| Page Range | 58707-59502 | |
| FR Document |
| Page and Subject | |
|---|---|
| 82 FR 59216 - Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs | |
| 82 FR 58707 - Catastrophic Risk Protection Endorsement; Area Risk Protection Insurance Regulations; and the Common Crop Insurance Regulations, Basic Provisions | |
| 82 FR 58749 - Vessel Documentation Regulations-Technical Amendments | |
| 82 FR 59501 - Reinvigorating America's Human Space Exploration Program | |
| 82 FR 58971 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change Amending the Consolidated Audit Trail Funding Fees | |
| 82 FR 59122 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change Amending the Consolidated Audit Trail Funding Fees | |
| 82 FR 58917 - Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Establish the Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 59004 - Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change to Amend the Fee Schedule | |
| 82 FR 59094 - Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Amend the Fee Schedule | |
| 82 FR 58854 - Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Establish the Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 58944 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and Chapter XV, Section 11 | |
| 82 FR 59067 - Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and Chapter XV, Section 11 | |
| 82 FR 59040 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC.; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and Chapter XV, Section 11 | |
| 82 FR 58891 - Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rule 7004 and Chapter XV, Section 11 | |
| 82 FR 59177 - Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Establish the Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 58731 - Compliance Date for Form 10-D Hyperlink Requirements | |
| 82 FR 59204 - Agency Information Collection Activities: Proposed Collection; Generic Clearance for the Collection of Qualitative Feedback on Agency Service Delivery | |
| 82 FR 58807 - Notice of Termination of Receivership of 10485, Bank of Wausau, Wausau, Wisconsin | |
| 82 FR 58792 - Food Crediting in Child Nutrition Programs: Request for Information | |
| 82 FR 58816 - Patient-Focused Drug Development: Developing and Submitting Proposed Draft Guidance Relating to Patient Experience Data; Public Workshop; Request for Comments | |
| 82 FR 58795 - Pacific Fishery Management Council; Public Meeting (Webinar) | |
| 82 FR 58739 - Military Lending Act Limitations on Terms of Consumer Credit Extended to Service Members and Dependents | |
| 82 FR 58824 - New Postal Product | |
| 82 FR 58795 - Foreign-Trade Zone (FTZ) 158-Jackson, Mississippi; Notification of Proposed Production Activity; Traxys Cometals Processing, Inc. (Manganese and Aluminum Alloying Agents); Burnsville, Mississippi | |
| 82 FR 59205 - City and County of Denver-Acquisition Exemption-Western Stock Show Association in the City and County of Denver, CO | |
| 82 FR 58818 - Submission for OMB Review; 30-Day Comment Request; Special Volunteer and Guest Researcher Assignment (Office of Intramural Research, Office of the Director) | |
| 82 FR 58823 - Meetings of Humanities Panel | |
| 82 FR 58807 - Agency Information Collection Activities: Announcement of Board Approval Under Delegated Authority and Submission to OMB | |
| 82 FR 58820 - Intent To Grant Exclusive Patent License to Montana Emergent Technologies | |
| 82 FR 58797 - Submission for OMB Review; Comment Request | |
| 82 FR 58797 - Agency Information Collection Activities; Comment Request; Teacher Cancellation Low Income Directory | |
| 82 FR 58798 - Agency Information Collection Activities; Comment Request; Work Colleges Application and Agreement | |
| 82 FR 58798 - Agency Information Collection Activities; Comment Request; Work Colleges Expenditure Report | |
| 82 FR 58728 - Revision to Children's Gasoline Burn Prevention Act Regulation | |
| 82 FR 58822 - Agency Information Collection Activities; Proposed eCollection eComments Requested; Reinstatement, With Change, of a Previously Approved Collection for Which Approval Has Expired: FBI eFOIA Form | |
| 82 FR 59213 - Reasonable Charges for Medical Care or Services; v3.23, 2018 Calendar Year Update and National Average Administrative Prescription Drug Charge Update | |
| 82 FR 59206 - Surface Transportation Project Delivery Program; TxDOT Audit #4 Report | |
| 82 FR 58804 - Information Collection Being Reviewed by the Federal Communications Commission Under Delegated Authority | |
| 82 FR 58806 - Information Collections Being Reviewed by the Federal Communications Commission Under Delegated Authority | |
| 82 FR 58759 - Terrestrial Use of the 2473-2495 MHz Bands for Low-Power Mobile Broadband Networks; Amendments to Rules for the Ancillary Terrestrial Component of Mobile Satellite Service Systems | |
| 82 FR 58805 - Information Collection Being Reviewed by the Federal Communications Commission Under Delegated Authority | |
| 82 FR 58749 - Accelerating Wireless Broadband Deployment by Removing Barriers to Infrastructure Investment | |
| 82 FR 58819 - Information Collection Request to Office of Management and Budget; OMB Control Number: 1625-0011 | |
| 82 FR 58815 - Public Workshop on Safety Assessment for Investigational New Drug Safety Reporting; Correction | |
| 82 FR 58817 - Government-Owned Inventions; Availability for Licensing | |
| 82 FR 58742 - Safety Zone; Delaware River, Pipeline Removal, Marcus Hook, PA | |
| 82 FR 58808 - Agency Information Collection Activities; Proposed Collection; Comment Request; Prescription Drug Marketing Act of 1987; Administrative Procedures, Policies, and Requirements | |
| 82 FR 58811 - Agency Information Collection Activities; Proposed Collection; Comment Request; Current Good Manufacturing Practice Regulations for Finished Pharmaceuticals | |
| 82 FR 58821 - Agency Information Collection Activities: Submission to the Office of Management and Budget for Review and Approval; Abandoned Mine Reclamation Funds | |
| 82 FR 58820 - Agency Information Collection Activities: Submission to the Office of Management and Budget for Review and Approval; Subsidence Insurance Program Grants | |
| 82 FR 58802 - Cimarron River Pipeline, LLC; Notice of Intent To Prepare an Environmental Assessment for the Planned Request for Comments on Environmental Issues | |
| 82 FR 58800 - EnPowered; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 Authorization | |
| 82 FR 58801 - Notice of Availability of the Revised Engineering Guidelines for the Evaluation of Hydropower Projects: Chapter 11-Arch Dams and Request for Comments | |
| 82 FR 58800 - Combined Notice of Filings | |
| 82 FR 58801 - Combined Notice of Filings #1 | |
| 82 FR 58799 - City of Fitchburg, Massachusetts; Notice of Preliminary Determination of a Qualifying Conduit Hydropower Facility and Soliciting Comments and Motions To Intervene | |
| 82 FR 58764 - Federal Reserve Policy on Payment System Risk; U.S. Branches and Agencies of Foreign Banking Organizations | |
| 82 FR 58731 - Investment Company Reporting Modernization | |
| 82 FR 58796 - Vietnam War Commemoration Advisory Committee; Notice of Federal Advisory Committee Meeting | |
| 82 FR 59037 - Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Amendment No. 2 to the Proposed Rule Change To Amend the Schedule of Fees and Assessments To Adopt a Fee Schedule To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 59151 - Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Amend the Schedule of Fees and Assessments To Adopt a Fee Schedule To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 58827 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change to Adopt a Fee Schedule to Establish the Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail | |
| 82 FR 58881 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Exclude Options Overlying NDX From Several Pricing Programs | |
| 82 FR 58884 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2 and Order Approving on an Accelerated Basis a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the GraniteShares Platinum Trust Under NYSE Arca Rule 8.201-E | |
| 82 FR 58998 - Self-Regulatory Organizations; Cboe Futures Exchange, LLC; Notice of Filing of Proposed Rule Change Regarding CFE's New Trading System | |
| 82 FR 59031 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice, as Modified by Amendment No. 1, Concerning the Adoption of a New Minimum Cash Requirement for the Clearing Fund | |
