Large Trader Rule Means Large Headaches

Terry Flanagan

The large trader reporting regime unveiled last week by the Securities and Exchange Commission will entail extensive modifications to the systems used by both institutions and broker-dealers, notwithstanding the SEC’s statements to the contrary.

“For financial industry technology vendors and their clients, the SEC’s Large Trader Reporting Regime is a technically feasible but logistically daunting regime,” Charles Giessen, senior vice president and general manager of the financial markets division at SS&C Technologies, told Markets Media.

Institutions must file new forms 13h and receive from the SEC unique identifier codes, called large trader identification number (LTID), for each of their specific sub-accounts, which should map to unique tax IDs.

“Institutions must modify their internal systems to reflect these unique IDs and must update their EMS/OMS systems to pass this information to brokers with orders,” said Giessen.

For non -electronic orders, i.e. phone orders, institutions must adjust internal processes and systems to pass this information to the executing brokers in an alternative manner. This may be by email or fax. “This seems very difficult to support,” said Giessen. “It therefore appears that all orders will require entry into a time stamped and linked EMS.”

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 require that transaction records be available for reporting on a next-day basis.

Broker-dealers or their agents must gather LTIDs from their clients and map them to their internal client account numbers. This mapping of account numbers is required to preserve the anonymity of the underlying account.

“Broker-dealers will have to modify existing systems to receive and record these sub-account details with the block institutional order,” said Giessen. “Brokers will have to modify their internal OMS system to review these new account id’s and if necessary verify any regulatory controls on volumes, etc., prior to releasing orders to the market.”

Broker-dealers will also need to map execution details, such as fills, to the original institutional order and the unique sub-accounts associated with the order, as well as transmit details back to the institutional EMS and recorded at the institution.

Finally, the entire process must be recorded, stored and recoverable for a seven year period.

“Today various EMS/OMS and FIX networks are available to comply with this process,” said Giessen. “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.”

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