82 FR 25863 - Self-Regulatory Organizations; NASDAQ PHLX 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 | 25863-25870 | |
| FR Document | 2017-11506 |
[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)] [Notices] [Pages 25863-25870] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-11506] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80811; File No. SR-Phlx-2017-43] Self-Regulatory Organizations; NASDAQ PHLX 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, NASDAQ PHLX LLC (``Phlx'' 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 3400 series relating to the Order Audit Trail System, Rule 785 relating to Electronic Blue Sheets, Rule 1022 relating to account identification, and Rule 1063 and Option Floor Procedure Advices and Order and Decorum Regulations C-2 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://nasdaqphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission's Public Reference Room. [[Page 25864]] 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Rule 3400 series relating to the Order Audit Trail System (``OATS''), Rule 785 relating to Electronic Blue Sheets (``EBS''), Rule 1022 relating to account identification, and Rule 1063 Option Floor Procedure Advices and Order and Decorum Regulations C-2 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-Phlx-2017-38). 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 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 Phlx Rule 900A Series to implement provisions of the CAT NMS Plan that are applicable to Phlx 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-Phlx-2017-07). --------------------------------------------------------------------------- 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, Phlx is proposing to delete the Rule 3400 Series (the ``OATS Rules'') from the Phlx rulebook once the CAT achieves the specific accuracy and reliability standards described below, and Phlx 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 Phlx 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\ Phlx 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 [[Page 25865]] 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\ Phlx 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 and requests for trading information can be amended 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. --------------------------------------------------------------------------- Phlx 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, Phlx 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 Phlx to conduct surveillance. Although Phlx is proposing to measure the appropriate error rates in the aggregate, rather than firm-by-firm, Phlx believes that the error rates for equity securities should be measured separately from options since options orders are not currently reported regularly or included in OATS. --------------------------------------------------------------------------- \19\ Id. --------------------------------------------------------------------------- To ensure the CAT's accuracy and reliability, Phlx 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\ Phlx 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. Phlx 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). --------------------------------------------------------------------------- Phlx 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\ Phlx 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 Exhange [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\ Phlx 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\ Phlx 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\ Phlx is proposing that there [[Page 25866]] 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\ Phlx 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, Phlx believes that during the minimum 180-day period during which the thresholds are calculated, Phlx'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 Phlx to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Phlx 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.'' Phlx 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, PHLX 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 Phlx members to report to CAT while others continue to report to OATS. Consequently, Phlx 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, Phlx 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). Phlx 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. Phlx 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, Phlx 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, Phlx 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 PHLX 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, Phlx 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. Phlx 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, Phlx 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 Rule 785 is Phlx's rule regarding the automated submission of specific trading data to Phlx upon request using the Electronic Blue Sheet (``EBS'') system. Rule 785 requires members to submit certain trade information as prescribed by the Exchange, 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. Rule 1022 imposes certain account identification requirements on Specialists and Registered Options Traders. Specifically, Rule 1022 requires those market participants to file with the Exchange upon request and keep current a list identifying all accounts for stock, Exchange-Traded Fund Shares, option and related securities or foreign currencies, physical commodities, physical commodity options, commodity futures contracts, options on commodity futures contracts, any other derivatives based on such commodity and other related trading in which the Specialist or Registered Options Trader may, directly or indirectly, engage in trading activities or over which they exercise investment discretion. That Rule prohibits a Specialist or Registered Options Trader from engaging in trading in any of these instruments in an account that has not been reported to the Exchange 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, Phlx will not need to use the EBS system or request information [[Page 25867]] 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 Exchange 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 785 and Rule 1022 to clarify how Phlx will request data under these rules after members are reporting to the CAT. Specifically, the proposed Supplementary Material to these rules will note that the Exchange 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, the Exchange 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, Phlx 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 error rate thresholds have been met, and Phlx 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 Phlx 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] --------------------------------------------------------------------------- Phlx 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, Phlx 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\ Phlx 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 Phlx believes that the CAT would then have all necessary data from the Industry Members for Phlx to perform the regulatory surveillance that currently is performed via EBS. For this reason, Phlx 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\ Phlx 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. Phlx 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, Phlx 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. Phlx 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\ Phlx believes that it is critical that the CAT Data be sufficiently accurate and reliable for Phlx to perform the regulatory functions that it now performs via EBS. Accordingly, Phlx believes that the CAT Data should meet specific quantitative error rates, as well as certain qualitative requirements. --------------------------------------------------------------------------- \37\ Id. --------------------------------------------------------------------------- Phlx 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\ Phlx 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. Phlx 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. Phlx proposes to measure the appropriate error rates in the aggregate, rather than firm-by-firm. The 2% and 5% error rates are in line [[Page 25868]] 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, Phlx believes that during the minimum 180-day period during which the thresholds are calculated, Phlx'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 Phlx to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Phlx 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, Phlx and the other options exchanges propose to eliminate COATS in accordance with the proposed timeline discussed below. Phlx adopted Rule 1063 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 Phlx's CAT Compliance Rule, Rule 900A.\39\ Phlx also proposes to make a corresponding change to Option Floor Procedure Advices and Order and Decorum Regulations C-2. --------------------------------------------------------------------------- \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. Phlx 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 Phlx's rules implemented to comply with the Order as duplicative of the CAT. Accordingly, Phlx 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. --------------------------------------------------------------------------- Rule 1063(e) describes the operations and requirements of the Floor Broker Management System, which is designed to create an electronic audit trail for equity, equity index and U.S. dollar-settled foreign currency options orders represented by Floor Brokers on the Exchange's Options Floor. Among other things, Rule 1063(e) requires a Floor Broker or that Floor Broker's employees, contemporaneously upon receipt of an order and prior to the representation of such an order in the trading crowd, to record order information including (i) the order type (i.e., customer, firm, broker-dealer, professional) and order receipt time; (ii) the option symbol; (iii) buy, sell, cross or cancel; (iv) call, put, complex (i.e., spread, straddle), or contingency order; and (v) number of contracts. Option Floor Procedure Advices and Order and Decorum Regulations C- 2 repeats these requirements, and imposes a schedule of fines for violating these requirements. 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, Phlx 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 Phlx 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 Phlx 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] --------------------------------------------------------------------------- Phlx 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, Phlx 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\ Phlx 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. Phlx 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, Phlx 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 [[Page 25869]] 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\ Phlx 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, Phlx believes that the CAT Data should meet specific quantitative error rates, as well as certain qualitative requirements. --------------------------------------------------------------------------- \43\ Id. --------------------------------------------------------------------------- Phlx 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\ Phlx 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. Phlx 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. Phlx proposes to measure the appropriate error rates in the aggregate, rather than firm-by-firm. In addition, Phlx 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, Phlx believes that during the minimum 180-day period during which the thresholds are calculated, Phlx'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 Phlx to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Phlx 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, Phlx will announce the implementation date of the proposed rule change in a Regulatory Notice that will be published once Phlx 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). --------------------------------------------------------------------------- Phlx believes that the proposed rule change fulfills the obligation in the CAT NMS Plan for Phlx 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, Phlx 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 Phlx and its members, and therefore, will enhance the efficiency of the securities markets. Furthermore, Phlx believes that the approach set forth in the proposed rule change strikes the appropriate balance between ensuring that Phlx 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. Phlx 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. Phlx 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 Phlx 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 [[Page 25870]] 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, Phlx 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, Phlx anticipates that the CAT will be designed to collect the data necessary to permit the retirement of OATS, EBS and COATS. As discussed above, Phlx disagrees with the recommendation to provide individual exemptions to those CAT Reporters who obtain satisfactory data reporting quality; however, Phlx 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: 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-Phlx-2017-43 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Phlx-2017-43. 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 such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2017-43, 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. 2017-11506 Filed 6-2-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25863
general, to protect investors and the longer period to be appropriate and submissions should refer to File
public interest. publishes its reasons for so finding or Number SR–FINRA–2017–015 and
Pursuant to the proposal, FINRA (ii) as to which the self-regulatory should be submitted on or before June
would make available to subscribers an organization consents, the Commission 26, 2017.
