82 FR 25820 - Self-Regulatory Organizations; The NASDAQ Stock Market 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 106 (June 5, 2017)
Federal Register Volume 82, Issue 106 (June 5, 2017)
| Page Range | 25820-25827 | |
| FR Document | 2017-11507 |
[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)] [Notices] [Pages 25820-25827] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-11507] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80813; File No. SR-NASDAQ-2017-055] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Eliminate Requirements That Will Be Duplicative of CAT May 30, 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 26, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Rule 7000A series relating to the Order Audit Trail System, Rule 8211 and Chapter IX, Section IV relating to Electronic Blue Sheets, Chapter VII, Section VII relating to account identification, and Chapter V, Section VII relating to the Consolidated Options Audit Trail System to reflect changes to these rules once members are effectively reporting to the Consolidated Audit Trail (``CAT'') and the CAT's accuracy and reliability meets certain standards as described below. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. 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 Exchange 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 Exchange 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 The Exchange proposes to amend the Rule 7000A series relating to the Order Audit Trail System (``OATS''), Rule 8211 and Chapter IX, Section IV relating to Electronic Blue Sheets (``EBS''), Chapter VII, Section VII relating to account identification, and Chapter V, Section VII relating to the Consolidated Options Audit Trail System (``COATS'') to reflect changes to these rules once members are effectively reporting to the CAT, and the CAT's accuracy and reliability meets certain standards as described below.\3\ --------------------------------------------------------------------------- \3\ The Exchange initially filed the proposed rule change on May 15, 2017 (SR-NASDAQ-2017-050). On May 26, 2017, the Exchange withdrew that filing and submitted this filing. --------------------------------------------------------------------------- Background 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.; FINRA; International Securities Exchange, LLC; Investors' Exchange LLC; ISE Gemini, LLC; ISE Mercury, LLC; Miami International Securities Exchange LLC; MIAX PEARL, LLC; NASDAQ BX, Inc.; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; National Stock Exchange, Inc.; New York Stock Exchange LLC; NYSE MKT LLC; and NYSE Arca, Inc. (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \4\ and Rule 608 of [[Page 25821]] Regulation NMS thereunder,\5\ the National Market System Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\6\ The Participants filed the Plan to comply with Rule 613 of Regulation NMS under the Exchange Act.\7\ The Plan was published for comment in the Federal Register on May 17, 2016,\8\ and approved by the Commission, as modified, on November 15, 2016.\9\ On March 15, 2017, the Commission approved the new Nasdaq Rule 6800 Series and Chapter IX, Section 8 to implement provisions of the CAT NMS Plan that are applicable to Nasdaq members.\10\ --------------------------------------------------------------------------- \4\ 15 U.S.C. 78k-1. \5\ 17 CFR 242.608. \6\ 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. 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 Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017); Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No. 80325 (March 29, 2017), 82 FR 16445 (April 4, 2017). National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017), 82 FR 9258 (February 3, 2017). \7\ 17 CFR 242.613. \8\ Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016). \9\ Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (``Approval Order''). \10\ See Securities Exchange Act Release No. 80256 (March 15, 2017), 82 FR 14526 (March 21, 2017) (SR-NASDAQ-2017-008). --------------------------------------------------------------------------- The CAT NMS Plan is designed to create, implement, and maintain a consolidated audit trail that will capture in a single consolidated data source 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. 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.'' \11\ 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.'' \12\ Finally, the Plan requires the rule filing to discuss the following: --------------------------------------------------------------------------- \11\ CAT NMS Plan, Appendix C, Section C.9. \12\ See id. --------------------------------------------------------------------------- (i) 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; (ii) 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; and (iii) 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.\13\ --------------------------------------------------------------------------- \13\ See id. --------------------------------------------------------------------------- Changes to OATS In response to these requirements, Nasdaq is proposing to delete the Rule 7000A Series (the ``OATS Rules'') from the Nasdaq rulebook once the CAT achieves the specific accuracy and reliability standards described below, and Nasdaq 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 Nasdaq to continue to meet its surveillance obligations,\14\ and confirmed that the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan.\15\ --------------------------------------------------------------------------- \14\ As noted in the Participants' September 23, 2016 response to comment letters on the Plan, the Participants ``worked to keep [the CAT] gap analyses up-to-date by including newly-added data fields in these duplicative systems, such as the new OATS data fields related to the tick size pilot and ATS order book changes, in the gap analyses.'' See Letter from Participants to Brent J. Fields, Secretary, Commission, dated September 23, 2016, at 21. The Participants noted that they ``will work with the Plan Processor and the industry to develop detailed Technical Specifications to ensure that by the time Industry Members are required to report to the CAT, the CAT will include all data elements necessary to facilitate the rapid retirement of duplicative systems.'' Id. \15\ Nasdaq notes that the OATS Rules were originally proposed to fulfill one of the undertakings contained in an order issued by the Commission relating to the settlement of an enforcement action against the National Association of Securities Dealers, Inc. for failure to adequately enforce its rules. See Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998). In approving the OATS Rules, the Commission concluded that OATS satisfied the conditions of the SEC's order and was consistent with the Exchange Act. See id. at 12566-67. --------------------------------------------------------------------------- Specific Accuracy and Reliability Standards The first issue the Plan requires the proposed rule change to discuss is ``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.'' \16\ Nasdaq believes that relevant error rates are the primary, but not the sole, metric by which to determine the CAT's accuracy and reliability and will serve as the baseline requirement needed before OATS can be retired to account for information being available in the CAT. --------------------------------------------------------------------------- \16\ See id. [sic] --------------------------------------------------------------------------- As discussed in Section A.3.(b) of Appendix C to the CAT NMS Plan, the Participants established an initial Error Rate, as defined in the Plan, of 5% on initially submitted data (i.e., data as submitted by a CAT Reporter before any required corrections are performed). The Participants noted in the Plan that their expectation was that ``error rates after reprocessing of error corrections will be de minimis.'' \17\ The Participants based this Error Rate on their consideration of ``current and historical OATS Error Rates, the magnitude of new reporting requirements on the CAT Reporters and the fact that many CAT Reporters may have never been obligated to report data to an audit trail.'' \18\ --------------------------------------------------------------------------- \17\ See CAT NMS Plan, Appendix C, Section A.3(b), at n.102. \18\ Id. --------------------------------------------------------------------------- Nasdaq agrees with the Participants' conclusion that a 5% pre- correction threshold ``strikes the balance of adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction, as well as having a sufficient level of accuracy to facilitate the retirement of existing regulatory reports and systems where possible.'' \19\ However, Nasdaq believes that, when assessing the accuracy and reliability of the data for the purposes of retiring OATS, the error thresholds should be measured in more granular ways and should also include minimum error rates of post-correction data, which represents the data most likely to be used by Nasdaq to conduct surveillance. Although Nasdaq is proposing to measure the appropriate error rates in the aggregate, rather than firm-by-firm, Nasdaq believes that the error rates for equity securities should be measured separately from options since options [[Page 25822]] orders are not currently reported regularly or included in OATS. --------------------------------------------------------------------------- \19\ Id. --------------------------------------------------------------------------- To ensure the CAT's accuracy and reliability, Nasdaq is proposing that, before OATS could be retired, the CAT would generally need to achieve a sustained error rate for Industry Member reporting in each of the categories below 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).\20\ Nasdaq is proposing 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. Nasdaq 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 for Industry Member reporting while also ensuring that single-day measurements do not unduly affect the overall measurements. --------------------------------------------------------------------------- \20\ 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, Appendix C, Section A.2(a). --------------------------------------------------------------------------- Nasdaq is proposing to use error rates in each the following categories, measured separately for options and for equities, to assess whether the threshold pre- and post-correction error rates are being met:Rejection Rates and Data Validations. Data validations for the CAT, while not expected to be designed the same as OATS, must be functionally equivalent to OATS in accordance with the CAT NMS Plan (i.e., the same types of basic data validations must be performed by the Plan Processor to comply with the CAT NMS Plan requirements). Appendix D of the Plan, for example, requires that certain file validations \21\ and syntax and context checks be performed on all submitted records.\22\ If a record does not pass these basic data validations, it must be rejected and returned to the CAT Reporter to be corrected and resubmitted.\23\ The specific validations can be determined only after the Plan Processor has finalized the Industry Member Technical Specifications; however, the Plan also requires the Plan Processor to provide daily statistics on rejection rates after the data has been processed, including the number of files rejected and accepted, the number of order events accepted and rejected, and the number of each type of report rejected.\24\ Nasdaq is proposing that, over the 180-day period, aggregate rejection rates (measured separately for equities and options) must be no more than 5% pre-correction or 2% post-correction across all CAT Reporters. --------------------------------------------------------------------------- \21\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan requires the Plan Processor to confirm that file transmission and receipt are in the correct formats, including validation of header and trailers on the submitted report, confirmation of a valid Exchange[sic]-Assigned Market Participant Identifier, and verification of the number of records in the file. Id. \22\ See id. The Plan notes that syntax and context checks would include format checks (i.e., that data is entered in the specified format); data type checks (i.e., that the data type of each attribute conforms to the specifications); consistency checks (i.e., that all attributes for a record of a specified type are consistent); range/logic checks (i.e., that each attribute for every record has a value within specified limits and the values provided are associated with the event type they represent); data validity checks (i.e., that each attribute for every record has an acceptable value); completeness checks (i.e., that each mandatory attribute for every record is not null); and timeliness checks (i.e., that the records were submitted within the submission timelines). Id. \23\ See id. \24\ See id. --------------------------------------------------------------------------- Intra-Firm Linkages. The Plan requires that ``the Plan Processor must be able to link all related order events from all CAT Reporters involved in the lifecycle of an order.'' \25\ At a minimum, this requirement includes the creation of an order lifecycle between ``[a]ll order events handled within an individual CAT Reporter, including orders routed to internal desks or departments with different functions (e.g., an internal ATS).'' \26\ Nasdaq is proposing that aggregate intra-firm linkage rates across all Industry Member Reporters must be at least 95% pre-correction and 98% post-correction. --------------------------------------------------------------------------- \25\ CAT NMS Plan, Appendix D, Section 3. \26\ Id. --------------------------------------------------------------------------- Inter-Firm Linkages. The order linkage requirements in the Plan also require that the Plan Processor be able to create the lifecycle between orders routed between broker-dealers.