SEC Drops the hammer on Exchanges over CAT!

The Securities and Exchange Commission (SEC) is increasing its pressure on exchanges to finish the long-delayed Consolidated Audit Trail (CAT), which will be used to detect anomalies in the marketplace that can be potential violations of the Securities Industry Regulations. The exchanges would face financial penalties if they miss further deadlines for building CAT. SEC Chairman Jay Clayton told exchanges that CAT must be implemented without any further delays. The implementation of CAT thus far, has been difficult to say the least. Besides what the exchanges are required to do, Industry Members are also working with Self-Regulatory Organizations (SRO)’s to resolve a long list of issues related to the requirements surrounding the various workflow scenarios that exist in the industry.

Various forums in the industry have been holding working groups for the implementation of CAT. The Equities portion of this effort is less complex than the Options portion. Even so, there are still some lingering questions around Equities. There are also many workflows for Options that remain unresolved with regard to what is required, what is not, and how Industry Members will be able to comply when certain required data elements are not available or readily accessible.

Furthermore, for Options there are “Complex” orders, which are orders that have multiple legs that may involve Equities in addition to Options. The goal is to link these multiple legs of a Complex order together, so that the regulators know they are related. This most likely won’t be a simple task to for some of the industry’s workflows.

One of the main high-level requirements of CAT, is the Firm Designated ID (FDID). This ID is required to identify the beneficial owner of an account. The industry has not finalized how this ID will be handled, with respect to both format and the need to disguise the customer’s personal identifying information.

The Industry forums continue to hold Q&A sessions with regulators, and working group meetings with their members. This will be ongoing throughout the entire implementation time frame.

With an April 20, 2020 deadline for Industry Members to begin reporting for Phase 2a of the project (Equities), and a May 18, 2020 deadline for Industry Members to begin reporting for Phase 2b of the project (Options), one has to wonder just how rough the start will be.

Additionally, Phases 2c and 2d, continuations of 2a and 2b, will be rolled out over the proceeding year and a half beyond the first two phases. On one hand, there are still many discussions to be had, many questions to be answered, and many issues to be resolved. The SEC on the other hand, seems to be quite firm on the timeline and it doesn’t appear that there will be any other extensions.

Will CAT Implementation go relatively smooth, or will it be so full of issues that the SEC will finally see that extensions are necessary?

Source: The Wall Street Journal