optional End-of-Day TRACE Transaction will: For the Commission, by the Division of
File that would include all transaction (A) By order approve or disapprove Trading and Markets, pursuant to delegated
data disseminated that day as part of such proposed rule change, or authority.7
Real-Time TRACE transaction data for (B) institute proceedings to determine Eduardo A. Aleman,
TRACE-Eligible Securities. FINRA whether the proposed rule change Assistant Secretary.
believes that the proposed End-of-Day should be disapproved.
[FR Doc. 2017–11500 Filed 6–2–17; 8:45 am]
TRACE Transaction File provides a IV. Solicitation of Comments BILLING CODE 8011–01–P
simpler alternative to the Real-Time
TRACE transaction data product, which Interested persons are invited to
provides transparency information on submit written data, views and
arguments concerning the foregoing, SECURITIES AND EXCHANGE
the price and size of transactions in COMMISSION
TRACE-Eligible Securities, and may be including whether the proposed rule
useful to interested parties that do not change is consistent with the Act. [Release No. 34–80811; File No. SR–Phlx–
require intra-day, real-time transaction Comments may be submitted by any of 2017–43]
data on TRACE-Eligible Securities. the following methods:
Self-Regulatory Organizations;
Thus, FINRA believes that the proposed Electronic Comments NASDAQ PHLX LLC; Notice of Filing of
rule change is in the public interest and • Use the Commission’s Internet Proposed Rule Change To Eliminate
consistent with the Act. comment form (http://www.sec.gov/ Requirements That Will Be Duplicative
B. Self-Regulatory Organization’s rules/sro.shtml); or of CAT
Statement on Burden on Competition • Send an email to rule-comments@
May 30, 2017.
sec.gov. Please include File Number SR–
FINRA does not believe that the Pursuant to Section 19(b)(1) of the
FINRA–2017–015 on the subject line.
proposed rule change would result in Securities Exchange Act of 1934
any burden on competition that is not Paper Comments (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
necessary or appropriate in furtherance • Send paper comments in triplicate notice is hereby given that on May 26,
of the purposes of the Act. to Robert W. Errett, Deputy Secretary, 2017, NASDAQ PHLX LLC (‘‘Phlx’’ or
Securities and Exchange Commission, ‘‘Exchange’’) filed with the Securities
Economic Impact Analysis
100 F Street NE., Washington, DC and Exchange Commission (‘‘SEC’’ or
FINRA’s existing Real-Time TRACE ‘‘Commission’’) the proposed rule
20549–1090.
data product provides transaction data change as described in Items I, II, and
for the following Data Sets: Corporate All submissions should refer to File
III below, which Items have been
Bond Data Set, Agency Data Set, SP Data Number SR–FINRA–2017–015. This file
prepared by the Exchange. The
Set, and Rule 144A Data Set. As detailed number should be included on the
Commission is publishing this notice to
above, FINRA is proposing to create an subject line if email is used. To help the
solicit comments on the proposed rule
End-of-Day TRACE Transaction File that Commission process and review your
change from interested persons.
would include all transaction data comments more efficiently, please use
disseminated that day as part of Real- only one method. The Commission will I. Self-Regulatory Organization’s
Time TRACE transaction data, and post all comments on the Commission’s Statement of the Terms of Substance of
would be separately available for each Internet Web site (http://www.sec.gov/ the Proposed Rule Change
data set for which Real-Time TRACE rules/sro.shtml). Copies of the The Exchange proposes to amend the
transaction data is available. The submission, all subsequent Rule 3400 series relating to the Order
proposal to create an End-of-Day TRACE amendments, all written statements Audit Trail System, Rule 785 relating to
Transaction File would not impose any with respect to the proposed rule Electronic Blue Sheets, Rule 1022
additional reporting requirements or change that are filed with the relating to account identification, and
costs on firms, and the purchase of Commission, and all written Rule 1063 and Option Floor Procedure
TRACE data products would continue to communications relating to the Advices and Order and Decorum
be optional for market participants and proposed rule change between the Regulations C–2 relating to the
others and, as a result, would have no Commission and any person, other than Consolidated Options Audit Trail
direct impact on firms. those that may be withheld from the System to reflect changes to these rules
public in accordance with the once members are effectively reporting
C. Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be to the Consolidated Audit Trail (‘‘CAT’’)
Statement on Comments on the available for Web site viewing and and the CAT’s accuracy and reliability
Proposed Rule Change Received From printing in the Commission’s Public meets certain standards as described
Members, Participants, or Others Reference Room, 100 F Street NE., below.
Written comments were neither Washington, DC 20549, on official The text of the proposed rule
solicited nor received. business days between the hours of 10 change is available on the Exchange’s
asabaliauskas on DSKBBXCHB2PROD with NOTICES
a.m. and 3 p.m. Copies of such filing Web site at http://
III. Date of Effectiveness of the also will be available for inspection and
Proposed Rule Change and Timing for nasdaqphlx.cchwallstreet.com/, at the
copying at the principal office of principal office of the Exchange, and at
Commission Action FINRA. All comments received will be the Commission’s Public Reference
Within 45 days of the date of posted without change; the Commission Room.
publication of this notice in the Federal does not edit personal identifying
Register or within such longer period (i) information from submissions. You 7 17 CFR 200.30–3(a)(12).
as the Commission may designate up to should submit only information that 1 15 U.S.C. 78s(b)(1).
