Consolidated Audit Trail: a renewed sense of urgency

Published On : 11/21/2019

After a hiatus earlier this year over who would orchestrate the consolidated audit trail (CAT) – a new comprehensive database for US equity and options trades–the project is back on track, with Financial Industry Regulatory Authority (FINRA) at the helm. So what should Capital Market participants do now to prepare? Harshad Pitkar, an independent CAT expert and board member at Inforalgo, advises on next steps.

In January this year, when Thesys, the originally chosen consolidated audit trail (CAT) processor, was pulled from the major new US equity and options trading database project, the news received a mixed reaction. Unsurprisingly, 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. So now that FINRA is the confirmed choice of CAT processor, what if anything has changed, and what should market participants do next to prepare for the known requirements?

Here’s the latest information, as confirmed at recent networking 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 roll-out 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 4 sub-phases, as follows:

Figure II: Updated phasing for large broker-dealers

More details on the above phases and dates can be found on the CAT NMS Plan website (https://www.catnmsplan.com/wpcontent/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf)

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.

• No further delays expected but reintroduction of the conformance period is highly likely

On September 9th, 2019 the SEC proposed Transparency and Financial Accountability amendments to the CAT NMS plan which rule out any formal extension / delays to the timeline. However, a reintroduction of the conformance period 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.

4 things to do right now

Because the new reporting requirements will be inevitably complex, it will take time to get to grips with everything, so time is of the essence.

This would seem to be the best strategy currently:

• Proceed 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.

• Forma strong control framework

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.

• Prioritise simple flows for now

Irrespective of the type and size of firm, simple order flows will 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% of overall volumes, can be dealt with later.

• Take the opportunity to participate and voice 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. 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.

• For further details, download an eBook on the run-up to CAT here https://inforalgo.com/consolidated-audit-trail-ebook/

About the author

Harshad Pitkar is an independent CAT expert and a board member of Inforalgo, the Capital Markets data integration & smart automation solutions provider. www.inforalgo.com 

Wanda Rich

Wanda Rich has been the Editor-in-Chief of Global Banking & Finance Review since 2011, playing a pivotal role in shaping the publication’s content and direction. Under her leadership, the magazine has expanded its global reach and established itself as a trusted source of information and analysis across various financial sectors. She is known for conducting exclusive interviews with industry leaders and oversees the Global Banking & Finance Awards, which recognize innovation and leadership in finance. In addition to Global Banking & Finance Review, Wanda also serves as editor for numerous other platforms, including Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.