| 82 FR 58825 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Amend the Exchange Rules To Make Permanent a Program That Allows Transactions To Take Place in Open Outcry Trading at Prices of at Least $0 But Less Than $1 per Option Contract (“Sub-Dollar Cabinet Trades”) | |
| 82 FR 58996 - Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Transaction Fees for Exchange's Equity Trading Platform | |
| 82 FR 59035 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Transaction Fees at Chapter XV, Section 2(1) | |
| 82 FR 59148 - Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB Form G-45 To Collect Additional Data About the Transactional Fees Primarily Assessed by Programs Established To Implement the ABLE Act | |
| 82 FR 58825 - Product Change-Priority Mail Negotiated Service Agreement | |
| 82 FR 58824 - Product Change-First-Class Package Service Negotiated Service Agreement | |
| 82 FR 58824 - Product Change-Priority Mail Express and Priority Mail Negotiated Service Agreement | |
| 82 FR 58783 - Representation-Case Procedures | |
| 82 FR 58722 - Amendment of the Prohibition Against Certain Flights in Specified Areas of the Sanaa (OYSC) Flight Information Region | |
| 82 FR 58807 - Formations of, Acquisitions by, and Mergers of Bank Holding Companies | |
| 82 FR 58761 - Atlantic Highly Migratory Species; North Atlantic Swordfish Fishery | |
| 82 FR 58747 - Contingency Measures for the 1997 PM2.5 | |
| 82 FR 58790 - Air Plan Approval; Florida; Stationary Sources Emissions Monitoring; Reopening of Comment Period | |
| 82 FR 58745 - Finding of Failure To Submit a Section 110 State Implementation Plan for Interstate Transport for the 2012 Annual National Ambient Air Quality Standards for Fine Particles | |
| 82 FR 58718 - Airworthiness Directives; Airbus Airplanes | |
| 82 FR 58707 - Airworthiness Directives; Fokker Services B.V. Airplanes | |
| 82 FR 58778 - Passports | |
| 82 FR 58777 - Ancillary Airline Passenger Revenues | |
| 82 FR 58778 - Transparency of Airline Ancillary Service Fees | |
| 82 FR 58715 - Airworthiness Directives; Airbus Airplanes | |
| 82 FR 58713 - Airworthiness Directives; Alexander Schleicher GmbH & Co. Segelflugzeugbau Gliders | |
| 82 FR 58709 - Airworthiness Directives; The Boeing Company Airplanes | |
| 82 FR 58772 - Airworthiness Directives; Airbus Airplanes |
Federal Crop Insurance Corporation
Food and Nutrition Service
Foreign-Trade Zones Board
National Oceanic and Atmospheric Administration
Federal Energy Regulatory Commission
Centers for Medicare & Medicaid Services
Food and Drug Administration
National Institutes of Health
Coast Guard
Geological Survey
Surface Mining Reclamation and Enforcement Office
Federal Aviation Administration
Federal Highway Administration
Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, and notice of recently enacted public laws.
To subscribe to the Federal Register Table of Contents electronic mailing list, go to https://public.govdelivery.com/accounts/USGPOOFR/subscriber/new, enter your e-mail address, then follow the instructions to join, leave, or manage your subscription.
In rule document 2017-25330 beginning on page 55723 in the issue of Friday, November 24, 2017, make the following corrections:
Federal Aviation Administration (FAA), DOT.
Final rule; request for comments.
We are adopting a new airworthiness directive (AD) for Fokker Services B.V. Model F28 Mark 0070 and 0100 airplanes. This AD requires contacting the FAA to obtain instructions for addressing the unsafe condition on these products, and doing the actions specified in those instructions. This AD was prompted by a report of an engine multiple fan blade-off (MFBO) event, caused by engine fan flutter. We are issuing this AD to address the unsafe condition on these products.
This AD becomes effective December 29, 2017.
We must receive comments on this AD by January 29, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
You may examine the AD docket on the internet at
Tom Rodriguez, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone: 425-227-1137; fax: 425-227-1149.
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2014-0055, dated March 7, 2014 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for Fokker Services B.V. Model F28 Mark 0070 and 0100 airplanes. The MCAI states:
In 2008, EASA issued AD 2008-0088 to require installation of a modified normal maximum (second) detent reverse thrust on F28 Mark 0100 aeroplanes equipped with TAY 620 engines, except those already modified in accordance with Fokker Services Service Bulletin (SB) SBF100-76-016.
Since that [EASA] AD was issued, the investigation into a TAY 620 Multiple Fan Blade-Off (MFBO) event in September 2012 determined that fan flutter was the root cause. It was also determined that, under certain conditions, fan flutter can develop on TAY 620 engines when the N1 engine speed stabilizes within the range of 54 to 72% for more than 7.5 seconds during reverse thrust operation.
This condition, if not corrected, may lead to further MFBO events, possibly resulting in damage to the aeroplane.
To address this potential unsafe condition, Fokker Services published SBF100-76-022 which provides instructions for removing the normal maximum (second) detent reverse thrust position and for changing the Airplane Flight Manual (AFM) of the affected aeroplanes.
For the reasons described above, this [EASA] AD supersedes EASA AD 2008-0088 and requires removal of the normal maximum (second) detent reverse thrust position and introduction of changes to the AFM.
You may examine the MCAI on the internet at
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI. We are issuing this AD because we evaluated all pertinent information and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.
Since there are currently no domestic operators of this product, we find good cause that notice and opportunity for prior public comment are unnecessary. In addition, for the reason(s) stated above, we find that good cause exists for making this amendment effective in less than 30 days.
This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant data, views, or arguments about this AD. Send your comments to an address listed under the
We will post all comments we receive, without change, to
Currently, there are no affected U.S.-registered airplanes. This AD requires contacting the FAA to obtain instructions for addressing the unsafe condition, and doing the actions specified in those instructions. Based on the actions specified in the MCAI AD, we are providing the following cost estimates for an affected airplane that is placed on the U.S. Register in the future:
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD becomes effective December 29, 2017.
None.
This AD applies to the Fokker Services B.V. airplanes, certificated in any category, identified in paragraphs (c)(1) and (c)(2) of this AD.
(1) Model F28 Mark 0070 airplanes, all serial numbers.
(2) Model F28 Mark 0100 airplanes equipped with Rolls-Royce Deutschland TAY-620-15 engines.
Air Transport Association (ATA) of America Code 76, Engine controls.
This AD was prompted by a report of an engine multiple fan blade-off (MFBO) event, caused by engine fan flutter. We are issuing this AD to prevent engine MFBO events, which could lead to structural damage and possible reduced controllability of the airplane.
Comply with this AD within the compliance times specified, unless already done.
Within 30 days after the effective date of this AD, request instructions from the Manager, International Section, Transport Standards Branch, FAA, to address the unsafe condition specified in paragraph (e) of this AD; and accomplish the action(s) at the times specified in, and in accordance with, those instructions. Guidance can be found in Mandatory Continuing Airworthiness Information (MCAI) European Aviation Safety Agency (EASA) AD 2014-0055, dated March 7, 2014.
The Manager, International Section, Transport Standards Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the International Section, send it to the attention of the person identified in paragraph (i)(2) of this AD. Information may be emailed to:
(1) Refer to MCAI EASA AD 2014-0055, dated March 7, 2014, for related information. You may examine the MCAI on the internet at
(2) For more information about this AD, contact Tom Rodriguez, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone: 425-227-1137; fax: 425-227-1149.