\27\ Nasdaq is proposing that at least a 95% pre-correction and 98% post-correction aggregate match rate be achieved for orders routed between two Industry Member Reporters.\28\ --------------------------------------------------------------------------- \27\ Id. \28\ This assumes linkage statistics will include both unlinked route reports and new orders where no related route report could be found. --------------------------------------------------------------------------- Order Linkage Rates. In addition to creating linkages within and between broker-dealers, the Plan also includes requirements that the Plan Processor be able to create lifecycles to link various pieces of related orders.\29\ For example, the Plan requires linkages between customer orders and ``representative'' orders created in firm accounts for the purpose of facilitating a customer order, various legs of option/equity complex orders, riskless principal orders, and orders worked through average price accounts.\30\ Nasdaq is proposing that there be at least a 95% pre-correction and 98% post-correction linkage rate for multi-legged orders (e.g., related equity/options orders, VWAP orders, riskless principal transactions). --------------------------------------------------------------------------- \29\ See CAT NMS Plan, Appendix D, Section 3. \30\ See id. --------------------------------------------------------------------------- Exchange and TRF/ORF Match Rates. The Plan requires that an order lifecycle be created to link ``[o]rders routed from broker- dealers to exchanges'' and ``[e]xecuted orders and trade reports.'' \31\ Nasdaq is proposing at least a 95% pre-correction and 98% post- correction aggregate match rate to each equity exchange for orders routed from Industry Members to an exchange and, for over-the-counter executions, the same match rate for orders linked to trade reports. --------------------------------------------------------------------------- \31\ Id. --------------------------------------------------------------------------- In addition to these minimum error rates and matching thresholds that generally must be met before OATS can be retired, Nasdaq believes that during the minimum 180-day period during which the thresholds are calculated, Nasdaq'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 Nasdaq to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Nasdaq 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. Small Industry Member Data Availability The second issue the Plan requires the proposed rule change to address is ``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.'' Nasdaq believes that there is no effective way to retire OATS until all current OATS reporters are reporting to the CAT. Although Technical Specifications for Industry Members are not yet available, Nasdaq believes it would be inefficient, less reliable, and more costly to attempt to marry the OATS and CAT databases for a temporary period to allow some Nasdaq members to report to CAT while others [[Page 25823]] continue to report to OATS. Consequently, Nasdaq has concluded at this time that having data from those Small Industry Members currently reporting to OATS available two years after the Effective Date would substantially facilitate a more expeditious retirement of OATS. For this reason, Nasdaq supports an amendment to the Plan that would require current OATS Reporters that are ``Small Industry Members'' to report two years after the Effective Date (instead of three). Nasdaq intends to work with the other Participants to submit a proposed amendment to the Plan to require Small Industry Members that are OATS Reporters to report two years after the Effective Date. Nasdaq has identified approximately 300 member firms that currently report to OATS and meet the definition of ``Small Industry Member;'' however, only ten of these firms submit information to OATS on their own behalf, and eight of the ten firms report very few orders to OATS.\32\ The vast majority of these 300 firms use third parties to fulfill their reporting obligations, and many of these third parties will begin reporting to CAT in November 2018. Consequently, Nasdaq believes that the burden on current OATS Reporters that are ``Small Industry Members'' would not be significant if those firms are required to report to CAT beginning in November 2018 rather than November 2019. The burdens, however, are significantly greater for those firms that are not reporting to OATS currently; therefore, Nasdaq does not believe it would be necessary or appropriate to accelerate CAT reporting for ``Small Industry Members'' that are not currently reporting to OATS, and Nasdaq would not support an amendment to the Plan to accelerate CAT reporting for ``Small Industry Members'' that are not currently OATS Reporters. --------------------------------------------------------------------------- \32\ For example, in one recent month, eight of the ten firms submitted fewer than 100 reports during the month, with four firms submitting fewer than 50. --------------------------------------------------------------------------- Individual Industry Member Exemptions The final issue the Plan requires the proposed rule change to address is ``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.'' As described above, Nasdaq believes that a single cut-over from OATS to CAT is highly preferable to a firm-by-firm approach and is not proposing to exempt members from the OATS requirements on a firm-by- firm basis. The primary benefit to a firm-by-firm exemptive approach would be to reduce the amount of time an individual firm is required to report to a legacy system (e.g., OATS) if it is also accurately and reliably reporting to the CAT. Nasdaq believes that the overall accuracy and reliability thresholds for the CAT described above would need to be met under any conditions before firms could stop reporting to OATS. Moreover, as discussed above, Nasdaq supports amending the Plan to accelerate the reporting requirements for Small Industry Members that are OATS Reporters to report on the same timeframe as all other OATS Reporters. If such an amendment were approved by the Commission, there would be no need to exempt members from OATS requirements on a firm-by-firm basis. Changes to EBS and Account Identification Rules The EBS rule is Nasdaq's rule regarding the automated submission of specific trading data to Nasdaq upon request using the Electronic Blue Sheet system. Rule 8211 applies to EBS reporting for equity securities, while Chapter IX, Section 4 applies EBS reporting to options. Rule 8211 and Chapter IX, Section 4 require members to submit certain trade information as prescribed by Nasdaq Regulation, including, for proprietary transactions, the clearing house number or alpha symbol of the member submitting the data, the identifying symbol assigned to the security, and the date the transaction was executed. Chapter VII, Section VII imposes certain account identification requirements on Market Makers. Specifically, Chapter VII, Section VII requires, among other things, that each Market Maker shall file with Nasdaq Regulation and keep current a list identifying all accounts for stock, options and related securities trading in which the Market Maker may, directly or indirectly, engage in trading activities or over which it exercises investment discretion. The rule also prohibits a Market Maker from engaging in stock, options or related securities trading in an account which has not been reported pursuant to this rule. 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, Nasdaq will not need to use the EBS system or request information pursuant to these rules for NMS Securities or OTC Equity 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, these rules cannot be completely eliminated immediately upon the CAT achieving the appropriate thresholds because Nasdaq Regulation staff may still need to request information pursuant to these rules for trading activity occurring before a member was reporting to the CAT.\33\ In addition, these rules apply to information regarding transactions involving securities that will not be reportable to the CAT, such as fixed-income securities; thus, these rules must remain in effect with respect to those transactions indefinitely or until those transactions are captured in the CAT. --------------------------------------------------------------------------- \33\ 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. --------------------------------------------------------------------------- The proposed rule change proposes to add new Supplementary Material to Rule 8211, Chapter VII, Section VII and Chapter IX, Section 4 to clarify how Nasdaq will request data under these rules after members are reporting to the CAT. Specifically, the proposed Supplementary Material to these rules will note that Nasdaq Regulation will request information under these rules 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 Supplementary Material, Nasdaq Regulation will make requests under these rules if and only if the information is not otherwise available through the CAT. The CAT NMS Plan states, however, 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.\34\ Accordingly, as discussed in more detail below, Nasdaq believes that the EBS data may be replaced by CAT Data at a date after all Industry Members are reporting to the CAT when the proposed [[Page 25824]] error rate thresholds have been met, and Nasdaq 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 Nasdaq 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. --------------------------------------------------------------------------- \34\ Id. [sic] --------------------------------------------------------------------------- Nasdaq believes CAT Data should not be used in place of EBS data until all Participants and Industry Members are reporting data to CAT. In this way, Nasdaq 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.'' \35\ Nasdaq believes that the submission of data to the CAT by Small Industry Members a year earlier than is required in the CAT NMS Plan, at the same time as the other Industry Members, would expedite the replacement of EBS data with CAT Data, as Nasdaq believes that the CAT would then have all necessary data from the Industry Members for Nasdaq to perform the regulatory surveillance that currently is performed via EBS. For this reason, Nasdaq supports amending the CAT NMS Plan to require Small Industry Members to report data to the CAT two years after the Effective Date (instead of three), and intends to work with other Participants toward that end. --------------------------------------------------------------------------- \35\ Id. --------------------------------------------------------------------------- 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.'' \36\ Nasdaq believes that a single cut- over from EBS to CAT is highly preferable to a firm-by-firm approach and is not proposing to exempt members from the EBS requirements on a firm-by-firm basis. Nasdaq believes 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 exchanges to create, for a brief temporary period, a cross-system regulatory function and to integrate data from 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, Nasdaq does not believe that such exemptions would be an appropriate use of limited resources. Moreover, the primary benefit to a firm-by-firm exemptive approach would be to reduce the amount of time an individual firm is required to comply with EBS if it is also accurately and reliably reporting to the CAT. Nasdaq believes that the overall accuracy and reliability thresholds for the CAT described above would need to be met under any conditions before firms could stop reporting to EBS, and as discussed above, by accelerating Small Industry Members to report on the same timeframe as all other Industry Members, there is no need to exempt members from EBS requirements on a firm-by-firm basis. --------------------------------------------------------------------------- \36\ Id. --------------------------------------------------------------------------- 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.'' \37\ Nasdaq believes that it is critical that the CAT Data be sufficiently accurate and reliable for Nasdaq to perform the regulatory functions that it now performs via EBS. Accordingly, Nasdaq believes that the CAT Data should meet specific quantitative error rates, as well as certain qualitative requirements. --------------------------------------------------------------------------- \37\ Id. --------------------------------------------------------------------------- Nasdaq believes that, before CAT Data may be used in place of EBS data, 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).