Last month FINRA submitted a filing with the SEC outlining their enforcement of CAT regulatory compliance, which included the industry’s goal to retire OATS reporting.  This filing provided additional guidance around FINRA’s plan to ensure the CAT data is complete and accurate before OATS reporting can be fully decommissioned.

The Filing states the following data requirements are based on only 2a (Equity reporting) since options were not required in OATS reporting.  These will be calculated as averages over 180-day period and across all participants:

  • An initial pre-correction error rate of CAT submission data below 5%
  • A post-correction error rate of CAT submission data below 2%
  • Intra-Firm Linkage rates of at least 95% pre-correction and 98% post-correction
  • Inter-Firm Linkage rates of at least 95% pre-correction and 98% post-correction
  • Firm-to-Exchange Linkage rates of at least 95% pre-correction and 98% post-correction

In addition to the above requirements, FINRA must also ensure that their surveillance and investigations are comparable to those being used on OATS data.  Given the late-October Go-Live compliance dates for each of the requirements, coupled with the 180-day average, OATS could be decommissioned as early as late second quarter of 2021.  It is likely this will require additional time, but keep in mind that there are financial milestone incentives for plan processors to complete the retirement of OATS by December 31st, 2021 (see our June 23, 2020 blog “The Consolidated Audit Trail (CAT) is Live” for more details on the reporting incentives).

Industry members and CAT Reporting Agents (“CRAs”) can currently comment on the proposed rule change to retire OATS, SR-FINRA-2020-024.  CAT reporters are extremely eager to decommission OATS reporting and no longer be obligated report and support both trade reporting activities.  Most firms are already working with scarce industry reporting expertise, development/support resources and compliance staff needed to comply with the reporting obligation of OATS and CAT while still developing future CAT reporting.

A common theme across our client base is that firms and CRAs agree with some, but not all, of the metrics set forth in the filing.  There is concern surrounding some of the linkage requirements.  Linkage specific to representative order flow was not required in OATS, and there is a desire that the only CAT data which should serve as a replacement for OATS should be considered in the decommissioning process.

Additionally, though the industry will likely meet the outline metric requirements, FINRA must also be ready to transition its automated surveillances to CAT data.  This will be essential in the evaluation of the accuracy and reliability of the CAT data and could potentially require re-tooling of the systems required to ingest and operationalize CAT data.

What should firms be doing?

Firms are encouraged to review and comment on the proposed rule change to eliminate OATS.  They should also continue detailed analysis of their CAT reporting, knowing that all current FINRA examinations will include CAT reporting review for both equities and options.  For firms that may not have done so yet should conduct a thorough policy and procedure review.  This should include a review of controls and data validation to the source, whenever possible.  These steps will go a long way in preparing firms for the regulatory scrutiny which they will face in the coming months and years.

Oyster Consulting can help you assess how your firm is positioned for CAT readiness, manage your requirements assessment and implementation phases, interface with your own technology providers, and assist you in determining what and how your technology providers will report for you. We can also assist in testing data scenarios and data linkage, as well as creating an error repair process. Firms can also leverage Oyster testing tools to gather and analyze reported data and errors.  For more information contact us or call (9084) 965-5400 and one of our Relationship Managers will be happy to assist you.

About The Author
Photo of Ralph Magee

Ralph Magee Jr.

Ralph Magee Jr. is a securities industry professional with over 25 years of experience in the financial services industry. Ralph has led multifaceted teams in large-scale client remediation and clearing platform conversion-related projects. Ralph also uses his expertise in trade reporting providing large broker dealers project management and subject matter expertise related to the Consolidated Audit Trail (CAT).