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As we head into 2020, US broker-dealers are preparing for new
mandates on how they report transactions back to customers. The
requirements - established by the Securities and Exchange
Commission's (SEC) updates to Rule 606
- aim to bring investors greater transparency and an assurance that
orders are handled in line with the principles of best
execution.
For background, the SEC delayed the implementation of these
requirements several times, most recently in September. As of
today, broker-dealers are looking towards staggered go-live dates
of 1 January 2020 for 606a and a simplified version of 606b3, and
April 1 2020 for full 606b3 including look-through data, which
leaves no time to waste in gathering data from downstream brokers,
and more broadly, determining which methods of data collection will
be used going forward.
To address the comprehensive implications of the updates to Rule
606, IHS Markit recently hosted an industry roundtable in New York,
where we discussed best practices for meeting the SEC's
requirements.
Here are three key takeaways that broker-dealers need to think
about.
1. Now is the time to have conversations with your
downstream brokers and venues
It's difficult to proceed without knowing the level of data and
details downstream brokers and venues will be able to provide. By
engaging with your counterparties, you'll be able to discuss the
depth of required look-through data and the means of facilitating
it to interested parties. In order to stay compliant with
606(b)(3), brokers can only trade with execution service providers
who are willing and able to provide downstream route data. It is
likely that different execution service providers will have
differing approaches to delivering look-through data because there
is no SEC template for look-through, and there are some pros and
cons to each approach.
Our discussion at the roundtable showed that most participants
are still in the early stages of internal discussion regarding
look-through data, and generally have not yet started the
conversation with execution service providers. Across the board,
there was concern about exposing sensitive information to
counterparties, which many firms plan to mitigate through the use
of vendor provided technology instead of home-grown solutions.
2. Start gathering the required look through
data
Broker-dealers who use downstream brokers for execution services
will have some challenges in acquiring and processing look-through
data. There are two options for receiving data from downstream
brokers: aggregated, or raw.
In practice, this will force firms to consider how
implementation is going to work and weigh the various implications
of potentially exposing investor identity, revealing routing logic
intellectual property, and grappling with the inherent complexity
of manipulating and reconciling large datasets.
3. Understand the two options to obtain and process
downstream execution data
There are two basic formats of receiving data: aggregated data
and raw data.
Option one is to receive aggregated data from downstream
brokers, either aggregated by customer, month and venue, or by
order number, venue and trade date.
The positives of aggregating by customer, month and venue are
that the SEC's XML format can be used, which downstream brokers
usually support for their own reporting anyway, and that it
represents the highest possible level of aggregation, therefore
divulging the least amount of proprietary routing logic from the
perspective of the downstream broker.
The negatives are that a customer ID must be supplied,
potentially exposing sensitive client information to the downstream
broker, and since the it is the highest level of aggregation, it is
also the most challenging to reconcile between reporting and
downstream brokers.
The positives of aggregating by order number, venue and trade
date are that the downstream broker's routing logic is still
somewhat protected, and at the same time the investor's identity is
also protected.
The negatives are that special logic must be created by both
the downstream broker and the reporting broker, or vendor, to fully
process the data, and to a certain extent reconciliation may be
challenging at times - as it always is when working off of
aggregated records (though less difficult than when aggregated by
customer, month and venue).
Option two is to receive raw data, either provided by a broker
or given through an intermediary aggregator.
The positives of receiving raw data directly from the broker
are that no special logic needs to be created by the downstream
broker, and very little additional logic is required by the
reporting broker (or its vendor). It allows for full reconciliation
and can later be used for full scale performance and venue
analysis.
The negatives are that it increases data processing volume for
the reporting broker and potentially exposes the downstream
broker's proprietary routing logic.
Based on these takeaways, it's clear that the revised data
requirements for Rule 606 are substantial - without delay,
broker-dealers need to evaluate their capacity for managing this
in-house or through an external provider. While the SEC's delay
provides some temporary relief, 2020 is just around the corner, and
the New Year will be here in the blink of an eye.
IHS Markit will continue to monitor developments in this space
and report back with updates. We're also happy to answer any
questions you have. To get in touch, email me at
John.Jannes@ihsmarkit.com.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
