The level is totally tied to Quality, the levels you see Killroy show what highest level team was in that Cup.
The Cup is supposed to be different from CL, that is intentional. So, changing the format to be like CL would be ...boring.
I have won the Cup more with my no money and farm teams, by far.. so I think the Cup _is_ good for managers who don't want to spend.
With the take over feature this has made it harder at the top, as people who were struggling there take over a lower level team, the draw takes in more levels down.