90 days of such date if it finds such you wish to make available publicly. All 2 17 CFR 240.19b–4.
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![25864 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
II. Self-Regulatory Organization’s NMS Plan’’ or ‘‘Plan’’).6 The including, but not limited to, whether
Statement of the Purpose of, and Participants filed the Plan to comply the attainment of a certain Error Rate
Statutory Basis for, the Proposed Rule with Rule 613 of Regulation NMS under should determine when a system
Change the Exchange Act.7 The Plan was duplicative of the CAT can be retired;
published for comment in the Federal (ii) whether the availability of certain
In its filing with the Commission, the
Register on May 17, 2016,8 and data from Small Industry Members two
Exchange included statements
approved by the Commission, as years after the Effective Date would
concerning the purpose of and basis for
modified, on November 15, 2016.9 On facilitate a more expeditious retirement
the proposed rule change and discussed
March 15, 2017, the Commission of duplicative systems; and
any comments it received on the (iii) whether individual Industry
approved the new Phlx Rule 900A
proposed rule change. The text of these Members can be exempted from
Series to implement provisions of the
statements may be examined at the reporting to duplicative systems once
CAT NMS Plan that are applicable to
places specified in Item IV below. The their CAT reporting meets specified
Phlx members.10
Exchange has prepared summaries, set accuracy and reliability standards,
The CAT NMS Plan is designed to
forth in sections A, B, and C below, of including, but not limited to, ways in
create, implement, and maintain a
the most significant aspects of such which establishing cross-system
consolidated audit trail that will capture
statements. regulatory functionality or integrating
in a single consolidated data source
A. Self-Regulatory Organization’s customer and order event information data from existing systems and the CAT
Statement of the Purpose of, and the for orders in NMS Securities and OTC would facilitate such Individual
Statutory Basis for, the Proposed Rule Equity Securities, across all markets, Industry Member exemptions.13
Change from the time of order inception through
Changes to OATS
routing, cancellation, modification, or
1. Purpose In response to these requirements,
execution. Among other things, Section
The Exchange proposes to amend the C.9. of Appendix C to the Plan, as Phlx is proposing to delete the Rule
Rule 3400 series relating to the Order modified by the Commission, requires 3400 Series (the ‘‘OATS Rules’’) from
Audit Trail System (‘‘OATS’’), Rule 785 each Participant to ‘‘file with the SEC the Phlx rulebook once the CAT
relating to Electronic Blue Sheets the relevant rule change filing to achieves the specific accuracy and
(‘‘EBS’’), Rule 1022 relating to account eliminate or modify its duplicative rules reliability standards described below,
identification, and Rule 1063 Option within six (6) months of the SEC’s and Phlx has determined that its usage
Floor Procedure Advices and Order and approval of the CAT NMS Plan.’’ 11 The of the CAT Data has not revealed
Decorum Regulations C–2 relating to the Plan notes that ‘‘the elimination of such material issues that have not been
Consolidated Options Audit Trail rules and the retirement of such systems corrected, confirmed that the CAT
System (‘‘COATS’’) to reflect changes to [will] be effective at such time as CAT includes all data necessary to allow
these rules once members are effectively Data meets minimum standards of Phlx to continue to meet its surveillance
reporting to the CAT, and the CAT’s accuracy and reliability.’’ 12 Finally, the obligations,14 and confirmed that the
accuracy and reliability meets certain Plan requires the rule filing to discuss Plan Processor is sufficiently meeting all
standards as described below.3 the following: of its obligations under the CAT NMS
(i) Specific accuracy and reliability Plan.15
Background standards that will determine when Specific Accuracy and Reliability
Bats BYX Exchange, Inc.; Bats BZX duplicative systems will be retired, Standards
Exchange, Inc.; Bats EDGA Exchange,
Inc.; Bats EDGX Exchange, Inc.; BOX 6 See Letter from the Participants to Brent J. The first issue the Plan requires the
Options Exchange LLC; C2 Options Fields, Secretary, Commission, dated September 30, proposed rule change to discuss is
2014; and Letter from Participants to Brent J. Fields, ‘‘specific accuracy and reliability
Exchange, Incorporated; Chicago Board Secretary, Commission, dated February 27, 2015.
Options Exchange, Incorporated; On December 24, 2015, the Participants submitted
13 See id.
Chicago Stock Exchange, Inc.; FINRA; an amendment to the CAT NMS Plan. See Letter
14 As
from Participants to Brent J. Fields, Secretary, noted in the Participants’ September 23,
International Securities Exchange, LLC; 2016 response to comment letters on the Plan, the
Commission, dated December 23, 2015.
Investors’ Exchange LLC; ISE Gemini, ISE Gemini, LLC, ISE Mercury, LLC and Participants ‘‘worked to keep [the CAT] gap
LLC; ISE Mercury, LLC; Miami International Securities Exchange, LLC have been analyses up-to-date by including newly-added data
International Securities Exchange LLC; renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, fields in these duplicative systems, such as the new
and Nasdaq ISE, LLC, respectively. See Securities OATS data fields related to the tick size pilot and
MIAX PEARL, LLC; NASDAQ BX, Inc.; ATS order book changes, in the gap analyses.’’ See
Exchange Act Release No. 80248 (March 15, 2017),
NASDAQ PHLX LLC; The NASDAQ 82 FR 14547 (March 21, 2017); Securities Exchange Letter from Participants to Brent J. Fields, Secretary,
Stock Market LLC; National Stock Act Release No. 80326 (March 29, 2017), 82 FR Commission, dated September 23, 2016, at 21. The
Exchange, Inc.; New York Stock 16460 (April 4, 2017); and Securities Exchange Act Participants noted that they ‘‘will work with the
Release No. 80325 (March 29, 2017), 82 FR 16445 Plan Processor and the industry to develop detailed
Exchange LLC; NYSE MKT LLC; and Technical Specifications to ensure that by the time
(April 4, 2017).
NYSE Arca, Inc. (collectively, the Industry Members are required to report to the CAT,
National Stock Exchange, Inc. has been renamed
‘‘Participants’’) filed with the NYSE National, Inc. See Securities Exchange Act the CAT will include all data elements necessary
Commission, pursuant to Section 11A of Release No. 79902 (Jan. 30, 2017), 82 FR 9258 to facilitate the rapid retirement of duplicative
systems.’’ Id.
the Exchange Act 4 and Rule 608 of (February 3, 2017).
