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FINRA CAT: What’s Next?

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By Andrew Pheifer, CFA, CAIA, Director, EMS Product Management, SS&C Eze.

The long-awaited Consolidated Audit Trail (CAT) is now live, ingesting billions of equity transactions daily from U.S. broker-dealers (Industry Members). The go-live has largely been considered a success, with more than 1,000 broker-dealers reporting into the CAT.

The CAT’s origins date back to 2012 when the SEC adopted Rule 613 of Reg NMS. The June 2020 go-live represents only one phase of a multi-phased rollout that will extend into 2022. While the industry agrees the phased approach is most pragmatic, iterative rollouts present unique challenges. Unlike a single big-bang event, iterative rollouts create complexity in orchestrating all the moving parts.

FINRA CAT will need to provide support for reporters, publish new technical specifications for future phases, and implement improvements to their tech stack and user web portal as each new phase rolls out. Delays are not an option; the SEC is holding FINRA CAT to strict and immovable deadlines.

For Industry Members and CAT Reporting Agents, the challenge will be delivering seamless upgrades and deployments to handle the new reporting requirements. For many firms, staffing or outsourced support will need to scale to be able to handle dealing with daily issues in addition to adequately preparing for future phases. For those on the frontlines, the challenge will be to get through each phase and not surrender to “CAT fatigue.”

Much of the attention initially will go toward repairing rejects on file submissions and/or rejects on subsets of reported events that need to be corrected. Additionally, broker-dealers must ensure that their reports are comprehensive, covering all eligible reporting activity. Critical fields like FDID need to be correctly populated, and all reported data attributes must be accurate. Enlisting a reputable CAT Reporting Agent to assist with providing reporting expertise and workforce can help tackle these challenges.

For the remainder of 2020, large Industry Members’ sights are set on several key milestones. Options reporting went live on 7/20. Intrafirm linkage validations for equities and options go live on 7/27 and 8/24, respectively. Interfirm linkage validations for equities and options go live on 10/26 and 1/4, respectively. And, all the while, testing will open for new customer reporting requirements and the next big wave of equity reporting requirements that address more complex reporting scenarios on 12/14 and 1/31, respectively.

Options reporting and interfirm linkage validations stand out as the most intriguing areas when assessing whether the industry is truly ready for CAT reporting. The Order Audit Trail System (OATS) that preceded CAT did not require option reporting, so the industry is grappling with this reporting for the first time. Regarding interfirm linkage validations, it remains to be seen how broker-dealers will operate amongst themselves in a maximum T+3 error correction window to resolve who is “at fault” for a given linkage validation issue. FINRA CAT doesn’t have a mechanism to assist broker-dealers with this problem, so the Financial Information Forum (FIF) stepped up to the plate and created a CAT Contact Utility for Industry Members to understand who to contact for issue resolution.

The complexity of the CAT reporting project is prompting some members to ask, “What happens with reporting violations? Who will be fined, and how much?” Just Google “OATS Violations,” and you’ll see that over the years, FINRA and the SEC have cracked down on failures to meet the reporting requirements. These violations underscore the importance of working with experts who not only understand the regulation but also how to navigate the challenges with orchestrating a phased rollout.

Some validation coming from the SEC for the usefulness of the data will be welcome news for Industry Members. Typically, technologists implement phased rollouts so value can be added along the way, and not just at the end. Phased rollouts are a critical component of the agile methodology that expects learning and adjustment after each release.

It’ll be interesting to see if CAT phasing was simply designed to achieve better conformity by Industry Members, or whether the SEC can derive real value before project completion in 2022. Industry Members are hoping for the latter, if only to expedite the sunsetting of OATS to eliminate that reporting burden once and for all.

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