SEC Market-Access Rule 15c3-5 to have Far-Reaching Impact, TABB Says

July 12, 2011

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Research Firm Forecasts US Broker Spending on Pre-Trade Risk Controls to Grow at 12% CAGR till 2014 as New Controls Raise the Cost of Protecting the Markets

NEW YORK & LONDON--(BUSINESS WIRE)-- In the wake of the credit crisis, regulators are focusing on preventative action to shore up the equity markets’ integrity and restore investor confidence. New controls, defensible procedures and clear-cut responsibility and accountability are all wrapped up in the SEC’s Market-Access Rule (MAR) 15c3-5.

“In one fell swoop,” reports Miranda Mizen, a TABB Group principal, head of equity research and author of a new report, “The Market-Access Rule: Blueprint for the New Regime,” “this SEC rule replaces trust with proof, makes new demands for aggregated data and immediate information and puts every broker’s CEO on the regulatory hook for orders headed to market.”

Despite the recently announced compliance extension for two parts of the rule which is due to be implemented on July 14, the Market-Access Rule is pivotal regulation. “It sets the scene for the new regulatory regime.”

Some brokers see the rule as barely affecting their current risk management controls while others need to add to existing controls but, says Mizen, they’ll do the bare minimum anticipating this will suffice, based on their interpretation of the rule. For HFT firms, this injects unwanted latency into the process and will lead some to re-evaluate their trading strategies and market-access requirements.

The MAR comes at a time when brokers are already dealing with tight budgets. “The new regulatory obligations challenge the technology capabilities of some brokers,” Mizen says. “This will force changes in their business model and creates an opportunity for others. Legacy systems, batch processes, disparate execution channels, geographical diversity and organizational silos all pose hurdles to the conservative implementation of the requirements.”

Due to this more stringent environment where all orders in equities, options, exchange-traded funds (ETFs), debt securities and security-based swaps must be validated by the broker whose Market Participant ID (MPID) is used to access the market, TABB estimates US broker spending on pre-trade risk controls will rise at a compound annual growth rate (CAGR) of 12% until 2014. She adds, however, that “we believe similar regulations will be implemented more widely by other regulators both within the US and overseas.”.

As prevention takes a front seat to crisis management, the increasingly onerous regulatory burden will cause some brokers to revisit their value proposition and find more efficient ways to operate. This will create an opportunity for others to leverage regulation and technology and provide differentiated services.

“Regardless of the implementation timeframe, long-term impact of the MAR is going to be broad across the industry as the cost of doing business rises and best practices are replaced by regulation, the interpretation of which is left to the market participant,” says Mizen.

The 19-page research report with 6 exhibits is available for download by TABB Group Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

About TABB Group

TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, the online community currently with more than 8,000 capital markets members, drawn from buy-side and sell-side firms, exchanges, regulatory agencies, academia, consultants, vendors and media, focusing on issues covering current industry-wide topics.