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The enormous, known complexities of the industry-level reporting of U.S. equity and option order and trade-related events to the Consolidated Audit Trail (CAT) continue to be discussed and evolve on a daily basis as the first reporting deadline looms.
But there are particular requirements that broker-dealers must handle within this sea of complexity. Currently top of mind is the Firm Designated Identifier (FDID).
The CAT Operating Committee’s recent guidance on FDID, stipulating that account numbers cannot be used, has created a new issue for many broker-dealers who planned on using them as their FDIDs. What firms need to do now is to take a step back and consider the broader landscape of not only initial compliance with CAT submission rules, but how they can convert this new challenge into longer term efficiencies and business advantages.
All industry members familiar with CAT are aware of the departure of FDID from OATS in terms of actual identification of a client on their orders versus just indicating a client initiated the order. Additionally, with the guidance that account numbers cannot be used as FDIDs, broker-dealers have had their flexibility restricted in creating an FDID and cannot re-use existing linkages for events across many of their systems.
Broker-Dealers will need to create 40-character, alphanumeric FDIDs to designate trades to specific clients. The use of FDIDs will begin with the first go-live of transaction events in February 2020. However, the underlying data that is required to link information across firms at the industry level will not exist until 2021 (at the earliest) when client data reporting begins.
Firms not only must face the challenge of creating a new client identifier that extends across systems, and possibly business lines. They also must create this identifier without knowing the final shape of client data to be reported to CAT and how to effectively link the data internally to the FDID.
The Long-Term View
The first step to solving the FDID dilemma is to take a step back and look beyond the immediate challenges posed by FDID for initial reporting compliance and think about why the FDID exists and how that impacts the way firms respond to regulatory queries.
The FDID exists to allow orders and events to be traced across the industry by regulators. It answers the question of “who” as the regulator looks at cross-dealer market activities. Armed with this information, regulators will be able to ask industry members more informed and penetrating questions around the what, why, when and how of orders and events as they investigate possible breaches of market trading rules.
For industry members, long-term planning around FDID should take into account how the individual broker-dealer can utilize it to effectively and efficiently respond to queries from regulators. This means thinking about more than just the account identifiers. Instead, the firm must think of clients as entities (people) and how these entities interact and relate to each other (e.g. parent-child-sibling relationships) as well as various parts of the firm. From there, the firm can create FDID structures representing the richness of these relationships and interactions.
Such insights can give broker-dealers the intelligence they need to respond to a broader range of queries on related activities. Through a better understanding of client relationships and activities, FDIDs can improve a firm’s trade surveillance to reduce risk and enable better and faster responses to regulatory queries.
Improved Data and Analytics
Taking a more expansive and fundamental view of FDID can provide an improved basis for other data intensive and dependent activities. FDID can serve as part of a broader capability to respond to and manage not only CAT reporting, but overall responsiveness to regulatory queries. What does this mean?
Creating this broader FDID capability requires synthesizing all the relationships that a client may have, as well as linking them to the multitude of ways (internally and externally) the client may be identified. In doing this, broker-dealers will gain insight into data quality, sources and management – providing the basis for improving the quality of data within the firm and ensuring data governance processes are applied consistently across the representation of clients. This means there will be better data available for activities across trade surveillance, artificial intelligence (AI), robotic process automation (RPA) and analytics.
The problem with FDIDs is that analytic aspects are speculative. But if firms implement FDIDs right, and think about them as more than just a client identifier that goes to CAT, then they can structure them to be more flexible in terms of linking data together across systems, trading desks and business units.
Much More than a Mandate
Broker-Dealers need to think of FDIDs as entities rather than identifiers, and not just a way to satisfy a CAT reporting requirement. Envision the potential impacts and outcomes down the road in terms of responding to regulatory queries or other reporting requirements outside of the context of CAT. FDIDs can allow you to gain a full universe of information within your firm, and the opportunity to explore new ways to add value to the organization over the long term.
How will your firm use FDIDs to its advantage?