Consolidated Audit Trail

Consolidated Audit Trail Considerations for broker-dealers March 2017

Introduction On November 15, 2016, the Securities and Exchange Commission (the SEC) unanimously approved the highly anticipated Consolidated Audit Trail (CAT) National Market System (NMS) Plan, better known as the CAT NMS Plan, proposed by the self-regulatory organizations (SRO). The approval of the CAT NMS Plan has set in motion many activities that SROs and broker-dealers have to perform over the next three years as set forth in the CAT implementation timeline. Background In today s high-speed electronic markets, trading is widely dispersed across a variety of market centers (exchanges, alternative trading systems, also called dark pools, over-the-counter (OTC) broker-dealers, etc.). In order to fulfill market oversight responsibilities, the exchanges and FINRA (collectively, the SROs) maintain their own order and trade audit trail systems with each audit trail varying in scope, required data and format. These include the Order Audit Trail System (OATS) and Electronic Blue Sheets (EBS), among others. The SEC relies heavily on the data gathered by these SROs to perform investigations. Given this complexity, the SEC realized that there are significant shortcomings in the completeness, accuracy, accessibility and timeliness of the existing audit trail data. This became evident by the amount of time it took the SEC and its representatives to investigate the Flash Crash of May 2010. In 2012, the SEC adopted Rule 613, under the Securities Exchange Act of 1934 (Exchange Act), to require national securities exchanges and FINRA to submit a NMS plan to create, implement and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities. This system would capture customer and order event information for orders in NMS securities, across all markets from the time of order inception through routing, cancelation, modification or execution. On April 27, 2016, the SEC published the proposed CAT NMS Plan put together by the SROs for public comments. The industry provided feedback to the SEC through multiple comment letters. The SEC finally approved an amended CAT NMS Plan on November 15, 2016. 1 Consolidated Audit Trail Considerations for broker-dealers

CAT overview CAT is intended to enable regulators to monitor, analyze and investigate trading activities in NMS securities (equities and options) and OTC equities, by using data stored in the central repository. CAT reporters SROs: National securities exchanges A Broker-dealers: Large broker-dealers Small broker-dealers* Other data providers: SIP (securities information processor) Central repository to be built and operated by Thesys Technologies LLC. Regulators and SROs SEC Bats BZX Bats BYX BOX C2 CBOE CHX Bats EDGA Bats A emini ISE Mercury MIAX NASDAQ BX NASDAQ PHLX NASDAQ NSX NYSE NYSE MKT NYSE Arca IEX The CAT NMS Plan imposes enhanced data capture, reporting and retention requirements on broker-dealers. Compliance with CAT reporting will have a significant impact on the technology, operations; and process, risk and control functions of broker -dealers. CAT reporters The CAT NMS Plan requires national securities exchanges and A, the broker dealers and SIPs, collectively called the CAT reporters, to submit order and trade data across the life cycle, from quote through execution and allocation, to the CAT repository on a daily basis. The CAT reporters will also have to submit the information of the customer that initiated the orders. The will operate the centralized repository that will collect, process and maintain the data submitted by the CAT reporters and make it available to the SEC and the SROs to perform market surveillance and oversight. The will be governed by an operating committee consisting of representatives from the SROs. At a high level, the is expected to: Validate data submitted by CAT reporters and support repair of erroneous data anage customer identifiers to uniquely identify a customer across multiple firms Create linkages across orders to trade life cycle events based on data received Have accurately linked data ready for regulators access by 8:00 a.m. EST of T+5 (five days after the trade date of the security) Create a framework for regulators to use the data for their analyses On January 17, 2017, Thesys Technologies LLC was chosen by the SROs to build and operate the CAT repository. *Small broker-dealer as defined in 17 CFR 240.0-10(c) under the Exchange Act Consolidated Audit Trail Considerations for broker-dealers 2

CAT implementation timeline The CAT implementation timeline comprises various milestones over a period of three years. These milestones are tied to the CAT NMS Plan approval date of November 15, 2016. The timeline below highlights the dates by when large and small broker-dealers need to begin reporting their CAT data to the central repository. Thesys Technologies LLC selected as CAT processor SROs begin reporting to (12 months from CAT NMS Plan effective date) November 15, 2016 May 15, 2017 November 15, 2017 May 15, 2018 November 15, 2018 November 15, 2019 Final CAT NMS Plan approved and becomes effective CAT Reporters to synchronize business clocks by Mar 15, 2017 (4 months from CAT NMS Plan effective date) publishes technical specification for submission of order life cycle data publishes technical specifications for submission of customer information Large brokerdealers must begin reporting to (24 months from CAT NMS Plan effective date) Small brokerdealers must begin reporting to (36 months from CAT NMS Plan effective date) Large broker-dealers have only 12 months after technical specifications are published to begin CAT reporting Given the magnitude of the change and aggressive turnaround time, broker-dealers should initiate activities in preparation for the implementation immediately. 3 Consolidated Audit Trail Considerations for broker-dealers