\38\ Nasdaq 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. Nasdaq 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. Nasdaq proposes to measure the appropriate error rates in the aggregate, rather than firm-by-firm. The 2% and 5% error rates are in line with the proposed retirement threshold for other systems, such as OATS and COATS. --------------------------------------------------------------------------- \38\ 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. --------------------------------------------------------------------------- In addition to these minimum error rates before using CAT Data instead of EBS data, Nasdaq believes that during the minimum 180-day period during which the thresholds are calculated, Nasdaq'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 Nasdaq to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Nasdaq 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. Changes to COATS The options exchanges utilize 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, Nasdaq and the other options exchanges propose to eliminate COATS in accordance with the proposed timeline discussed below. Nasdaq adopted Chapter V, Section 7 to implement certain reporting requirements related to COATS, and therefore proposes to eliminate the information reporting requirements of that rule and replacing those requirements with a requirement that members report information pursuant to this rule as required by the Exchange's CAT compliance rule, Chapter IX, Section 8.\39\ Among other things, [[Page 25825]] Chapter V, Section 7 requires an Options Participant to ensure that each options order received from a Customer for execution on the Nasdaq Options Market is recorded and time-stamped immediately, and also at the time of any modification or cancellation of the order. The rule also specifies the information that must be contained at a minimum, including a unique order identification, the underlying security, opening/closing designation, the identity of the Clearing Participant, and the Options Participant identification. --------------------------------------------------------------------------- \39\ COATS was developed to comply with an order of the Commission requiring the then-options exchanges to ``design and implement'' a consolidated audit trail to ``enable the options exchanges to reconstruct markets promptly, effectively surveil them and enforce order handling, firm quote, trade reporting and other rules.'' See Section IV.B.e.(v) of the Commission's Order Instituting Public Administrative Proceedings Pursuant to Sections 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (the ``Order''). See Securities Exchange Act Release No. 43268 (September 11, 2000) and Administrative Proceeding File No. 3-10282. As noted, 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. Nasdaq has already adopted rules to enforce compliance by its Industry Members, as applicable, with the provisions of the Plan. Once the CAT is fully operational, it will be appropriate to delete Nasdaq's rules implemented to comply with the Order as duplicative of the CAT. Accordingly, Nasdaq believes that it would continue to be in compliance with the requirements of the Order once the CAT is fully operational and the COATS rules are deleted. --------------------------------------------------------------------------- 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.\40\ As discussed in more detail below, Nasdaq and the other options exchanges believe that COATS 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 Nasdaq 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 Nasdaq 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. --------------------------------------------------------------------------- \40\ Id. [sic] --------------------------------------------------------------------------- Nasdaq believes COATS should not be retired until all Participants and Industry Members that report data to COATS are reporting comparable data to the CAT. In this way, Nasdaq 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.'' \41\ The Exchange believes COATS 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, the Exchange 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. --------------------------------------------------------------------------- \41\ Id. --------------------------------------------------------------------------- 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.'' \42\ Nasdaq believes that a single cut- over from COATS to CAT is highly preferable to a firm-by-firm approach and is not proposing to exempt members from the COATS requirements on a firm-by-firm basis. Nasdaq 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 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, Nasdaq and the other options exchanges do not believe that such exemptions would be an appropriate use of limited resources. --------------------------------------------------------------------------- \42\ Id. --------------------------------------------------------------------------- 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.'' \43\ Nasdaq believes that it is critical that the CAT Data be sufficiently accurate and reliable for the Exchange to perform the regulatory functions that it now performs via COATS. Accordingly, Nasdaq believes that the CAT Data should meet specific quantitative error rates, as well as certain qualitative requirements. --------------------------------------------------------------------------- \43\ Id. --------------------------------------------------------------------------- Nasdaq 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).\44\ Nasdaq 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. Nasdaq 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. Nasdaq proposes to measure the appropriate error rates in the aggregate, rather than firm-by-firm. In addition, Nasdaq proposes to measure the error rates for options only, not equity securities, as only options are subject to COATS. The 2% and 5% error rates are in line with the proposed retirement threshold for OATS. --------------------------------------------------------------------------- \44\ 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. --------------------------------------------------------------------------- In addition to these minimum error rates before COATS can be retired, Nasdaq believes that during the minimum 180-day period during which the thresholds are calculated, Nasdaq'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 Nasdaq to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Nasdaq 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, Nasdaq will [[Page 25826]] announce the implementation date of the proposed rule change in a Regulatory Notice that will be published once Nasdaq concludes 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 The Exchange believes that its proposal is consistent with Section 6(b) of the Act,\45\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\46\ in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. --------------------------------------------------------------------------- \45\ 15 U.S.C. 78f(b). \46\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Nasdaq believes that the proposed rule change fulfills the obligation in the CAT NMS Plan for Nasdaq 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.'' \47\ As this proposal implements the Plan, Nasdaq believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Exchange Act. --------------------------------------------------------------------------- \47\ Approval Order at 84697. --------------------------------------------------------------------------- Moreover, the purpose of the proposed rule change is to eliminate 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 Nasdaq and its members, and therefore, will enhance the efficiency of the securities markets. Furthermore, Nasdaq believes that the approach set forth in the proposed rule change strikes the appropriate balance between ensuring that Nasdaq 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 \48\ requires that the Exchange's rules not impose any burden on competition that is not necessary or appropriate. Nasdaq 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. Nasdaq 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 Nasdaq in meeting its regulatory obligations pursuant to the Plan. Similarly, all exchanges and FINRA are proposing the elimination of their rules related to OATS, EBS and COATS 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 self-regulatory organizations and/or their members. --------------------------------------------------------------------------- \48\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Although written comments on the proposed rule change were not solicited, two commenters, the Financial Information Forum (``FIF'') and the Securities Industry and Financial Markets Association (``SIFMA''), submitted letters to the Participants regarding the retirement of systems related to the CAT.\49\ In its comment letter, with regard to the retirement of duplicative systems more generally, FIF recommends that the Participants continue the effort to incorporate current reporting obligations into the CAT in order to replace existing reportable systems with the CAT. In addition, FIF further recommends that, once a CAT Reporter achieves satisfactory reporting data quality, the CAT Reporter should be exempt from reporting to any duplicative reporting systems. FIF believes that these recommendations ``would serve both an underlying regulatory objective of more immediate and accurate access to data as well as an industry objective of reduced costs and burdens of regulatory oversight.'' \50\ In its comments about EBS specifically, FIF states that the retirement of the EBS requirements should be a high priority, and that the CAT should be designed to include the requisite data elements to permit the rapid retirement of the EBS system.\51\ Similarly, SIFMA states that ``the establishment of the CAT must be accompanied by the prompt elimination of duplicative systems,'' and ``recommend[ed] that the initial technical specifications be designed to facilitate the immediate retirement of . . . duplicative reporting systems.'' \52\ --------------------------------------------------------------------------- \49\ Letter from William H. Hebert, FIF, to Participants re: Milestone for Participants' rule change filings to eliminate/modify duplicative rules, dated April 12, 2017 (``FIF Letter''); Letter from Kenneth E. Bentsen, Jr., SIFMA, to Participants re: Selection of Thesys as CAT Processor, dated April 4, 2017 (``SIFMA Letter''), at 2. \50\ FIF Letter at 2. \51\ Id. \52\ SIFMA Letter at 2. --------------------------------------------------------------------------- As discussed above, Nasdaq agrees with the commenters that the OATS, EBS and COATS reporting requirements should be replaced by the CAT reporting requirements as soon as accurate and reliable CAT Data is available. To this end, Nasdaq anticipates that the CAT will be designed to collect the data necessary to permit the retirement of OATS, EBS and COATS. As discussed above, Nasdaq disagrees with the recommendation to provide individual exemptions to those CAT Reporters who obtain satisfactory data reporting quality; however, Nasdaq supports amendments to the CAT NMS Plan that would accelerate reporting for Small Industry Members that are currently reporting to OATS to facilitate the retirement of that system. 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 Exchange consents, the Commission shall: (a) By order approve or disapprove such 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: [[Page 25827]] 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-NASDAQ-2017-055 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-NASDAQ-2017-055. 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, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the 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-NASDAQ-2017-055 and should be submitted on or before June 26, 2017. --------------------------------------------------------------------------- \53\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\53\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-11507 Filed 6-2-17; 8:45 am] BILLING CODE 8011-01-P
![25820 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
USPS 820.200 RETENTION AND DISPOSAL the principal office of the Exchange, and
[CHANGE TO READ] at the Commission’s Public Reference
SYSTEM NAME:
1. IMb Tracing® records are retained Room.
Mail Management and Tracking for up to 7 days.