15 Phlx notes that the OATS Rules were originally
7 17 CFR 242.613.
Regulation NMS thereunder,5 the
asabaliauskas on DSKBBXCHB2PROD with NOTICES
8 Securities Exchange Act Release No. 77724 proposed to fulfill one of the undertakings
National Market System Plan Governing contained in an order issued by the Commission
(April 27, 2016), 81 FR 30614 (May 17, 2016).
the Consolidated Audit Trail (the ‘‘CAT 9 Securities Exchange Act Release No. 79318
relating to the settlement of an enforcement action
against the National Association of Securities
(November 15, 2016), 81 FR 84696 (November 23, Dealers, Inc. for failure to adequately enforce its
3 The Exchange initially filed the proposed rule 2016) (‘‘Approval Order’’). rules. See Securities Exchange Act Release No.
change on May 15, 2017 (SR–Phlx–2017–38). On 10 See Securities Exchange Act Release No. 80256
39729 (March 6, 1998), 63 FR 12559 (March 13,
May 26, 2017, the Exchange withdrew that filing (March 15, 2017), 82 FR 14526 (March 21, 2017) 1998). In approving the OATS Rules, the
and submitted this filing. (SR–Phlx–2017–07). Commission concluded that OATS satisfied the
4 15 U.S.C. 78k–1. 11 CAT NMS Plan, Appendix C, Section C.9.
conditions of the SEC’s order and was consistent
5 17 CFR 242.608. 12 See id. with the Exchange Act. See id. at 12566–67.
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25865
standards that will determine when OATS could be retired, the CAT would Reporter to be corrected and
duplicative systems will be retired, generally need to achieve a sustained resubmitted.23 The specific validations
including, but not limited to, whether error rate for Industry Member reporting can be determined only after the Plan
the attainment of a certain Error Rate in each of the categories below for a Processor has finalized the Industry
should determine when a system period of at least 180 days of 5% or Member Technical Specifications;
duplicative of the CAT can be lower, measured on a pre-correction or however, the Plan also requires the Plan
retired.’’ 16 Phlx believes that relevant as-submitted basis and 2% or lower on Processor to provide daily statistics on
error rates are the primary, but not the a post-correction basis (measured at rejection rates after the data has been
sole, metric by which to determine the T+5).20 Phlx is proposing to measure the processed, including the number of files
CAT’s accuracy and reliability and will 5% pre-correction and 2% post- rejected and accepted, the number of
serve as the baseline requirement correction thresholds by averaging the order events accepted and rejected, and
needed before OATS can be retired and error rate across the period, not require the number of each type of report
requests for trading information can be a 5% pre-correction and 2% post- rejected.24 Phlx is proposing that, over
amended to account for information correction maximum each day for 180 the 180-day period, aggregate rejection
being available in the CAT. consecutive days. Phlx believes that rates (measured separately for equities
As discussed in Section A.3.(b) of measuring each of the thresholds over and options) must be no more than 5%
Appendix C to the CAT NMS Plan, the the course of 180 days will ensure that pre-correction or 2% post-correction
Participants established an initial Error the CAT consistently meets minimum across all CAT Reporters.
Rate, as defined in the Plan, of 5% on accuracy and reliability thresholds for • Intra-Firm Linkages. The Plan
initially submitted data (i.e., data as Industry Member reporting while also requires that ‘‘the Plan Processor must
submitted by a CAT Reporter before any ensuring that single-day measurements be able to link all related order events
required corrections are performed). The do not unduly affect the overall from all CAT Reporters involved in the
Participants noted in the Plan that their measurements. lifecycle of an order.’’ 25 At a minimum,
expectation was that ‘‘error rates after Phlx is proposing to use error rates in this requirement includes the creation
reprocessing of error corrections will be each the following categories, measured of an order lifecycle between ‘‘[a]ll order
de minimis.’’ 17 The Participants based separately for options and for equities, events handled within an individual
this Error Rate on their consideration of to assess whether the threshold pre- and CAT Reporter, including orders routed
‘‘current and historical OATS Error post-correction error rates are being met: to internal desks or departments with
Rates, the magnitude of new reporting • Rejection Rates and Data different functions (e.g., an internal
requirements on the CAT Reporters and Validations. Data validations for the ATS).’’ 26 Phlx is proposing that
the fact that many CAT Reporters may CAT, while not expected to be designed aggregate intra-firm linkage rates across
have never been obligated to report data the same as OATS, must be functionally all Industry Member Reporters must be
to an audit trail.’’ 18 equivalent to OATS in accordance with at least 95% pre-correction and 98%
Phlx agrees with the Participants’ the CAT NMS Plan (i.e., the same types post-correction.
conclusion that a 5% pre-correction of basic data validations must be
• Inter-Firm Linkages. The order
threshold ‘‘strikes the balance of performed by the Plan Processor to
linkage requirements in the Plan also
adapting to a new reporting regime, comply with the CAT NMS Plan
require that the Plan Processor be able
while ensuring that the data provided to requirements). Appendix D of the Plan,
to create the lifecycle between orders
regulators will be capable of being used for example, requires that certain file
routed between broker-dealers.27 Phlx is
to conduct surveillance and market validations 21 and syntax and context
proposing that at least a 95% pre-
reconstruction, as well as having a checks be performed on all submitted
correction and 98% post-correction
sufficient level of accuracy to facilitate records.22 If a record does not pass these
aggregate match rate be achieved for
the retirement of existing regulatory basic data validations, it must be
orders routed between two Industry
reports and systems where possible.’’ 19 rejected and returned to the CAT
Member Reporters.28
However, Phlx believes that, when • Order Linkage Rates. In addition to
20 The Plan requires that the Plan Processor must
assessing the accuracy and reliability of creating linkages within and between
ensure that regulators have access to corrected and
the data for the purposes of retiring linked order and Customer data by 8:00 a.m. broker-dealers, the Plan also includes
OATS, the error thresholds should be Eastern Time on T+5. See CAT NMS Plan, requirements that the Plan Processor be
measured in more granular ways and Appendix C, Section A.2(a).
able to create lifecycles to link various
should also include minimum error 21 See CAT NMS Plan, Appendix D, Section 7.2.
pieces of related orders.29 For example,
rates of post-correction data, which The Plan requires the Plan Processor to confirm that
file transmission and receipt are in the correct the Plan requires linkages between
represents the data most likely to be formats, including validation of header and trailers customer orders and ‘‘representative’’
used by Phlx to conduct surveillance. on the submitted report, confirmation of a valid orders created in firm accounts for the
Although Phlx is proposing to measure Exhange [sic]-Assigned Market Participant
purpose of facilitating a customer order,
the appropriate error rates in the Identifier, and verification of the number of records
in the file. Id. various legs of option/equity complex
aggregate, rather than firm-by-firm, Phlx 22 See id. The Plan notes that syntax and context orders, riskless principal orders, and
believes that the error rates for equity checks would include format checks (i.e., that data orders worked through average price
securities should be measured is entered in the specified format); data type checks
accounts.30 Phlx is proposing that there
separately from options since options (i.e., that the data type of each attribute conforms
to the specifications); consistency checks (i.e., that
orders are not currently reported
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all attributes for a record of a specified type are 23 See id.
regularly or included in OATS. consistent); range/logic checks (i.e., that each 24 See id.
