Industry Update: T+1, CAT and CAIS Reporting

Major Industry Changes

In May 2024, two major industry projects came into effect: T+1 settlement cycle and go-live compliance for FINRA CAT and CAIS reporting. Our podcast delves into these critical developments, bringing you the latest insights and updates.

T+1, CAT and CAIS Reporting Update

Join Oyster Capital Markets and Operations expert Jeff Gearhart as he provides detailed updates from recent industry meetings and discussions with key participants. In this episode, Jeff covers:

• Affirmation and fail rates
• Margin balances
• Securities lending
• His outlook for the future of T+1

Additionally, Ralph Magee, Oyster’s CAT/CAIS expert, shares his observations on what industry members and clients are experiencing post-implementation. Ralph provides valuable insights into:

• Current challenges firms are facing
• The importance of considering the data provided to FINRA
• Preparing for potential inquiries and sweeps

What is T+1 Settlement?

The T+1 settlement cycle, fully implemented in May 2024, shortens the settlement period for most securities issuances and trades from two business days after the trade date to one business day after the trade date.  The effort to achieve T+1 extends beyond broker-dealers; T+1 is also significant to investors and global custodians, requiring technology enhancements and behavior modification.

CAT / CAIS Regulatory Background

In 2012 The SEC passed Rule 613, expanding the types of order event data collected on NMS securities to include client and firm indicators, as well as data on listed options, market making quotes and post-execution allocations. The Rule also included requirements to be able to link the various pieces of information reported from different systems and participants in order to see the entire order and trade lifecycle. Eight years later, the Consolidated Audit Trail (CAT) went live for equity reporting on June 22, 2020. In May 2024, the industry implemented the Customer Account Information System (CAIS) and effected Go Live Compliance for Consolidated Audit Trail (CAT) reporting.

Additional Resources:

Finding Success with CAT CAIS Reporting – Part 1

Successful FINRA CAT and CAIS Reporting – Part 2

SEC Issues T+1 Risk Alert

The Oyster Difference

Oyster Consulting provides CAT and CAIS reporting solutions through our consulting services and our proprietary CAT reporting software. Our consultants use their deep regulatory experience in trade reporting to help firms achieve their CAT reporting obligations and get the most out of their CAT reporting investment. Our Oyster Solutions CAT reporting application consolidates CAT reporting events, error analysis and validation data into a central program. The CAT Application then will identify errors, linkage and gaps between vendor data and CAT reported data.

Our operations management consultants have extensive hands-on experience in operations management, risk management, and financial advisory services. We are dedicated to providing solutions that align with your strategic objectives.

With years of industry experience, our team has the knowledge and skills to navigate complex operational challenges. We take a holistic approach, considering all aspects of your business operations, from risk management to process improvements, to deliver comprehensive solutions.

Transcript

Transcript provided by TEMI

Bob Mooney:   Welcome to the Oyster Stew Podcast. I’m Bob Mooney, General Counsel for Oyster Consulting. The industry experienced two significant events in May, the move to T+1 and Go Live Compliance for CAT CAIS reporting. Jeff Gerhart, Oyster Capital Markets and Operations expert, recently met with key industry participants, and in today’s podcast will share his insights on how the industry is dealing with T+1, including affirmation and fail rates, margin balances, securities lending, and his outlook for the future regarding T+1. Ralph Magee, Oyster’s CAT / CAIS expert, discusses what industry members and our clients are experiencing post-implementation and what they can expect to see in the future. Ralph also shares his insights into issues that firms are currently struggling with, and the need for industry members to understand the data they are providing FINRA and ensure they are prepared for the resulting inquiries and sweeps. Let’s get started.

Jeff Gearhart:   Thanks Bob. Hi everyone. This is Jeff Gearhart from Oyster’s Capital Markets practice. There have been a lot of events lately in the marketplace. May was rather busy with 4210, CAIS, T+1, you name it. It was quite a challenge. We thought it would be relevant to give everybody an update on a couple of key projects. I’ll start with T+1. I’m going to turn it over to my colleague, Ralph McGee for an update on CAT / CAIS. So as everyone’s probably aware or should be aware, the industry recently moved to T+1 at the end of May, from the prior T+2 schedule. And quite honestly, it was a big accomplishment because it really squeezed the timeframe and forced a lot of work to happen in less than 24 hours. So, it’s a big deal and it’s going very well.

I’ve participated in some industry meetings lately and I’ve had the opportunity to talk to some direct participants, and I think T+1 is being touted as a big accomplishment and a great success. The stat that has been put out there by DTCC is a 73% affirmation rate in January, which is now 94%, which is great, and accurate. I think there was a lot of improvement though between January and May to move closer to 90%. And quite honestly, it was probably because of all the attention on T+1 and getting ready. I did get some other updates from DTCC at a recent industry meeting. Large entities always had a better affirmation rate. They went from 81% to 98%, which is probably to be expected. Investment managers that use central matching, they went from 92 to 97%.

So again, that’s a pretty good improvement. An area that might need a little attention is custodians that are self-affirming. They went from 51% to 84%, which I still think is a significant improvement, but there’s room to go there. So, I think that’s pretty much showing that the affirmation rates have improved, continuing to improve, the industry’s adapting, and the behavioral changes needed to come into place. Interestingly, the fail rates have stayed relatively consistent – that’s good news. I don’t think there’s a concern there, but perhaps maybe the biggest benefit is I did see a statistic that the DTCC settlement fund has decreased 28% since T+1. So, by reducing that one day out of the settlement cycle, they’ve been able to reduce margin balances by 28%. Honestly, that’s a big deal, and I did hear from DTCC that they said they haven’t changed their risk model. It’s truly a factor of that one-day time reduction.