Activity II. Self-Regulatory Organization’s
* * * * * SYSTEM MANAGER(S) AND ADDRESS Statement of the Purpose of, and
[CHANGE TO READ] Statutory Basis for, the Proposed Rule
CATEGORIES OF RECORDS IN THE SYSTEM Chief Customer and Marketing Officer Change
[CHANGE TO READ OR RENUMBER] and Executive Vice President, United In its filing with the Commission, the
* * * * * States Postal Service, 475 L’Enfant Plaza Exchange included statements
2. Identification information: SW., Washington, DC 20260. concerning the purpose of and basis for
Customer ID(s), last four digits of Social * * * * * the proposed rule change and discussed
Security Number (SSN), mailer ID, Stanley F. Mires, any comments it received on the
advertiser name/ID, username, and proposed rule change. The text of these
Attorney, Federal Compliance.
password. statements may be examined at the
[FR Doc. 2017–11489 Filed 6–2–17; 8:45 am]
3. Recipient information: Name, places specified in Item IV below. The
BILLING CODE 7710–12–P
address and signature of recipient or Exchange has prepared summaries, set
image of recipient signature. forth in sections A, B, and C below, of
4. Data on mailings: Paper and the most significant aspects of such
electronic data on mailings, including SECURITIES AND EXCHANGE statements.
postage statement data (such as volume, COMMISSION
class, rate, postage amount, date and A. Self-Regulatory Organization’s
[Release No. 34–80813; File No. SR–
time of delivery, mailpiece count), Statement of the Purpose of, and
NASDAQ–2017–055]
destination of mailing, delivery status, Statutory Basis for, the Proposed Rule
mailing problems, presort information, Self-Regulatory Organizations; The Change
reply mailpiece information, container NASDAQ Stock Market LLC; Notice of 1. Purpose
label numbers, package label, Special Filing of Proposed Rule Change To
Services label article number or USPS Eliminate Requirements That Will Be The Exchange proposes to amend the
Tracking number, and permit numbers. Duplicative of CAT Rule 7000A series relating to the Order
5. Payment information: Credit and/or Audit Trail System (‘‘OATS’’), Rule
May 30, 2017. 8211 and Chapter IX, Section IV relating
debit card number, type, and expiration
date; ACH information. Pursuant to Section 19(b)(1) of the to Electronic Blue Sheets (‘‘EBS’’),
Securities Exchange Act of 1934 Chapter VII, Section VII relating to
6. Customer preference data: Hold
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 account identification, and Chapter V,
Mail begin and end date, redelivery
notice is hereby given that on May 26, Section VII relating to the Consolidated
date, delivery options, shipping and
2017, The NASDAQ Stock Market LLC Options Audit Trail System (‘‘COATS’’)
pickup preferences, drop ship codes,
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the to reflect changes to these rules once
comments and instructions, Bulk Proof
Securities and Exchange Commission members are effectively reporting to the
of Delivery, Hold For Pickup requests or
(‘‘SEC’’ or ‘‘Commission’’) the proposed CAT, and the CAT’s accuracy and
redirection of mailpieces with a USPS
rule change as described in Items I, II, reliability meets certain standards as
Tracking and/or Special Services label
and III, below, which Items have been described below.3
and article number, mailing frequency,
prepared by the Exchange. The
preferred delivery dates, and preferred Background
Commission is publishing this notice to
means of contact.
solicit comments on the proposed rule Bats BYX Exchange, Inc.; Bats BZX
7. Product usage information: Special
change from interested persons. Exchange, Inc.; Bats EDGA Exchange,
Services label and article number.
8. Mail images: Images of mailpieces I. Self-Regulatory Organization’s Inc.; Bats EDGX Exchange, Inc.; BOX
captured during normal mail processing Statement of the Terms of Substance of Options Exchange LLC; C2 Options
operations the Proposed Rule Change Exchange, Incorporated; Chicago Board
* * * * * Options Exchange, Incorporated;
The Exchange proposes to amend the Chicago Stock Exchange, Inc.; FINRA;
PURPOSES
Rule 7000A series relating to the Order International Securities Exchange, LLC;
Audit Trail System, Rule 8211 and Investors’ Exchange LLC; ISE Gemini,
[CHANGE TO READ] Chapter IX, Section IV relating to
* * * * * LLC; ISE Mercury, LLC; Miami
Electronic Blue Sheets, Chapter VII, International Securities Exchange LLC;
8. To provide accurate and reliable Section VII relating to account
delivery information. MIAX PEARL, LLC; NASDAQ BX, Inc.;
identification, and Chapter V, Section NASDAQ PHLX LLC; The NASDAQ
9. To provide shipping records for VII relating to the Consolidated Options
mailpieces with a USPS Tracking Stock Market LLC; National Stock
Audit Trail System to reflect changes to Exchange, Inc.; New York Stock
and/or Special Service label and these rules once members are effectively
article number. Exchange LLC; NYSE MKT LLC; and
reporting to the Consolidated Audit NYSE Arca, Inc. (collectively, the
asabaliauskas on DSKBBXCHB2PROD with NOTICES
* * * * * Trail (‘‘CAT’’) and the CAT’s accuracy ‘‘Participants’’) filed with the
and reliability meets certain standards Commission, pursuant to Section 11A of
RETRIEVABILITY
as described below. the Exchange Act 4 and Rule 608 of
[CHANGE TO READ] The text of the proposed rule change
By customer name, customer ID(s), is available on the Exchange’s Web site 3 The Exchange initially filed the proposed rule
logon ID, mailing address(es), 11-digit at http://nasdaq.cchwallstreet.com, at change on May 15, 2017 (SR–NASDAQ–2017–050).
ZIP Code, any Intelligent Mail barcode, On May 26, 2017, the Exchange withdrew that filing
USPS Tracking number or Special 1 15 U.S.C. 78s(b)(1). and submitted this filing.
Service label and article number. 2 17 CFR 240.19b–4. 4 15 U.S.C. 78k–1.
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25821
Regulation NMS thereunder,5 the Plan requires the rule filing to discuss Specific Accuracy and Reliability
National Market System Plan Governing the following: Standards
the Consolidated Audit Trail (the ‘‘CAT (i) Specific accuracy and reliability The first issue the Plan requires the
NMS Plan’’ or ‘‘Plan’’).6 The standards that will determine when proposed rule change to discuss is
Participants filed the Plan to comply duplicative systems will be retired, ‘‘specific accuracy and reliability
with Rule 613 of Regulation NMS under including, but not limited to, whether standards that will determine when
the Exchange Act.7 The Plan was the attainment of a certain Error Rate duplicative systems will be retired,
published for comment in the Federal should determine when a system including, but not limited to, whether
Register on May 17, 2016,8 and duplicative of the CAT can be retired; the attainment of a certain Error Rate
approved by the Commission, as (ii) whether the availability of certain should determine when a system
modified, on November 15, 2016.9 On data from Small Industry Members two duplicative of the CAT can be
March 15, 2017, the Commission years after the Effective Date would retired.’’ 16 Nasdaq believes that relevant
approved the new Nasdaq Rule 6800 facilitate a more expeditious retirement error rates are the primary, but not the
Series and Chapter IX, Section 8 to of duplicative systems; and sole, metric by which to determine the
implement provisions of the CAT NMS CAT’s accuracy and reliability and will
(iii) whether individual Industry
Plan that are applicable to Nasdaq serve as the baseline requirement
Members can be exempted from
members.10 needed before OATS can be retired to
reporting to duplicative systems once
The CAT NMS Plan is designed to their CAT reporting meets specified account for information being available
create, implement, and maintain a accuracy and reliability standards, in the CAT.
