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 January 1 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
- 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.