In March this year, US stock markets announced that the Financial Industry Regulatory Authority (FINRA) would take over as the orchestrator for the consolidated audit trail (CAT), a massive database for all equity and options trades executed on their platforms. After a history of false starts, this latest development meant that firms’ plans could now progress again towards compliance. So what’s the latest, and what should they be doing now to ensure they are ready when the time comes to file trade data to CAT? Harshad Pitkar, an independent CAT expert and board member of Inforalgo, advises.
The news in January that Thesys – the originally chosen consolidated audit trail (CAT) processor – had been fired, was seen by many in the Capital Markets industry as something of a mixed blessing.
Here was a small, agile, disruptive technology firm ready to draw on emerging technologies and build an optimal solution without the tiresome issues associated with legacy trade reporting solutions such as OATS and Bluesheets. Yet, there were also concerns about soaring expenses associated with this path. FINRA, one of the other original bidders, might have simply extended its existing OATS set-up to support additional CAT requirements, giving way to a faster and less expensive option for the industry. 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.
|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|
The current state of play
Here’s what we know now, following the news in March 2019 that FINRA (or more specifically FINRA CAT) will now fulfil the role of CAT processor. These clarifications or 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 rollout 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 four 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 six to nine 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 four-point action plan
However CAT is not going away and it is clear that the system will not be an evolution of the existing OATS mechanism. So, if they have not already, firms should now register with the CAT plan processor and prepare to start reporting within a year.
CAT reporting requirements will be complex, and it will take time to get to grips with everything.
There are four 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 percent 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.
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