None.
Federal Aviation Administration (FAA), DOT.
Final rule.
We are adopting a new airworthiness directive (AD) for all The Boeing Company Model 737-100, -200, -200C, -300, -400, and -500 series airplanes. This AD was prompted by a report indicating that wear of the bearing plate slider bushings could cause disconnection of certain elevator hinges, which could excite the horizontal stabilizer under certain in-flight speed/altitude conditions and lead to degradation of the structure. This AD requires repetitive inspections and checks of certain elevator hinges and related components, repetitive replacements and tests of the bearing plate, and related investigative and corrective actions, if necessary. We are issuing this AD to address the unsafe condition on these products.
This AD is effective January 18, 2018.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of January 18, 2018.
For service information identified in this final rule, contact Boeing Commercial Airplanes, Attention: Contractual & Data Services (C&DS), 2600 Westminster Blvd., MC 110-SK57, Seal Beach, CA 90740-5600; telephone 562-797-1717; internet
You may examine the AD docket on the internet at
George Garrido, Aerospace Engineer, Airframe Section, FAA, Los Angeles ACO Branch, 3960 Paramount Boulevard, Lakewood, CA 90712-4137; phone: 562-627-5357; fax: 562-627-5210; email:
We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all The Boeing Company Model 737-100, -200, -200C, -300, -400, and -500 series airplanes. The NPRM published in the
We are issuing this AD to detect and correct wear of the bearing plate slider bushings, which could result in heavy airplane vibration and damage and could lead to departure of the elevator and/or horizontal stabilizer from the airplane, and loss of continued safe flight and landing.
We gave the public the opportunity to participate in developing this final rule. The following presents the comments received on the NPRM and the FAA's response to each comment.
Air Line Pilots Association, International (ALPA) concurred with the content of the NPRM.
Boeing stated that no inspections are specified in Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, for Group 1 airplanes and requested that the reference to Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, be removed from paragraph (g) of this AD.
The European Aviation Safety Agency (EASA) observed that in paragraph (g) of the proposed AD, the reference to Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, for Group 1 airplanes, is not consistent with the Accomplishment Instructions of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, which states only that Group 1 airplanes have exceeded their limit of validity (LOV) and gives no further advice.
We agree with the commenters. We have removed the reference to Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, from the compliance requirements specified in paragraph (g) of this AD.
EASA suggested that the inspections and checks in the proposed AD be extended to all hinges because any other loose hinge could create overloading in adjacent hinges, and therefore could contribute to the failure of hinges 4 and 6.
We do not agree with the commenter's assessment. We have consulted with Boeing and confirmed the following information.
Hinge fittings 1 and 2 support thrust loads only and do not have the sliding bearing plates. Therefore, these fittings do not need inspections to address the unsafe condition.
Boeing's flutter analysis shows that failure (disconnect) at either hinge 4 or 6 is flutter critical. However, a failed hinge 3 or 5, with the shorter span between adjacent hinges, will have less weight relative to stiffness, such that instability does not occur.
The fatigue loads on the affected Model 737 airplane elevator are not substantial. If hinge 3 or 5 becomes loose, the load increase on hinge 4 or 6 is insignificant. If hinge 3 or 5 fails, the inspection and replacement program in Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, will still detect any crack at hinge 4 or 6 before it becomes critical. In addition, the normal maintenance procedure of hinge lubrication per the Maintenance Planning Document during a C check should detect a failed hinge 3 or 5.
We have not changed this AD in this regard.
EASA requested clarification of the reason that paragraph (i) of the proposed AD includes no repeat instruction for Group 2, Configuration 1 airplanes, regarding bearing plate replacement.
Group 2, Configuration 1 airplanes are not included in paragraph (i) of this AD, which contains requirements for repetitive bearing plate replacements and tests, because these airplanes do not have the bearing plates. We have not changed this AD regarding this issue.
EASA requested confirmation that sufficient access exists to adequately inspect and test all areas via the methods defined.
Boeing has confirmed that sufficient access exists. Additionally, Boeing has released 737-55A1099 Information Notice 01, dated May 23, 2017, to notify operators that hinge 4 inspections cannot be accomplished if existing repairs are installed in accordance with Boeing Special Attention Service Bulletin 737-55-1059, Revision 1, dated April 6, 2016. In that case, alternative inspection procedures must be approved in accordance with the procedures specified in paragraph (m) of this AD.
Aviation Partners Boeing stated that accomplishing the Supplemental Type Certificate (STC) ST01219SE does not affect the actions specified in the NPRM.
We concur with the commenter. We have redesignated paragraph (c) of the proposed AD as paragraph (c)(1) and added paragraph (c)(2) to this AD to state that installation of STC ST01219SE does not affect the ability to accomplish the actions required by this AD. Therefore, for airplanes on which STC ST01219SE is installed, a “change in product” alternative method of compliance (AMOC) approval request is not necessary to comply with the requirements of 14 CFR 39.17.
We reviewed the relevant data, considered the comments received, and determined that air safety and the public interest require adopting this final rule with the changes described previously and minor editorial changes. We have determined that these minor changes:
• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and
• Do not add any additional burden upon the public than was already proposed in the NPRM.
We also determined that these changes will not increase the economic burden on any operator or increase the scope of this final rule.
We reviewed Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016. The service information describes procedures for repetitive inspections and checks of elevator hinge numbers 4 and 6 and related components, repetitive replacements and tests of the bearing plate, and related investigative and corrective actions. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
We estimate that this AD affects 192 airplanes of U.S. registry. We estimate the following costs to comply with this AD:
We estimate the following costs to do any necessary related investigative and corrective actions that would be required based on the results of the inspection. We have no way of determining the number of aircraft that might need these actions:
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective January 18, 2018.
None.
(1) This AD applies to all The Boeing Company Model 737-100, -200, -200C, -300, -400, and -500 series airplanes, certificated in any category.
(2) Installation of Supplemental Type Certificate (STC) ST01219SE (
Air Transport Association (ATA) of America Code 55, Stabilizers.
This AD was prompted by a report indicating that wear of the bearing plate slider bushings could cause disconnection of elevator hinge number 4 or number 6, which could excite the horizontal stabilizer under certain in-flight speed/altitude conditions and lead to degradation of the structure, departure of the elevator or horizontal stabilizer from the airplane, and loss of continued safe flight and landing.
Comply with this AD within the compliance times specified, unless already done.
For airplanes identified as Group 1 in Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016: Within 120 days after the effective date of this AD, do inspections and checks of the elevator and horizontal stabilizer at elevator hinge numbers 4 and 6 and the replacement and test of the bearing plate at elevator hinge numbers 4 and 6, and do all applicable related investigative and corrective actions, using a method approved in accordance with the procedures specified in paragraph (m) of this AD.
For airplanes identified as Groups 2 and 3 in Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016: Except as required by paragraph (j)(1) of this AD, at the applicable time specified in paragraph 1.E., “Compliance,” of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, do the applicable inspections and checks of elevator hinge numbers 4 and 6 and related components specified in paragraphs (h)(1) through (h)(8) of this AD, and do all applicable related investigative and corrective actions, in accordance with the Accomplishment Instructions of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, except as required by paragraph (j)(2) of this AD. Do all applicable related investigative and corrective actions before further flight. Repeat the actions specified in paragraphs (h)(1) through (h)(8) of this AD thereafter at the applicable times specified in paragraph 1.E., “Compliance,” of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016.
(1) For Groups 2 and 3 airplanes: A high frequency eddy current (HFEC) inspection for cracking of the elevator hinge numbers 4 and 6.