consolidated audit trail that will capture including, but not limited to, ways in As discussed in Section A.3.(b) of
in a single consolidated data source which establishing cross-system Appendix C to the CAT NMS Plan, the
customer and order event information regulatory functionality or integrating Participants established an initial Error
for orders in NMS Securities and OTC data from existing systems and the CAT Rate, as defined in the Plan, of 5% on
Equity Securities, across all markets, would facilitate such Individual initially submitted data (i.e., data as
from the time of order inception through Industry Member exemptions.13 submitted by a CAT Reporter before any
routing, cancellation, modification, or required corrections are performed). The
execution. Among other things, Section Changes to OATS Participants noted in the Plan that their
C.9. of Appendix C to the Plan, as expectation was that ‘‘error rates after
In response to these requirements,
modified by the Commission, requires reprocessing of error corrections will be
Nasdaq is proposing to delete the Rule
each Participant to ‘‘file with the SEC de minimis.’’ 17 The Participants based
7000A Series (the ‘‘OATS Rules’’) from
the relevant rule change filing to this Error Rate on their consideration of
the Nasdaq rulebook once the CAT
eliminate or modify its duplicative rules ‘‘current and historical OATS Error
achieves the specific accuracy and Rates, the magnitude of new reporting
within six (6) months of the SEC’s
reliability standards described below, requirements on the CAT Reporters and
approval of the CAT NMS Plan.’’ 11 The
and Nasdaq has determined that its the fact that many CAT Reporters may
Plan notes that ‘‘the elimination of such
usage of the CAT Data has not revealed have never been obligated to report data
rules and the retirement of such systems
material issues that have not been to an audit trail.’’ 18
[will] be effective at such time as CAT
corrected, confirmed that the CAT Nasdaq agrees with the Participants’
Data meets minimum standards of
includes all data necessary to allow conclusion that a 5% pre-correction
accuracy and reliability.’’ 12 Finally, the
Nasdaq to continue to meet its threshold ‘‘strikes the balance of
5 17 CFR 242.608.
surveillance obligations,14 and adapting to a new reporting regime,
6 See Letter from the Participants to Brent J. confirmed that the Plan Processor is while ensuring that the data provided to
Fields, Secretary, Commission, dated September 30, sufficiently meeting all of its obligations regulators will be capable of being used
2014; and Letter from Participants to Brent J. Fields, under the CAT NMS Plan.15 to conduct surveillance and market
Secretary, Commission, dated February 27, 2015.
On December 24, 2015, the Participants submitted reconstruction, as well as having a
13 See id.
an amendment to the CAT NMS Plan. See Letter sufficient level of accuracy to facilitate
14 As noted in the Participants’ September 23,
from Participants to Brent J. Fields, Secretary, the retirement of existing regulatory
Commission, dated December 23, 2015. 2016 response to comment letters on the Plan, the
Participants ‘‘worked to keep [the CAT] gap reports and systems where possible.’’ 19
ISE Gemini, LLC, ISE Mercury, LLC and
International Securities Exchange, LLC have been analyses up-to-date by including newly-added data However, Nasdaq believes that, when
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, fields in these duplicative systems, such as the new assessing the accuracy and reliability of
and Nasdaq ISE, LLC, respectively. See Securities OATS data fields related to the tick size pilot and the data for the purposes of retiring
Exchange Act Release No. 80248 (March 15, 2017), ATS order book changes, in the gap analyses.’’ See
Letter from Participants to Brent J. Fields, Secretary, OATS, the error thresholds should be
82 FR 14547 (March 21, 2017); Securities Exchange
Act Release No. 80326 (March 29, 2017), 82 FR Commission, dated September 23, 2016, at 21. The measured in more granular ways and
16460 (April 4, 2017); and Securities Exchange Act Participants noted that they ‘‘will work with the should also include minimum error
Release No. 80325 (March 29, 2017), 82 FR 16445 Plan Processor and the industry to develop detailed rates of post-correction data, which
(April 4, 2017). Technical Specifications to ensure that by the time
Industry Members are required to report to the CAT, represents the data most likely to be
National Stock Exchange, Inc. has been renamed
NYSE National, Inc. See Securities Exchange Act the CAT will include all data elements necessary used by Nasdaq to conduct surveillance.
Release No. 79902 (Jan. 30, 2017), 82 FR 9258 to facilitate the rapid retirement of duplicative Although Nasdaq is proposing to
(February 3, 2017). systems.’’ Id. measure the appropriate error rates in
15 Nasdaq notes that the OATS Rules were
7 17 CFR 242.613.
the aggregate, rather than firm-by-firm,
asabaliauskas on DSKBBXCHB2PROD with NOTICES
8 Securities Exchange Act Release No. 77724 originally proposed to fulfill one of the
undertakings contained in an order issued by the Nasdaq believes that the error rates for
(April 27, 2016), 81 FR 30614 (May 17, 2016).
9 Securities Exchange Act Release No. 79318
Commission relating to the settlement of an equity securities should be measured
enforcement action against the National Association separately from options since options
(November 15, 2016), 81 FR 84696 (November 23, of Securities Dealers, Inc. for failure to adequately
2016) (‘‘Approval Order’’). enforce its rules. See Securities Exchange Act
10 See Securities Exchange Act Release No. 80256 16 See id. [sic]
Release No. 39729 (March 6, 1998), 63 FR 12559
(March 15, 2017), 82 FR 14526 (March 21, 2017) (March 13, 1998). In approving the OATS Rules, the
17 See CAT NMS Plan, Appendix C, Section
(SR–NASDAQ–2017–008). Commission concluded that OATS satisfied the A.3(b), at n.102.
11 CAT NMS Plan, Appendix C, Section C.9. 18 Id.
conditions of the SEC’s order and was consistent
12 See id. with the Exchange Act. See id. at 12566–67. 19 Id.
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![25822 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
orders are not currently reported basic data validations, it must be various legs of option/equity complex
regularly or included in OATS. rejected and returned to the CAT orders, riskless principal orders, and
To ensure the CAT’s accuracy and Reporter to be corrected and orders worked through average price
reliability, Nasdaq is proposing that, resubmitted.23 The specific validations accounts.30 Nasdaq is proposing that
before OATS could be retired, the CAT can be determined only after the Plan there be at least a 95% pre-correction
would generally need to achieve a Processor has finalized the Industry and 98% post-correction linkage rate for
sustained error rate for Industry Member Member Technical Specifications; multi-legged orders (e.g., related equity/
reporting in each of the categories below however, the Plan also requires the Plan options orders, VWAP orders, riskless
for a period of at least 180 days of 5% Processor to provide daily statistics on principal transactions).
or lower, measured on a pre-correction rejection rates after the data has been • Exchange and TRF/ORF Match
or as-submitted basis and 2% or lower processed, including the number of files Rates. The Plan requires that an order
on a post-correction basis (measured at rejected and accepted, the number of lifecycle be created to link ‘‘[o]rders
T+5).20 Nasdaq is proposing to measure order events accepted and rejected, and routed from broker-dealers to
the 5% pre-correction and 2% post- the number of each type of report exchanges’’ and ‘‘[e]xecuted orders and
correction thresholds by averaging the rejected.24 Nasdaq is proposing that, trade reports.’’ 31 Nasdaq is proposing at
error rate across the period, not require over the 180-day period, aggregate least a 95% pre-correction and 98%
a 5% pre-correction and 2% post- rejection rates (measured separately for post-correction aggregate match rate to
correction maximum each day for 180 equities and options) must be no more each equity exchange for orders routed
consecutive days. Nasdaq believes that than 5% pre-correction or 2% post- from Industry Members to an exchange
measuring each of the thresholds over correction across all CAT Reporters. and, for over-the-counter executions, the
the course of 180 days will ensure that • Intra-Firm Linkages. The Plan same match rate for orders linked to
the CAT consistently meets minimum requires that ‘‘the Plan Processor must trade reports.
accuracy and reliability thresholds for be able to link all related order events In addition to these minimum error
Industry Member reporting while also from all CAT Reporters involved in the rates and matching thresholds that
ensuring that single-day measurements lifecycle of an order.’’ 25 At a minimum, generally must be met before OATS can
do not unduly affect the overall this requirement includes the creation be retired, Nasdaq believes that during
measurements. of an order lifecycle between ‘‘[a]ll order the minimum 180-day period during
Nasdaq is proposing to use error rates events handled within an individual which the thresholds are calculated,
in each the following categories, CAT Reporter, including orders routed Nasdaq’s use of the data in the CAT
measured separately for options and for to internal desks or departments with must confirm that (i) usage over that
equities, to assess whether the threshold different functions (e.g., an internal time period has not revealed material
pre- and post-correction error rates are ATS).’’ 26 Nasdaq is proposing that issues that have not been corrected, (ii)
being met: aggregate intra-firm linkage rates across the CAT includes all data necessary to
• Rejection Rates and Data all Industry Member Reporters must be allow Nasdaq to continue to meet its
Validations. Data validations for the at least 95% pre-correction and 98% surveillance obligations, and (iii) the
CAT, while not expected to be designed post-correction. Plan Processor is sufficiently meeting all
the same as OATS, must be functionally • Inter-Firm Linkages. The order of its obligations under the CAT NMS
equivalent to OATS in accordance with linkage requirements in the Plan also Plan. Nasdaq believes this time period
the CAT NMS Plan (i.e., the same types require that the Plan Processor be able to use the CAT Data is necessary to
of basic data validations must be to create the lifecycle between orders reveal any errors that may manifest
performed by the Plan Processor to routed between broker-dealers.27 themselves only after surveillance
comply with the CAT NMS Plan Nasdaq is proposing that at least a 95% patterns and other queries have been
requirements). Appendix D of the Plan, pre-correction and 98% post-correction run and to confirm that the Plan
for example, requires that certain file aggregate match rate be achieved for Processor is meeting its obligations and
validations 21 and syntax and context orders routed between two Industry performing its functions adequately.
