The Securities and Exchange Commission (SEC) ordered the creation of the Consolidated Audit Trail (CAT) in 2012 after regulators realized that they did not have enough market data to explain the Flash Crash that occurred in May 2010. This crash was a trillion-dollar stock market crash that lasted for approximately 36 minutes. Stock indexes, such as the S&P 500, Dow Jones Industrial Average and Nasdaq Composite, collapsed and rebounded very rapidly; A U.S. Commodity Futures Trading Commission 2014 report described it as one of the most turbulent periods in the history of financial markets.
In order to prevent another Flash Crash of this nature, the SEC put in place the CAT Rule, which addresses the audit trail of all transactions, providing information and checks and balances for market activity. In fact, CAT greatly expands on the requirements of the Order Audit Trail System (OATS) regulation, which was adopted in 1998. OATS was revolutionary for its time but as markets and exchanges became more interconnected and automated, the SEC decided that additional rules were required.
The SEC adopted CAT, also known as Rule 613, in order to “create a comprehensive consolidated audit trail that would allow regulators to efficiently and accurately track all activity throughout the U.S. markets in National Market System (NMS) securities”. The regulation requires all self-regulatory organizations (SROs) to jointly submit a plan, known as an NMS plan, to “create, implement and maintain a consolidated audit trail”.
Transitioning from OATS to CAT:
Firms who have processes and controls in place for OATS will need to conduct gap analysis and extensive planning in order to ensure a smooth transition to CAT. Given the complexities of planning for CAT’s overarching technical and operational changes, it is critical for firms to use this opportunity to thoroughly assess the impact CAT will have on their regulatory reporting operations and technology stack. CAT will pose a number of challenges for firms but also will present an opportunity for firms to enhance other operational business units such as data analytics, surveillance, and client relationship management.
The biggest difference between these two regulations is that CAT will have broader reporting requirements when it comes to customer information, market maker proprietary order submissions, and options execution. There will also be changes around the error correction timeframe, with CAT reducing the window firms have to reconcile errors.
A high-level timeline of the events that led to the creation of CAT as well as major milestones:
CAT Key Requirements:
Broker-dealers conducting business in the US equity and options markets will be required to report order lifecycle events on a daily basis. This will include orders, quotes, cancellations, routes, and allocations.
Firms will be required to provide internal unique identifiers to support the CAT linkage process. Unlike most US based regulatory reporting regimes, customer identification must be provided and firms will need to have a consistent ‘golden source’ of data for all of their customers.
CAT will have little to no exemptions for the reporting requirements. Almost all financial firms will be in scope for this rule.
The scope of work for CAT is immense. The new requirements present firms with a heavy lift in terms of redefining their processes and technology. Firms will need to plan large-scale initiatives around software development, testing, and operational readiness. With the right investment and planning, CAT presents an opportunity for firms to unlock value in several key business areas while also ensuring regulatory compliance.
Monticello Consulting Group (MCG) assists clients across the financial services industry in implementing the necessary infrastructure to ensure compliance and reduce regulatory risks. This experience, coupled with our in-depth knowledge of the financial regulatory environment, uniquely positions Monticello to guide financial institutions, regardless of their size, in the adoption of technologies in the regulatory reporting space and the implementation of strong CAT governance principles.
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