August 14, 2018

 

CAT is Not OATS…..CAT is so Much More

 

Chris Montagnino,
Managing Director, Compliance Services, Jordan & Jordan
chris.montagnino@jandj.com

 

The Consolidated Audit Trail (“CAT”) is the most significant regulatory requirement impacting order/transaction reporting since the implementation of the Order Audit Trail System (“OATS”) almost 20 years ago.  In many ways it is the most substantial regulatory reporting requirement that the financial industry has ever enacted.  Upon full implementation, the CAT will allow the SEC, FINRA and other regulators the ability to quickly identify order and trade activity of interest in extensive detail, either by particular firms or specific clients, without the need to contact the broker-dealers directly for such information via electronic blue sheet requests.  The breadth of order and transaction information required for the CAT is unprecedented for a single regulation and the burden upon firms to comply will be considerable.  Once fully implemented and the regulators have access to the CAT data, the consolidated data should allow for more streamlined surveillance with a single dataset. 

Although initially proposed almost eight years ago, the SEC has confirmed that the CAT is not going away, in fact it is moving ahead full steam with a current initial implementation scheduled for late 2019.   This article will highlight the substantial differences in CAT from OATS, the challenges firms will face resulting from those differences and actions to consider today in order to prepare for the new requirements.  Make no mistake, CAT is coming and likely applies to your broker-dealer.

Key Differences

Notable distinctions between CAT and OATS include:

  • CAT requires events that were not required in OATS (an example are representative orders such as riskless principal, bunched orders, etc.)
  • CAT requires reporting of the modification or cancellation of internal routes (desk routes in OATS)
  • OATS requires Route events but does not require reporting of the modification or cancellations of Route events whereas CAT does
  • Order Restatement events (resending event information daily for GTC orders) and Order Fulfillment events (used to report instances where a client is provided with an average price fill for their order) are currently required in CAT but do not exist in OATS
  • Additional data elements are required in CAT that were not previously reported in OATS including:
    • Route “results” (accepted, rejected)
    • Clearing number information on certain Trade events
    • Client information via a Firm Designated ID
    • Session IDs
    • Trade and Trader IDs

 

Why Should I Care?

  • We have analyzed the list of approximately 4700 registered SEC broker-dealers and segmented them into CAT eligible versus non-eligible. There are approximately 1700 broker-dealers subject to CAT with approximately 800 that did not previously report to OATS. 
  • Current OATS reporting models will not work.  Whether you report directly or use your order management system (“OMS”) vendor or clearing firm, changes must be made to capture and report CAT required data.   As an example, OATS does not require the transfer of order information between OMS and execution management systems (“EMS”), while CAT does.
  • Account identifying information, referred to in CAT as a Firm Designated ID, and order IDs would need to traverse across the different technology processing points to be specifically reported to CAT. Most internal OMS/EMS systems, as well as vendor systems, do not have that capability today.
  • Dual reporting to OATS and CAT will be required, at least initially. Both will have disparate error correction timeframes and repair processes that firms will have to negotiate for full compliance. 

Action Points – The Way Forward…

  • For those firms that have never reported to OATS and are subject to CAT, the immediate task is to understand impending compliance dates and reporting alternatives.
  • If OATS reporting is currently handled through your clearing firm or OMS/EMS vendor, understand how their new service, if they plan to expand, affects you. If you use an OATS reporting vendor, assess if they will provide a CAT service. The pricing will most likely change due to the added complexity. If you use only one clearing firm or only one OMS, the task should be easier.
  • Get your customer information and account identifiers consistent from application to application. This may have always been on your firm’s to-do list as a nice-to-have, now it’s necessary for accurate CAT reporting.
  • Consolidate all order information from various external and internal systems into a data lake or hub for ease and consistency of reporting.
  • Assess CAT processing alternatives including whether CAT reporting can be consolidated with other services.   As mentioned earlier, CAT provides a number of opportunities to centrally manage your data, perform more-focused internal surveillance, and may reduce the burden of response to regulatory inquiries which collectively can serve to potentially reduce your firm’s cost associated with regulatory reporting and data management.

In summary, CAT is happening and continually changing, but for the first time we have a clear, believable path forward.