Impact to broker-dealers hile final technical specifications have yet to be released, broker dealers need to understand and analyze potential impacts and initiate planning activities to conform with CAT NMS plan requirements. Below is a high-level overview of data o ith the impacted areas highlighted. Key capability requirements for broker-dealers Large and small broker-dealers will have to develop or enhance their current capabilities across the following areas to conform with CAT requirements: Retail customers Institutional customers 1. Customer information capture and reporting Uniquely identify each customer Orders Executions/ allocations Orders Executions/ allocations Provide consolidated and accurate information for each customer initially and periodically Broker-dealer Provide daily reporting for new and updated customer information Trade capture system Orders Exchanges 2. Order life cycle events data capture and reporting Capture and store applicable data points and events, including products and events not currently captured in OATS, e.g., listed options, market-making quotes, postexecution allocations Order management system Crossing engine/alternative trading system Executions Liquidity pools ormat and report CAT data in timely and accurate manner once technical specifications are published Customer information Trade data store Other broker-dealers 3. Clock synchronization and time stamp capture Synchronize business clocks to the National Institute of Standards and Technology (NIST) clock within a maximum permissible drift of 50 milliseconds* Record time stamps for each reportable event in milliseconds or even finer increments (for electronic o s) and in seconds (for manual o s) 4. Process and governance Align resources and operating model for parallel reporting of CAT, OATS and EBS in the near term Update relevant policies, procedures, and risk and control frameworks to incorporate CAT considerations Update or develop operational and technology processes and controls for efficient e ception handling, communications and escalation mechanisms for errors in CAT reporting Trade and post-trade data Reporting interface Customer data Already required to conform ith A ule, per A guidance 1 2 Impacted areas Consolidated Audit Trail Considerations for broker-dealers 4

Key questions To understand the readiness for CAT reporting, below are a few high-level questions that broker-dealers should be asking themselves to understand key gaps in their existing capabilities and to plan next steps: Customer data reporting Trade and post-trade events reporting Can a customer be uniquely identified at the account and subaccount levels o are unique identifiers assigned to e isting customers at the firm level Are all key customer attributes (e.g., entity name, address, account type, unique identifiers such as, L,, T ) accurately captured and stored Are there e isting data quality issues ith key data elements, specifically unique identifiers, such as, T, L Is the current customer management and maintenance process designed to identify and capture any change to customer data, including additions, deletions and modifications on a daily basis Are the time stamps for each trade and post trade event captured Are they captured ith the right granularity, i.e., milliseconds or less for electronic o s and seconds for manual o s Are all material terms of equities and options events (e.g., orders quotes, modifications, cancellations, internal and e ternal routes e ecutions as applicable) captured Are all material terms for allocations, e.g., account and subaccount, allocations quantity, allocations prices, captured in accordance ith the allocations instructions (e.g., pro rata, average price) Can a unique order identifier be assigned to each event How we can help Our team brings extensive knowledge and experience on CAT and regulatory reporting. EY has been monitoring developments on the CAT NMS Plan since it was proposed in 2012. As the industry is planning next steps to conform with CAT requirements, we offer to assist broker-dealers with the following key services. Current state assessment Requirements analysis Implementation planning Program management and support 5 Consolidated Audit Trail Considerations for broker-dealers

Implementation approach Below is a high-level illustrative approach for broker-dealers to organize their CAT implementation program. Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Program governance Mobilize Assess Conduct assessment of preparedness against CAT requirements across key areas, including clock sync and time stamp capture, order life cycle events and customer reference data capture and reporting Design Leverage current state gaps to 1) determine best approach for CAT solution (e.g., tactical vs. strategic) and 2) design future state CAT reporting capabilities, including business requirements, target operating model (e.g., processes and controls), technology architecture strategy (e.g., centralized vs. decentralized, build vs. buy), and functional specifications Implement Based on requirements and specifications, develop CAT solution testing plan and testing use cases Customer data Events data Time synchronization Objectives Focus on assessing the capability of the existing customer data business and technology framework to meet the following CAT requirements: Uniquely identify each customer Provide consolidated and accurate information for each customer initially and periodically Provide daily reporting for new and updated customer information Perform comprehensive analysis of order/trade life cycle events data capture capability and feasibility for events data reporting. pecifically, for each trading o, confirm availability of data sources/feeds for the CAT reportable events and the associated data elements that are not part of OATS reporting currently (e.g., firm designated for customer during original order receipt, CAT order ID) Assess millisecond granularity for time stamping of order/ quote and trade life cycle CAT reportable events in all the applicable T systems identified Assess compliance with the clock synchronization requirements described in the CAT NMS Plan Article IV Section 6.8 (b) and Appendix C, Section A.3(c)

Additional information or additional information on ho e can assist ith your CAT program, please contact a member of our team: EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. David Contompasis Executive Director Ernst & Young LLP david.contompasis@ey.com +1 212 773 2854 Nagaraj Swaminathan Executive Director Ernst & Young LLP nagaraj.swaminathan@ey.com +1 212 773 8710 EY refers to the global organization, and may refer to one or more, of the member firms of rnst oung lobal Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. or more information about our organization, please visit ey.com. rnst oung LL is a client serving member firm of Ernst & Young Global Limited operating in the US. 2017 Ernst & Young LLP. All Rights Reserved. SCORE no. 01229-171US 1702-2202414 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. lease refer to your advisors for specific advice. ey.com Andy Booth Executive Director Ernst & Young LLP andy.booth@ey.com +1 212 773 1834 Sayak Mukherjee Senior Manager Ernst & Young LLP sayak.mukherjee@ey.com +1 212 773 7677