To ensure the CAT’s accuracy and attribute for every record has a value within 25 CAT NMS Plan, Appendix D, Section 3.
reliability, Phlx is proposing that, before specified limits and the values provided are 26 Id.
associated with the event type they represent); data 27 Id.
16 See
validity checks (i.e., that each attribute for every
id. [sic] record has an acceptable value); completeness
28 This assumes linkage statistics will include
17 See CAT NMS Plan, Appendix C, Section both unlinked route reports and new orders where
checks (i.e., that each mandatory attribute for every
A.3(b), at n.102. record is not null); and timeliness checks (i.e., that no related route report could be found.
18 Id. 29 See CAT NMS Plan, Appendix D, Section 3.
the records were submitted within the submission
19 Id. timelines). Id. 30 See id.
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be at least a 95% pre-correction and expeditious retirement of OATS. For The primary benefit to a firm-by-firm
98% post-correction linkage rate for this reason, Phlx supports an exemptive approach would be to reduce
multi-legged orders (e.g., related equity/ amendment to the Plan that would the amount of time an individual firm
options orders, VWAP orders, riskless require current OATS Reporters that are is required to report to a legacy system
principal transactions). ‘‘Small Industry Members’’ to report two (e.g., OATS) if it is also accurately and
• Exchange and TRF/ORF Match years after the Effective Date (instead of reliably reporting to the CAT. Phlx
Rates. The Plan requires that an order three). Phlx intends to work with the believes that the overall accuracy and
lifecycle be created to link ‘‘[o]rders other Participants to submit a proposed reliability thresholds for the CAT
routed from broker-dealers to amendment to the Plan to require Small described above would need to be met
exchanges’’ and ‘‘[e]xecuted orders and Industry Members that are OATS under any conditions before firms could
trade reports.’’ 31 Phlx is proposing at Reporters to report two years after the stop reporting to OATS. Moreover, as
least a 95% pre-correction and 98% Effective Date. discussed above, Phlx supports
post-correction aggregate match rate to Phlx has identified approximately 300 amending the Plan to accelerate the
each equity exchange for orders routed member firms that currently report to reporting requirements for Small
from Industry Members to an exchange OATS and meet the definition of ‘‘Small Industry Members that are OATS
and, for over-the-counter executions, the Industry Member;’’ however, only ten of Reporters to report on the same
same match rate for orders linked to these firms submit information to OATS timeframe as all other OATS Reporters.
trade reports. on their own behalf, and eight of the ten If such an amendment were approved
In addition to these minimum error firms report very few orders to OATS.32 by the Commission, there would be no
rates and matching thresholds that The vast majority of these 300 firms use need to exempt members from OATS
generally must be met before OATS can third parties to fulfill their reporting requirements on a firm-by-firm basis.
be retired, Phlx believes that during the obligations, and many of these third
minimum 180-day period during which Changes to EBS and Account
parties will begin reporting to CAT in Identification Rules
the thresholds are calculated, Phlx’s use November 2018. Consequently, Phlx
of the data in the CAT must confirm that believes that the burden on current Rule 785 is Phlx’s rule regarding the
(i) usage over that time period has not OATS Reporters that are ‘‘Small automated submission of specific
revealed material issues that have not Industry Members’’ would not be trading data to Phlx upon request using
been corrected, (ii) the CAT includes all significant if those firms are required to the Electronic Blue Sheet (‘‘EBS’’)
data necessary to allow Phlx to continue system. Rule 785 requires members to
report to CAT beginning in November
to meet its surveillance obligations, and submit certain trade information as
2018 rather than November 2019. The
(iii) the Plan Processor is sufficiently prescribed by the Exchange, including,
burdens, however, are significantly
meeting all of its obligations under the for proprietary transactions, the clearing
greater for those firms that are not
CAT NMS Plan. Phlx believes this time house number or alpha symbol of the
reporting to OATS currently; therefore,
period to use the CAT Data is necessary member submitting the data, the
Phlx does not believe it would be
to reveal any errors that may manifest identifying symbol assigned to the
necessary or appropriate to accelerate
themselves only after surveillance security, and the date the transaction
CAT reporting for ‘‘Small Industry
patterns and other queries have been was executed.
Members’’ that are not currently Rule 1022 imposes certain account
run and to confirm that the Plan
reporting to OATS, and PHLX would identification requirements on
Processor is meeting its obligations and
not support an amendment to the Plan Specialists and Registered Options
performing its functions adequately.
to accelerate CAT reporting for ‘‘Small Traders. Specifically, Rule 1022 requires
Small Industry Member Data Industry Members’’ that are not those market participants to file with
Availability currently OATS Reporters. the Exchange upon request and keep
The second issue the Plan requires the Individual Industry Member current a list identifying all accounts for
proposed rule change to address is Exemptions stock, Exchange-Traded Fund Shares,
‘‘whether the availability of certain data option and related securities or foreign
from Small Industry Members two years The final issue the Plan requires the currencies, physical commodities,
after the Effective Date would facilitate proposed rule change to address is physical commodity options,
a more expeditious retirement of ‘‘whether individual Industry Members commodity futures contracts, options on
duplicative systems.’’ can be exempted from reporting to commodity futures contracts, any other
Phlx believes that there is no effective duplicative systems once their CAT derivatives based on such commodity
way to retire OATS until all current reporting meets specified accuracy and and other related trading in which the
OATS reporters are reporting to the reliability standards, including, but not Specialist or Registered Options Trader
CAT. Although Technical Specifications limited to, ways in which establishing may, directly or indirectly, engage in
for Industry Members are not yet cross-system regulatory functionality or trading activities or over which they
available, PHLX believes it would be integrating data from existing systems exercise investment discretion. That
inefficient, less reliable, and more costly and the CAT would facilitate such Rule prohibits a Specialist or Registered
to attempt to marry the OATS and CAT Individual Industry Member Options Trader from engaging in trading
databases for a temporary period to exemptions.’’ in any of these instruments in an
allow some Phlx members to report to As described above, Phlx believes that account that has not been reported to
a single cut-over from OATS to CAT is
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CAT while others continue to report to the Exchange pursuant to this rule.