(2) For Groups 2 and 3 airplanes: A loose bolt check at elevator hinge numbers 4 and 6.
(3) For Groups 2 and 3 airplanes: An HFEC inspection and low frequency eddy current (LFEC) inspection for cracking of the horizontal stabilizer forward of elevator hinge numbers 4 and 6.
(4) For Groups 2 and 3 airplanes: A loose bolt check of horizontal stabilizer attach plates at elevator hinge numbers 4 and 6.
(5) For Groups 2 and 3 airplanes: A detailed inspection of the horizontal stabilizer rear spar outer mold line, gusset plate, and inspar skin for any corrosion.
(6) For Group 2, Configuration 2, and Group 3 airplanes: A general visual inspection of the elevator front spar around hinge numbers 4 and 6 for any ply damage.
(7) For Group 2 and 3 airplanes: A tap test inspection of the elevator skin for any delamination at elevator hinge numbers 4 and 6.
(8) For Group 2, Configuration 2, and Group 3 airplanes on which elevator hinge fitting assembly 65C31307-( ) is installed at elevator hinge number 6: An HFEC inspection of the hinge fitting for any crack.
For airplanes identified as Group 2, Configuration 2, and Group 3 in Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016: Except as required by paragraph (j)(1) of this AD, at the applicable time specified in paragraph 1.E., “Compliance,” of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, do the actions specified in paragraphs (i)(1) and (i)(2) of this AD, and do all applicable related investigative and corrective actions, in accordance with the Accomplishment Instructions of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, except as required by paragraph (j)(2) of this AD. All applicable related investigative and corrective actions must be done before further flight. Repeat the actions specified in paragraphs (i)(1) and (i)(2) of this AD thereafter at the applicable time specified in paragraph 1.E., “Compliance,” of Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016.
(1) Replace the bearing plates at elevator hinge numbers 4 and 6.
(2) Do an elevator hinge bearing plate binding test at elevator hinge numbers 4 and 6.
(1) Where Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, specifies a compliance time “after the original issue date of this Service Bulletin,” this AD requires compliance within the specified compliance time after the effective date of this AD.
(2) Although Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016, specifies to contact Boeing for repair instructions, and specifies that action as “RC” (Required for Compliance), this AD requires repair before further flight using a method approved in accordance with the procedures specified in paragraph (m) of this AD.
As of the effective date of this AD: A horizontal stabilizer, an elevator, or a bearing plate may be installed on any airplane, provided the actions required by paragraphs (h) and (i) of this AD are done within the applicable compliance times specified in paragraphs (h) and (i) of this AD.
This paragraph provides credit for the actions specified in paragraphs (h) and (i) of this AD, if those actions were performed before the effective date of this AD using Boeing Alert Service Bulletin 737-55A1099, dated July 5, 2016.
(1) The Manager, Los Angeles ACO Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the certification office, send it to the attention of the person identified in paragraph (n) of this AD. Information may be emailed to:
(2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
(3) An AMOC that provides an acceptable level of safety may be used for any repair, modification, or alteration required by this AD if it is approved by the Boeing Commercial Airplanes Organization Designation Authorization (ODA) that has been authorized by the Manager, Los Angeles ACO Branch, to make those findings. To be approved, the repair method, modification deviation, or alteration deviation must meet the certification basis of the airplane, and the approval must specifically refer to this AD.
(4) Except as required by paragraph (j)(2) of this AD: For service information that contains steps that are labeled as Required for Compliance (RC), the provisions of paragraphs (m)(4)(i) and (m)(4)(ii) of this AD apply.
(i) The steps labeled as RC, including substeps under an RC step and any figures identified in an RC step, must be done to comply with the AD. If a step or substep is labeled “RC Exempt,” then the RC requirement is removed from that step or substep. An AMOC is required for any
(ii) Steps not labeled as RC may be deviated from using accepted methods in accordance with the operator's maintenance or inspection program without obtaining approval of an AMOC, provided the RC steps, including substeps and identified figures, can still be done as specified, and the airplane can be put back in an airworthy condition.
For more information about this AD, contact George Garrido, Aerospace Engineer, Airframe Section, FAA, Los Angeles ACO Branch, 3960 Paramount Boulevard, Lakewood, CA 90712-4137; phone: 562-627-5357; fax: 562-627-5210; email:
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.
(i) Boeing Alert Service Bulletin 737-55A1099, Revision 1, dated October 21, 2016.
(ii) Reserved.
(3) For service information identified in this AD, contact Boeing Commercial Airplanes, Attention: Contractual & Data Services (C&DS), 2600 Westminster Blvd., MC 110-SK57, Seal Beach, CA 90740-5600; telephone 562-797-1717; internet
(4) You may view this service information at the FAA, Transport Standards Branch, 1601 Lind Avenue SW, Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Federal Aviation Administration (FAA), Department of Transportation (DOT).
Final rule.
We are adopting a new airworthiness directive (AD) for all Alexander Schleicher GmbH & Co. Segelflugzeugbau Models ASH 25M and ASH 26E gliders. This AD results from mandatory continuing airworthiness information (MCAI) issued by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as fatigue cracks found on the exhaust silencer. We are issuing this AD to require actions to address the unsafe condition on these products.
This AD is effective January 18, 2018.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of January 18, 2018.
You may examine the AD docket on the internet at
For service information identified in this AD, contact Alexander Schleicher GmbH & Co. Segelflugzeugbau, Alexander-Schleicher-Str. 1, D-36163 Poppenhausen, Germany; phone: +49 (0) 06658 89-0; fax: +49 (0) 06658 89-40; internet:
Jim Rutherford, Aerospace Engineer, FAA, Small Airplane Standards Branch, 901 Locust, Room 301, Kansas City, Missouri 64106; telephone: (816) 329-4165; fax: (816) 329-4090; email:
We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Alexander Schleicher GmbH & Co. Segelflugzeugbau Models ASH 25M and ASH 26E gliders. The NPRM was published in the
Occurrences were reported of finding cracks on exhaust silencer part number (P/N) 800.65.0001, installed on ASK 21 Mi powered sailplanes. Subsequent investigation determined that the affected part is susceptible to fatigue cracking and is also installed on other Schleicher powered sailplanes.
This condition, if not corrected, could lead to heat damage in the engine compartment and to the engine installation, possibly resulting in reduced control of the powered sailplane.
To address this potentially unsafe condition, Schleicher issued Technical Note (TN) ASK 21 Mi No. 11, TN ASW 22 BLE 50R No. 16, TN ASH 25 M/Mi No. 32 and TN ASH 26 E No. 19 (single document, hereafter referred to as `the TN' in this [EASA] AD), to provide replacement instructions.
For the reasons described above, this [EASA] AD requires replacement of the affected exhaust silencer with an improved part and introduces installation restrictions of a part with P/N 800.65.0001].
We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.
We reviewed the relevant data and determined that air safety and the public interest require adopting this AD as proposed except for minor editorial changes. We have determined that these minor changes:
• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and
• Do not add any additional burden upon the public than was already proposed in the NPRM.
We reviewed Alexander Schleicher GmbH & Co. Segelflugzeugbau ASK 21 Mi Technical Note No. 11, ASW 22 BLE 50R Technical Note No. 16, ASH 25 M/Mi Technical Note No. 32, ASH 26 E Technical Note No. 19 (single document), dated January 8, 2016. The service information describes procedures for replacing the exhaust silencer with an improved part. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
We estimate that this AD will affect 35 products of U.S. registry. We also estimate that it will take about 8 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Required parts will cost about $3,900 per product.
Based on these figures, we estimate the cost of this AD on U.S. operators to be $160,300, or $4,580 per product.