So that’s good news. Now, the cautious news is, is it sustainable, these behavioral changes and resources? Are they temporary or are they permanent? In other words, if there’s going to be a market disruption or something of that nature, are we still going to continue to have this level of success? And I think everybody’s positive about it, but the reality is there’s probably more technology changes that need to go into place. So, while we can celebrate, I think, we will need to be aware that there could be some disruptions coming if there’s major market moves or something of that nature. Now, we did have a recent triple witching event seem to go fine, but we’ll see how it moves. So, for those of you who don’t know, the recent Triple witching event was when stock options, stock index futures and stock index options all expire on the same day. And that can create some volatility in increased volumes.

So overall, the key is T+1 was a success. It’s to be seen if we can continue to have the level of success. I think everybody’s expecting it. The trouble spots have been few, if any. If there’s one that comes to mind, it’s FX, which is still on a T+2 day, and then Europe in general on a T+2 settlement. But of course, now there’s pressure for them to move up to a T+1 settlement for FX. They’re probably doing more pre-funding than they had to in the past, but apparently they’re adapting. And then, pleasant surprise, SEC lending is going smoothly, so, there haven’t been a lot of issues reported there. So, there you go. A rather positive T+1 update. Stay tuned, we’ll see how it goes, and I’ll turn it over to Ralph for a CAT / CAIS update.

Ralph Magee:   Thanks, Jeff. This is Ralph McGee. I am a Director here at Oyster Consulting and I act as the subject matter expert for CAT and CAIS here for the firm. As Jeff had already mentioned, we had a big implementation date for CAIS at the end of May where we are now Go Live Compliance for all of the CAIS information being submitted to FINRA CAT.  That concludes a multi-year implementation in industry-wide implementation for CAT reporting, across all broker dealers and RIAs. Another huge accomplishment for the industry, as Jeff has already pointed out, as well. What we continue to see as issues with that implementation is we’re finding that there are problem points for introducing broker dealers who may introduce their order flow to a clearing house or a clearing firm as a correspondent. They’re still unaware of where their responsibilities lie in that reporting process, and especially in the surveillance and compliance end of things.

We’re still seeing folks that are coming to us asking for guidance and how to repair certain errors that they didn’t know that they were really subject to, being needed, or they’re needing expertise internally to solve for those repairs for those errors that they’re receiving back from the industry. The other big thing that we are currently working on is, in the industry, is what do you do now that you are submitting all of this data to both CAT and CAIS? If you think about it, and just step back for a second and look at it, the regulators now have a ton of information at their disposal. They have the information about the transaction that’s reported to CAT, and they have the information about your customer and your information system that is reported to the CAIS database. They can now tick and tie that data back to one another and surveil that client across the industry.

Let’s say you have a client that has an account at Morgan Stanley and another account at Raymond James – just picking two random broker dealers out there. Now, the industry can surveil that client and the activity of that client across the entire industry, no matter how many accounts that a client, a particular client could have, or even more granular, the customers that are acting on those accounts. So, this is a huge deal for firms that are out there, and we recognize that firms need to stay ahead of the regulatory body and what they’re doing with that data. We’re now brainstorming with our clients to try to make sure that they are being as savvy with the data that they are submitting to the regulatory body and what the regulatory body is doing with that data.

In terms of sweeps and inquiries, in terms of what industry members can expect to see, I can give a few examples that we’ve started to see from some of our clients in the sweeps that are being hit across the board. One is Best Execution. How can the CAT data be used to surveil CAT or to surveil the Best Execution for a firm? It’s not 100% there, but it could lead to situations where they would ask additional questions in terms of how a firm is maintaining and ensuring that their clients are getting Best Execution. The other is IPOs. So, as IPOs get listed, we are seeing some issues and some sweeps that are concerning, about the trading of that IPO, once it gets listed and gets free to trade out in the marketplace and what symbols specifically it’s being traded under. So those are two examples that we can provide of how we’re seeing the regulatory body use the CAT data to find other issues that may be present in the industry.

Oyster, in addition to just working with our clientele, does have a proprietary software platform that we have developed to help stay in compliance and surveil their CAT and CAIS reporting.

We have a module for each. We’ve been doing a lot of trade reporting in general trade reporting obligations and or reviews, current state assessments, which would include both CAT and CAIS. And we’ve done a lot of great work in terms of identifying issues that clients have, both from the introducing and the self-reporting perspective. So, if there’s a way that we can help you, please reach out and talk with our experts here. We feel like we’re in a very good position to help your firm stay in compliance for CAT and CAIS.

Jeff Gearhart:   Thanks Ralph. I’ve been involved in some of those engagements, and we really are adding value using our software and with the expertise of the team. So yeah, please don’t hesitate to reach out on that topic, T+1 or any other of the key topics in the marketplace right now. There’s a lot going on and we’re happy to have a conversation at any point. So, thank you everyone.

Bob Mooney:   Thanks everyone for listening. If you’d like to learn more about our experts and how Oyster can help your firm, visit our website at oysterllc.com. If you like what you heard today, follow us on whatever platform you listen to and give us a review. Reviews make it easier for people to find us. Have a great day.