OATS. Consequently, Phlx has highly preferable to a firm-by-firm Once broker-dealer reporting to the
concluded at this time that having data approach and is not proposing to CAT has begun, the CAT will contain
from those Small Industry Members exempt members from the OATS the data the Participants would
currently reporting to OATS available requirements on a firm-by-firm basis. otherwise have requested via the EBS
two years after the Effective Date would 32 For example, in one recent month, eight of the
system for purposes of NMS Securities
substantially facilitate a more ten firms submitted fewer than 100 reports during
and OTC Equity Securities.
the month, with four firms submitting fewer than Consequently, Phlx will not need to use
31 Id. 50. the EBS system or request information
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25867
pursuant to these rules for NMS surveillance obligations, and confirmed other issues. Given the limited time in
Securities or OTC Equity Securities for that the Plan Processor is sufficiently which such exemptions would be
time periods after CAT reporting has meeting all of its obligations under the necessary, Phlx does not believe that
begun if the appropriate accuracy and CAT NMS Plan. such exemptions would be an
reliability thresholds are achieved, Phlx believes CAT Data should not be appropriate use of limited resources.
including an acceptable accuracy rate used in place of EBS data until all Moreover, the primary benefit to a firm-
for customer and account information. Participants and Industry Members are by-firm exemptive approach would be
However, these rules cannot be reporting data to CAT. In this way, Phlx to reduce the amount of time an
completely eliminated immediately will continue to have access to the individual firm is required to comply
upon the CAT achieving the appropriate necessary data to perform its regulatory with EBS if it is also accurately and
thresholds because Exchange staff may duties. reliably reporting to the CAT. Phlx
still need to request information The CAT NMS Plan requires that a believes that the overall accuracy and
pursuant to these rules for trading rule filing to eliminate a duplicative reliability thresholds for the CAT
activity occurring before a member was rule address whether ‘‘the availability of described above would need to be met
reporting to the CAT.33 In addition, certain data from Small Industry under any conditions before firms could
these rules apply to information Members two years after the Effective stop reporting to EBS, and as discussed
regarding transactions involving Date would facilitate a more expeditious above, by accelerating Small Industry
securities that will not be reportable to retirement of duplicative systems.’’ 35 Members to report on the same
the CAT, such as fixed-income Phlx believes that the submission of timeframe as all other Industry
securities; thus, these rules must remain data to the CAT by Small Industry Members, there is no need to exempt
in effect with respect to those Members a year earlier than is required members from EBS requirements on a
transactions indefinitely or until those in the CAT NMS Plan, at the same time firm-by-firm basis.
transactions are captured in the CAT. as the other Industry Members, would The CAT NMS Plan also requires that
The proposed rule change proposes to expedite the replacement of EBS data a rule filing to eliminate a duplicative
add new Supplementary Material to with CAT Data, as Phlx believes that the rule to provide ‘‘specific accuracy and
Rule 785 and Rule 1022 to clarify how CAT would then have all necessary data reliability standards that will determine
Phlx will request data under these rules from the Industry Members for Phlx to when duplicative systems will be
after members are reporting to the CAT. perform the regulatory surveillance that retired, including, but not limited to,
Specifically, the proposed currently is performed via EBS. For this whether the attainment of a certain
Supplementary Material to these rules reason, Phlx supports amending the Error Rate should determine when a
will note that the Exchange will request CAT NMS Plan to require Small system duplicative of the CAT can be
information under these rules only if the Industry Members to report data to the retired.’’ 37 Phlx believes that it is
information is not available in the CAT CAT two years after the Effective Date
critical that the CAT Data be sufficiently
because, for example, the transactions in (instead of three), and intends to work
accurate and reliable for Phlx to perform
question occurred before the firm was with other Participants toward that end.
The CAT NMS Plan requires that this the regulatory functions that it now
reporting information to the CAT or performs via EBS. Accordingly, Phlx
involved securities that are not rule filing address ‘‘whether individual
Industry Members can be exempted believes that the CAT Data should meet
reportable to the CAT. In essence, under specific quantitative error rates, as well
the new Supplementary Material, the from reporting to duplicative systems
once their CAT reporting meets as certain qualitative requirements.
Exchange will make requests under Phlx believes that, before CAT Data
these rules if and only if the information specified accuracy and reliability
standards, including, but not limited to, may be used in place of EBS data, the
is not otherwise available through the CAT would need to achieve a sustained
CAT. ways in which establishing cross-system
regulatory functionality or integrating error rate for a period of at least 180
The CAT NMS Plan states, however,
data from existing systems and the CAT days of 5% or lower measured on a pre-
that the elimination of rules that are
would facilitate such Individual correction or as-submitted basis, and
duplicative of the requirements of the
Industry Member exemptions.’’ 36 Phlx 2% or lower on a post-correction basis
CAT and the retirement of the related
believes that a single cut-over from EBS (measured at T+5).38 Phlx proposes to
systems should be effective at such time
to CAT is highly preferable to a firm-by- measure the 5% pre-correction and 2%
as CAT Data meets minimum standards
firm approach and is not proposing to post-correction thresholds by averaging
of accuracy and reliability.34
exempt members from the EBS the error rate across the period, not
Accordingly, as discussed in more detail require a 5% pre-correction and 2%
below, Phlx believes that the EBS data requirements on a firm-by-firm basis.
Phlx believes that providing such post-correction maximum each day for
may be replaced by CAT Data at a date 180 consecutive days. Phlx believes that
after all Industry Members are reporting individual exemptions to Industry
Members would be inefficient, more measuring each of the thresholds over
to the CAT when the proposed error rate the course of 180 days will ensure that
thresholds have been met, and Phlx has costly, and less reliable than the single
cut-over. Providing individual the CAT consistently meets minimum
determined that its usage of the CAT accuracy and reliability thresholds
Data has not revealed material issues exemptions would require the
exchanges to create, for a brief while also ensuring that single-day
that have not been corrected, confirmed measurements do not unduly affect the
that the CAT includes all data necessary temporary period, a cross-system
overall measurements. Phlx proposes to
asabaliauskas on DSKBBXCHB2PROD with NOTICES
to allow Phlx to continue to meet its regulatory function and to integrate data
from EBS and the CAT to avoid creating measure the appropriate error rates in
33 Firms are required to maintain the trade any regulatory gaps as a result of such the aggregate, rather than firm-by-firm.
information for pre-CAT transactions in equities exemptions. Such a function would be The 2% and 5% error rates are in line
and options pursuant to applicable rules, such as costly to create and would give rise to
books and records retention requirements, for the 37 Id.
relevant time period, which is generally three or six a greater likelihood of data errors or 38 The Plan requires that the Plan Processor must
years depending upon the record. See 17 CFR ensure that regulators have access to corrected and
240.17a–3(a), 240.17a–4. 35 Id.
linked order and Customer data by 8:00 a.m.
