Consolidate Audit Trail – Timeliness of Reporting

Ahead of Consolidated Audit Trail implementation, the subject of timeliness for reporting remains a topic of conversation.

While US broker dealers anticipate the initiation of the Consolidated Audit Trail (CAT), many aspects of this regulation remains a topic of conversation for the industry.

One area of particular interest is the subject of timeliness for reporting. ‘Timeliness’ has been defined as “when the data is available to regulators and how long it would take to process before it could be used for regulatory analysis.” So how does one determine whether the current CAT NMS Plans will allow for timeliness of reporting, and what opportunities are there for technology to help support this objective?

There are many elements to consider in determining judgement on this statement and technology will play a big role in improving and streamlining the management of this process. This article reviews some of these influential factors and technical components that can support the timeliness of CAT reporting.

Regulatory Approval

In November 2016, the Securities and Exchange Commission (SEC) approved the NMS plan submitted by the SRO’s (Self Regulated Organisations) “Order Approving the National Markets System Plan Governing the Consolidated Audit Trail”(The Plan). This cited a number of factors that reduce the timeliness of reporting visibility to regulators. Notably 1) the ability to identify the customer who originated orders, 2) the ability to link orders by the same customer and 3) the lack of direct access for regulators.

Access is a key objective in CAT in order for regulators to effectively and efficiently monitor the markets. According to the plan, “the CAT NMS Plan provides that CAT Reporters must report order event and trading information into the Central Repository by 8:00 a.m. ET on the Trading Day following the day the CAT Reporter records such information.”

Since this information must be available to regulators by T+5, how can firms utilise technology to support their business in meeting this requirement. The Plan defines the following data processing milestones for the CAT Processor:

  • Initial data submission (8:00am Eastern Time T+1)
  • Initial validation, life cycle linkage, communication of errors (12:00pm ET T+1)
  • Resubmission of errors (8:00am ET T+3)
  • Repossessing of error corrections (T+4)
  • Data ready for regulators (T+5)

With an overall goal to achieve more efficient, effective market surveillance and analysis which can lead to an increased ability to identify areas of misconduct, it is essential that a CAT reporters operational workflow is matched to this timeframe to ensure reported data is of real value to the regulator in a timely fashion.

Initial data submission (08:00am Eastern Time T+1)

Under current Order Audit Trail System (OATs) reporting FINRA members submit data on a daily basis by 5:00am ET on T+1. The submission timeline for CAT is to be extended by 3 hours to 8:00am ET providing more time for reporting.

In line with this, firms may opt to put a number of checks in place before data is submitted to the CAT Processor (the central CAT repository), to ensure due diligence and data integrity qualification prior to submission. Using a technology platform to replicate CAT Processor validation checks and utilizing market reference data for validation and enrichment purposes enables a firm to improve the quality of the initial submission of data.

The short reporting deadline can have an impact on this initiative as dealing across asset classes, with different markets could affect the availability of key reference data prior to 8:00am ET. Another element to consider in timeliness of reporting is the defining event that must occur by 8:00am ET.

Is it the physical submission of data to the CAT Processor, or is it the successful consumption of data at the CAT Processor or is the successful receipt of an acknowledgement from the CAT Processor? Will peak submission time bottlenecks play havoc on reporting timeliness? Events such as market close, release of reference data, the last few hours before deadline, an overnight batch job are key times to expect peak volumes.

With around 1800 broker dealers expecting to connect to the CAT Processor, these factors are bound to have an impact on reporting timeliness, but utilising technology could be an option for firms. For the CAT Processor, this would reduce the number of connection points to the data warehouse as it would be spread across a hand full of Data Submitters effectively reducing the risk of a potential volume overload, not to mention reducing maintenance efforts and the support of fewer entities.

For CAT Reporters, they will have fewer broker dealers competing for bandwidth, particularly at peak times.

Initial validation, life cycle linkage, communication of errors (12:00pm ET T+1)

The CAT NMS Plan does not mandate the format that data is to be reported but has authorised the Plan Processor, Thesys Technologies, to determine the electronic format in which data must be reported. Defining a uniform format across the industry helps streamline the input, processing and output of data.

Although it means all CAT Reports will need to conform to a standard specification, it also means there should be a single interpretation, single set of validation rules and a single set of exception management processes for the industry.

This will make the validation, linkage and communication of errors far more efficient and over time improve completeness of data and likely reduce the time to readiness of the data for regulators. Technology can assist firms in the reconstruction of raw source data to meet the electronic format to be defined by the Plan Processor.

Resubmission of errors (8:00am ET T+3), Repossessing of error corrections

The provision of an Error Correction Timeline does provide some leeway for firms to correct erroneous data in a second submission attempt before 08:00am ET on T+3. This supports the provision of providing visibility of correct, complete and accurate data to a regulator by 08:00am ET on T+5.

Using a uniform format for reporting may mean that the number of errors identified at this stage can be reduced, and if firms opt to embed pre-validation checks into their reporting procedure, this can limit the errors to be only related to linkage issues, making more effective use of operations teams.

To further reduce the number of errors to manage at this stage, firms can also consider pre-reconciliation procedures that would highlight any potential linkage errors, but again, readiness and availability of data could make this a challenge to achieve prior to the initial submission deadline.

It is stated that error correction information received from the CAT Processer will be delivered to CAT Reporters by 5:00pm Eastern Time on T+1 to be rectified by 8:00am ET on T+3. This may have an operational impact on firms across the US who will have one business day to rectify the issue and could see financial implications when supporting this.

However, the incremental compliance costs have been deemed reasonable by the Commission in order to support the regulatory oversight benefits of having this information made available to regulators in a timely fashion.

Exception management is a key operational task for any regulatory reporting obligation, and can become more challenging when there is a requirement to resolve data linkage errors. There may be a multitude of paths to follow to find the source of the break but again, using technology to trace and track internal lifecycle links can provide visibility into the right route for investigation, therefore reducing the time it takes to identify and rectify the problem.

Data ready for regulators (T+5)

In providing access to regulations, the current OATS T+8 schedule and Electronic Blue Sheets 10 business days after initial request is submitted will be consolidated into a 5 business day activity under CAT. CAT also introduces direct access to the data for regulator.

Currently OATS is only available for FINRA and can take several weeks to be established for other regulators. CAT is a significant advancement on this as it removes the need for a data request process, and allows regulators to access and use this data to detect suspicious activity prior to T+5.

This article has identified a few ways in which the implementation of CAT and the collaboration of technology can support timeliness of reporting, and accessibility to data for regulators:

  1. Using a pre-defined reporting format, which has now been adopted by the CAT Plan Processor.
  2. CAT Reports can incorporate pre-submission validation checks into their reporting process.
  3. Using reporting vendors or service bureaus to alleviate high connection rates and high volume.
  4. Error management tools to manage non syntactical errors

So, does the CAT NMS Plan and the plans of the CAT Processor ensure timeliness of reporting? From a CAT Reporters perspective, the answer is a yes. However, they may also be concerned about the effect of the implementation on their operational and technical teams, as well as their budgets.

Since the events of 2008, regulators have been looking for greater visibility and oversight into the activities of financial institutions to monitor industry threats such as systemic risk, market abuse and insider dealing. Because of this, a T+5 timeliness deadline is justifiable, and achievable by the industry as it is the analysis of this information over periods of time that identify cause for concern.

The CAT process will definitely support regulators in improving data analytics and reconstructing market events. The ability to do this in a shorter time frame can safeguard the industry from future failures and support further regulatory policy governing malpractice potential violations.

This article was written by Maryse Gordon, Senior Pre-Sales Consultant, UnaVista.

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