The Financial Industry Regulatory Authority (FINRA) may be facing its toughest technology challenge ever with the Consolidated Audit Trail (CAT). With complex and evolving business requirements, robust performance and scaling considerations, serious security posture scrutiny, and a timeframe of under one year to pull it all together, everyone (especially the broker-dealers subject to reporting) wants to know: will they really get it done on time?
On March 1, 2019, FINRA was announced as the plan processor for the CAT, a massive database of equity and options orders that is expected to process over 58 billion order events daily. The CAT's roots date back to 2012, when the SEC adopted Rule 613 of Reg NMS. In response to the Flash Crash of 2010, the CAT is expected to provide the SEC with additional transparency to better regulate U.S. markets.
FINRA recently took over for Thesys Technologies, the original plan processor that was hired in January 2017. Thesys recently lost the job after project delays, funding concerns and other issues. This leaves FINRA with a lot of critical decisions to make – and make quickly.
FINRA has not stated whether they will use Thesys’s tech stack or redesign from the ground up. Inheriting a partially completed code base has many challenges. Just getting familiar with architecture and design principles, existing backlog, and gaining awareness of any technical debt can take weeks or even months. Restarting the project, however, may have just as many challenges — chiefly, time to market. If it took Thesys two years to come this far, can FINRA be successful in half the time?
FINRA has been clear that the technical specifications for industry members would remain the same through the Thesys transition. Broker-dealers and vendor systems have already invested too much into compliance with reporting obligations; a significant pivot to new requirements would cause major industry uproar. But with a timeline of less than a year to deliver the plan processor technology, keeping a 195 page technical specifications document (and an accompanying reporting scenarios document that’s 186 pages) means FINRA will be dealing with all the same problems that Thesys struggled to resolve. And soon they’ll also need to break ground on a front-end user portal for feedback and error correction workflows, which is still in mockups.
Will all that prove too tall a task to address in one year?
Given the road ahead, it sounds like the chips are stacked against FINRA. But all hope is not lost. FINRA has some core and experiential advantages that will work in their favor. First, as the OATS* (Order Audit Trail System) plan processor since 2007, FINRA has more than a decade of experience in this type of regulatory reporting. They’re intimately familiar with the marketplace they serve and the vast ecosystem supporting order handling and execution. This knowledge and history of the marketplace and technology evolution is not something Thesys possessed, and it should serve FINRA well.
Second, to promote better alignment between the SEC and the 22 self-regulatory organizations (SROs), SEC chairman Jay Clayton hired Manisha Kimmel to coordinate the SEC’s oversight of the SROs creation and implementation of the CAT. Kimmel has more than 20 years of experience in regulatory implementation. Having someone in this role, which was not included during the Thesys buildout, positions FINRA to expedite issue resolution when conflict emerges between the SROs.
All said, there’s no doubt that FINRA has its work cut out. Delays in regulatory launches are not uncommon. MiFID II was delayed by the European Commission for a full year. The SEC recently delayed the compliance date for Rule 606 amendments from May 20th of this year to Oct 1st. The last major OATS Phase III amendments were delayed by several months. The CAT itself was already delayed from an expected equity reporting go-live of November 15, 2018 to April 2019.
Can industry members expect to see more delays?
The truth is that the answer doesn’t matter. The only prudent path forward is for industry members to assume the deadlines will be upheld. This means that broker-dealers should expect to report to CAT within the current timeframe. If you’re a broker-dealer, you should be assured that your technology team or provider is actively developing a solution that’s flexible, robust and secure. SS&C is leading the charge with a CAT reporting solution to assist broker-dealers with this reporting obligation. It will be available for the December 2019 testing period ahead of the April 2020 go-live.
*Note: CAT will sunset OATS after a period of stabilization post go-live.
Written by Andrew Pheife
Director, Product Management, SS&C Eze