With phase-one compliance due by April 2020, testing due to begin this December, and most specifications now confirmed, broker-dealers and trading firms have no time to lose. Harshad Pitkar, an independent CAT expert, believes smaller trading firms could address 95 per cent of data requirements within 8 weeks with the right help
A leading independent expert on the Consolidated Audit Trail (CAT), has urged trading firms to press ahead with CAT data preparations as the first compliance deadline looms.
Harshad Pitkar, a board advisor to Capital Markets data automation specialist Inforalgo, notes that, by April 2020 – followed quickly by a second deadline in May 2020 – the first two phases of the new comprehensive trade data reporting requirements will be live. More pressing still, testing is due to begin on December 16th this year, according to the formal timetable.
CAT is a new comprehensive database for US equity and options trades, which will be orchestrated and overseen by the Financial Industry Regulatory Authority (FINRA).
Although CAT has been on firms’ radar for some time, momentum stalled at the beginning of this year when the organisation originally appointed to manage the database, Thesys, was dropped. With a hiatus of a couple of months before FINRA was confirmed as the successor, many Capital Markets participants diverted time and funds to other projects. But now CAT is back on track and the window for compliance preparations is shrinking rapidly.
“For large broker-dealers with 20-30 different order / execution management systems, and complex order flows including the way orders are bunched together or split out, the work involved in preparing for CAT is substantial,” Harshad warns. “If they haven’t already put in a lot of the groundwork in mapping all the order flows, and ensuring data’s completeness and accuracy, this will be a race against time – and it could take them up to two years to be on top of things.”
The first two deadlines next spring relate to file submission and data integrity, with testing due to begin before the end of this year. For smaller proprietary trading firms with a simpler set-up, there is hope of being ready, Harshad says – if they act quickly. “For a participant that deals with only one or two trading systems, with no complexity involving bunching or splitting of trades, there is still a chance to get ahead,” he comments.
He says the firms Inforalgo is working with are looking at an 8-week turnaround, to consolidate their order events and bring everything together. “And because they can do this in the cloud, they don’t need to spend a lot of money trying to prepare everything internally. Inforalgo can support them afterwards, too,” Harshad notes.
For those firms that are beginning to panic, he offers some reassurance. “The best approach for now is to focus on simple order flows first which typically account for 80 – 90 per cent of the volume,” he advises. “The remaining more complex scenarios, should be handled as exceptions. The important thing is to make good, solid progress sooner rather than later on the more voluminous order flow.”
Although regulators are expected to provide some leeway, PJ Di Giammarino, CEO of regulatory think-tank, JWG Group, warns that market participants can expect a clampdown and potential fines for non-compliance quickly.
“Our experience with new reporting regimes finds that once regulators establish a baseline of what ‘good’ reports look like, they will start to come down heavily on poor-quality data or breaks in trade flows,” he says. “Irrespective of where firms are on the spectrum of trading scale and complexity, there is important work to be done now to avoid risk and disruption as the regulation starts to make the rounds next year.”
The latest timelines are available c/o SIFMA, the trade association for broker-dealers, investment banks and asset managers operating in the US and global capital markets, at https://www.sifma.org/resources/news/cat-a-new-timeline-but-data-protection-must-remain-a-top-priority/