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Markets Regulation
Finra to advance data collection plan
From the Financial Times of Sun, 18 May 2014 21:38:08 GMT

The Financial Industry Regulatory Authority will make some concessions on its new massive data collection plan to address cost concerns and other issues raised by the securities industry as the agency looks to improve the way bad behaviour by brokers is identified and stopped.

Rick Ketchum, chief executive of Finra, is set to announce the latest details of the Comprehensive Automated Risk Data System, known as Cards, at the agency’s annual conference on Monday. The plan aims to stop illegal or risky activities at a faster pace by regularly collecting information from more than 4,100 securities firms in the US.

Cards reflects a radical change in the way Finra gets data from brokers, compared with the current ad hoc system which relies on information gathered from periodic tests.

Mr Ketchum will tell industry participants that worries about an unfair playing field have increased because of concerns about high-frequency trading and market structure. As a result, Finra has to work even harder to bolster investor trust and establishing Cards is part of that effort.

But the new plan has sparked alarm among brokers, who have complained about privacy concerns, data security and the costs of complying with such a system. Finra has received more than 800 comment letters since it first discussed the possibility of Cards in December.

“We need investors to understand that we are watching the markets like hawks – and monitoring to see that orders are handled fairly,” Mr Ketchum will say in his remarks on Monday. “We need investors to understand that when we see potential or existing harm, we can respond quickly. We need investors to trust in the market again.”

With some adjustments to address broker worries, Finra is forging ahead with Cards, and recommendations will be submitted to the Finra board in July. The proposal then will move to the Securities and Exchange Commission to go through its approval process. The aim is to have Cards in place next year.

Cards will collect information on brokerage transactions and balances on a weekly or monthly basis, with the regularity to be finalised at a later date. The data will be continually assessed to spot unreasonable commissions, overcharges for trades or a high level of activity in risky or illiquid securities, among other issues.

Finra is investing more in data analytics, moving systems to the virtual cloud to improve processing and putting more people on data surveillance to handle the increase in incoming information.

One example Mr Ketchum gives of where Cards could help identify problems more quickly is the complexity of an exotic exchange traded fund, or ETF. Currently, Finra would have to rely on various sources to identify firms selling the ETF and then send out broad letters to narrow down the source of concern. If Cards existed today, Finra would already have the data it needed to identify the relevant brokers and accounts.

Brokers complained about the requirement that data be sent through clearing firms, which would increase costs. Now Finra will allow companies to choose how they send their data to the agency, with an option to send information directly to Finra, according to Mr Ketchum.

Companies will also be able to send their data in various formats to address the different terminology used among various firms. Small brokerage firms may be given more time to comply, but that has yet to be determined.

Cards will be launched in stages and in the initial phases, Finra will not require firms to submit information on products not held at the companies, such as variable annuities and direct mutual funds. That kind of information may be collected in the future, but would be based on a new rule proposal.

To address privacy concerns, Finra has already said personal identification information, such as social security numbers and addresses, will not be included in Cards data.

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