The Consolidated Audit Trail (CAT) – What You Should Be Doing Now

On March 16, 2020 the SEC announced no-action relief to allow Participants to delay implementation of Consolidated Audit Trail (CAT) until May 20, 2020.  This announcement comes as the industry deals with disruptions as a result of COVID-19, and members must make difficult prioritization decisions around staff required to implement CAT.

This is an excellent opportunity for firms to shift their focus to test the validity of the data being reported, looking beyond syntax checks, and to perform more data comparisons to the source data file used to generate CAT reporting events. We are recommending that our clients continue to prepare for the implementation of CAT as internal resources allow.

In this week’s episode of Oyster Stew, Oyster Consultant Ralph Magee and Devyze CEO Jeff Call discuss what the Consolidated Audit Trail (CAT) is and its purpose, what is happening in the industry from a reporting standpoint, where we are with the CAT today and what firms should be doing.

Oyster can help you assess how your firm is positioned for CAT readiness, manage your requirements assessment and implementation phases, interface with your own technology providers, and assist you in determining what and how your technology providers will report for you. We can also assist in testing data scenarios and data linkage, as well as creating an error repair process. Firms can also leverage Oyster testing tools to gather and analyze reported data and errors.

Oyster provides free resources such as podcasts and blogs, as well a team of consultants and software to help you organize and automate your compliance program. Oyster Consulting has the knowledge and experience to support your efforts to achieve compliance. To learn more about how we can help your firm, please give us a call at (804) 965-5400 and a Relationship Manager will be glad to connect you with an Oyster expert.

Transcript

Oyster: Welcome to this week’s serving of Oyster Stew, a mix of financial services, commentary and insights. Each
week we’ll discuss what is happening in the industry based on what we see as we work with regulators and clients.
We hope you come away with the knowledge and tools to help you make the best decisions for your firm’s future.

Elizabeth Gatlin: I’m Elizabeth Gatlin, your host for today’s podcast about the Consolidated Audit Trail, or CAT, reporting requirements. With me are Oyster Consultants, Ralph McGee and Jeff Call. As an Oyster Consultant, Ralph has led teams in large-scale client remediation and clearing platform conversion-related projects. Currently, Ralph is using his expertise in trade reporting to provide large broker-dealers project management and subject matter expertise related to the Consolidated Audit Trail. Prior to becoming CEO of Devyze and developing the technology behind Oyster Solutions software, Jeff Call previously worked for 15 years at SunGard, most of that time as VP of technology and CTO, which included the development of the Protegent trading surveillance program. In today’s podcast, we’ll cover the basics, including what the Consolidated Audit Trail is and its purpose, what is happening in the industry from a reporting standpoint, where we are with CAT today, and what firms should be doing. Gentlemen, I’d like to thank you for spending time with me and our listeners today.

Ralph Magee: Thank you, Elizabeth.

Elizabeth Gatlin: Ralph, let’s start with a question for you. What is CAT?

Ralph Magee: Sure. CAT is an acronym that stands for Consolidated Audit Trail and this is a depository of sorts that
will track equity and option orders throughout their life cycle across broker-dealers throughout our nation. And this
will allow regulators to identify the broker-dealers handling those orders and eventually the clients that are
originating the order club.

Elizabeth Gatlin: And how long has the industry been preparing for CAT reporting?

Ralph Magee: For quite a while. For those of you in the financial industry space, you’ve been hearing about this since
2010 when it was first proposed. It was later adopted under SEC rules 613 in 2012 and since then, the industry has
seen a lot of delays. With this implementation and initiative from a regulatory standpoint, it’s even seen a change in
processor over the past eight years. However, since FINRA has taken over and replaced Thesys in February 2019,
we’ve seen quite an acceleration to the timeline and implementation of this regulatory requirement, and I’m sure
that most of our listeners and folks in the financial industry can appreciate what an undertaking this is. Let’s think
about that for a second. Every equity and option order originated in NMS securities across investment firms in the U S
will have to report that activity to CAT.

This will include the origination of the order, the routing of the order, the execution, the modification or potentially
cancellation of that order throughout the life’s cycle, and it will eventually include the allocations to the client. If you
were only to consider just the data space that’s needed to capture and store that relevant information related to
each of those order events, you can start to appreciate what a mess, what magnitude that we’re talking about here
with this initiative. Not to mention the IT resources that are needed to put all of this in place. I’m sure Jeff can speak
to this. Jeff, can you comment on the infrastructure and some of the resources that you may have found helpful from
a technical standpoint?

