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Exchanges in talks with U.S. SEC to delay new audit system: sources

© Reuters. FILE PHOTO:  The seal of the U.S. Securities and Exchange Commission  on the wall at SEC headquarters in Washington© Reuters. FILE PHOTO: The seal of the U.S. Securities and Exchange Commission on the wall at SEC headquarters in Washington

By John McCrank

NEW YORK (Reuters) – Stock exchanges are in talks with the U.S. Securities and Exchange Commission to possibly delay the rollout of a new system aimed at helping the regulator better police the markets, sources familiar with matter the told Reuters.

The U.S. exchanges are seeking to postpone implementation of a massive database, known as the Consolidated Audit Trail (CAT), due to concerns about fast approaching deadlines and worries about cyber security, said the sources, who asked for anonymity because the talks are private.

The SEC, which ordered CAT after the May 2010 “flash crash” and views it as critical to the oversight of markets where trading happens in tiny fractions of a second, declined to comment.

The talks come after the recent disclosure by the SEC of a cyber attack on one of its filing systems, which prompted some exchanges and market participants to suggest putting a hold on CAT pending an in-depth cyber security review.

CAT has been likened to a Hubble Telescope for financial markets and will be a central database for all stock and options “message traffic,” meaning every trade order, execution, modification and cancellation. It will also hold highly sensitive personal identifying information, such as the social security numbers of exchange customers.

A delay would be significant because the project is already approaching eight years in the making.

After the flash crash, in which around $1 trillion was wiped out from the stock market within minutes before an almost equally rapid rebound, it took several months to piece together the data needed to attempt to diagnose what caused the event. CAT would greatly speed up such an investigation.

Exchanges are due to begin reporting data to the database on Nov. 15, and to begin using it for market surveillance on Jan. 15. Large brokers are scheduled to begin reporting data to CAT on Nov. 15, 2018, with smaller firms due to begin a year later.

There are questions as to whether those deadlines can be met, as well as about who will pay for the database and how much, the sources said.

The SEC tasked the exchanges with creating CAT’s rules, including how it would be funded. But the fee plan was delayed after some financial firms complained that the exchanges wanted fees from brokers, banks and other traders to cover the bulk of the costs.

While discussions between the exchanges and SEC are ongoing, with a meeting as recently as Wednesday, the exchanges have not made any formal request for a delay in the trading database, the sources said.

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