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Spurred by the Flash Crash, Consolidated Audit Trail (CAT) will change how SEC regulated banks and broker dealers manage information and reporting, creating monumental changes in technology, operations and processing flows. The data repository will link cross-firm trade events and track potential market manipulation, overseeing the most complex orders and trading strategies making oversight transparent.
CAT will create a single database of equity and listed options orders, quotes and executed trades that is expected to grow to the equivalent of over 10 times the content of all U.S. academic research. Only the National Securities Agencys database will be larger. The projected size of the database is not the only measure of the scope and complexity of CAT. Twenty-three Self-Regulatory Organizations (SROs) manage the plan, thousands of broker dealers will need to report – including those exempted under current regulations, a new asset class (options) is being added on top of the equities currently reported in OATS, and there may not be immediate retirement of overlapping reporting mechanisms such as OATS when CAT goes live.
Key CAT Challenges: Industry
As currently planned, CAT will receive data on approximately 58 billion transactions daily and maintain data on over 100 million institutional and retail accounts and their customers personal identifiable information (PII). With so much data, and so many participants, the CAT programme has already run up against the challenges of complex coordination (with 23 SROs on the CAT Operating Committee) and gaining industry feedback and expertize. The most immediate results have been the Request for Exemptive Relief to change all the deadlines and the inability to create complete specifications on the original schedule for both SRO reporting and industry member (broker dealer) reporting. The revised approach announced by the Operating Committee on 30 January 2018 to gain industry feedback is a good step in overcoming these issues.
The scope of PII being held has raised numerous cybersecurity concerns – not only with a single repository containing so much PII, but also with the proposed ability of all 23 SROs being able to download data from the repository. This increases the number of vulnerable nodes that may be holding copies of this data, making the cybersecurity task harder and more complex. Congress and the industry – SIFMA has provided an alternate proposal – have all raised these concerns, but the central issue remains – without some way to identify who has initiated orders, how can suspicious activity be noticed or tracked across firms effectively?
Finally, the industry faces the issue of who pays for this central repository. The CAT repository is designed to enable the SROs to better perform their market surveillance functions, yet all SRO proposals on funding the CAT to date have put the onus on the broker dealer community, leading to SEC rejection of the initial proposal. Industry members face cost challenges to implement solutions and operate in the new CAT environment, and do not see the logic of being primary responsible for the $50M+ estimates of running the repository.
Key CAT Challenges – Banks and Broker Dealers
Cost is the most obvious challenge for industry members. The SEC has estimated the total annual cost of CAT at $1.7 billion, 88 percent of this being spent by broker-dealers to meet their data reporting requirements. Small firms, and others previously exempted from OATS are expected to be heavily impacted affecting their operating cost structures.Implementation costs for large firms were estimated at $5 million for implementation and $3.6 million for ongoing operation and maintenance.
The implementation and operating challenges are not only cost related. Though the CAT Operating Committee is working to the dates in the Request for Exemptive Relief, this has not been approved by the SEC, and the actual date for industry reporting remains uncertain with most expecting a date prior to April 2020, the target in the relief request. Whatever the final date, firms face complex requirements, that when finalized, will leave a short timeline to delivery of CAT solutions and operating processes.
Creating CAT solutions and operating processes requires mapping how existing systems, infrastructures and operating models must change. Since even within the scope of OATS that overlaps with CAT, CAT is more extensive and adds in processes (allocations) and instruments (listed options) that are beyond that scope or covered by other reporting today (e.g. Electronic Blue Sheets); firms will require expertize across these areas and additional disciplines (in particular data management, project management, solutions architecture and security) to deliver their solutions. And once CAT is delivered, firms may still be required to continue operating their OATS and other reporting for unclear timeframes.
Can CAT Add Value for Reporting Firms?
CAT poses a number of challenges. In overcoming these challenges and reporting into CAT, can broker dealer firms get added value? One of the primary requirements for firms in CAT is to aggregate all the data across the event lifecycle of equity and listed options trading, from order and quotes to allocations – across multiple systems and venues. Proper reporting will require effective data management and consolidation to be able to not only report, but deal with exceptions and future investigative requests from the regulators.
Delivering this kind of capability effectively will ensure a well-functioning operating environment, but provides a basis for utilizing this aggregated and well-managed data for business purposes and creating added value. This type of long-term effectiveness will only come with adopting the right approach to dealing with the challenges of CAT.
The Right Approach
Firms can treat CAT in a variety of ways – targeted upgrades to select systems, using their existing reporting processes, and trying to do the minimum necessary to meet the deadlines. This approach will feel more and more attractive for those firms who are awaiting some final clarity in the timelines and requirements before proceeding. The result will be in line with the previous experience of rolling out solutions reporting regime by regime – siloed processing that is more expensive to maintain and operate than expected, and cannot be leveraged for the next set of asset classes in CAT or for other regulatory reporting requirements.
Industry members can take a more strategic route. Though the final requirements and timelines are not complete, the overall scope of the problem is – how do we, as a firm, collect, manage, transform, link and report this data. The strategic approach will look to answer two primary questions: 1. How do we want our reporting technology, compliance and operations to work in the future, and 2. How do we understand the data we are collecting that may be useful to the business, beyond compliance.
The scope of CAT means that any solution for it, properly conceived, must provide a platform for long-term consolidation multi-asset class, multi-jurisdiction order event, trade and transaction reporting. This will harmonize the operating model and reduce the costs of technology deployed. It is particularly important for firms to look at how they can mutualize this cost base – what are the technologies and services available to meet the CAT requirement (which all reporters have) and not engage in non-differentiating efforts.
We generally understand the scope of the data that will need to be gathered inside each firm to produce CAT reporting. Technology, operations and compliance need to engage the business and other groups to help them understand the scope of data collected, the raw data in and the results of processing. They also need to understand from these other constituents what data is of interest to them, how the organization is looking at data management and governance, and how the CAT programme can integrate into the overall data strategies and be a trusted source of data for analytics and other business processes.
You Can Start Now
CAT timelines and specifications remain in flux. Industry member firms, however, can take a proactive approach to CAT by placing it in the larger context of how to transform their regulatory reporting technology, operations and compliance models to be more effective and efficient. At the same time, they can engage the business to implement this enhanced operating model in ways that further overall firm data strategies and make the solutions deployed more valuable to the long term growth prospects of their firms. The key is to begin the thought process of where your firm wants to be when CAT has gone live, and how this will enable further innovation and compliance down the road.
David Campbell,head of capital markets strategy at Broadridge Financial Services. Prior to joining Broadridge, David held product management leadership positions at Fiserv, Pershing, and Financial Models Company.
Keith Jamaitis, managing director at Broadridge Financial Services. Keith provides technology advisory services to help clients solve the many challenges facing the industry today. Keith has a deep expertise within automated trading systems for the institutional sell side, buy side and global exchanges, and has held FINRA Series 7, 63, 24 licenses.