Jeff Call: Sure. Ralph. Just to get an idea of the volume, we’re talking just in the testing phase right now, 35 billion
advanced process this last week. So the magnitude is enormous and the just handling that day, that obviously is a
great challenge. As I look for technical resources, really the best source is the, the FINRA site, but the official site is
CATNMSplan.com. There are three main specifications right now that you should take time to explore and read
through. The first is the phase 2a and 2b spec, and that is currently the 2.2.1 r3, and there’s another update will be
coming out shortly on that. But that’s the latest spec and that has all of the requirements for phase 2a. A couple of
months ago they released the 2c specifications. That’s also available on the site and there’s also a spec out around
the customer and account technical specifications.

Another portion of the site is called the member reporting scenarios, and there’s a lot of great documents there.
There’s the tech spec on for 2a, 2b, and this document really explains more of the use cases, and it gives great real life
examples of the spec. Definitely recommend that you use both the spec and the scenario documents together. The
scenarios doc for 2c has been widely anticipated that will be coming out this week. We’re excited to get that
document and that will be a companion to the 2c spec. Also, there is a scenario version 1 for the customer account
reporting. Another important part to the site is the reference data. This contains, start of day and end of day listings
for the both for equities and for options, and also has a listing of all the industry members and any conflicts on that
list.

Elizabeth Gatlin: So Ralph, have you also found the webpage helpful, and how might you use it from a subject matter
expertise perspective?

Ralph Magee: Oh, absolutely. I think Jeff is dead on with this. It is a great resource. In addition to the technical specs
and the reporting scenario documents that he’s mentioned, I’ve relied on those pretty heavily working with our
clients. There’s a lot of useful information there. Also, on guidance in conjunction with those two documents, I use
the Frequently Asked Questions section of the webpage. Quite often these will help you dive into more detail around
interpreting and clarifying these specifications that were listed. There are also onboarding guides that will give clients
step-by-step directions on how they should become certified to report the cat. There are also connectivity
supplements out there that help from more of a technical standpoint. And I’m sure Jeff has used those in the past as
well. I think the site does a great job of providing access to industry calls and alerts and things that are CAT-specific to
the industry members.

You know, I can say to our listeners that one that I would recommend, if you’re just getting into CAT and learning
about it, is they do have a CAT presentation called CAT 101. This was put out on on January 8th of this year. And you
can search for that in the top right-hand corner by typing CAT 101. That’ll take you right to the recorded presentation.
That’s very useful I think for someone that’s familiarizing themselves with CAT and CAT reporting. You know, as we
represent clients throughout the normal course of business in a week, there are several calls that happen, industry
calls. They have a touch point call every Tuesday at 4:15 that we represent our clients on. There’s a slightly more
technical spec, or technical working group, if you will. It’s called the Technical Spec Working Group. They are longer
presentations in nature. As you can imagine, the types of information that’s discussed on those calls are around
specific scenarios that industry members may have questioned or brought up in a Frequently Asked Question.

Elizabeth Gatlin: What seems to be the pending industry timeline? Last I checked, firms are due to start reporting to
CAT later in April, right?

Ralph Magee: Yeah, that, that’s exactly right, Elizabeth. Firms have been in the midst of preparing for 2a which is
geared towards their equity reporting events. All of our clients and most firms that are out there in the industry in the
process of completing this certification. This certification would require that all firms submit a full day’s production
data, the FINRA CAT, hich results in a less than 10 error rate. And all of our clients are in the process of getting that
certification right now. However, in light of the unfortunate events that we’re seeing related to Covid 19, we probably
should talk about what firms should be doing and what this means for our clients. Many firms in the financial industry
have implemented their BCP plans obviously to protect the safety of the workforce, and to protect their operational
readiness.

This is understandably a stress on the internal IT resources of our clients and many firms across the financial industry.
This has taken resources that were previously assigned to the implementation of CAT and has shifted that to support
staff and remote users as these BCPs have been implemented. Here’s what we know. This is subject to change. I’ll put
that down as a disclaimer. The SEC issued a No Action Letter providing exemptive relief for their participants until
May 20th. All right, so what does this mean? Firms can delay their reporting for 2a until May 20th, but firms still need
to complete their certification. If they choose to take the exemptive relief, firms must still provide FINRA CAT a 14day
window to review their data submissions for certification. Therefore, if you look at that May 6th date, that would be
your new deadline under the relief. Now, FINRA CAT still will except CAT reports from firms that have already
certified starting on April 20th, which was the original date.

However, keep in mind there’ll be no compliance expectations for these firms until after the May 20th date. In other
words, if a firm chose to report, they would not be subject to having to repair any errors that are resulting from that
reporting until that May 20th date. Now in response to this No Action Letter, the Operating Committee of the CAT
NMS plan also issued a statement on that No Action Letter essentially confirming the previously mentioned details.

