upon us, with clearing members already being required to report and swap dealers having a compliance date of July 2012,” said Phil Wang, senior vice president of product management at OpenLink.

“Even for existing requirements, I would expect additional refinements, changes and clarifications,” said Wang. “For example, in the case of the Large Trader Report, one could envision this being extended to additional commodity products and/or derivative types in the future.”

OpenLink’s Large Trader Reporting compliance system is intended to alleviate the need for clients to develop and maintain their own data extraction/reporting/interfacing solutions.

“Clients’ internal IT and business teams will be challenged enough due to the number of competing compliance initiatives that will require attention over the next few years,” Wang said. “This out of the box solution will alleviate the demands on our clients’ resources – not just during initial implementation, but over the long term as requirements change and evolve.”

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