CAT – Phase 2d and Ongoing Challenges
The industry has successfully implemented phase 2a,2b and 2c of CAT reporting and testing has begun for phase 2d which has a compliance go-live date of December 13th, 2021.
For the most part, transactional reporting has gone well. Phase 2d will bring more complex products requiring multi-leg reporting scenarios. However, there are still some aspects of phase 2d that are being challenged by Industry Members and their associated advocacy groups such as SIFMA and FIF.
The most pressing of these challenges is the reporting of Authorized Traders on accounts to CAT, as defined in SEC Rule 613. For many broker-dealers, the collection of Authorize Traders’ PII has never been required in their current books and records. With the time remaining before the go-live date, the collection, systemization and reporting of this information would be an insurmountable implementation for some, if not a majority of Industry Members.
There is also concern surrounding the collection and storage of PII and customer related data in the CAIS database. While the industry doesn’t necessary disagree with that the SEC should have access to customer information, they are concerned about the risk associated with the storage of this information, including who has immediate access to it and how. Simply put, these risks outweigh the benefits, and the recent hacks and ransomware attacks certainly should be considered.
Ongoing challenges include the limited liability clause, in which Industry Members are required to submit the trade and customer data to CAT but effectively would assume all liability related to a breach or potential misuse of the data. The CAT system has been primarily designed and operated by the SROs. Once the data is submitted by Industry Members, they no longer have any control over the data. This is certainly a legitimate concern as is potential litigation related expenses if a breach occurs.
The SEC continues to review potential alternative approaches to these issues as well as recent industry push-back related to the CAT Funding Model. In April 2021 the SEC proposed that 75% of the previous and go-forward costs to implement and maintain CAT would be paid by the Industry Members versus that of only 25% for the SROs (see Under Looming CAT Deadlines, Firms Try to Land on Their Feet for more information). Also under review is a proposal for exemptive relief to extend the deadline of corrected data to T+4 from T+3 at 8:00am.
Oyster Consulting can assess how your firm is currently positioned for CAT reporting as well as help manage your requirements for future implementation phases. Oyster’s team has experience working with several large CAT reporters and have developed a practical analysis tool called the Oyster Solutions CAT Application. This application monitors a firm’s CAT reporting by ingesting CAT reports from any source and combining that data with all feedback files from FINRA CAT. The Oyster Solutions CAT Application also assists in error correction and repair, enhancing a firm’s ability to supervise CAT reporting. The application is designed to conform to the recommendation for CAT Supervisory systems and procedures found in FINRA’s Notice to Members 20-31.
About the Author: Ralph Magee is a Senior Consultant with over 20 years of experience in the financial services industry. Through a variety of roles with Wachovia Securities, LLC and The FinancialGroup of Virginia, Ralph gained his expertise in clearing conversions as well as an extensive understanding of trading and regulatory reporting of equity and fixed income securities. A member of the Oyster Consulting team since 2010, Ralph has led multifaceted teams in large-scale client remediation and clearing platform conversion-related projects. Most recently, Ralph is using his expertise in trade reporting providing large broker dealers project management and subject matter expertise related to the Consolidated Audit Trail (CAT).