We have no way of determining the number of products that have an affected exhaust silencer, part number 800.65.0001, installed that will need to be replaced. Therefore, this cost estimate includes all affected gliders on the U.S. registry.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to small airplanes, gliders, and domestic business jet transport airplanes to the Director of the Policy and Innovation Division.
We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
You may examine the AD docket on the internet at
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This airworthiness directive (AD) becomes effective January 18, 2018.
None.
This AD applies to Alexander Schleicher GmbH & Co. Segelflugzeugbau Models ASH 25M and ASH 26E gliders, all serial numbers, that:
(1) Have an exhaust silencer, part number (P/N) 800.65.0001, installed; and
(2) are certificated in any category.
Air Transport Association of America (ATA) Code 78: Engine Exhaust.
This AD was prompted by mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as fatigue cracks found on the exhaust silencer. We are issuing this AD to prevent heat damage in the engine compartment and to the engine installation, which could result in reduced control.
Unless already done, do the following actions:
(1) Before exceeding 150 hours time-in-service (TIS) on the exhaust silencer, P/N 800.65.0001, since new, or within the next 5 hours TIS after January 18, 2018 (the effective date of this AD), whichever occurs later, replace P/N 800.65.0001 with an improved exhaust silencer, P/N 800.65.9010. Do the replacement as specified in Alexander Schleicher GmbH & Co. Segelflugzeugbau ASK 21 Mi Technical Note No. 11, ASW 22 BLE 50 R Technical Note No. 16, ASH 25 M/Mi Technical Note No. 32, ASH 26 E Technical Note No. 19 (single document), dated January 8, 2016.
(2) As of January 18, 2018 (the effective date of this AD), do not install a P/N 800.65.0001 exhaust silencer.
The following provisions also apply to this AD:
(1)
(2)
Refer to MCAI EASA AD 2017-0136, dated July 31, 2017, for related information. You may examine the MCAI on the internet at
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.
(i) Alexander Schleicher GmbH & Co. Segelflugzeugbau ASK 21 Mi Technical Note No. 11, ASW 22 BLE 50R Technical Note No. 16, ASH 25 M/Mi Technical Note No. 32, ASH 26 E Technical Note No. 19 (single document), dated January 8, 2016.
(ii) Reserved.
(3) For Alexander Schleicher GmbH & Co. Segelflugzeugbau service information identified in this AD, contact Alexander Schleicher GmbH & Co. Segelflugzeugbau, Alexander-Schleicher-Str. 1, D-36163 Poppenhausen, Germany; phone: +49 (0) 06658 89-0; fax: +49 (0) 06658 89-40; internet:
(4) You may view this service information at the FAA, Policy and Innovation Division, 901 Locust, Kansas City, Missouri 64106. For information on the availability of this material at the FAA, call (816) 329-4148. In addition, you can access this service information on the internet at
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Federal Aviation Administration (FAA), Department of Transportation (DOT).
Final rule.
We are superseding Airworthiness Directive (AD) 2012-21-04, which applied to all Airbus Model A300 series airplanes; Model A310 series airplanes; and Model A300 B4-600, B4-600R, and F4-600R series airplanes, and Model A300 C4-605R Variant F airplanes (collectively called Model A300-600 series airplanes).
AD 2012-21-04 required repetitive inspections for, and replacement of, any cracked hood halves of fuel pump canisters. Since we issued AD 2012-21-04, we allowed inspections of the wing-outer tank and trim tank fuel pump canister hood halves to be terminated.
This new AD retains the requirements of AD 2012-21-04, reinstates the terminated inspections, and adds optional terminating actions. This AD was prompted by reports of cracked fuel pump canister hoods located in fuel tanks and new in-service events of wing-outer tank fuel pump canister hood cracking. We are issuing this AD to address the unsafe condition on these products.
This AD is effective January 18, 2018.
The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of January 18, 2018.
The Director of the Federal Register approved the incorporation by reference of certain other publications listed in this AD as of November 27, 2012 (77 FR 64701, October 23, 2012).
For service information identified in this final rule, contact Airbus SAS, Airworthiness Office—EAW, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone: +33 5 61 93 36 96; fax: +33 5 61 93 44 51; email:
You may examine the AD docket on the internet at
Dan Rodina, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone: 425-227-2125; fax: 425-227-1149.
We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 to supersede AD 2012-21-04, Amendment 39-17220 (77 FR 64701, October 23, 2012) (“AD 2012-21-04”). AD 2012-21-04 applied to all Airbus Model A300 series airplanes; Model A310 series airplanes; and Model A300 B4-600, B4-600R, and F4-600R series airplanes, and Model A300 C4-605R Variant F airplanes (collectively called Model A300-600 series airplanes).
The NPRM published in the
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2017-0051, dated March 23, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A300 series airplanes; Model A310 series airplanes; and Model A300-600 series airplanes. The MCAI states:
Reports were received of finding cracked fuel pump canister hoods located in fuel tanks on in-service aeroplanes. Initial analyses, laboratory testing and examinations suggested that vibration-induced fatigue could have caused these cracks. However, initial data could not exclude some other potential contributing factors.
This condition, if not detected and corrected, could lead to detached canister hood fragments or debris being ingested into the fuel feed system. In addition, metallic debris inside the fuel tank could result in a potential source of fuel vapour ignition, possibly resulting in a fire or fuel tank explosion and consequent loss of the aeroplane.
To address this potential unsafe condition, EASA issued AD 2011-0124 (later revised) [FAA AD 2012-21-04 corresponds to EASA AD 2011-0124] to require repetitive inspections of the canister hood halves installed on all fuel pump canisters and, if any damage was found, replacement. EASA AD 2011-0124R1 introduced an optional terminating action for the wing inner and centre fuel tanks, and cancelled the repetitive inspections of the fuel pump canister hoods in outer wing and trim tanks, for which no cracks had been reported following the initial inspection.
Since that [EASA] AD was issued, new in service events of outer tank fuel pump canister hood cracking have been reported. Consequently, the canister hoods of the outer tank fuel pumps and trim tank fuel pumps will need to be inspected.
For the reasons described above, this [EASA] AD retains the requirements of EASA AD 2011-0124R1, which is superseded, retaining the repetitive inspections of fuel pump canister hoods in wing inner and centre tanks, and reintroduces repetitive detailed inspections (DET) for outer tank and trim tank fuel pump canister hoods. This [EASA] AD also retains the existing optional terminating action for the repetitive DET of wing inner and centre tank fuel pump canister hoods, and introduces a new optional terminating action for the repetitive DET of the outer and trim tank fuel pump canister hoods required by this [EASA] AD.
You may examine the MCAI in the AD docket on the internet at
We gave the public the opportunity to participate in developing this AD. We considered the comment received. The commenter, John Sanderson, supported the NPRM.
We reviewed the available data, including the comment received, and determined that air safety and the public interest require adopting this AD as proposed except for minor editorial changes. We have determined that these minor changes:
• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and
• Do not add any additional burden upon the public than was already proposed in the NPRM.
Airbus has issued the following service information.
• Airbus Service Bulletin A300-28-0089, Revision 03, dated December 16, 2016. This service information describes procedures for repetitive detailed inspections of all fuel pump locations (center, wing-inner, and wing-outer tank), and replacing any cracked hood halves of fuel pump canisters.
• Airbus Service Bulletin A300-28-0092, Revision 01, dated August 29, 2014; Airbus Service Bulletin A300-28-6110, Revision 01, dated August 29, 2014; and Airbus Service Bulletin A310-28-2175, Revision 01, dated August 29, 2014. This service information describes procedures for replacement of the hood halves of the fuel pump canisters with newer design hood halves for the wing-inner tank and the center tank fuel pumps. These documents are distinct since they apply to different airplane models.
