United States: FINRA Proposes To Phase Out OATS As CAT Comes On Line

FINRA filed a proposed rule change with the SEC that would remove Order Audit Trail System ("OATS") rules from the FINRA Rule 7400 Series, and amend FINRA electronic blue sheet Rules 8211 and 8213, as members begin reporting to the consolidated audit trail ("CAT"). The proposal is a response to the CAT NMS plan requirement that FINRA "file with the SEC the relevant rule change filing to eliminate or modify its duplicative rules within six (6) months of the SEC's approval of the CAT NMS Plan."

The CAT NMS plan is intended to create a comprehensive database for trading activity in the U.S. equity and options markets. The proposed rule change would require verification of CAT's reliability and accuracy before OATS was phased out fully. According to FINRA, relevant error rates are the "primary, but not the sole, metric" that FINRA would use to determine the CAT's accuracy and reliability, and would serve as the baseline for FINRA to use to determine whether OATS could be "retired."

FINRA requested that comments be submitted within 21 days of publication of the proposed rule in the Federal Register.

Commentary / Patrick A. Calves

Firms should carefully review FINRA's "Economic Impact Assessment" under the proposal and consider how they can supplement FINRA's cost/benefit analysis with data, specific cost estimates and as much information as possible regarding the efforts that will be needed from a technical and systems standpoint to maintain duplicative reporting regimes for an indefinite period of time.

Notably, FINRA's proposal does not allow exemptions from OATS reporting for individual firms once their CAT reporting meets specified accuracy and reliability standards. Instead, firms will be subject to duplicative reporting requirements (both OATS and CAT) until FINRA makes its determination to phase out OATS reporting on an industry-wide basis.

Further, the individual exemption from duplicative reporting should provide motivation for much of the industry to transfer to the CAT reporting regime in a precise and expeditious manner. This "carrot" would seemingly make industry participants and regulators alike very happy. This is a significant issue, among others, on which firms should consider commenting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.