In this contributed piece, Nate Call, FIS RegTech Solutions Director, gives his take on the Consolidated Audit Trail and answers some FAQ.
The Consolidated Audit Trail (SEC Rule 613), requiring large broker-dealers to report trades and other relevant data to the SEC via the CAT Plan Processor, Thesys CAT, goes into effect November 2018. The idea is to provide regulators one comprehensive database through which they can trace trading activities in U.S. equity and options markets. Self-Regulatory Organizations (SROs) had a November 15, 2017 reporting deadline; small broker-dealers have until November 2019 to comply. To avoid potential fines and penalties, large broker-dealers should be preparing for CAT now.
Nate Call, FIS
Nate Call, FIS RegTech Solutions Director, offers insight into the legislation and next steps for broker-dealers. Call has been associated with FIS, a global leader in financial services technology and cybersecurity partner to U.S. Homeland Security, for almost 20 years. With a deep background in financial services and regulatory technology solutions, Call sees the next several months as an opportunity for broker-dealers to consolidate reporting efforts, reduce cost and gain a competitive edge using big data analytics to improve business decisions.
What’s the urgency among broker-dealers to finalize CAT preparations?
It seems a fire would be lit to get this in place, but that’s not been the case. Many in the industry took a soft tone after President Trump was elected, thinking the rules wouldn’t be as strict. But neither the SEC nor the President have indicated as much. The matter is urgent, and the early movers stand to gain much benefit in working with the rich data set CAT will require to manage compliance moving forward.
What challenges stand in the way?
Recently, we asked broker-dealers in a live webinar what challenges they saw regarding CAT implementation. The top three responses were 1) selecting a tool to manage the implementation, 2) creating workflows for aggregating, formatting, cleaning and submitting data and 3) ensuring organizational procedures were in place to efficiently execute the task.
The data involved in building a CAT reporting system comes from many sources and can be difficult to integrate. To manage it effectively, the information is best stored in a single repository. In addition, broker-dealers must maintain these records for six years. We’re talking about a massive data lake to facilitate the process.
When you consider that the SEC will be processing over 50 billion records daily to maintain the reporting, another significant concern becomes security. In light of the Equifax debacle, the House of Representatives approved H.R.3973, the Market Data Protection Act, holding the SEC accountable for cybersecurity risks. Clearly, broker-dealers must continue to expand their cybersecurity controls in preparation for CAT, as intermediary systems represent weak points and data security protocols can be extremely complex.
How will CAT impact financial reporting and operations moving forward?
CAT has the potential to solve a lot of problems for regulators, consolidating reporting duties onto one master system. But until then, two other systems are still valid and must be maintained: Order Audit Trail System (OATS) and Electronic Blue Sheets (EBS). These systems alone are onerous enough. As CAT settles in, there will be reporting overlaps. The trick for broker-dealers will be to find a solution that effectively serves all three systems through a single data feed. Think outsourcing. Think single vendor.
How can broker-dealers benefit?
Broker-dealers will have to embrace big data at last. In short, this is the impetus we’ve been waiting for to enter the digital age. One of the miracles of big data is that you can begin to uncover the unknowns surrounding your business. Big data analytics makes this possible. Broker-dealers who embrace it will soon be mining complexities across their trade order lifecycle, asking specific “what if” questions, and re-imagining their trading behaviors to gain significant efficiencies fast. How and when to route orders at reduced cost, how to group them to an exchange for a better tier on executions, what behaviors surrounding my own stock can be managed to achieve growth targets, etc. Big data, supported by artificial intelligence and machine learning, can reveal insights never before possible – and we have CAT to thank for that.
What next steps can assure success?
Find a qualified partner who understands the business. Make sure they understand how big data works, are able to manage mass quantities of data efficiently, and have the cybersecurity to ensure that the data is locked-down. Look for someone who can help establish the workflows, processes and best practices you need to manage compliance, and do it now. The cost will only go up as the clock counts down.