• Airbus Service Bulletin A300-28-0094, Revision 00, dated January 9, 2017. This service information describes procedures for replacement of the hood halves of the fuel pump canisters with newer design hood halves for the wing-outer tank.
• Airbus Service Bulletin A300-28-6106, Revision 03, dated December 16, 2016; and Airbus Service Bulletin A310-28-2173, Revision 03, dated December 16, 2016. This service information describes procedures for repetitive detailed inspections of all fuel pump locations (center, wing-inner, wing-outer, and trim tank), and replacing any cracked hood halves of fuel pump canisters. These documents are distinct since they apply to different airplane models.
• Airbus Service Bulletin A300-28-6114, Revision 00, dated January 9, 2017; and Airbus Service Bulletin A310-28-2178, Revision 00, dated January 9, 2017. This service information describes procedures for replacement of the hood halves of the fuel pump canisters with newer design hood halves for the wing-outer tank and the trim tank fuel pumps. These documents are distinct since they apply to different airplane models.
This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
We estimate that this AD affects 168 airplanes of U.S. registry.
The actions required by AD 2012-21-04, and retained in this AD take about 12 work-hours per product, at an average labor rate of $85 per workhour. Based on these figures, the estimated cost of the actions that are required by AD 2012-21-04 is $1,020 per product.
We also estimate that it will take about 9 work-hours per product to comply with the new basic requirements of this AD, at an average labor rate of $85 per work-hour. Based on these figures, we estimate the cost of the new basic requirements of this AD on U.S. operators to be $128,520, or $765 per product.
In addition, we estimate that the optional terminating actions will take about 1 work-hour and require parts costing $255, for a cost of $340 per product. We have no way of determining the number of aircraft that might need these actions.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective January 18, 2018.
This AD replaces AD 2012-21-04, Amendment 39-17220 (77 FR 64701, October 23, 2012) (“AD 2012-21-04”).
This AD applies to the airplanes identified in paragraphs (c)(1), (c)(2), and (c)(3) of this AD, certificated in any category, all certificated models, all manufacturer serial numbers.
(1) Airbus Model A300 B2-1A, B2-1C, B2K-3C, B2-203, B4-2C, B4-103, and B4-203 airplanes.
(2) Airbus Model A310-203, -204, -221, -222, -304, -322, -324, and -325 airplanes.
(3) Airbus Model A300 B4-601, B4-603, B4-620, and B4-622 airplanes, Model A300 B4-605R and B4-622R airplanes, Model A300 F4-605R and F4-622R airplanes, and Model A300 C4-605R Variant F airplanes.
Air Transport Association (ATA) of America Code 28, Fuel.
This AD was prompted by reports of cracked fuel pump canister hoods located in fuel tanks and new in-service events of wing-outer tank fuel pump canister hood cracking. We are issuing this AD to prevent any detached canister hood fragments/debris from being ingested into the fuel feed system, and becoming a potential source of ignition with consequent fire or explosion.
Comply with this AD within the compliance times specified, unless already done.
This paragraph restates the requirements of paragraph (g) of AD 2012-21-04, with revised requirements and service information. Within 30 months after November 27, 2012 (the effective date of AD 2012-21-04), do a detailed inspection for cracking of the fuel pump canister hood halves installed on all center and wing-inner tank fuel pump canisters having part numbers (P/N) 2052C11, 2052C12, and C93R51-601, in accordance with the Accomplishment Instructions of the service bulletin specified in paragraph (g)(1), (g)(2), or (g)(3) of this AD, as applicable. If any crack is found on any fuel pump canister hood half during any inspection, before further flight, replace the fuel pump canister hood half, in accordance with the Accomplishment Instructions of the service bulletin specified in paragraph (g)(1), (g)(2), or (g)(3) of this AD, as applicable.
(1) For Model A300 series airplanes: Airbus Mandatory Service Bulletin A300-28-0089, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011; or Airbus Service Bulletin A300-28-0089, Revision 03, dated December 16, 2016. As of the effective date of this AD, only use Airbus Service Bulletin A300-28-0089, Revision 03, dated December 16, 2016.
(2) For Model A300-600 series airplanes: Airbus Mandatory Service Bulletin A300-28-6106, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011; or Airbus Service Bulletin A300-28-6106, Revision 03, dated December 16, 2016. As of the effective date of this AD, only use Airbus Service Bulletin A300-28-6106, Revision 03, dated December 16, 2016.
(3) For Model A310 series airplanes: Airbus Mandatory Service Bulletin A310-28-2173, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011; or Airbus Service Bulletin A310-28-2173, Revision 03, dated December 16, 2016. As of the effective date of this AD, only use Airbus Service Bulletin A310-28-2173, Revision 03, dated December 16, 2016.
This paragraph restates the requirements of paragraph (h) of AD 2012-21-04, with no changes. Within 30 months after accomplishing the actions specified in paragraph (g) of this AD, and thereafter at intervals not to exceed 30 months, repeat the detailed inspection specified in paragraph (g) of this AD.
Within 30 months after the effective date of this AD, do a detailed inspection for cracking of the wing-outer tank and trim tank, as applicable, fuel pump canister hood halves installed on all fuel pump canisters having P/Ns 2052C11, 2052C12, and C93R51-601, in accordance with the Accomplishment Instructions of the service bulletin specified in paragraph (i)(1), (i)(2), or (i)(3) of this AD, as applicable. Repeat the inspection thereafter at intervals not to exceed 30 months. If any crack is found on any fuel pump canister hood half during any inspection, before further flight, replace the fuel pump canister hood half, in accordance with the Accomplishment Instructions of the service bulletin specified in paragraph (i)(1), (i)(2), or (i)(3) of this AD, as applicable.
(1) For Model A300 series airplanes: Airbus Service Bulletin A300-28-0089, Revision 03, dated December 16, 2016.
(2) For Model A300-600 series airplanes: Airbus Service Bulletin A300-28-6106, Revision 03, dated December 16, 2016.
(3) For Model A310 series airplanes: Airbus Service Bulletin A310-28-2173, Revision 03, dated December 16, 2016.
Replacement of the fuel pump canister hood halves installed on all fuel pump canisters having P/Ns 2052C11, 2052C12, and C93R51-601, constitutes terminating action for the inspections required by paragraphs (g) and (h) of this AD for that airplane. The replacement of the fuel pump canister hood halves must be done in accordance with the Accomplishment Instructions of the service information specified in paragraph (j)(1), (j)(2), or (j)(3) of this AD, as applicable.
(1) For Model A300 series airplanes: Airbus Service Bulletin A300-28-0092, Revision 01, dated August 29, 2014 (for center and wing-inner tank fuel pump canister hood halves); and Airbus Service Bulletin A300-28-0094, Revision 00, dated January 9, 2017 (for wing-outer tank fuel pump canister hood halves).
(2) For Model A300-600 series airplanes: Airbus Service Bulletin A300-28-6110, Revision 01, dated August 29, 2014 (for center and wing-inner tank fuel pump canister hood halves); and Airbus Service Bulletin A300-28-6114, Revision 00, dated January 9, 2017 (for wing-outer tank and trim tank fuel pump canister hood halves).
(3) For Model A310 series airplanes: Airbus Service Bulletin A310-28-2175, Revision 01, dated August 29, 2014 (for center and wing-inner tank fuel pump canister hood halves); and Airbus Service Bulletin A310-28-2178, Revision 00, dated January 9, 2017 (for wing-outer tank and trim tank fuel pump canister hood halves).
