82 FR 25492 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change To Eliminate Requirements That Will Be Duplicative of CAT

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 104 (June 1, 2017)

[Federal Register Volume 82, Number 104 (Thursday, June 1, 2017)]
[Notices]
[Pages 25492-25495]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-11365]



[[Page 25492]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80789; File No. SR-BOX-2017-17]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Eliminate Requirements That Will 
Be Duplicative of CAT

May 26, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 15, 2017, BOX Options Exchange LLC (the ``Exchange'' or ``SRO'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rules 7120, 8060 and 10040 to the 
extent these rules collect information that is duplicative of the data 
collection requirements of the consolidated audit trail (``CAT'') 
adopted pursuant to the National Market System Plan Governing the 
Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\3\ The 
text of the proposed rule change is available from the principal office 
of the Exchange, at the Commission's Public Reference Room and also on 
the Exchange's Internet Web site at http://boxexchange.com.
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    \3\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth herein, or in the CAT 
Compliance Rule Series or in the CAT NMS Plan.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA 
Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 
Options Exchange, Incorporated, Chicago Board Options Exchange, 
Incorporated, Chicago Stock Exchange, Inc., Financial Industry 
Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami 
International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, 
Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\4\ NASDAQ 
PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, 
NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\5\ (collectively, 
the ``Participants'') filed with the Commission, pursuant to Section 
11A of the Exchange Act \6\ and Rule 608 of Regulation NMS 
thereunder,\7\ CAT NMS Plan.\8\ The Participants filed the Plan to 
comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan 
was published for comment in the Federal Register on May 17, 2016,\9\ 
and approved by the Commission, as modified, on November 15, 2016.\10\ 
The Plan is designed to create, implement and maintain a CAT that would 
capture customer and order event information for orders in NMS 
Securities and OTC Equity Securities, across all markets, from the time 
of order inception through routing, cancellation, modification, or 
execution in a single consolidated data source. Pursuant to Appendix C 
of the CAT NMS Plan, each Participant is required to conduct analyses 
of which of its existing trade and order data rules and systems require 
the collection of information that is duplicative of information 
collected for the CAT.\11\ In addition, among other things, Section C.9 
of Appendix C to the Plan, as modified by the Commission, requires each 
Participant to ``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.'' \12\ The Plan notes that ``the 
elimination of such rules and the retirement of such systems [will] be 
effective at such time as CAT Data meets minimum standards of accuracy 
and reliability.'' \13\
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    \4\ ISE Gemini, LLC, ISE Mercury, LLC and International 
Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq 
MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange 
Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); 
Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 
(Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 
2017), 82 FR 16445 (Apr. 4, 2017).
    \5\ National Stock Exchange, Inc. has been renamed NYSE 
National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 
2017), 82 FR 9258 (Feb. 3, 2017).
    \6\ 15 U.S.C. 78k-1.
    \7\ 17 CFR 242.608.
    \8\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 24, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
    \9\ Securities Exchange Act Rel. No. 77724 (Apr. 27, 2016), 81 
FR 30614 (May 17, 2016).
    \10\ Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 
FR 84696 (Nov. 23, 2016) (``Approval Order'').
    \11\ Appendix C of CAT NMS Plan, Approval Order at 85010.
    \12\ Id.
    \13\ Id.
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    After conducting its analysis of its rules in accordance with the 
CAT NMS Plan, SRO determined that certain audit trail information 
collected under the BOX Rules is intended to be collected by the CAT. 
Therefore, SRO believes that these rules may no longer be necessary 
once the CAT is operational. Accordingly, SRO submits this proposed 
rule change to amend Rules 7120, 8060 and 10040 once certain accuracy 
and reliability standards are met. Discussed below is a description of 
the duplicative rule requirements as well as the timeline for 
eliminating the duplicative rule.
(1) Duplicative COATS Requirements
    The options exchanges utilize the consolidated options audit trail 
system (``COATS'') to collect and review data regarding options orders, 
quotes and transactions. The Participants have provided COATS technical 
specifications to the Plan Processor for the CAT for use in developing 
the Technical Specifications for the CAT, and the Participants are 
working with the Plan Processor to include the necessary COATS data 
elements in the CAT Technical Specifications. Accordingly, although the 
Technical Specifications for the CAT have not yet been finalized, SRO 
and the other options exchanges propose to eliminate COATS in 
accordance with the proposed timeline discussed below.
    The proposed rule change proposes to add new Interpretive Materials 
to Rules 7120,- [sic] 8060 and 10040 to clarify how SRO will request 
data under these rules after members are reporting to the CAT. 
Specifically, the proposed Interpretive Materials will note that SRO 
will request information only if the information is not available in 
the CAT