34 Id. [sic] 36 Id. Eastern Time on T+5. See CAT NMS Plan, at C–15.
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![25868 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
with the proposed retirement threshold corresponding change to Option Floor the CAT. In this way, Phlx will continue
for other systems, such as OATS and Procedure Advices and Order and to have access to the necessary data to
COATS. Decorum Regulations C–2. perform its regulatory duties.
In addition to these minimum error Rule 1063(e) describes the operations The CAT NMS Plan requires that a
rates before using CAT Data instead of and requirements of the Floor Broker rule filing to eliminate a duplicative
EBS data, Phlx believes that during the Management System, which is designed rule address whether ‘‘the availability of
minimum 180-day period during which to create an electronic audit trail for certain data from Small Industry
the thresholds are calculated, Phlx’s use equity, equity index and U.S. dollar- Members two years after the Effective
of the data in the CAT must confirm that settled foreign currency options orders Date would facilitate a more expeditious
(i) usage over that time period has not represented by Floor Brokers on the retirement of duplicative systems.’’ 41
revealed material issues that have not Exchange’s Options Floor. Among other The Exchange believes COATS should
been corrected, (ii) the CAT includes all things, Rule 1063(e) requires a Floor not be retired until all Participants and
data necessary to allow Phlx to continue Broker or that Floor Broker’s employees, Industry Members that report data to
to meet its surveillance obligations, and contemporaneously upon receipt of an COATS are reporting comparable data to
(iii) the Plan Processor is sufficiently order and prior to the representation of the CAT. While the early submission of
meeting all of its obligations under the such an order in the trading crowd, to options data to the CAT by Small
CAT NMS Plan. Phlx believes this time record order information including (i) Industry Members could expedite the
period to use the CAT Data is necessary the order type (i.e., customer, firm, retirement of COATS, the Exchange
to reveal any errors that may manifest broker-dealer, professional) and order believes that it premature to consider
themselves only after surveillance receipt time; (ii) the option symbol; (iii) such a change and that additional
patterns and other queries have been buy, sell, cross or cancel; (iv) call, put, analysis would be necessary to
run and to confirm that the Plan complex (i.e., spread, straddle), or determine whether such early reporting
Processor is meeting its obligations and contingency order; and (v) number of by Small Industry Members would be
performing its functions adequately. contracts. feasible.
Option Floor Procedure Advices and The CAT NMS Plan requires that this
Changes to COATS rule filing address ‘‘whether individual
Order and Decorum Regulations C–2
The options exchanges utilize COATS repeats these requirements, and imposes Industry Members can be exempted
to collect and review data regarding a schedule of fines for violating these from reporting to duplicative systems
options orders, quotes and transactions. requirements. once their CAT reporting meets
The Participants have provided COATS The CAT NMS Plan states that the specified accuracy and reliability
technical specifications to the Plan elimination of rules that are duplicative standards, including, but not limited to,
Processor for the CAT for use in of the requirements of the CAT and the ways in which establishing cross-system
developing the Technical Specifications regulatory functionality or integrating
retirement of the related systems should
for the CAT, and the Participants are data from existing systems and the CAT
be effective at such time as CAT Data
working with the Plan Processor to would facilitate such Individual
meets minimum standards of accuracy
include the necessary COATS data Industry Member exemptions.’’ 42 Phlx
and reliability.40 As discussed in more
elements in the CAT Technical believes that a single cut-over from
detail below, Phlx and the other options
Specifications. Accordingly, although COATS to CAT is highly preferable to
exchanges believe that COATS may be
the Technical Specifications for the a firm-by-firm approach and is not
retired at a date after all Industry
CAT have not yet been finalized, Phlx proposing to exempt members from the
Members are reporting to the CAT when
and the other options exchanges COATS requirements on a firm-by-firm
the proposed error rate thresholds have
propose to eliminate COATS in basis. Phlx and the other options
been met, and Phlx has determined that exchanges believe that providing such
accordance with the proposed timeline its usage of the CAT Data has not
discussed below. individual exemptions to Industry
revealed material issues that have not Members would be inefficient, more
Phlx adopted Rule 1063 to implement
been corrected, confirmed that the CAT costly, and less reliable than the single
certain reporting requirements related to
includes all data necessary to allow cut-over. Providing individual
COATS, and therefore proposes to
Phlx to continue to meet its surveillance exemptions would require the options
eliminate the information reporting
obligations, and confirmed that the Plan exchanges to create, for a brief
requirements of that rule and replacing
Processor is sufficiently meeting all of temporary period, a cross-system
those requirements with a requirement
its obligations under the CAT NMS regulatory function and to integrate data
that members report information
Plan. from COATS and the CAT to avoid
pursuant to this rule as required by
Phlx believes COATS should not be creating any regulatory gaps as a result
Phlx’s CAT Compliance Rule, Rule
retired until all Participants and of such exemptions. Such a function
900A.39 Phlx also proposes to make a
Industry Members that report data to would be costly to create and would
39 COATS was developed to comply with an order COATS are reporting comparable data to give rise to a greater likelihood of data
of the Commission requiring the then-options errors or other issues. Given the limited
exchanges to ‘‘design and implement’’ a information for orders in NMS Securities and OTC
consolidated audit trail to ‘‘enable the options Equity Securities, across all markets, from the time time in which such exemptions would
exchanges to reconstruct markets promptly, of order inception through routing, cancellation, be necessary, Phlx and the other options
effectively surveil them and enforce order handling, modification, or execution in a single consolidated exchanges do not believe that such
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firm quote, trade reporting and other rules.’’ See data source. Phlx has already adopted rules to exemptions would be an appropriate
Section IV.B.e.(v) of the Commission’s Order enforce compliance by its Industry Members, as
Instituting Public Administrative Proceedings applicable, with the provisions of the Plan. Once use of limited resources.
