Earlier this year, the Financial Industry Regulatory Authority (FINRA) was confirmed as the new orchestrator of the consolidated audit trail (CAT) – a huge database that will house accurate, up-to-date records of all US equity and options trades. With that settled, followed an extended period of uncertainty around what are likely to be the new reporting requirements, the picture is starting to clear so Capital Markets participants must start progressing in earnest towards compliance.
Here, Harshad Pitkar, an independent CAT expert and board member of Inforalgo, provides some tips on what to do now.
In January, the news came that Thesys – the designated processor of the new consolidated audit trail (CAT) trade records database for US equity and options – had been fired, marking the latest in a series of false starts for the bold new Capital Markets transparency initiative.
The development received a mixed reaction by the industry. Thesys’s appeal had been as an agile, disruptive technology firm, poised to harness emerging technologies and build something without the thorny issues associated with legacy trade reporting solutions such as OATS and Bluesheets.
On the other hand, the prospect of starting afresh sparked some concerns about the potential for the raised cost of compliance. Certainly, Capital Markets participants are becoming jaded by all of the added administration and IT expense that keeps coming their way each time there is a new set of regulatory reporting requirements.
In March, the picture changed again, with the news that FINRA would take up the CAT mantle after all. So, where does this leave us?
|July 2012||SEC adopts Regulation NMS Rule 613|
|February 2013||CAT RFP published|
|November 2015||3 bidders shortlisted (Thesys, FIS, FINRA) from a crowded pool of more than 15|
|January 2017||Thesys selected as the winning bidder to build and operate the CAT|
|November 2017||Participants file for exemptive relief proposing updated timelines, pushing the go-live date by more than a year for an implementation completion date of April 2021|
|May 2018||Participants submit a ‘Master Plan’ to the SEC with a phased implementation approach and updated timelines with all phases being implemented by November 2022|
|October 2018||Final technical specifications for phase 2a and 2b published with several unresolved issues|
|November 2018||SROs start reporting to the CAT (after significant delays). Several issues reported|
|January 2019||Thesys replaced as the CAT processor by an unnamed potential successor|
|February 2019||Participants publish an updated elongated roll-out plan for phase 2a and 2b for large broker-dealer reporting which further breaks down the project into sub-phases|
|March 2019||FINRA (FINRA CAT) officially named as the CAT processor|
What we know now
Following the news that FINRA (or more specifically FINRA CAT) will now fulfil the role of CAT processor, a few specifics have been clarified. These updates are based on discussions at the latest industry events:
No changes are planned to industry member technical specifications
FINRA CAT will continue to use the final industry member technical specifications published in October 2018 (version 1.0). No material changes to the specifications are expected outside of resolution of outstanding issues.
Error feedback and correction mechanism to be included
The need for a mechanism to facilitate error feedback and correction has been acknowledged.
Updated roll-out plan
A revised roll-out plan for phase 2 A and 2B for large broker-dealers has been scheduled, which further breaks down the implementation for these two phases into 4 sub-phases, as follows:
|Phase||Sub-phase||Testing Start Date||Go-live date|
|2A Equity||File Submission & Data Integrity||December 16, 2019||April 2020|
|Intra-Firm Linkage||April 2020||July 2020|
|Inter-Firm Linkage||July 2020||October 2020|
|Exchange and TRF Linkage||September 2020||October 2020|
|2B Options||File Submission & Data Integrity||December 16, 2019||May 2020|
|Intra-Firm Linkage||April 2020||August 2020|
|Inter-Firm Linkage||July 2020||October 2020|
|Exchange and TRF Linkage||September 2020||December 2020|
Given these changes, a ‘Regulatory conformance period’ is no longer deemed necessary.
Details relating to Phase 2C and 2D, and updated timelines for small broker-dealers, have not yet been communicated, so watch this space.
Delays remain likely
A 6-9 month delay to the proposed timeline is highly likely, as the transition to FINRA CAT will be complex and there remain some unanswered questions – for instance around the eventual technology assets that will be used. Expedited resolution of key issues will be critical too, in enabling the development effort to be completed in a timely fashion, and it will take time to establish a decent error correction and feedback mechanism.
A 4-point action plan
It is clear that the CAT system will not be an evolution of the existing OATS mechanism, even though FINRA is now in driving seat. To maximise their changes of being ready, market participants should now look to register with the CAT plan processor if they haven’t already done so, and prepare to start reporting within a year. Certainly, CAT reporting requirements will be complex and it will take time to get to grips with everything, so there is no time to lose.
Here are 4 things firms should do now:
- Continue development as planned for Phase 2a, with increased focus on 2b
Although proposals to make the roll-out more gradual relieve some of the pressure, the CAT go-live dates remain aggressive. Firms should therefore continue development as planned for Phase 2a and 2b.
- Build a strong control framework
The concept of a mature control framework for regulatory trade reporting is relatively new. Given the increased volumes and complex requirements for CAT, issues and breaks already seen with existing reporting will be magnified without robust controls. A strong control framework will greatly reduce breaks and errors, and speed up testing.
- Focus on simple flows first
Irrespective of the type and size of firm, simple order flows account for the highest volume of transactions (eg where an order is routed away without any splitting or bunching, or is crossed internally etc), so handling these successfully will be a big win. More complex order flows (eg multiple entity / desk / system hops, splitting / bunching etc), which typically account for only 10-20% of overall volumes, can be dealt with later.
- Be engaged, proactive & forceful in voicing concerns
Industry participants should aim to use the latest CAT developments as an opportunity to address any residual concerns they might have about the impending new requirements, especially as FINRA CAT appears to be more accommodating of industry requests than Thesys. This is a good chance to participate proactively in industry forums (FIF, SIFMA etc), and make heard any concerns and requests relating to outstanding issues and desired functionality.