Navigating the Risks and Challenges of FINRA CAT Reporting

Financial service providers face rapidly increasing complexity in today’s financial markets. Regulatory compliance is one of the most critical aspects of their business operations.

For broker-dealers and other market participants, FINRA’s Consolidated Audit Trail (CAT) has introduced both new opportunities and challenges.

Risk of Non-Compliance

Failing to meet FINRA's CAT (Consolidated Audit Trail) reporting requirements exposes firms to significant risks, including: 

• Regulatory Penalties: Firms can face substantial fines, as seen with: 

  • Citadel Securities was fined $1 million by FINRA for failing to properly report a "0" in the “leaves quantity” field for fully canceled order events 

  • IMC Financial Markets also faced a $1.2 million fine after submitting inaccurate data on over 21.8 billion equity and options orders to the CAT system. 

  • Instinet was penalized even more, agreeing to a $3.8 million fine for submitting inaccurate and delayed CAT reports. 

• Reputational Damage: Fines and public scrutiny can undermine trust from clients, investors, and the broader financial community, potentially leading to a loss of business and long-term harm to a firm's reputation. 

• Operational Disruptions: Incorrect or delayed submissions often point to deeper issues with a firm’s data quality, internal controls, or reporting processes. Addressing these problems typically requires significant operational changes, which can create inefficiencies and further disruptions. 

These risks highlight the critical need for a seamless, automated, and error-free CAT reporting process. 

Challenges of FINRA CAT Reporting

The Consolidated Audit Trail (CAT) is designed to give regulators a complete, one-stop view of all trading activity, so they can keep a better eye on the market and improve market oversight. However, while the system's goals are noble, the journey to effective compliance presents several challenges. These include: 

1. Data Quality and Accuracy

The first challenge of CAT reporting is ensuring that the data submitted to FINRA is of the highest quality and accuracy.  

Broker-dealers must capture and report every order, execution, modification, cancellation, and trade activity within a specific timeframe.  

Any error in the formatting or the failure to capture the right data can lead to rejected submissions, fines, or regulatory scrutiny. 

2. Data Volume and Complexity

The volume of data that needs to be captured is enormous. With high-frequency trading, millions of trades can occur daily. Traditional systems may struggle to manage large amounts of transaction data and ensure that it is kept throughout its lifecycle, from submission to FINRA through to storage and retrieval. Any corruption or incomplete data could lead to costly errors. 

 

3. Integration with Existing Systems 

Integrating CAT reporting with existing trading platforms, risk management systems, and compliance tools can be a daunting task. Many firms have legacy systems that were not designed to handle the demands of regulatory reporting.  

The integration of new reporting pipelines into legacy systems can also cause system downtimes or slowdowns, impacting trading operations.

4. Regulatory and Technical Changes

FINRA frequently updates its rules, schemas, and technical requirements. Staying abreast of these changes requires technical updates to reporting workflows, data pipelines, and integration strategies. 

There is a lot more to know about CAT reporting. In other articles we share how Sosuv Consulting can help companies by building a streamlined CAT reporting pipeline tailored to their unique workflow. 

If you have specific questions, you can also contact us to arrange an intro call and discussion.