The first industry reporting test for the consolidated audit trail (CAT) begins today (December 16), but there could be a dearth of activity as participants have cited issues with an agreement presented by the exchanges.

Industry members—mainly large broker-dealers—have expressed concern over the CAT reporter agreement, which reporting firms are required to sign in order to gain access to the testing environment, and many have held off signing it. The Securities Industry and Financial Markets Association (Sifma) says the agreement protects self-regulating organizations (SROs), such as exchanges, from liability and opens up sensitive data.

One way or another, I’m not particularly optimistic that there’s going to be a lot of activity in the test environment.

Joshua Beaton, Morgan Stanley

Ellen Greene, managing director of Sifma’s Financial Services Operations group, says provisions in the agreement endanger CAT information and the private transaction data of its members.  

“Our biggest problem with the agreement is that there are several clauses throughout it that basically shield the SROs from any liability in connection with CAT reporting,” Greene says. “Our firms are contributing not only sensitive customer data, but they’re also sending in institutional data, including their trade data. This is a very high breach target, and we just don’t feel that it’s appropriate for members to sign away liability, given the potential risk that this opens up for them.”

She adds that downloading CAT data in bulk into several exchanges will create potential targets for hackers. Further, Sifma wants to limit the data that exchanges can download to their respective transactions—the argument being exchanges’ responsibility is to regulate only those transactions and aren’t supposed to be privy to activity within fellow exchanges.

The agreement states total liability of the SROs, as Consolidated Audit Trail LLC, cannot exceed $500 and that it can modify the agreement, with which companies have 60 days to comply. The agreement does not explicitly mention bulk downloads, but does authorize CAT LLC to release the reporters’ data to the plan processor. It also states the SROs have no liability from the release of the information.

Finra CAT, the plan processor and a separate entity created by the Financial Industry Regulatory Authority (Finra) to oversee the CAT, tells WatersTechnology that it is not a party to the agreement but does require it before accessing the testing environment.

Subjecting the CAT reporter agreement to the conditions proposed by Sifma is both unprecedented and would undermine the viability of the SRO model that has been a feature of the federal securities laws since 1934.

Michael Simon, CAT NMS, in a letter

The SROs responded to Sifma’s complaints in a November 27 letter to the US Securities and Exchange Commission (SEC) that the industry group “re-raises numerous issues that were previously addressed by the commission and the [CAT National Market System plan] participants.” The letter was signed by Michael Simon, CAT NMS plan operating committee chair.

“Subjecting the CAT reporter agreement to the conditions proposed by Sifma is both unprecedented and would undermine the viability of the SRO model that has been a feature of the federal securities laws since 1934,” Simon wrote. “The participants continue to believe that the CAT reporter agreement is not substantively different from other regulatory reporting agreements with similar liability provision such as the Finra Order Audit Trail System (OATS).”

Simon also noted that industry members regularly enter into limited liability agreements with customers. The letter pointed out that CAT data restrictions limiting access to trading activity specific to each exchange “are inconsistent with the participants’ obligations under the federal securities laws and CAT NMS plan, and are at odds with the regulatory purpose of the CAT.”

The SROs and Sifma met with the SECs chairman, Jay Clayton, on December 11, but the issue has not yet been resolved.

Big Test

This test period will look at data validation of trades sent through the CAT system. It will be the first time the industry will send out real-time transaction data. Tests will run from December 16 until April 2020. In April, CAT reporters must pass several tests to prove their data has an error rate of 10% or less before they can participate in live production by April 20, 2020.

A number of sources, including Joshua Beaton, head of Americas trade and transaction reporting at Morgan Stanley, tell WatersTechnology that several broker-dealers have not signed the CAT reporter agreement that will allow them access into the testing environment.

“As it stands right now, the vast majority of the larger broker-dealers have not signed and therefore do not have access to the test environment. Even after they sign, it’ll still take two or three weeks to jump through a bunch of administrative things to actually get access,” Beaton says. “So, one way or another, I’m not particularly optimistic that there’s going to be a lot of activity in the test environment.”

• How Thesys, the SROs and the SEC Mishandled the Consolidated Audit Trail: WatersTechnology investigates the torturous journey to create a stock-trading database for the US. Click here to read more.

But Finra CAT chief operating officer Shelly Bohlin says large volumes of data are not expected to flow through the test environment in the first few months, no matter what, as companies are still getting used to sending out trade and customer data in the specific format the CAT needs, and some private links will not come online until January. While she won’t say how many broker-dealers have yet to sign the agreement, she notes that they have to be cognizant of the time they have left to test their data to get it to the required error-rate limit. Basically, if they haven’t signed, they should know that Finra CAT isn’t going to give them an extension.  

There are also other links that need to be locked in place in order for the CAT to run smoothly. Finra CAT tapped CenturyLink, BT, and Amazon Web Services (AWS) to provide machine-to-machine connectivity to the system. The AWS connectivity, however, will not be available until January. In the meantime, industry members can use the CAT Reporter Portal, which is aimed at smaller firms processing smaller volumes of information.

Clayton appeared in a Senate committee hearing on SEC oversight on December 10, where lawmakers expressed apprehension over SROs having the ability to gain access to data that needs to be secured. Clayton said the SEC is working with the SROs to determine how to “significantly limit phone book information and allow us to do the job,” while protecting sensitive data.

Live production of the CAT in April is mainly for industry members dealing with equities that were previously OATS reporters. Options, specific to large broker-dealers, go live a month later. Full production is expected to take place by December 2021.