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Modernizing Data Infrastructure for SEC Compliance 

By Joe Urban, Managing Director Electronic Trading, Clear Street

The U.S. Securities and Exchange Commission has proposed an atypical 30 new rules in 2022, more than in the previous two years combined, and the most in a single year since 2011.[1] The final, proposed, and pre-proposal discussions impact every aspect of front, middle and back offices. The most relevant of these new and proposed rules for investment managers include:

These rules and proposals come with data and disclosure requirements that make significant demands on firm resources and require more cross-firm collaboration. Investment professionals could find themselves struggling with data infrastructure designed years ago for antiquated regulations in a futile effort to pull relevant data and comply with the new rules. Traders, portfolio managers, operations, and compliance staff will need to make significant data infrastructure investments in order to generate simple, bespoke reports in real-time and in compliance with SEC regulations.

As investment professionals know, pulling data can be an arduous task, draining resources from firms and their employees. It remains difficult for financial services and modern capital markets to operate when the standard is paperwork, outdated technology and mainframes. This legacy technology and its associated operational, data, and manual processes levy a massive tax on global financial services. That impact has been estimated at $24 billion per year.[2] Modernization is urgently needed to meet the many demands driven by SEC regulatory shifts.

What does it mean to modernize? It means data infrastructure designed with compliance obligations in mind, rather than tacked on as an afterthought. It means everyone under the investment manager’s roof understands and respects their duties to embrace opportunities to better serve their clients, preserve the reputation of their firm and industry and generate  trust. It means leveraging modern tools to make business, operations and compliance more fluid.

For example, cloud computing is transforming the investment industry, providing enhanced agility, efficiency, resiliency and security within firms’ technology and business operations, at potentially lower costs.[3] For market participants, this means easier access to the data necessary to meet new and changing SEC requirements. Modernizing infrastructure and data access will drive efficiencies as firms and funds tackle these new regulatory challenges. Here are few key considerations based on some of the higher profile proposals from the SEC: 

  1. Shortening the cycle to T+1 settlement

T+1 will touch nearly every aspect of the front, middle, and back offices, and much of the industry is not ready from a technology perspective. Firms with modern infrastructures, like cloud-native clearing and custody and single sources of data flowing front to back, will be well-positioned for shorter time frames between trade and settlement.

  1. Securities lending transparency and Short sale disclosure

The various proposals on the table around further disclosures in security finance call for major shifts to data access, leverage and reporting. Like with clearing and custody, critical components of the securities finance industry run on decades-old technology. Data can be siloed and require manual processing. Firms that adopt a horizontally scalable engineering framework and organize their data infrastructure will be better prepared for new requirements.

  1. Equity market structure modernization

The SEC has proposed significant changes that if incorporated are impactful to U.S. equity trading. This includes Disclosure of Order Execution InformationTick SIzes, Access Fees, and Transparency of Better Priced OrdersEnhancing Order Competition; and Regulation of Best Execution.

The three areas highlighted require considerable attention to front-to-back workflows, operations, and data processing. It’s clear that a move to modernization continues with greater speed and urgency, including demand for structured data reporting. The SEC’s market structure overhaul agenda is another reason investment firms have to think holistically about their technology, data and operations. The speed of change in the markets continues to accelerate, and firms must constantly position themselves for today and tomorrow.

[1] SEC Rulemaking Index

[2] Deloitte, Artificial intelligence in post-trade processing, June 2021