By Peter Gargone, CEO at n-Tier.
FINRA’s August 14 SEC rule filing, coupled with its July 29 compliance webinar, provide the clearest view yet on FINRA’s approach to enforcing CAT regulatory compliance and achieving the industry’s goal of retiring OATS reporting. Peter Gargone of compliance software specialist n-Tier discusses the complexities of the transition, and the importance of implementing proper policies, procedures, governance structures and control processes for your CAT reporting regulatory obligations.
OATS Retirement
The rule filing is the start of a process that includes significant data quality and data completeness hurdles that the industry must meet before actual OATS retirement can occur. These data requirements are based on phase 2a reporting requirements and are computed as averages over a 180-day period across all participants and include:
- An error rate for initial pre-correction CAT submission data at or below 5%
- A post correction CAT submission data error rate at or below 2% (note OATS is currently at 1%)
- Order Life Cycle Linkage rates of at least 95% pre-correction and 98% post-correction for phase 2a event linkage requirements
- Intra-Firm Linkage rates of at least 95% pre-correction and 98% post-correction
- Inter-Firm Linkage rates of at least 95% pre-correction and 98% post-correction
- Exchange and TRF/ORF Match Rates of at least 95% pre-correction and 98% post-correction
As part of their overall market surveillance obligations regulators are also focused on ensuring that CAT reporting data is complete and accurate based on the comparison of that data to OATS reporting data. And, that surveillance and investigations being run on CAT data produce results consistent with those being run on OATS data.
While OATS retirement could potentially occur sometime in the second quarter of 2021 after phase 2c go-live, there is a recognition by FINRA that the retirement process may take considerably longer than that as stated in their filing. “Based on the proposed accuracy and reliability standards described above, FINRA anticipates that the time period for implementation for the deletion of the OATS Rules could be significant.”
CAT Regulatory Compliance Enforcement
CAT regulatory compliance enforcement is shaping up to be very different from that of OATS. With regulators instituting a ‘Rapid Remediation’ approach to surveillance and having a stated of goal of ensuring CAT data-related issues are corrected by firms as soon as possible, some significant differences with OATS Compliance enforcement include:
- Frequent delivery of alerts to firms with reporting errors as opposed to OATS which was quarterly, and in some cases, trimester based.
- An immediate outreach process to participants with the expectation that firms will correct reporting issues in previously reported data as soon as possible.
Surveillance patterns used by FINRA CAT and FINRA’s enforcement group should expand over time but even in their initial state include comparisons of firm’s CAT data to the same data they submitted under OATS. While some of these OATS comparison statistics may not be apparent in a firm’s CAT report cards, they will drive alerts and reporting errors that will be looked at by both the FINRA examination team and the SEC.
The desire to have data correct or corrected as soon as possible is driving the dynamics of how the regulators are looking at CAT reporting issues and statistics. Which will most likely also influence their enforcement actions and the fines they issue to firms.
- There is a clear focus on having the initially submitted data as clean as possible. For firms that have high initial submission error rates this may be problematic even if they perform all required corrections in a T+3 window.
- There is a stated benefit for firms which self-disclose issues. This is carrying over from OATS and implies that if firms have known issues with their reporting and they do not disclose them and correct the related data they will be penalized.
CAT Regulatory Examinations
CAT regulatory examinations are the second component of FINRA’s and the SEC’s enforcement strategy and are being instituted much sooner than most firms may realize. For all FINRA examinations announced in July they will include CAT equities reporting and for all FINRA examinations announced in August or later they will include both CAT equites and options.
The compliance webinar includes a good overview of FINRA’s expectations for firms with some of the key items being:
- Policies and Procedures;
- Data Validation, Control Structures, and Review Processes including sample checks of data back to books and records systems and other data sources; and
- Governance and Management Reporting.
Conclusions
Given the regulators’ approach to enforcement of CAT compliance, firms should be taking a detailed look at their CAT reporting now to make sure they are prepared for the regulatory scrutiny which they will be subject to over the coming months and years.
For firms that have not yet done so, they should conduct a thorough review of their policies and procedures and data control/validation programs and processes to ensure they are properly prepared for their CAT examinations.
As the industry moves towards OATS retirement, firms that are above the error rate thresholds are will be in a very poor position from a regulatory compliance perspective. As error rates for firms include comparison of CAT reporting data to their respective OATS reporting data firms will need to have processes in place to ensure both sets of reporting are in synch.
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