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Customer and Account Challenges Ahead After CAT Announcement

Tony Brownlee
3/7/17 6:30 AM

Like many regulations, the Consolidated Audit Trail (CAT) requirements have been “baking” since first published by the SEC nearly six years ago. As others such as WatersTechnology journalist Dan DeFrancesco are covering, there is a lot of work ahead for the industry as 2017 marks the year that CAT becomes real. I’ve personally been working with regulators and industry members on CAT since 2013 and I think we can help firms understand some of the basics about CAT as well as some challenges that are likely to emerge. How to get started after the consolidate audit trail announcement.jpg

The core reporting requirement of CAT is similar to the legacy OATS reporting, but expanded both in breadth of market activity as well as data required for reporting. There are two essential parts to CAT reporting, summarized by these requirements out of the NMS Plan:

  • “…each Participant shall record and electronically report to the Central Repository the following details for each order and each Reportable Event”
  • “…broker-dealer CAT Reporters must also submit customer information to the CAT so that the order and trade data can be matched to the specific customer”

In simple terms - broker dealers must report orders and events and make sure the respective customer and account information is associated with those events. It's the latter part, the customer and account information that makes the CAT both unique as well as challenging when it comes to your regulatory reporting. Not only will regulators want to understand specific equity or options market activity, but with CAT, they’ll now be able to look at that activity by Customer, across broker deal, across execution venue. They can't do this today because firms have never had to report it. The inclusion of customer and account information will allow the SEC to be able to look across the market to triangulate activity by customer to provide additional context for surveillance. What this means is that for the first time in the U.S. market, there will be an expectation that the customer information reported across broker dealer will need to be complete, consistent, and accurate. This is for individual retail customers as well as institutional legal entity customers. Based upon what we've seen working with customer data from many brokers for the past 25 years, the reporting of this customer and account information for CAT may very well be a big lift for the industry.  Many times customer and account data is often disconnected or simply not suited for this type of coordinated regulatory reporting (e.g. trading systems and KYC systems are often quite disconnected in practice, even if their intent is symbiotic).

CAT Deadlines 

There are many details yet to be published, but per the regulation if you’re a large broker dealer you get to go first. Small broker dealers will follow. Keep an eye on the following timeframes in 2017 and 2018. 

  • June 2017:  Draft specifications are available for Industry comment. They may come out sooner or there may be opportunities to engage with industry associations or working groups earlier. Be ready to review and comment on the specifications as they are published.
  • November 2017:  Those specifications will be finalized so you can begin using them to support your development work and formalize your plans for reporting. 
  • May 2018:  Customer and Account reporting testing will begin, providing you your first opportunity to test this new reporting of customer and account information. 
  • October 2018:  Customer and Account reporting will be live, with daily reporting of all accounts associated with your market activity and the associated customer information. Error reporting and corrections will need to be in place.

Prepping for CAT

In just a few months the activity will commence and broker dealers around the U.S. markets will jump on the CAT treadmill for the next year and half. I’m sure the industry activities will be starting soon and there will be many great opportunities to contribute questions, feedback, and wrap our collective arms around this customer and account reporting. Internally, your work can start now. Here are a few things you can do to get the process started in the next 60 days.

  • Identify all “in scope” market data systems of orders, trades, reportable events
  • Identify where the related Customer and Account data resides for those “in scope” systems
  • Assess the quality of the Customer and Account data against CAT quality and error correction expectations
  • Plan for the technical work (extraction, quality control, daily reporting requirements, industry testing involvement)
  • Plan for and perform any one-time data remediation activities for known Customer and Account data issues
  • Review entities that have LEIs assigned and look to see if you need to assign additional identifiers

For Kingland, we have lived in this customer and account data world for most of our corporate life (we turn 25 this year by the way). We're going to provide additional details in the weeks to come about some of the specific challenges reporting firms may be finding. We'll also share some available techniques to help ease the data burden of the CAT reporting. If you have questions and want to get ahead of the game, feel free to contact me at - we're here to help.

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