The dust is now settling following the announcement that CAT has changed its Plan Processor. FINRA has been selected, updated specifications are being published, and the new long-term plan for all phases of CAT has been unveiled to industry members. As with each new twist in the CAT tale, firms need to look at the totality of the changes being announced and determine the implications for both implementing solutions and the end state operational models they will need in place once CAT is fully live.
In assessing the implications, it makes sense to first look at where the industry has been previously in its plans for implementing CAT.
Before, After and Now
It seems like ancient history, but 18 months ago, the industry was being asked to implement a big-bang approach to CAT, with the entire scope going live on a single date. Based on the new requirements of CAT versus OATS – reporting on market making, customer data and allocations, the inclusion of options reporting, and more complex linkages – this approach became more untenable as the increasing level of complexity became clear during deeper analysis.
The first version of the CAT Master Plan was introduced to de-risk this approach and get to substantial reporting sooner than a full-scope, big-bang implementation. This plan introduced the now familiar Phases 2a through 2e, which deferred more complicated (or controversial) items such as complex options and customer data reporting. It also introduced a Regulatory Conformance Period for Phase 2a. During this period, all validations per the technical specifications would be applied, but there would be forbearance on meeting error rates and correction times. The Firm Designated ID (FDID) was maintained from the beginning in reporting, though decoupled from the reporting of the underlying customer data. Although the plan reduced risks, it still required firms to undertake parallel work streams across requirements analysis, coding, testing and production operations to get to being fully live.
The newly published CAT Master Plan shifts timing for most of the phases, with the exception of Phase 2b which maintains the same base timelines. The most obvious changes are two-fold: (1) A simultaneous start of industry testing for Phases 2a and 2b, and (2) The replacement of the Conformance Period with a phased implementation of validations within each phase.
The industry has also received a new baseline for Phases 2c and 2d, requiring final specifications and starting builds in 2020 to occur in parallel with the testing and production roll-out of Phases 2a and 2b. Though the live dates for these phases are in 2021, the work to understand and implement these phases will start in 2019.
Running in Parallel
The most obvious implication of the revised plans is the need for firms to conduct multiple parallel projects for the same solution. Creating large, extended programs of work brings increased overhead and coordination issues for all firms affected. Adding in a hard regulatory deadline with requirements that remain not fully known, as yet, makes the program even more difficult to manage as the combination of uncertainty and time pressures would likely lead to design and build decisions that could cause costly rework of solutions, longer-term inefficiencies in processes, and deployment of staff. This scenario is undoubtedly familiar to those who have been working on other global regulatory rollouts over the past few years.
The phased-in validation model adds a new layer of parallel efforts. Whereas previously, the Regulatory Conformance Period for equities ended three months prior to the go-live of options, we now have multiple parallel testing windows in 2020 along with production reporting starting in April 2020. This removes a much-needed period of time when firms could apply lessons learned from equities testing and production of all validations to the options test environment. Under the new Master Plan, industry members now will be trying to test new validation while simultaneously applying changes based on what has been learned in production.
What Path, to What End?
The big question is, what are we all aiming to accomplish? All affected firms must adhere to the Phase 2a and 2b live dates. But there is much more that needs to be done, especially when it comes to responding to future queries. If firms only focus on making the live dates, then their operational models may not work properly once queries start coming in. And with more and different types of data involved, we have to assume that over the long term, more frequent and voluminous queries from regulators will arise, especially once customer data reporting begins.
How should firms balance future queries with all the parallel work that must be done? The answer is simple: Start working with partners to place yourself in the best position for the December 2019 test environment.
If firms focus on ensuring their solutions are strategically delivered with maximum functionality and have all validations ready by for early December, then any necessary adjustments will be easier to make. Establishing solution integrity as a key part of the plan will also reduce the stress on firms key resources and staff who will be integral to completing the work for Phases 2c and 2d. It will ultimately keep solution development on the right track by eliminating significant and costly rework that would intensify the strain on parallel work requirements.
The Strategic Delivery Approach
The pace of CAT implementation is accelerating. The requirements for Phase 2a and 2b will be final by the end of April 2019, and the Phase 2a testing is just a few months away. Firms must complete their work as soon as possible to avoid putting too much stress on their organizations in 2020.
By keeping to a strategic delivery approach, firms will have a clear view of future phases while ensuring their operating models are ready to handle new requirements anticipated volume increases that come with regulatory enquiries and the likely changes that will come as CAT settles in. Otherwise, the CAT implementation process will stretch further out on the calendar while becoming more costly than the current timelines and parallel work might demand today.
David Campbell is Vice President, Strategy and Business Development, Global Technology and Operations, at Broadridge