And then on last Friday, the CAT participants, that’s the SROs themselves that manage this CAT processor, submitted
a request for relief to the Securities and Exchange Commission seeking that they extend and make more precise the
SEC March 16th Coven 19 No Action Relief Letter from May 20th to June 22nd, for 2a Equities and July 20th for 2b
Options, specifically. So this request is going to the SEC from the participants and the SROs saying, “Hey, we
appreciate that you recognize the impact that COVID 19 has had on the industry, but we had an original structure of a
phased implementation 2a, 2b being April 20th and May 20th. And we’d like to see the same thing happen for this
exemptive relief. Can we make it June 22nd and July 20th, corresponding with the original kind of plan?” Now, that
could shift some things around as well. Right. That could shift the entire timeline of this implementation.
As we move through this, I do want to note that the SEC has yet to approve that SRO request and there’s ambiguity
around the impact of this proposed No Action Relief for 2a, 2b inter-firm an intra-firm linkage requirements. I’m sure
Jeff can give us a summary of some of the data that we got on last Tuesday’s FINRA touch point call that that would
highlight kind of where the industry is, how many participants are actively testing and maybe some of what the
numbers look like. Jeff, could you help us with that?

Jeff Call: Sure. So I will say on the lighter side with the COVID 19 impact the last few presentations have been very
entertaining with everyone working from home. So a lot of interruptions from pets and children and a host dropping
off, having to reconnect. So just be aware when you listen to those presentations that they’re a little different from
what they were several weeks back. Anyway, let me hop into the numbers and stats here. So as of March 20th, we
have 108 confirmed certified with another 56 pending. The number of industry members submitting has increased to
1048 with 1.3 million files, with most of those being submitted through a private line.

Let me hop into just some quick breakdowns on equities and options. They just barely start breaking this down. It
used to be all together, but they’ve started breaking out equity stats and options stats separately. Keep in mind that
options are a month behind equities. So there’s definitely less volume and less testing right now in options. On the
equity front, total for the week processed: 35 billion events, with 262 million rejected, which is about .74%, so under
1% rejection rate. So that’s important. That’s a very good rejection rate. Obviously, everyone is trying to get under
the 10% rejection rate in order to pass this initial testing. If we look at the options breakdown, less volume there but
still significant with a 377 million, that rejection rate is higher – it’s closer to 7%, as that’s a bit newer and people are
still working through some of the issues and bugs on that front. But that’s a quick breakdown just on the stats as of
March 20th.

Ralph Magee: Then I’ll add one other thing to that. You know, as it stands right now, I just want to make sure all our
listeners are aware, as it stands right now there is no exemptive relief for 2b, so the only exemptive relief that folks
are being given right now is for 2a, extending that 2a requirement to May 20th, which was the original date for 2b, as
well the options. So those firms that elect to take the exemptive relief as it stands right now, without any further
changes, would have to report their equities and options security reporting events to CAT starting on May 20th.

Elizabeth Gatlin: Thank you. Well, you and Jeff have provided us with a lot of great information today and I have one
final question before we wrap up this first CAT podcast. What should firms be focusing on right now?

Ralph Magee: Well, I think firms should be ultra-focused on the SEC and what else or what further guidance that they
may give. If firms have gotten a sense of where they stand, if they have certified, then they should be working
through a business plan to report the CAT. For those firms that have not been certified, they probably should be
building a business plan and get that wrapped up very quickly. That business plan would basically guide them through
the next steps that they need to do for reporting for all phases of the CAT implementation over the next several
years. The things that they’d need to check immediately I would say, would be to take a look at the registration and
onboarding requirements that are posted on the CAT in the NMS plan website. They should continue to test their
data for 2a and 2b, as those things are the most immediate reporting requirements for these firms. And in testing,
they need to make sure that all of their order flow is being captured in reporting to CAT.

We’ve found with working with several clients and potential clients, don’t assume that your clearing firm is reporting
all of your activity. There may be a subset of order flow that’s on another platform that is not being reported by your
clearing firms. So don’t make that assumption. I think people need to be looking at their entire book and making sure
that all of that is captured and being reported to CAT. They should be reviewing their policies and procedures and
making those updates to the trade reporting to reflect the new procedures for CAT. They should be analyzing their
staffing, right? What’s it going to take to staff the requirements for CAT reporting? Who will do the rejections and the
repairs for CAT? Many firms are using some of their long-term employees to do this for OATS reporting, which is very
similar.

And eventually OATS will be replaced by CAT. But what do you do with those resources? We’ve had several firms not
know where they want to take the existing knowledge of those that have mastered OATS, and teach them a new
reporting structure, if you will, of CAT. So we’ve had firms struggling with where to put those resources. Do they hire
a new person to do this? Do they need additional people? Can they absorb it inside and handle it with what they’ve
got? You should be also obtaining your certification for reporting to CAT if you haven’t done so. And then obviously
there should be a business plan, like I mentioned, that prepares for the future reporting phases of CAT reporting. Jeff,
maybe you can talk a little bit about some specifics of how we’re working with our current clients on their CAT
implementation.

