The long-running consolidated audit trail (CAT) project has been a major industry achievement but with a compliance deadline rapidly approaching, exemptive relief on some particularly complex reporting issues is due to expire in February 2025.
RegTech Insight caught up with ION’s Douglas Craig, Senior Product Manager at Fidessa who had raised concerns on the complexity of the issue a little over a year ago (see Consolidated Audit Trail: Preparing for the next phase of regulation) – the reporting of Port Level Defaults and Representative Order Linkages for both senders and receivers.
Craig explains, “Requiring the sender of an order to report any CAT material order attributes that the receiver adds (or includes by default), not only lowers the integrity of the audit trail (e.g. I didn’t actually send that ‘instruction’ but I still have to report it on my route), but it also presents a major challenge to all CAT reporters that send orders to each other.” He continues “There’s no generic mechanism or interface that allows CAT reporters to communicate default port (or any other) settings, to understand if/when these defaults change, or systematically add these to CAT records. So, simply from a general standpoint, this represents a large effort for the industry, and results in a less accurate audit trail.”Craig continues, “The Representative Order Linkage requirements are likely to change trader workflows – something that CAT was not supposed to do – and require additional manual steps by a trader prior to actioning or ‘representing’ a customer order.”
Potential outcomes include slower time to market, lower quality executions, and other unintended consequences. Like the Default Port Settings requirement, requiring firms to report Representative Order linkages that do not actually exist represents a large effort for the industry, and results in a less accurate audit trail. Another way of summing these two requirements is that they both require CAT reporters to report something to the CAT that did not actually happen.”
CAT History
The CAT National Market System (NMS) plan was approved in Nov 2016, and the initial CAT transaction certification and reporting go-live was in June 2020. Additional transaction reporting phases added to the assets and workflows CAT reporters are required to report to the CAT. For example, in December 2021, the final major phase (2d) for transaction reports added Complex Options and OTC equity workflows.The (non-transaction) Customer and Account Information portion of CAT also went live in phases, beginning with Large Trader Identification Number (LTID) CAIS reporting in December 2020, through to full go-live in 2023 as well as Firm Designated ID (FDID) validation and industry member report card statistics in May of this year.
Finally, beginning with trading activity in September of this year, the CAT Participants began billing Industry Members for both the historical (build out) and ongoing (recurring maintenance) costs of the CAT. These costs borne by the industry are over and above any internal costs associated with a firm’s CAT solution, including proprietary/vendor software/hardware build out, new network comms mandated by FINRA CAT, initial and ongoing internal review and compliance, etc.
FINRA has implemented a cost recovery fee structure, but debates continue within the industry regarding the fairness of these costs. Smaller firms, argue that they are disproportionately affected by the costs of compliance with the need for system upgrades and additional personnel. The cost sharing burden associated with CAT remains a major issue.
The story of Fidessa mirrors two decades of significant regulatory developments in the U.S. financial markets. Over this period, the U.S. regulatory landscape has been shaped by numerous major mandates, many of which were key projects for Fidessa. These include Regulation SHO (2005), Regulation NMS (2007), the Market Access Rule (2011), the Tick Size Pilot (2016), Rule 606 changes (2019), the phased go-live of the Consolidated Audit Trail (starting in 2020), and this year’s approval of the Rule 605 overhaul.
“We’ve invested in new databases, established new processes and s/w delivery mechanisms, and logged 10,0000+ developer days; all to provide tools and functionality to our subscribers that facilitate their compliance with the CAT NMS Plan,” explains Craig.
Looking ahead, in addition preparing for Feb 2025, Fidessa is preparing for the upcoming requirements for fractional trade reporting and dissemination, expected in the first half of next year. In addition, three major SEC market structure proposals are still pending final rule publication and approval: Regulation Best Execution, the Tick Size Proposal, and the Order Competition Rule.
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