[[Page 25493]]

because, for example, the transactions in question occurred before the 
firm was reporting information to the CAT or involved securities that 
are not reportable to the CAT. In essence, under the new Interpretive 
Materials, SRO will make requests under these rules if and only if the 
information is not otherwise available through the CAT.
(2) The EBS Rule
    The EBS Rule is SRO's rule regarding the automated submission of 
specific trading data to SRO upon request using the Electronic Blue 
Sheet (``EBS'') system. Once broker-dealer reporting to the CAT has 
begun, the CAT will contain the data the Participants would otherwise 
have requested via the EBS system for purposes of NMS Securities and 
OTC Equity Securities. Consequently, SRO will not need to use the EBS 
system or request information pursuant to the EBS Rule for NMS 
Securities for time periods after CAT reporting has begun if the 
appropriate accuracy and reliability thresholds are achieved, including 
an acceptable accuracy rate for customer and account information. 
However, the EBS Rule cannot be completely eliminated immediately upon 
the CAT achieving the appropriate thresholds because SRO staff may 
still need to request information pursuant to the EBS Rule for trading 
activity occurring before a member was reporting to the CAT.\14\
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    \14\ Firms are required to maintain the trade information for 
pre-CAT transactions in equities and options pursuant to applicable 
rules, such as books and records retention requirements, for the 
relevant time period, which is generally three or six years 
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
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    The proposed rule change proposes to add new Interpretive Material 
to Rule 10040 to clarify how SRO will request data under these rules 
after members are reporting to the CAT. Specifically, the proposed 
Interpretive Material will note that SRO will request information only 
if the information is not available in the CAT because, for example, 
the transactions in question occurred before the firm was reporting 
information to the CAT or involved securities that are not reportable 
to the CAT. In essence, under the new Interpretive Material, SRO will 
make requests under these rules if and only if the information is not 
otherwise available through the CAT.
(3) Timeline for Elimination of Duplicative Rule
    The CAT NMS Plan states that the elimination of rules that are 
duplicative of the requirements of the CAT and the retirement of the 
related systems should be effective at such time as CAT Data meets 
minimum standards of accuracy and reliability.\15\ As discussed in more 
detail below, SRO and the other options exchanges believe that COATS 
and EBS may be retired at a date after all Industry Members are 
reporting to the CAT when the proposed error rate thresholds have been 
met, and SRO has determined that its usage of the CAT Data has not 
revealed material issues that have not been corrected, confirmed that 
the CAT includes all data necessary to allow SRO to continue to meet 
its surveillance obligations, and confirmed that the Plan Processor is 
sufficiently meeting all of its obligations under the CAT NMS Plan.
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    \15\ Id. [sic].
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    SRO believes COATS and EBS should not be retired until all 
Participants and Industry Members that report data to COATS and EBS are 
reporting comparable data to the CAT. In this way, SRO will continue to 
have access to the necessary data to perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \16\ 
SRO believes COATS and EBS should not be retired until all Participants 
and Industry Members that report data to COATS are reporting comparable 
data to the CAT. While the early submission of options data to the CAT 
by Small Industry Members could expedite the retirement of COATS, SRO 
believes that it premature to consider such a change and that 
additional analysis would be necessary to determine whether such early 
reporting by Small Industry Members would be feasible.
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    \16\ Id.
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    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \17\ SRO believes that a single cut-over 
from COATS and EBS to CAT is highly preferable to a firm-by-firm 
approach and is not proposing to exempt members from the COATS and EBS 
requirements on a firm-by-firm basis. SRO and the other options 
exchanges believe that providing such individual exemptions to Industry 
Members would be inefficient, more costly, and less reliable than the 
single cut-over. Providing individual exemptions would require the 
options exchanges to create, for a brief temporary period, a cross-
system regulatory function and to integrate data from COATS and EBS and 
the CAT to avoid creating any regulatory gaps as a result of such 
exemptions. Such a function would be costly to create and would give 
rise to a greater likelihood of data errors or other issues. Given the 
limited time in which such exemptions would be necessary, SRO and the 
other options exchanges do not believe that such exemptions would be an 
appropriate use of limited resources.
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    \17\ Id.
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    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine when duplicative systems will be retired, 
including, but not limited to, whether the attainment of a certain 
Error Rate should determine when a system duplicative of the CAT can be 
retired.'' \18\ SRO believes that it is critical that the CAT Data be 
sufficiently accurate and reliable for SRO to perform the regulatory 
functions that it now performs via COATS and EBS. Accordingly, SRO 
believes that the CAT Data should meet specific quantitative error 
rates, as well as certain qualitative requirements.
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    \18\ Id.
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    SRO and the other options exchanges believe that, before COATS may 
be retired, the CAT would need to achieve a sustained error rate for a 
period of at least 180 days of 5% or lower measured on a pre-correction 
or as-submitted basis, and 2% or lower on a post-correction basis 
(measured at T+5).\19\ SRO proposes to measure the 5% pre-correction 
and 2% post-correction thresholds by averaging the error rate across 
the period, not require a 5% pre-correction and 2% post-correction 
maximum each day for 180 consecutive days. SRO believes that measuring 
each of the thresholds over the course of 180 days will ensure that the 
CAT consistently meets minimum accuracy and reliability thresholds 
while also ensuring that single-day measurements do not unduly affect 
the overall measurements. SRO proposes to measure the appropriate error 
rates in the aggregate, rather than firm-by-firm. In addition, SRO 
proposes to measure the error rates for options only, not