checks be performed on all submitted Member Reporters.28 Small Industry Member Data
records.22 If a record does not pass these • Order Linkage Rates. In addition to Availability
creating linkages within and between The second issue the Plan requires the
20 The Plan requires that the Plan Processor must
broker-dealers, the Plan also includes proposed rule change to address is
ensure that regulators have access to corrected and
linked order and Customer data by 8:00 a.m.
requirements that the Plan Processor be ‘‘whether the availability of certain data
Eastern Time on T+5. See CAT NMS Plan, able to create lifecycles to link various from Small Industry Members two years
Appendix C, Section A.2(a). pieces of related orders.29 For example, after the Effective Date would facilitate
21 See CAT NMS Plan, Appendix D, Section 7.2.
the Plan requires linkages between a more expeditious retirement of
The Plan requires the Plan Processor to confirm that customer orders and ‘‘representative’’
file transmission and receipt are in the correct duplicative systems.’’
formats, including validation of header and trailers orders created in firm accounts for the Nasdaq believes that there is no
on the submitted report, confirmation of a valid purpose of facilitating a customer order, effective way to retire OATS until all
Exchange[sic]-Assigned Market Participant
Identifier, and verification of the number of records current OATS reporters are reporting to
checks (i.e., that each mandatory attribute for every
in the file. Id. record is not null); and timeliness checks (i.e., that the CAT. Although Technical
22 See id. The Plan notes that syntax and context
the records were submitted within the submission Specifications for Industry Members are
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checks would include format checks (i.e., that data timelines). Id. not yet available, Nasdaq believes it
is entered in the specified format); data type checks 23 See id.
(i.e., that the data type of each attribute conforms
would be inefficient, less reliable, and
24 See id.
to the specifications); consistency checks (i.e., that more costly to attempt to marry the
25 CAT NMS Plan, Appendix D, Section 3.
all attributes for a record of a specified type are 26 Id.
OATS and CAT databases for a
consistent); range/logic checks (i.e., that each temporary period to allow some Nasdaq
27 Id.
attribute for every record has a value within
specified limits and the values provided are 28 This assumes linkage statistics will include members to report to CAT while others
associated with the event type they represent); data both unlinked route reports and new orders where
validity checks (i.e., that each attribute for every no related route report could be found. 30 See id.
record has an acceptable value); completeness 29 See CAT NMS Plan, Appendix D, Section 3. 31 Id.
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25823
continue to report to OATS. Individual Industry Member otherwise have requested via the EBS
Consequently, Nasdaq has concluded at exemptions.’’ system for purposes of NMS Securities
this time that having data from those As described above, Nasdaq believes and OTC Equity Securities.
Small Industry Members currently that a single cut-over from OATS to Consequently, Nasdaq will not need to
reporting to OATS available two years CAT is highly preferable to a firm-by- use the EBS system or request
after the Effective Date would firm approach and is not proposing to information pursuant to these rules for
substantially facilitate a more exempt members from the OATS NMS Securities or OTC Equity
expeditious retirement of OATS. For requirements on a firm-by-firm basis. Securities for time periods after CAT
this reason, Nasdaq supports an The primary benefit to a firm-by-firm reporting has begun if the appropriate
amendment to the Plan that would exemptive approach would be to reduce accuracy and reliability thresholds are
require current OATS Reporters that are the amount of time an individual firm achieved, including an acceptable
‘‘Small Industry Members’’ to report two is required to report to a legacy system accuracy rate for customer and account
years after the Effective Date (instead of (e.g., OATS) if it is also accurately and information. However, these rules
three). Nasdaq intends to work with the reliably reporting to the CAT. Nasdaq cannot be completely eliminated
other Participants to submit a proposed believes that the overall accuracy and immediately upon the CAT achieving
amendment to the Plan to require Small reliability thresholds for the CAT the appropriate thresholds because
Industry Members that are OATS described above would need to be met Nasdaq Regulation staff may still need
Reporters to report two years after the under any conditions before firms could to request information pursuant to these
Effective Date. stop reporting to OATS. Moreover, as rules for trading activity occurring
Nasdaq has identified approximately discussed above, Nasdaq supports before a member was reporting to the
300 member firms that currently report amending the Plan to accelerate the CAT.33 In addition, these rules apply to
to OATS and meet the definition of reporting requirements for Small information regarding transactions
‘‘Small Industry Member;’’ however, Industry Members that are OATS involving securities that will not be
only ten of these firms submit Reporters to report on the same reportable to the CAT, such as fixed-
information to OATS on their own timeframe as all other OATS Reporters. income securities; thus, these rules must
behalf, and eight of the ten firms report If such an amendment were approved remain in effect with respect to those
very few orders to OATS.32 The vast by the Commission, there would be no transactions indefinitely or until those
majority of these 300 firms use third need to exempt members from OATS transactions are captured in the CAT.
parties to fulfill their reporting requirements on a firm-by-firm basis. The proposed rule change proposes to
obligations, and many of these third add new Supplementary Material to
Changes to EBS and Account
parties will begin reporting to CAT in Rule 8211, Chapter VII, Section VII and
Identification Rules
November 2018. Consequently, Nasdaq Chapter IX, Section 4 to clarify how
The EBS rule is Nasdaq’s rule Nasdaq will request data under these
believes that the burden on current regarding the automated submission of
OATS Reporters that are ‘‘Small rules after members are reporting to the
specific trading data to Nasdaq upon CAT. Specifically, the proposed
Industry Members’’ would not be request using the Electronic Blue Sheet
significant if those firms are required to Supplementary Material to these rules
system. Rule 8211 applies to EBS will note that Nasdaq Regulation will
report to CAT beginning in November reporting for equity securities, while
2018 rather than November 2019. The request information under these rules
Chapter IX, Section 4 applies EBS only if the information is not available
burdens, however, are significantly reporting to options. Rule 8211 and
greater for those firms that are not in the CAT because, for example, the
Chapter IX, Section 4 require members transactions in question occurred before
reporting to OATS currently; therefore, to submit certain trade information as
Nasdaq does not believe it would be the firm was reporting information to
prescribed by Nasdaq Regulation, the CAT or involved securities that are
necessary or appropriate to accelerate including, for proprietary transactions,
CAT reporting for ‘‘Small Industry not reportable to the CAT. In essence,
the clearing house number or alpha under the new Supplementary Material,
Members’’ that are not currently symbol of the member submitting the
reporting to OATS, and Nasdaq would Nasdaq Regulation will make requests
data, the identifying symbol assigned to under these rules if and only if the
not support an amendment to the Plan the security, and the date the
to accelerate CAT reporting for ‘‘Small information is not otherwise available
transaction was executed. through the CAT.
Industry Members’’ that are not Chapter VII, Section VII imposes
currently OATS Reporters. The CAT NMS Plan states, however,
certain account identification that the elimination of rules that are
Individual Industry Member requirements on Market Makers. duplicative of the requirements of the
Exemptions Specifically, Chapter VII, Section VII CAT and the retirement of the related
requires, among other things, that each systems should be effective at such time
The final issue the Plan requires the Market Maker shall file with Nasdaq
proposed rule change to address is as CAT Data meets minimum standards
Regulation and keep current a list of accuracy and reliability.34
‘‘whether individual Industry Members identifying all accounts for stock,
can be exempted from reporting to Accordingly, as discussed in more detail
options and related securities trading in below, Nasdaq believes that the EBS
duplicative systems once their CAT which the Market Maker may, directly
reporting meets specified accuracy and data may be replaced by CAT Data at a
or indirectly, engage in trading activities date after all Industry Members are
reliability standards, including, but not
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or over which it exercises investment reporting to the CAT when the proposed
limited to, ways in which establishing discretion. The rule also prohibits a
cross-system regulatory functionality or Market Maker from engaging in stock, 33 Firms are required to maintain the trade
integrating data from existing systems options or related securities trading in information for pre-CAT transactions in equities
and the CAT would facilitate such an account which has not been reported and options pursuant to applicable rules, such as
books and records retention requirements, for the
32 For example, in one recent month, eight of the
pursuant to this rule. relevant time period, which is generally three or six
ten firms submitted fewer than 100 reports during
Once broker-dealer reporting to the years depending upon the record. See 17 CFR
the month, with four firms submitting fewer than CAT has begun, the CAT will contain 240.17a–3(a), 240.17a–4.