(1) This paragraph provides credit for the actions required by paragraph (g) of this AD, if those actions were performed before the effective date of this AD using the applicable service information specified in paragraph (k)(1)(i), (k)(1)(ii), or (k)(1)(iii) of this AD.
(i) Airbus Service Bulletin A300-28-0089, dated January 13, 2011; or Airbus Service Bulletin A300-28-0089, Revision 02, dated April 25, 2014.
(ii) Airbus Service Bulletin A300-28-6106, dated January 13, 2011; or Airbus Service Bulletin A300-28-6106, Revision 02, dated April 25, 2014.
(iii) Airbus Service Bulletin A310-28-2173, dated January 13, 2011; or Airbus Service Bulletin A310-28-2173, Revision 02, dated April 25, 2014.
(2) This paragraph provides credit for the actions required by paragraph (h) of this AD, if those actions were performed before the effective date of this AD using the applicable service information specified in paragraph (k)(2)(i), (k)(2)(ii), or (k)(2)(iii) of this AD.
(i) Airbus Service Bulletin A300-28-0089, dated January 13, 2011; Airbus Mandatory Service Bulletin A300-28-0089, Revision 01, dated April 15, 2011; or Airbus Service Bulletin A300-28-0089, Revision 02, dated April 25, 2014.
(ii) Airbus Service Bulletin A300-28-6106, dated January 13, 2011; Airbus Mandatory Service Bulletin A300-28-6106, Revision 01, dated April 15, 2011; or Airbus Service Bulletin A300-28-6106, Revision 02, dated April 25, 2014.
(iii) Airbus Service Bulletin A310-28-2173, dated January 13, 2011; Airbus Mandatory Service Bulletin A310-28-2173, Revision 01, dated April 15, 2011; or Airbus Service Bulletin A310-28-2173, Revision 02, dated April 25, 2014.
(3) This paragraph provides credit for the actions specified in paragraph (j) of this AD, if those actions were performed before the effective date of this AD using Airbus Service Bulletin A300-28-6110, Revision 00, dated November 28, 2013.
The following provisions also apply to this AD:
(1)
(i) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
(ii) AMOCs approved previously for AD 2012-21-04 are not approved as AMOCs with this AD.
(2)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA AD 2017-0051, dated March 23, 2017, for related information. This MCAI may be found in the AD docket on the internet at
(2) For more information about this AD, contact Dan Rodina, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone 425-227-2125; fax 425-227-1149.
(3) Service information identified in this AD that is not incorporated by reference is available at the addresses specified in paragraphs (n)(5) and (n)(6) of this AD.
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.
(3) The following service information was approved for IBR on January 18, 2018.
(i) Airbus Service Bulletin A300-28-0089, Revision 03, dated December 16, 2016.
(ii) Airbus Service Bulletin A300-28-0092, Revision 01, dated August 29, 2014.
(iii) Airbus Service Bulletin A300-28-0094, Revision 00, dated January 9, 2017.
(iv) Airbus Service Bulletin A300-28-6106, Revision 03, dated December 16, 2016.
(v) Airbus Service Bulletin A300-28-6110, Revision 01, dated August 29, 2014.
(vi) Airbus Service Bulletin A300-28-6114, Revision 00, dated January 9, 2017.
(vii) Airbus Service Bulletin A310-28-2173, Revision 03, dated December 16, 2016.
(viii) Airbus Service Bulletin A310-28-2175, Revision 01, dated August 29, 2014.
(ix) Airbus Service Bulletin A310-28-2178, Revision 00, dated January 9, 2017.
(4) The following service information was approved for IBR on November 27, 2012 (77 FR 64701, October 23, 2012).
(i) Airbus Mandatory Service Bulletin A300-28-0089, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011.
(ii) Airbus Mandatory Service Bulletin A300-28-6106, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011.
(iii) Airbus Mandatory Service Bulletin A310-28-2173, Revision 01, including Inspection Findings—Reporting Sheet, dated April 15, 2011.
(5) For service information identified in this AD, contact Airbus SAS, Airworthiness Office—EAW, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone: +33 5 61 93 36 96; fax: +33 5 61 93 44 51; email:
(6) You may view this service information at the FAA, Transport Standards Branch, 1601 Lind Avenue SW, Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.
(7) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Federal Aviation Administration (FAA), DOT.
Final rule; request for comments.
We are adopting a new airworthiness directive (AD) for all Airbus Model A330-200, A330-200
This AD becomes effective December 29, 2017.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of December 29, 2017.
We must receive comments on this AD by January 29, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this final rule, contact Airbus SAS, Airworthiness Office—EAL, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 45 80; email
You may examine the AD docket on the internet at
Vladimir Ulyanov, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone 425-227-1138; fax 425-227-1149.
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2017-0224, dated November 10, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A330-200, A330-200 Freighter, and A330-300 series airplanes; and Airbus Model A340-200, A340-300, A340-500, and A340-600 series airplanes. The MCAI states:
An occurrence was reported of a fuel pump showing cavitation erosion which breached the fuel pump housing through the inlet webs and exposed the fuel pump power supply wires. Inspections accomplished on fuel pumps removed from other aeroplanes identified signs of erosion in varying degrees. However, no other instance of break-through due to cavitation erosion was found. A list of potentially affected fuel pump Part Numbers (P/N) was established.
This condition, if not detected and corrected, could result, in case the pump is running dry, in an ignition source in the fuel tank, which may result in a fuel tank explosion and consequent loss of the aeroplane.
To address this potential unsafe condition, Airbus issued Alert Operators Transmission (AOT) A28L006-17 to provide instructions to inspect some fuel pumps when installed at specific positions, and to update the applicable Master Minimum Equipment List (MMEL).
For the reasons described above, this [EASA] AD requires repetitive inspections of these fuel pumps and, depending on findings, replacement of damaged fuel pumps with serviceable parts. This [EASA] AD also requires an update of the applicable MMEL, and the reporting of inspection results to Airbus.
This [EASA] AD is considered to be an interim measure and further [EASA] AD action may follow.
Airbus has issued Alert Operators Transmission A28L006-17, Rev. 00, dated November 3, 2017. The service information describes procedures for inspection of certain fuel pumps for cavitation erosion, and corrective actions. The service information also describes dispatch restrictions that affect the MEL. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are issuing this AD because we evaluated all pertinent information and determined the unsafe condition exists and is likely to exist or develop on other products of these same type designs.
An unsafe condition exists that requires the immediate adoption of this AD. The FAA has found that the risk to the flying public justifies waiving notice and comment prior to adoption of this rule because the unsafe condition could result in an ignition source in the fuel tank, which could result in a fuel tank explosion. Therefore, we determined that notice and opportunity for public comment before issuing this AD are impracticable and that good cause exists for making this amendment effective in fewer than 30 days.
This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant
We will post all comments we receive, without change, to
We estimate that this AD affects 107 airplanes of U.S. registry. We estimate the following costs to comply with this AD:
We estimate the following costs to do any necessary replacements that would be required based on the results of the inspection. We have no way of determining the number of aircraft that might need these replacements:
A federal agency may not conduct or sponsor, and a person is not required to respond to, nor shall a person be subject to penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a current valid OMB control number. The control number for the collection of information required by this AD is 2120-0056. The paperwork cost associated with this AD has been detailed in the Costs of Compliance section of this document and includes time for reviewing instructions, as well as completing and reviewing the collection of information. Therefore, all reporting associated with this AD is mandatory. Comments concerning the accuracy of this burden and suggestions for reducing the burden should be directed to the FAA at 800 Independence Ave. SW, Washington, DC 20591, ATTN: Information Collection Clearance Officer, AES-200.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD becomes effective December 29, 2017.
