Broker frustration and expected delays in compliance forced the NASD to delay the expansion of its Order Audit Trail System to over-the-counter equity securities. OATS, currently required for all NASD member firms trading Nasdaq-listed securities, provides a cradle-to-grave audit trail for orders.
The new start date for OATS reporting for OTC Bulletin Board and Pink Sheets stocks is February 4, 2008. Before, it was slated for June 11.
The NASD in March asked the Securities and Exchange Commission for the stay in the reporting deadline to give firms additional time to upgrade their systems and prepare for Regulation NMS implementation, scheduled for October. The SEC approved the expansion of OATS reporting to OTC stocks last October.
“The industry is breathing a welcome sigh of relief,” said Alan Mangelsdorf, vice president for marketing at SunGard BRASS, a sellside order management system used by many OTC market makers. “They now don’t have to try to handle two regulatory changes at the same time.”
Brokers were frustrated at the doubling up of regulatory deadlines. Many are devoting large amounts of money and IT resources to alter trading and compliance systems for the Reg NMS environment-and felt additionally taxed by the new OATS reporting requirements. They now have more time.
Unlike Reg NMS, which is a new set of regulations, OATS for OTC equities entails coverage of an expanded set of securities. “Firms already doing OATS reporting shouldn’t experience the same disruptive effect that is occurring with changes around NMS. So its impact is lessened,” Mangelsdorf said.
BRASS does OATS reporting for the majority of its customers. SunGard’s EnGard compliance management product also has OATS reporting capability. Still, customers must be able to examine audit-trail records and investigate OATS electronic files that are rejected or questioned, Mangelsdorf said.
Leonard Amoruso, senior managing director for compliance and regulatory affairs at Knight Capital Group, a large market maker in Nasdaq and OTC stocks, pointed out that firms that trade Nasdaq securities and manage their extensive OATS obligations in-house shouldn’t have a difficult time gearing up for the expansion of OATS “because they’re already used to operating in an OATS environment.” Knight handles its own OATS compliance.
However, smaller firms that trade Pink Sheets and Bulletin Board stocks exclusively face more significant hurdles if they don’t use an OMS or compliance product to manage their reporting obligations. Without an existing compliance infrastructure, they could incur “some significant expenses in trying to develop a system for OATS reporting,” Amoruso said. He added that the end-of-day OATS reports that must be filed with the NASD are “huge data files and need a robust, resilient IT infrastructure.”
These firms could also require additional bandwidth and compliance personnel, said SunGard’s Mangelsdorf. One challenge those firms face is capturing OTC audit-trail information for stocks traded manually.
Although brokers and OMS vendors now have longer to prepare for the expansion of OATS, one outstanding issue concerns the extent of OATS coverage for securities with no U.S. symbols.
Some small U.S. OTC securities don’t have assigned symbols, while others delisted from an exchange may not be assigned a symbol before trading begins. A number of foreign stocks also don’t have symbols in the United States.
“OATS reporting requirements are essentially identical for all classes of securities that OATS encompasses,” said Chris Kelley, executive vice president for product marketing at OMS vendor Royalblue. “It’s straightforward to expand the scope of our OATS processor, as long as there’s a clearly established convention for identifying OATS-reportable securities.” He added that the NASD hasn’t yet resolved this issue.
Royalblue’s Fidessa order and trade management system provides OATS reporting for most of its broker-dealer customers.
This spring the NASD said it is “reviewing the scope of covered securities under the new amendments.” The private-sector regulator is expected to publish guidance on the treatment of securities with no U.S. symbols in the coming months.