50. the data the Participants would 34 Id. [sic]
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Chapter V, Section 7 requires an rule address whether ‘‘the availability of retired.’’ 43 Nasdaq believes that it is
Options Participant to ensure that each certain data from Small Industry critical that the CAT Data be sufficiently
options order received from a Customer Members two years after the Effective accurate and reliable for the Exchange to
for execution on the Nasdaq Options Date would facilitate a more expeditious perform the regulatory functions that it
Market is recorded and time-stamped retirement of duplicative systems.’’ 41 now performs via COATS. Accordingly,
immediately, and also at the time of any The Exchange believes COATS should Nasdaq believes that the CAT Data
modification or cancellation of the not be retired until all Participants and should meet specific quantitative error
order. The rule also specifies the Industry Members that report data to rates, as well as certain qualitative
information that must be contained at a COATS are reporting comparable data to requirements.
minimum, including a unique order the CAT. While the early submission of Nasdaq and the other options
identification, the underlying security, options data to the CAT by Small exchanges believe that, before COATS
opening/closing designation, the Industry Members could expedite the may be retired, the CAT would need to
identity of the Clearing Participant, and retirement of COATS, the Exchange achieve a sustained error rate for a
the Options Participant identification. believes that it premature to consider period of at least 180 days of 5% or
The CAT NMS Plan states that the such a change and that additional lower measured on a pre-correction or
elimination of rules that are duplicative analysis would be necessary to as-submitted basis, and 2% or lower on
of the requirements of the CAT and the determine whether such early reporting a post-correction basis (measured at
retirement of the related systems should by Small Industry Members would be T+5).44 Nasdaq proposes to measure the
be effective at such time as CAT Data feasible. 5% pre-correction and 2% post-
meets minimum standards of accuracy The CAT NMS Plan requires that this correction thresholds by averaging the
and reliability.40 As discussed in more rule filing address ‘‘whether individual error rate across the period, not require
detail below, Nasdaq and the other Industry Members can be exempted a 5% pre-correction and 2% post-
options exchanges believe that COATS from reporting to duplicative systems correction maximum each day for 180
may be retired at a date after all Industry once their CAT reporting meets consecutive days. Nasdaq believes that
Members are reporting to the CAT when specified accuracy and reliability measuring each of the thresholds over
the proposed error rate thresholds have standards, including, but not limited to, the course of 180 days will ensure that
been met, and Nasdaq has determined ways in which establishing cross-system the CAT consistently meets minimum
that its usage of the CAT Data has not regulatory functionality or integrating accuracy and reliability thresholds
revealed material issues that have not data from existing systems and the CAT while also ensuring that single-day
been corrected, confirmed that the CAT would facilitate such Individual measurements do not unduly affect the
includes all data necessary to allow Industry Member exemptions.’’ 42 overall measurements. Nasdaq proposes
Nasdaq to continue to meet its Nasdaq believes that a single cut-over to measure the appropriate error rates in
surveillance obligations, and confirmed from COATS to CAT is highly preferable the aggregate, rather than firm-by-firm.
that the Plan Processor is sufficiently to a firm-by-firm approach and is not In addition, Nasdaq proposes to
meeting all of its obligations under the proposing to exempt members from the measure the error rates for options only,
CAT NMS Plan. COATS requirements on a firm-by-firm not equity securities, as only options are
Nasdaq believes COATS should not basis. Nasdaq and the other options subject to COATS. The 2% and 5% error
be retired until all Participants and exchanges believe that providing such rates are in line with the proposed
Industry Members that report data to individual exemptions to Industry retirement threshold for OATS.
COATS are reporting comparable data to Members would be inefficient, more
In addition to these minimum error
the CAT. In this way, Nasdaq will costly, and less reliable than the single
rates before COATS can be retired,
continue to have access to the necessary cut-over. Providing individual
data to perform its regulatory duties. Nasdaq believes that during the
exemptions would require the options
The CAT NMS Plan requires that a minimum 180-day period during which
exchanges to create, for a brief
rule filing to eliminate a duplicative the thresholds are calculated, Nasdaq’s
temporary period, a cross-system
use of the data in the CAT must confirm
regulatory function and to integrate data
consolidated audit trail to ‘‘enable the options that (i) usage over that time period has
from COATS and the CAT to avoid
exchanges to reconstruct markets promptly, not revealed material issues that have
effectively surveil them and enforce order handling, creating any regulatory gaps as a result
not been corrected, (ii) the CAT
firm quote, trade reporting and other rules.’’ See of such exemptions. Such a function
Section IV.B.e.(v) of the Commission’s Order would be costly to create and would includes all data necessary to allow
Instituting Public Administrative Proceedings give rise to a greater likelihood of data Nasdaq to continue to meet its
Pursuant to Sections 19(h)(1) of the Securities
errors or other issues. Given the limited surveillance obligations, and (iii) the
Exchange Act of 1934, Making Findings and Plan Processor is sufficiently meeting all
Imposing Remedial Sanctions (the ‘‘Order’’). See time in which such exemptions would
Securities Exchange Act Release No. 43268 be necessary, Nasdaq and the other of its obligations under the CAT NMS
(September 11, 2000) and Administrative
options exchanges do not believe that Plan. Nasdaq believes this time period
Proceeding File No. 3–10282. As noted, the Plan is to use the CAT Data is necessary to
designed to create, implement and maintain a CAT such exemptions would be an
that would capture customer and order event appropriate use of limited resources. reveal any errors that may manifest
information for orders in NMS Securities and OTC The CAT NMS Plan also requires that themselves only after surveillance
Equity Securities, across all markets, from the time
a rule filing to eliminate a duplicative patterns and other queries have been
of order inception through routing, cancellation, run and to confirm that the Plan
modification, or execution in a single consolidated rule to provide ‘‘specific accuracy and
Processor is meeting its obligations and
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data source. Nasdaq has already adopted rules to reliability standards that will determine
enforce compliance by its Industry Members, as when duplicative systems will be performing its functions adequately.
applicable, with the provisions of the Plan. Once If the Commission approves the
the CAT is fully operational, it will be appropriate retired, including, but not limited to,
to delete Nasdaq’s rules implemented to comply whether the attainment of a certain proposed rule change, Nasdaq will
with the Order as duplicative of the CAT. Error Rate should determine when a 43 Id.
Accordingly, Nasdaq believes that it would
continue to be in compliance with the requirements
system duplicative of the CAT can be 44 The Plan requires that the Plan Processor must
of the Order once the CAT is fully operational and ensure that regulators have access to corrected and
the COATS rules are deleted. 41 Id.
linked order and Customer data by 8:00 a.m.
40 Id. [sic] 42 Id. Eastern Time on T+5. See CAT NMS Plan, at C–15.
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![25826 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
announce the implementation date of B. Self-Regulatory Organization’s oversight.’’ 50 In its comments about
the proposed rule change in a Statement on Burden on Competition EBS specifically, FIF states that the
Regulatory Notice that will be published Section 6(b)(8) of the Exchange Act 48 retirement of the EBS requirements
once Nasdaq concludes the thresholds requires that the Exchange’s rules not should be a high priority, and that the
for accuracy and reliability described impose any burden on competition that CAT should be designed to include the
above have been met and that the Plan is not necessary or appropriate. Nasdaq requisite data elements to permit the
Processor is sufficiently meeting all of does not believe that the proposed rule rapid retirement of the EBS system.51
its obligations under the CAT NMS change will result in any burden on Similarly, SIFMA states that ‘‘the
Plan. competition that is not necessary or establishment of the CAT must be
2. Statutory Basis appropriate in furtherance of the accompanied by the prompt elimination
purposes of the Exchange Act. Nasdaq of duplicative systems,’’ and
The Exchange believes that its notes that the proposed rule change ‘‘recommend[ed] that the initial
proposal is consistent with Section 6(b) implements the requirements of the technical specifications be designed to
of the Act,45 in general, and furthers the CAT NMS Plan approved by the facilitate the immediate retirement of
objectives of Section 6(b)(5) of the Act,46 Commission regarding the elimination . . . duplicative reporting systems.’’ 52
in particular, in that it is designed to of rules and systems that are duplicative
the CAT, and is designed to assist As discussed above, Nasdaq agrees
promote just and equitable principles of
Nasdaq in meeting its regulatory with the commenters that the OATS,
trade, to remove impediments to and
obligations pursuant to the Plan. EBS and COATS reporting requirements
perfect the mechanism of a free and
Similarly, all exchanges and FINRA are should be replaced by the CAT
open market and a national market
system, and, in general to protect proposing the elimination of their rules reporting requirements as soon as
investors and the public interest. related to OATS, EBS and COATS to accurate and reliable CAT Data is
implement the requirements of the CAT available. To this end, Nasdaq
Nasdaq believes that the proposed NMS Plan. Therefore, this is not a anticipates that the CAT will be
rule change fulfills the obligation in the competitive rule filing and, therefore, it designed to collect the data necessary to
CAT NMS Plan for Nasdaq to submit a does not raise competition issues permit the retirement of OATS, EBS and
proposed rule change to eliminate or between and among the self-regulatory COATS. As discussed above, Nasdaq
modify duplicative rules. In approving organizations and/or their members. disagrees with the recommendation to
the Plan, the SEC noted that the Plan ‘‘is
C. Self-Regulatory Organization’s provide individual exemptions to those
necessary and appropriate in the public
Statement on Comments on the CAT Reporters who obtain satisfactory
interest, for the protection of investors
and the maintenance of fair and orderly Proposed Rule Change Received From data reporting quality; however, Nasdaq
markets, to remove impediments to, and Members, Participants, or Others supports amendments to the CAT NMS
perfect the mechanism of a national Although written comments on the Plan that would accelerate reporting for
market system, or is otherwise in proposed rule change were not solicited, Small Industry Members that are
furtherance of the purposes of the two commenters, the Financial currently reporting to OATS to facilitate
Act.’’ 47 As this proposal implements the Information Forum (‘‘FIF’’) and the the retirement of that system.