[[Page 25494]]

equity securities, as only options are subject to COATS. The 2% and 5% 
error rates are in line with the proposed retirement threshold for 
FINRA's Order Audit Trail System (``OATS'').
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    \19\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
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    In addition to these minimum error rates before COATS can be 
retired, SRO believes that during the minimum 180-day period during 
which the thresholds are calculated, SRO's use of the data in the CAT 
must confirm that (i) usage over that time period has not revealed 
material issues that have not been corrected, (ii) the CAT includes all 
data necessary to allow SRO to continue to meet its surveillance 
obligations, and (iii) the Plan Processor is sufficiently meeting all 
of its obligations under the CAT NMS Plan. SRO believes this time 
period to use the CAT Data is necessary to reveal any errors that may 
manifest themselves only after surveillance patterns and other queries 
have been run and to confirm that the Plan Processor is meeting its 
obligations and performing its functions adequately.
    If the Commission approves the proposed rule change, SRO will 
announce the date for the retirement of COATS and the implementation 
date of the proposed rule change in a Regulatory Circular that will be 
published once the options exchanges determine that the thresholds for 
accuracy and reliability described above have been met and that the 
Plan Processor is sufficiently meeting all of its obligations under the 
CAT NMS Plan.
2. Statutory Basis
    SRO believes that the proposed rule change is consistent with the 
provisions of Section 6(b)(5) of the Exchange Act,\20\ which require, 
among other things, that the SRO rules must be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest, and not designed to permit unfair 
discrimination between customers, issuers, brokers and dealer. SRO 
believes that this proposal is consistent with the Exchange Act because 
it fulfills the obligation in the CAT NMS Plan for SRO to submit a 
proposed rule change to eliminate or modify duplicative rules. In 
approving the Plan, the SEC noted that the Plan ``is necessary and 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanism of a national market system, or is otherwise 
in furtherance of the purposes of the Act.'' \21\ As this proposal 
implements the Plan, SRO believes that this proposal furthers the 
objectives of the Plan, as identified by the SEC, and is therefore 
consistent with the Exchange Act.
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    \20\ 15 U.S.C. 78f(b)(5).
    \21\ Approval Order at 84697.
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    Moreover, the purpose of the proposed rule change is to clarify how 
SRO will treat rules that require the submission of duplicative data to 
the exchange. The elimination of such duplicative requirements will 
reduce unnecessary costs and other compliance burdens for SRO and its 
members, and therefore, will enhance the efficiency of the securities 
markets. Furthermore, SRO believes that the approach set forth in the 
proposed rule change strikes the appropriate balance between ensuring 
that SRO is able to continue to fulfill its statutory obligation to 
protect investors and the public interest by ensuring its surveillance 
of market activity remains accurate and effective while also 
establishing a reasonable timeframe for elimination or modification of 
its rules that will be rendered duplicative after implementation of the 
CAT.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 6(b)(8) of the Exchange Act \22\ requires that SRO rules 
not impose any burden on competition that is not necessary or 
appropriate. SRO does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. SRO 
notes that the proposed rule change implements the requirements of the 
CAT NMS Plan approved by the Commission regarding the elimination of 
rules and systems that are duplicative the CAT, and is designed to 
assist SRO in meeting its regulatory obligations pursuant to the Plan. 
Similarly, all options exchanges are proposing the elimination of COATS 
and EBS and their rules related to COATS and EBS to implement the 
requirements of the CAT NMS Plan. Therefore, this is not a competitive 
rule filing and, therefore, it does not raise competition issues 
between and among the options exchanges and/or their members.
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    \22\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BOX-2017-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2017-17. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method.
    The Commission will post all comments on the Commission's Internet 
Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, on business days between the hours 
of 10:00 a.m. and 3:00 p.m., located at 100 F Street NE.,

[[Page 25495]]

Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2017-17 and should be 
submitted on or before June 22, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11365 Filed 5-31-17; 8:45 am]
 BILLING CODE 8011-01-P