On August 27, 2018, Brett Redfearn, Director of the Securities and Exchange Commission (SEC) Division of Trading and Markets, issued a public statement on the Consolidated Audit Trail (CAT) system, and how it expects a delay in implementation.(1) This comes almost a year after, on November 6, 2017, some of the major participants in the CAT system, to monitor trading in the U.S. equity market, had requested that the implementation date be delayed, as did the Securities Industry and Financial Markets Association (SIFMA), on November 8 last year.(2)  

Under Rule 613 of Regulation National Market System (NMS), adopted by the SEC in 2012, the Financial Industry Regulatory Authority (FINRA) and the national securities exchanges were required to work together to develop and submit a plan to create, implement, and maintain a consolidated audit trail plan (Self-Regulatory Organizations (SROs) CAT Plan). Under the SRO CAT Plan, the first phase of reporting, covering SROs was required to begin on November 15, 2017.(3) The requested delay in November 2017 was denied by SEC Chairman Jay Clayton, as he noted in a statement that he was not in a position to approve the requested relief, and urged that the SROs continue to work cooperatively with each other to meet their responsibilities as promptly as possible.(4) He also instructed SEC staff to be available to help ensure that project management and governance issues could be addressed, and that the SROs, Thesys Technologies LLC, who have been engaged to build the CAT systems, and industry participants, are engaged. To date, the SROs have not begun reporting required data to the CAT, and there are still delays in the development and build, with the SROs and Thesys missing new self-imposed deadlines.(5)

What this means  

In light of the delay, the SEC’s Division of Trading and Markets requested that the SROs create a detailed “Master Plan” that would outline a catalog of steps necessary to effectively implement the CAT, together with a revised timeline, with achievable milestones, and clearly defined obligations for both the SROs and Thesys. That plan was received by the SEC on May 25, 2018.(6) 

The SROs Master Plan calls for SROs’ “first phase” reporting to begin on November 15, 2018 and Large Broker Dealer “second phase” reporting to start on November 15, 2019, and all phases of Small Broker Dealer reporting to be completed by November 15, 2022. In addition, not all data will be available for reporting on those dates, for example in the case of large broker dealers, only equities, and no options data will be available.(7) 

A significant component of the SRO Master Plan are the CAT industry member reporting specifications, which provide the technical guidelines for how industry member data is to be reported to the CAT, and are key to phase two of the plan for large broker dealers.(8) The SEC has been informed by the SROs and Thesys that they are working with the broker-dealer community to refine these reporting specifications, with the concern being that it is not practical to report data to the CAT until the systems have been developed sufficiently to receive that data securely.(9)  The SEC, with this in mind, does not expect to make any enforcement actions concerning any industry participants for failure to report data to the CAT, if the systems and controls are not sufficiently developed to receive and process that data, but does expect industry members to work with the SROs and Thesys to develop effective technical specifications for reporting in order to implement the CAT as promptly as possible.(10) 

Conclusion

The CAT once implemented will be the world’s largest data repository for securities transactions, therefore it is imperative that the data is protected. Concerns expressed by industry participants, including SIFMA,  around data protection and cybersecurity risks have prompted this delay.(11) In light of increasing cyber risk, the SEC’s Division of Trading and Markets is continuing to review the SROs Master Plan, and they will also continue to monitor the development of cybersecurity controls for the CAT, and work with SROs, Thesys, and industry participants regarding the security of CAT data.(12) 

References 

  1. “SEC’s Redfearn Makes Statement on CAT Development, Delays and Implementation,” Traders, August 28, 2018. Access at: http://www.tradersmagazine.com/news/brokerage/secs-redfearn-makes-statement-on-cat-development-and-implementation-118151-1.html?pg=3 
  2. “SIFMA Requests Delay in CAT In Light of Ongoing Concerns, SIFMA, November 8, 2017. Access at: https://www.sifma.org/resources/news/sifma-requests-delay-in-cat-in-light-of-ongoing-concerns/
  3. “Statement on Status of the Consolidated Audit Trail,” Securities and Exchange Commission, August 27, 2018. Access at: https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail 
  4. Ibid 
  5. Ibid 
  6. Ibid 
  7. Ibid 
  8. Ibid 
  9. Ibid 
  10. Ibid 
  11. “SIFMA Testifies on CAT Concerns at House Financial Services Subcommittee Hearing,” SIFMA, November 30, 2017. Access at: https://www.sifma.org/resources/news/sifma-testifies-on-cat-concerns-at-house-financial-services-subcommittee-hearing/ 
  12. “SEC’s Redfearn Makes Statement on CAT Development, Delays and Implementation,” Traders, August 28, 2018. Access at: http://www.tradersmagazine.com/news/brokerage/secs-redfearn-makes-statement-on-cat-development-and-implementation-118151-1.html?pg=3 

Newsletter Author: Venetia WooMairi Bryan 

Newsletter Contact Person: Venetia Woo 

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation. 

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