Plan, Nasdaq believes that this proposal Securities Industry and Financial III. Date of Effectiveness of the
furthers the objectives of the Plan, as Markets Association (‘‘SIFMA’’),
Proposed Rule Change and Timing for
identified by the SEC, and is therefore submitted letters to the Participants
Commission Action
consistent with the Exchange Act. regarding the retirement of systems
related to the CAT.49 In its comment Within 45 days of the date of
Moreover, the purpose of the
letter, with regard to the retirement of publication of this notice in the Federal
proposed rule change is to eliminate
duplicative systems more generally, FIF Register or within such longer period (i)
rules that require the submission of
recommends that the Participants as the Commission may designate up to
duplicative data to the exchange. The
continue the effort to incorporate 90 days of such date if it finds such
elimination of such duplicative
current reporting obligations into the
requirements will reduce unnecessary longer period to be appropriate and
CAT in order to replace existing
costs and other compliance burdens for publishes its reasons for so finding or
reportable systems with the CAT. In
Nasdaq and its members, and therefore, (ii) as to which the Exchange consents,
addition, FIF further recommends that,
will enhance the efficiency of the the Commission shall: (a) By order
once a CAT Reporter achieves
securities markets. Furthermore, Nasdaq approve or disapprove such proposed
satisfactory reporting data quality, the
believes that the approach set forth in rule change, or (b) institute proceedings
CAT Reporter should be exempt from
the proposed rule change strikes the to determine whether the proposed rule
reporting to any duplicative reporting
appropriate balance between ensuring change should be disapproved.
systems. FIF believes that these
that Nasdaq is able to continue to fulfill
recommendations ‘‘would serve both an IV. Solicitation of Comments
its statutory obligation to protect
underlying regulatory objective of more
investors and the public interest by
immediate and accurate access to data Interested persons are invited to
ensuring its surveillance of market
as well as an industry objective of submit written data, views, and
activity remains accurate and effective
reduced costs and burdens of regulatory arguments concerning the foregoing,
asabaliauskas on DSKBBXCHB2PROD with NOTICES
while also establishing a reasonable
timeframe for elimination or including whether the proposed rule
48 15 U.S.C. 78f(b)(8).
modification of its rules that will be 49 Letter
change is consistent with the Act.
from William H. Hebert, FIF, to
rendered duplicative after Participants re: Milestone for Participants’ rule
Comments may be submitted by any of
implementation of the CAT. change filings to eliminate/modify duplicative the following methods:
rules, dated April 12, 2017 (‘‘FIF Letter’’); Letter
from Kenneth E. Bentsen, Jr., SIFMA, to 50 FIF
45 15U.S.C. 78f(b). Letter at 2.
Participants re: Selection of Thesys as CAT
46 15 51 Id.
U.S.C. 78f(b)(5). Processor, dated April 4, 2017 (‘‘SIFMA Letter’’), at
47 Approval Order at 84697. 2. 52 SIFMA Letter at 2.
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25827
Electronic Comments SECURITIES AND EXCHANGE INET is the proprietary core technology
COMMISSION utilized across Nasdaq’s global markets
• Use the Commission’s Internet and utilized on The NASDAQ Options
comment form (http://www.sec.gov/ [Release No. 34–80815; File No. SR–MRX–
2017–02]
Market LLC (‘‘NOM’’), NASDAQ PHLX
rules/sro.shtml); or LLC (‘‘Phlx’’) and NASDAQ BX, Inc.
• Send an email to rule-comments@ Self-Regulatory Organizations; Nasdaq (‘‘BX’’) (collectively, ‘‘Nasdaq
sec.gov. Please include File Number SR– MRX, LLC; Notice of Filing of Proposed Exchanges’’). The migration of MRX to
NASDAQ–2017–055 on the subject line. Rule Change in Connection With a the Nasdaq INET architecture would
System Migration to Nasdaq INET result in higher performance, scalability,
Paper Comments Technology and more robust architecture. With this
system migration, the Exchange intends
• Send paper comments in triplicate May 30, 2017. to adopt certain trading functionality
to Secretary, Securities and Exchange Pursuant to Section 19(b)(1) of the currently utilized at Nasdaq Exchanges.
Commission, 100 F Street NE., Securities Exchange Act of 1934 The functionality being adopted is
Washington, DC 20549–1090. (‘‘Act’’),1 and Rule 19b–4 thereunder,2 described in this filing.
All submissions should refer to File notice is hereby given that on May 17, The Exchange is also separately
2017, Nasdaq MRX, LLC (‘‘MRX’’ or filing 3 a rule change to amend the
Number SR–NASDAQ–2017–055. This
‘‘Exchange’’) filed with the Securities Exchange’s Opening Process. MRX will
file number should be included on the
and Exchange Commission replace its current opening process at
subject line if email is used. To help the (‘‘Commission’’) the proposed rule Rule 701 with Phlx’s Opening Process.4
Commission process and review your change as described in Items I and II The Exchange intends to begin
comments more efficiently, please use below, which Items have been prepared implementation of the proposed rule
only one method. The Commission will by the Exchange. The Commission is changes in Q3 2017. The migration will
post all comments on the Commission’s publishing this notice to solicit be on a symbol by symbol basis, and the
Internet Web site (http://www.sec.gov/ comments on the proposed rule change Exchange will issue an alert to members
rules/sro.shtml). from interested persons. in the form of an Options Trader Alert
Copies of the submission, all I. Self-Regulatory Organization’s to provide notification of the symbols
subsequent amendments, all written Statement of the Terms of Substance of that will migrate and the relevant dates.
statements with respect to the proposed the Proposed Rule Change Generally
rule change that are filed with the
The Exchange proposes to amend With the re-platform, the Exchange
Commission, and all written various rules in connection with a will now be built on the Nasdaq INET
communications relating to the system migration to Nasdaq INET architecture, which allows certain
proposed rule change between the technology. trading system functionality to be
Commission and any person, other than The text of the proposed rule change performed in parallel. The Exchange
those that may be withheld from the is available on the Exchange’s Web site believes that this architecture change
public in accordance with the at www.ise.com, at the principal office will improve the member experience by
provisions of 5 U.S.C. 552, will be of the Exchange, and at the reducing overall latency compared to
available for Web site viewing and Commission’s Public Reference Room. the current MRX system because of the
printing in the Commission’s Public II. Self-Regulatory Organization’s manner in which the system is
Reference Room, 100 F Street NE., Statement of the Purpose of, and segregated into component parts to
Washington, DC 20549, on official Statutory Basis for, the Proposed Rule handle processing.
business days between the hours of Change
10:00 a.m. and 3:00 p.m. Copies of the Trading Halts
filing also will be available for In its filing with the Commission, the Cancellation of Quotes
Exchange included statements
inspection and copying at the principal The Exchange proposes to amend
concerning the purpose of and basis for
office of the Exchange. All comments MRX Rule 702 entitled ‘‘Trading Halts.’’
the proposed rule change and discussed
received will be posted without change; any comments it received on the Specifically, the Exchange proposes to
the Commission does not edit personal proposed rule change. The text of these amend Rule 702(a)(2) to note that during
identifying information from statements may be examined at the a halt, the Exchange will maintain
submissions. You should submit only places specified in Item IV below. The existing orders on the book, but not
information that you wish to make Exchange has prepared summaries, set existing quotes prior to the halt, accept
available publicly. All submissions forth in sections A, B, and C below, of orders and quotes, and process cancels
should refer to File Number SR– the most significant aspects of such and modifications for quotes and orders,
NASDAQ–2017–055 and should be statements. except that existing quotes are
submitted on or before June 26, 2017. cancelled. Today, MRX maintains
A. Self-Regulatory Organization’s existing orders and quotes during a
For the Commission, by the Division of Statement of the Purpose of, and trading halt. With respect to cancels and
Trading and Markets, pursuant to delegated Statutory Basis for, the Proposed Rule modifications, this behavior will not
authority.53 Change change. MRX does not have a quote
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Eduardo A. Aleman,
1. Purpose
Assistant Secretary. 3 See SR–MRX–2017–01 (not yet published).
[FR Doc. 2017–11507 Filed 6–2–17; 8:45 am]
The purpose of this rule change is to 4 See Phlx Rule 1017. See also Securities
amend certain rules to reflect the MRX Exchange Act Release No. 79274 (November 9,
BILLING CODE 8011–01–P 2016), 81 FR 80694 (November 16, 2016) (SR–Phlx–
technology migration to a Nasdaq, Inc.
2017–79) (notice of Filing of Partial Amendment
(‘‘Nasdaq’’) supported architecture. No. 2 and Order Granting Approval of a Proposed
Rule Change, as Modified by Partial Amendment
1 15 U.S.C. 78s(b)(1). No. 2, to Amend PHLX Rule 1017, Openings in
53 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4. Options).
VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 E:\FR\FM\05JNN1.SGM 05JNN1](https://thefederalregister.org/doc/82_FR_25926/page/8.svg)
Document Created: 2018-11-14 10:00:47
Document Modified: 2018-11-14 10:00:47
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 25820 |
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