The US Securities and Exchange Commission (SEC)’s mandated consolidated audit trail (CAT) will be a test for market participants, when its phases begin to roll out from November 2019.
“People are going to be testing, developing and designing three different phases of the same regulation all at the same time. They could be playing catch up,” says David Campbell, vice president, strategy and business development, global technology and operations at Broadridge.
Under SEC Rule 613, FINRA and the national securities exchanges must jointly submit a National Market System (NMS) outlining how they will develop, implement and maintain a consolidated audit trail that collects and identifies every order, cancellation, modification and trade execution for all exchange-listed equities and options across US markets.
The phased approach to roll out is aimed to reduce the burden on industry players, but it could be complicating matters.
“This is a phase roll-out, but based on the timing of the phases you have to do a lot of parallel work,” says Campbell. “So firms that are trading equities and options are going to have a lot of challenges over the next while because they’re having to develop and be ready for the equity reporting next November 15, but the industry test window for options is December 1 next year. And the equity conformance period where firms have to report but some of the strictures around response times don’t need to be met, but once that’s ended by the end of February 2020, options have to be live three months later. Less than three months after that is the next phase of equities and all the complex other items."
On October 20, the reporting technical specifications on CAT were published, but Campbell says market participants are expecting more information.
“The technical specifications are final, we know that those aren’t going to change,” he says. “But the guidance around how to interpret is has not yet been fully laid out yet. So there’s going to be a lot of questions and a lot of regulatory guidance needed between now and next November. We would expect even for those firms who have planned this out very well – they’re going to have to do absolutely last minute changes on guidance and as we work through this.”
CAT will be a substantial change for market participants, and preparation will be crucial for a smooth transition.
“It is a very big change for some firms because of the additional market making propriety orders that need to be reported compared to previous regulations,” says Campbell. “It’s the case that many firms will have revamped and augmented their teams for this, or have really just spun their teams up again after the lull.”
“We’ve definitely seen some firms who have been working on CAT and have kept doing so over the past year and a half, so there’s some firms who are quite ahead of the game, and then there’s others who are going to be playing catch-up between now and until November.”