Tech vendors are urging market participants to adopt end-to-end consolidated audit trail (CAT) solutions as phased deadlines complicate implementation.
“It always comes down to the time and project pressures… We do the end-to-end so we control the mapping as well as the exception management. For other firms where they’re just doing the exception management or the submission for CAT, it could be difficult because they’re not controlling all the pieces of the puzzle,” says Phil Flood, chief commercial officer, Inforalgo, a Gresham Technologies company.
“The phased approach [to CAT] is good, but it also creates a lot of problems because they’re trying to maintain what they currently have as well as develop newer functionality for the remaining parts.”
Broker-dealers were originally meant to submit reports for equities to the Financial Industry Regulatory Authority (Finra) on April 20, but were granted a delay by the Securities and Exchange Commission (SEC) in April when the regulator announced a phased reporting timeline due to coronavirus. The SEC then announced in May that all reporting and linkages must be fully implemented by October 26, with respect to the Full Implementation of Core Equity Reporting Requirements. After that, market participants will have two months to achieve the required error rate by December 31.
“Straight off the back of the October 26 deadline is the more complex reporting, which starts in December, so there’s already a change that’s going to be made to existing reporting solutions for October 26. But straight afterwards they need to be testing the complex equities reporting scenarios as well, so it’s pretty tricky,” says Flood.
Despite recent changes made to prevent the dispersal of personal identifiable information (PII), many participants still hold fundamental criticisms about CAT.
On August 21, the SEC proposed amendments to CAT to bolster its data security, including the removal of sensitive PII such as social security numbers and taxpayer identification of individual investors. While the market welcomed this change, Commissioner Hester Pierce said in a statement that she would have preferred “the bolder step of confronting the CAT’s real and serious liberty implications.”
Flood says the SEC is now taking self-regulatory organisations (SROs) to task on the deadlines, but believes further amendments could come.
“There are 24 SROs and they can download the data in bulk from each other, so it can be done multiple times. There needs to be audit around who’s doing it, when they are doing it, what they have taken and so on,” he says.
“What happens to the data after it leaves the safety of the SRO? That’s what industry members and associations like [the Securities Industry and Financial Markets Association] (Sifma) have the main concern about – it’s the bulk downloading of such a large data set that’s the issue especially if it contains PII.”
The options for interfirm linkages go live at the start of 2021, which Flood predicts will yield errors. As options were not reportable under the ongoing Order Audit Trail System (OATS), this requirement will be an industry first.
“For interfirm linkage the regulator has only responded to data validation – now they’re starting to match the orders with the entire database. It’s producing thousands and thousands of errors – if you can imagine that there are 1,200 plus broker-dealers all submitting 16 billion messages, the exception rate, even at a small percentage, is going to be very high,” he says.
“That is the next challenge– to be able to deal with this process. And at the moment, the only tools broker-dealers really have is a phone and an email to work with the other side to work out what the problem is and why they’ve picked up an exception, all within a T+3 correction window.”