Jeff Call: Sure, Ralph. So obviously helping with that full implementation of CAT, targeting, obviously, 2a and 2b, but
also looking and preparing for 2c as that comes and working on helping firms with multiple reporting agents. So
typically a firm will have several relationships that help with their custody and clearing. We will work with those
multiple relationships and make sure all of those are reporting properly for you as a firm. We’ll also help participate
in the calls. So the regulatory industry calls help bring you up to speed, give you a summary of, of all that information
that’s happening there. We’ll help with the policy and procedure review and any updates that need to be made there.
We’ll also help you in your analysis. If you need to use a consolidation service, typically you’ll have your clearing custody firm, you know, if you’re working with a Refinitive or a Broadridge, or maybe a Pershing or Fidelity, typically those firms will provide the work to produce your CAT file and submit that CAT file for you.
But if you do have multiple vendors helping you with that analysis, and that’s the middle, sometimes it’s nice to use a
consolidator. So a consolidator will come in, they will receive those files from each of those sources of data,
consolidate and then send that data to FINRA nightly for you. Some of the advantages that they can help you with is,
if you do have some move in the future, obviously that is easier to happen since the consolidators listed and is the
main relationship with FINRA that would be easier to make that change. Also, they provide a lot of additional
services. So they do bring those files in, they provide a pre-check – they’ll look at any errors before it gets submitted
to FINRA and give you an update of those errors before submittal. They’ll also help in the error correction process
after the fact. You have three days to correct your errors and they’ll help facilitate that process as well.
So we’ll help you with that analysis as well on consolidation service, and how that might be helpful to you as a firm.
And there are pros and cons. So keep in mind that it is one more link in the process. One more entity involved which
may add some additional coordination efforts as well and can be kind of a costly endeavor for firms as well. There are
potentially some implementation fees and things that are involved in that. So the consolidators, obviously would
have an implementation fee. Some of those can be quite large and they’ll have a monthly fee as well. So yes, this can
be quite expensive.

As far as the services that are offered, another service that we offer our clients is a testing tool called the Oyster CAT
application that we’ve developed. As we’ve worked with our clients, and this tool is very helpful in the testing
process. It basically pulls in the data nightly, the CAT files from multiple sources from any of your reporting agents
and presents that data in a much more detailed fashion than is available currently on the FINRA site. Basically the
data is organized by event, but it’s also broken out by each event type. So you can go and look at your MENO record
or your MEOR record and see all the columns and filter on all those columns. It’ll organize all the errors for you in an
issues tab where you can easily correct and see those errors. It will also provide you an easy way to see all the
linkage, so you can click on an order and see the related a route or cancel or modify with that order. There’s also a lot
of reporting that quickly allows you to see breakdowns of your data and different statistics. Right now we’re working
on adding a lot of source file comparisons where we actually go in and pull in your source data from your vendor that
you’re working with and compare that against the CAT file that’s been reported to FINRA and looking at differences.
They’re looking for CAT events that should’ve reported. They’re not looking for the CAT event that got reported or
looking for the CAT event that was reported and seeing differences on each of those elements. So anyway, a very
useful tool that helps you in your testing process and beyond. It also helps you just moving forward with your analysis
and any corrections that need to be made. So once again, this is the tool that we provide to our customers as we help
them in the implementation of CAT.

Ralph Magee: Yeah, thanks Jeff. And I think this is a very, very powerful tool. Jeff and I are available at any time to
provide demos on this tool to any of our listeners that are interested. If you just reach out to us at Oyster, we’d be glad to set up a demo for you. I think for me personally, this tool has made working with CAT data a lot easier. In my history I’ve done a lot of contracts and working with firms and clients for their OATS reporting, and one of the biggest
downsides to that work is that you never really had a good tool to analyze those reports, and through working with
our clients, we’ve been able to develop that with Jeff’s expertise in it. I just would like to express my gratitude to Jeff
for the work that he’s done on this. This is a very, very powerful tool, and if you’re sitting there and you’re listening to
us and you’re using spreadsheets to review your CAT report, please, please reach out to us. This will make your life a
lot easier in a very affordable fashion as well.

Elizabeth Gatlin: Thank you both again for taking the time to offer your thoughts on CAT and how we are assisting
our clients with their CAT implementation. If you should have any questions, please reach out to our CAT team at
Oyster.

Oyster: Thanks again for listening to the Oyster Stew podcast. Don’t forget to subscribe so we can continue to bring
you resources to help you make the best decisions for your firm. If you’re struggling with a topic and you’d like us to
do a podcast on it, or you’d like a free consultation, feel free to reach out to us at (804) 965-5400 or by visiting our
website at oysterllc.com.