• Maureen Doyle-Spare, Head of US Consulting Services, JDX Consulting
• Steven Goune, Capital Markets Advisors, Partner: Finance & Regulatory Compliance Consulting
• Editorial by Steven Crotch, JDX Consulting

SEC Rule 613 – Consolidated Audit Trail (CAT)

CAT imposes fundamental changes in the way that SEC-regulated broker-dealers manage order event information from inception through execution and how they relate to others in the market.

Implementation timeline and COVID-19 impact

The SEC adopted the CAT rules on July 18, 2012 with a phased implementation timeline for large firms and small firms. As per the latest CAT NMS specifications, the initial go-live for Order Audit Trail System (OATS) reporting firms (Phase 2a and 2b) was scheduled for April 20, 2020 and May 20, 2020 for equities and options events respectively.

In response to the COVID-19 crisis, global regulators continue to provide regulatory relief to financial services firms through a combination of enforcement forbearance and the deferral of hard compliance deadlines. Regulators want to ensure that firms can focus capacity on business continuity, technology resilience, managing severe market volatility, market disruption events and supporting their customers.

Regulatory forbearance, through the issuance of temporary no-action and exemptive relief letters is essentially a directive from the SEC, pursuant to Section 36 of the Exchange Act and Rule 608(e) of Regulation NMS, that orders the respective self-regulatory organisations (SROs) to not take enforcement action for non-compliance, often for a temporary period of time.

On March 16th, in acknowledgement of the impact of COVID-19 on market participants and their need to implement business continuity plans, the SEC initially issued a no-action letter for CAT reporting¹, stating that they would not recommend that the commission take enforcement action against market participants should they not enforce the CAT implementation deadlines. The no-action relief was valid until May 20, 2020, but the commission stated in the letter that the relief could be further extended.

The reality of broad regulatory forbearance, as opposed to deferral of compliance deadlines, is that market participants are often reluctant to ease the pressure on their compliance efforts as there is still a hard deadline to work towards. Typically, firms only re-baseline a plan when dates are moved out.

In the case of the CAT relief, the reality of the initial forbearance was that it only really applied to the April 2020 compliance date and without relief or deferral in relation to any of the subsequent compliance dates. Consequently, the risk was that the industry would be faced with a potential bottleneck while reporting firms attempted to deal with remediation activity for phases which have already gone-live, with limited capacity (given market conditions and volumes), for the May, 2020 compliance date, while simultaneously having to prepare for subsequent compliance dates for which there was no relief or deferral. Remediation activity would also have been undertaken while building out/extending the existing phase 2a architecture into phases 2b – 2e, with the additional challenge of multiple phases running concurrently. A significant challenge even without the current COVID-19 crisis, the impact of which was likely to have a knock-on effect that would likely necessitate revisions to the formal implementation timeline for CAT. An unintended consequence that the SEC had inadvertently created, despite good intentions.

As industry trade associations continued to advocate for the deferral of hard compliance deadlines, as was the case with the Basel Committee and IOCSO’s deferral of the final implementation phases of the margin requirements for non-centrally cleared derivatives (by one year), global regulators are beginning to harmonize their approach from forbearance, calendar slide, to deferral of deadlines.

Consequently, on April 20, the SEC issued a statement² advising that in order to address the impact of COVID-19, while preserving progress toward existing milestones, that it had voted in favour of issuing two exemptive orders to move the CAT implementation forward. The exemptive orders establish a phased CAT reporting timeline for broker dealers, and permit introducing brokers to follow the small broker-dealer reporting timeline, conditional upon meeting certain requirements. The first exemptive order allows for a delayed start to CAT reporting, conditional upon adherence to the testing calendar for current and subsequent phases, with the initial reporting requirements for equities moved to June 22, 2020 and options to July 20, 2020. In a nutshell this a just a safe harbour for initial reporting and everything else remains the same on the CAT calendar through 2022.

Revised CAT phased implementation timeline, with no-action relief

Our main takeaway key dates for immediate planning from the SEC’s actions and revisions of select milestones are as follows:

• June 22, 2020: Initial equities reporting for large broker-dealers and small broker-dealers that currently report to FINRA’s Order Audit Trail System (OATS)
• July 20, 2020: Initial options reporting for large broker-dealers
• December 13, 2021: Full equities and options reporting for large and small broker-dealers
• July 11, 2022: Full customer and account reporting for large and small broker-dealer

In December 2019, industry test reporting for CAT highlighted issues (such as exchange liability and opening-up sensitive data) with the CAT reporter agreement, which reporting firms are required to sign to gain access to the testing environment. It is unclear at this stage how issues with the reporter agreement and delays to the timeline will now converge.

Depending on where firms stand in terms of their readiness for the June and July 2020 dates, we would suggest that they should focus their efforts on ensuring:

• That they have a robust reporting control framework – enhanced governance and data quality is integral to the CAT plan. Data quality controls, reconciliations between trade data sources and standards and policies are key, as well as the reconciliation between OATS and CAT reported data. This will help to ensure that any post go-live clean-up and remediation is kept to a minimum, freeing up capacity to prepare for subsequent compliance dates especially with regard to intra/inter firm and exchange linkage testing.
• Reporters must dedicate capacity to ensure that they have adequate expertise aligned to the products, reporting process and associated control framework. Reporters must dedicate sufficient time to examine the impact of allocation events, and new order events introduced in Phases 2c and 2d on their existing reporting solution and control checks.
• Member firms need to allocate business analyst capacity to work in parallel with the operational reporting team to prepare for subsequent compliance and testing dates. CAT reporters must ensure delivery of requirements to their technology and implementation teams with sufficient lead time to analyse solutions (buy vs build) and conduct internal system integration testing and user acceptance testing prior to the opening of the respective CAT testing windows.

¹ https://www.sec.gov/divisions/marketreg/mr-noaction/2020/consolidated-audit-trail-reporting-031620.pdf

² https://www.sec.gov/news/press-release/2020-92

³ https://www.sec.gov/rules/exorders/2020/34-88702.pdf

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