Pursuant to Sections 19(h)(1) of the Securities the CAT is fully operational, it will be appropriate The CAT NMS Plan also requires that
Exchange Act of 1934, Making Findings and to delete Phlx’s rules implemented to comply with a rule filing to eliminate a duplicative
Imposing Remedial Sanctions (the ‘‘Order’’). See the Order as duplicative of the CAT. Accordingly, rule to provide ‘‘specific accuracy and
Securities Exchange Act Release No. 43268 Phlx believes that it would continue to be in
(September 11, 2000) and Administrative compliance with the requirements of the Order reliability standards that will determine
Proceeding File No. 3–10282. As noted, the Plan is once the CAT is fully operational and the COATS
rules are deleted. 41 Id.
designed to create, implement and maintain a CAT
that would capture customer and order event 40 Id. [sic] 42 Id.
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![25870 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
immediate and accurate access to data Electronic Comments SECURITIES AND EXCHANGE
as well as an industry objective of COMMISSION
reduced costs and burdens of regulatory • Use the Commission’s Internet
comment form (http://www.sec.gov/ [Investment Company Act Release No.
oversight.’’ 50 In its comments about 32666; 812–14703]
EBS specifically, FIF states that the rules/sro.shtml); or
retirement of the EBS requirements • Send an email to rule-comments@ Dreyfus ETF Trust
should be a high priority, and that the sec.gov. Please include File Number SR–
CAT should be designed to include the Phlx–2017–43 on the subject line. May 30, 2017.
requisite data elements to permit the AGENCY: Securities and Exchange
rapid retirement of the EBS system.51 Paper Comments Commission (‘‘Commission’’).
Similarly, SIFMA states that ‘‘the ACTION: Notice.
• Send paper comments in triplicate
establishment of the CAT must be to Brent J. Fields, Secretary, Securities
accompanied by the prompt elimination Notice of an application for an order
and Exchange Commission, 100 F Street under section 6(c) of the Investment
of duplicative systems,’’ and
NE., Washington, DC 20549–1090. Company Act of 1940 (the ‘‘Act’’) for an
‘‘recommend[ed] that the initial
technical specifications be designed to All submissions should refer to File exemption from sections 2(a)(32),
facilitate the immediate retirement of 5(a)(1), 22(d), and 22(e) of the Act and
Number SR-Phlx-2017–43. This file
. . . duplicative reporting systems.’’ 52 rule 22c–1 under the Act, under
number should be included on the
sections 6(c) and 17(b) of the Act for an
As discussed above, Phlx agrees with subject line if email is used. To help the
exemption from sections 17(a)(1) and
the commenters that the OATS, EBS and Commission process and review your 17(a)(2) of the Act, and under section
COATS reporting requirements should comments more efficiently, please use 12(d)(1)(J) for an exemption from
be replaced by the CAT reporting only one method. The Commission will sections 12(d)(1)(A) and 12(d)(1)(B) of
requirements as soon as accurate and post all comments on the Commission’s the Act. The requested order would
reliable CAT Data is available. To this Internet Web site (http://www.sec.gov/ permit (a) index-based series of certain
end, Phlx anticipates that the CAT will rules/sro.shtml). Copies of the open-end management investment
be designed to collect the data necessary submission, all subsequent companies (‘‘Funds’’) to issue shares
to permit the retirement of OATS, EBS amendments, all written statements redeemable in large aggregations only
and COATS. As discussed above, Phlx with respect to the proposed rule (‘‘Creation Units’’); (b) secondary market
disagrees with the recommendation to change that are filed with the transactions in Fund shares to occur at
provide individual exemptions to those Commission, and all written negotiated market prices rather than at
CAT Reporters who obtain satisfactory communications relating to the net asset value (‘‘NAV’’); (c) certain
data reporting quality; however, Phlx proposed rule change between the Funds to pay redemption proceeds,
supports amendments to the CAT NMS Commission and any person, other than under certain circumstances, more than
Plan that would accelerate reporting for those that may be withheld from the seven days after the tender of shares for
Small Industry Members that are public in accordance with the redemption; (d) certain affiliated
currently reporting to OATS to facilitate provisions of 5 U.S.C. 552, will be persons of a Fund to deposit securities
the retirement of that system. available for Web site viewing and into, and receive securities from, the
printing in the Commission’s Public Fund in connection with the purchase
III. Date of Effectiveness of the
Reference Room, 100 F Street NE., and redemption of Creation Units; (e)
Proposed Rule Change and Timing for
Washington, DC 20549 on official certain registered management
Commission Action
business days between the hours of investment companies and unit
Within 45 days of the date of investment trusts outside of the same
10:00 a.m. and 3:00 p.m. Copies of such
publication of this notice in the Federal group of investment companies as the
filing also will be available for
Register or within such longer period (i) Funds (‘‘Funds of Funds’’) to acquire
inspection and copying at the principal shares of the Funds; and (f) certain
as the Commission may designate up to office of the Exchange. All comments
90 days of such date if it finds such Funds (‘‘Feeder Funds’’) to create and
received will be posted without change; redeem Creation Units in-kind in a
longer period to be appropriate and the Commission does not edit personal
publishes its reasons for so finding or master-feeder structure.
identifying information from
(ii) as to which the Exchange consents, APPLICANTS: Dreyfus ETF Trust (the
submissions. You should submit only ‘‘Trust’’), a Massachusetts business trust
the Commission shall: (a) By order
information that you wish to make registered under the Act as an open-end
approve or disapprove such proposed
rule change, or (b) institute proceedings available publicly. All submissions management investment company, The
to determine whether the proposed rule should refer to File Number SR–Phlx– Dreyfus Corporation (the ‘‘Initial
change should be disapproved. 2017–43, and should be submitted on or Adviser’’), a New York corporation
before June 26, 2017. registered as an investment adviser
IV. Solicitation of Comments under the Investment Advisers Act of
For the Commission, by the Division of
Interested persons are invited to Trading and Markets, pursuant to delegated 1940 (the ‘‘Advisers Act’’) and Mellon
submit written data, views, and authority.53 Capital Management Corporation, a
Delaware corporation registered with
asabaliauskas on DSKBBXCHB2PROD with NOTICES
arguments concerning the foregoing, Eduardo A. Aleman,
including whether the proposed rule the Commission as an investment
Assistant Secretary.
change is consistent with the Act. adviser under the Advisers Act.
[FR Doc. 2017–11506 Filed 6–2–17; 8:45 am]
Comments may be submitted by any of FILING DATES: The application was filed
BILLING CODE 8011–01–P
the following methods: on September 28, 2016, and amended
on February 21, 2017.
50 FIF Letter at 2. HEARING OR NOTIFICATION OF HEARING:
51 Id. An order granting the requested relief
52 SIFMA Letter at 2. 53 17 CFR 200.30–3(a)(12). will be issued unless the Commission
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Document Created: 2018-11-14 10:01:17
Document Modified: 2018-11-14 10:01:17
| 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 25863 |
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