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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 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.
Option two is to receive raw data, either provided by a broker or given through an intermediary aggregator.
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.