FINRA – Proposed Rule Change to Delete the FINRA Order Audit Trail System (OATS) Rules

August 12, 2020 – The proposal will eliminate the OATS rules once members effectively report to the Consolidated Audit Trail (CAT); once it meets accuracy and reliability standards. The proposed rule to delete OATS rules from Rule 7400, Rule 4554, alternative trading systems, recording, reporting requirements for orders, and NMS stock executions.

CAT plan required members to file with SEC the relevant rule change filing to eliminate or modify its duplicative rules within 6 months of SEC’s approval of the CAT NMS plan.

CAT Reliability Standards
The rule will be implemented once CAT achieves specific accuracy and reliability standards. Standards will determine when duplicative systems will be retired, including whether attainment of certain error rates should determine the retirement of the duplicative systems. FINRA believes relevant error rates are the primary metric by which to determine CAT’s accuracy and reliability, and it will serve as a baseline requirement needed before OATS can be retired.

Sustained Error Rate
FINRA proposed that CAT needs to achieve a sustained error rate for OATS to be retired. Rates sustained for a period of at least 180 days of 5% or lower on pre-correction or as-submitted basis; 2% or lower on a post-correction basis (measured at T+5). Thresholds measured by averaging the error rate across the period; will not require 5% pre-correction, 2% post-correction maximum each day for 180 consecutive days.

Error Rate Categories
FINRA will use error rates in specific categories, measured solely for equities; for
assessment whether pre-correction and post-correction error rate thresholds are being met. Will consider error rates of rejection rates, data validations, intra-firm linkages, inter-firm linkages, order linkage rates, exchange, and TRF/ORF match rate categories.

Additional CAT Data Usage
Even if error rate thresholds are met, FINRA must evaluate, confirm via incorporating
CAT Data into its automated surveillance program that data is accurate and reliable.
FINRA’s use of CAT data must confirm that there are no material issues that have not
been corrected, delays in processing data, issues with query functions, etc. Must confirm CAT includes all data needed to allow FINRA to meet surveillance obligations; confirm that the plan processor sufficiently meets its obligations under the CAT NMS Plan relating to reporting, linkage of phase 2a industry member data.

Small Industry Member Data
The plan requires proposed rule change to address whether the availability of small industry member data 2 years after the effective date would aid in the retirement of duplicative systems. Small industry OATS reporters and large industry members were required to begin reporting to CAT on June 22, 2020. Small industry members that are not currently required to record and report information to OATS are required to begin reporting to the CAT in December 2021. FINRA believes that Jun 22 CAT reporting date requirement will expedite OATS retirement, providing significant cost savings for the industry.

Individual Member Exemptions
The rule must address whether individual industry members can be exempted from reporting to duplicative systems once CAT reports meet accuracy and reliability standards. Including ways in which establishing cross-system regulatory functionality or integrating data from existing systems and CAT would facilitate such exemptions. FINRA believes a single cut-over from OATS to CAT is preferable to a firm-by-firm approach and is not proposing to exempt from OATS requirements on a firm-by-firm basis.

Will not be implemented until FINRA determined accuracy and reliability standards have been met and will file for immediate effectiveness, separate rule setting forth the basis for the determination. FINRA will publish a regulatory notice announcing the implementation date.

On August 12, 2020, FINRA filed the initial rule proposal with the SEC, pending approval.

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