None.
This AD applies to the Airbus airplanes identified in paragraphs (c)(1) through (c)(7) of this AD, certificated in any category, all manufacturer serial numbers.
(1) Model A330-223F and -243F airplanes.
(2) Model A330-201, -202, -203, -223, and -243 airplanes.
(3) Model A330-301, -302, -303, -321, -322, -323, -341, -342, and -343 airplanes.
(4) Model A340-211, -212, and -213 airplanes.
(5) Model A340-311, -312, and -313 airplanes.
(6) Model A340-541 airplanes.
(7) Model A340-642 airplanes.
Air Transport Association (ATA) of America Code 28, Fuel System.
This AD was prompted by a report indicating that a fuel pump showing cavitation erosion breached the fuel pump housing and exposed the fuel pump power supply wires. We are issuing this AD to detect and correct cavitation erosion of certain fuel pumps, which could result, if the pump is running dry, in an ignition source in the fuel tank, and consequent fuel tank explosion.
Comply with this AD within the compliance times specified, unless already done.
(1) For the purpose of this AD, an affected fuel pump has part number (P/N) 568-1-28300-101, P/N 568-1-28300-103, or P/N 568-1-28300-200, and is located at one of the positions specified in paragraph 3.3 of Airbus Alert Operators Transmission (AOT) A28L006-17, Rev. 00, dated November 3, 2017.
(2) A fuel pump having P/N 568-1-28300-101, P/N 568-1-28300-103, or P/N 568-1-28300-200 that is installed in locations other than those specified in paragraph 3.3 of Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017, is not affected by the inspection requirements of paragraph (i) of this AD.
For the purpose of this AD, airplane groups are designated as specified in paragraphs (h)(1) and (h)(2) of this AD.
(1) Group 1 airplanes are equipped with an affected fuel pump.
(2) Group 2 airplanes are not equipped with an affected fuel pump.
For Group 1 airplanes: Before an affected pump exceeds 10,000 flight hours since first installation on an airplane, or the applicable time specified in paragraph (i)(1) or (i)(2) of this AD, whichever occurs later, inspect all affected fuel pumps for cavitation erosion, in accordance with the instruction of Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017. Repeat the inspection thereafter at intervals not to exceed the applicable time specified in table 1 to paragraph (i) of this AD.
(1) For a center tank, rear center tank, or aft transfer fuel pump: Within 30 days after the effective date of this AD.
(2) For a stand-by fuel pump: Within 40 days after the effective date of this AD.
If, during any inspection required by paragraph (i) of this AD, severe erosion (Case 3), as specified in Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017, is found on a fuel pump: Before further flight, replace that fuel pump with a serviceable part, or deactivate that fuel pump as specified in the minimum equipment list (MEL), in accordance with the instructions of Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017.
(1) As of the effective date of this AD, a fuel pump having P/N 568-1-28300-101, P/N 568-1-28300-103, or P/N 568-1-28300-200 may be installed on an airplane, provided that the part is new, or, prior to installation, the part has passed the inspection (no erosion or Case 1: Light erosion) required by paragraph (i) of this AD and, following installation, the part is inspected within the applicable repetitive intervals and as required by paragraph (i) of this AD.
(2) As of the effective date of this AD, a fuel pump having P/N 568-1-28300-101, P/N 568-1-28300-103, or P/N 568-1-28300-200, with Case 2 (medium erosion), as specified in Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017, may be installed on an airplane provided the fuel pump is not installed at a location specified in paragraph 3.3 of Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017.
(1) Within 30 days after the effective date of this AD, revise the applicable MEL, in accordance with the instructions of Airbus AOT A28L006-17, Rev. 00, dated November 3, 2017, and thereafter operate the airplane accordingly.
(2) For Model A340-500 and A340-600 airplanes: In addition to the MEL revision required by paragraph (l)(1) of this AD, revise the applicable MEL to include the information specified in table 2 to paragraph (l)(2) of this AD, and thereafter operate the airplane accordingly.
At the applicable time specified in paragraph (m)(1) or (m)(2) of this AD: Report the results (including no findings) of each inspection required by paragraph (i) of this AD to
(1) If the inspection was done on or before the effective date of this AD: Report within 10 days after the effective date of this AD.
(2) If the inspection was done after the effective date of this AD: Report within 10 days after the inspection.
The following provisions also apply to this AD:
(1)
(2)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2017-0224, dated November 10, 2017, for related information. You may examine the MCAI on the internet at
(2) For more information about this AD, contact Vladimir Ulyanov, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone 425-227-1138; fax 425-227-1149.
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.
(i) Airbus Alert Operators Transmission A28L006-17, Rev. 00, dated November 3, 2017.
(ii) Reserved.
(3) For service information identified in this AD, contact Airbus SAS, Airworthiness Office—EAL, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 45 80; email
(4) You may view this service information at the FAA, Transport Standards Branch, 1601 Lind Avenue SW, Renton, WA. For information on the availability of this material at the FAA, call 425-227-1221.
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Federal Aviation Administration (FAA), Department of Transportation (DOT).
Final rule.
This action amends the Special Federal Aviation Regulation (SFAR) that prohibits certain flights in specified areas of the Sanaa (OYSC) Flight Information Region (FIR) by all: United States (U.S.) air carriers; U.S. commercial operators; persons exercising the privileges of an airman certificate issued by the FAA, except when such persons are operating U.S.-registered aircraft for a foreign air carrier; and operators of U.S.-registered civil aircraft, except where the operator of such aircraft is a foreign air carrier. There has been a reduction in the level of risk to U.S. civil aviation operations in limited portions of the specified areas of the Sanaa (OYSC) Flight Information region (FIR) where the FAA had prohibited flight operations under the SFAR. As a result, the FAA is reducing the amount of airspace in the Sanaa (OYSC) FIR in which U.S. civil aviation operations are prohibited. However, there continues to be an unacceptable level of risk to U.S. civil aviation operations in the remainder of the specified areas of the Sanaa (OYSC) FIR, as described in this rule, resulting from terrorist and militant activity. Consequently, the FAA is also amending this SFAR to extend its expiration date. The FAA is also republishing, with minor revisions, the approval process and exemption information for this SFAR.
This final rule is effective on December 14, 2017.
Michael Filippell, Air Transportation Division, Flight Standards Service, Federal Aviation Administration, 800 Independence Avenue SW, Washington, DC 20591; telephone (202) 267-8166; email
This action amends the prohibition of flight operations in specified areas of the Sanaa (OYSC) FIR by all: U.S. air carriers; U.S. commercial operators; persons exercising the privileges of an airman certificate issued by the FAA, except when such persons are operating U.S.-registered aircraft for a foreign air carrier; and operators of U.S.-registered civil aircraft, except where the operator of such aircraft is a foreign air carrier. Due to a reduction in the level of risk to U.S. civil aviation operating in limited portions of the specified areas of the Sanaa (OYSC) FIR where the FAA had prohibited U.S. civil aviation operations under SFAR No. 115, title 14 Code of Federal Regulations (CFR) 91.1611, this action amends SFAR No. 115, § 91.1611, to reduce the amount of airspace in the Sanaa (OYSC) FIR in which U.S. civil aviation operations are prohibited. Specifically, the FAA is revising SFAR No. 115, § 91.1611, to prohibit U.S. civil aviation operations in the Sanaa (OYSC) FIR, except that airspace east of a line drawn direct from KAPET (163322N 0530614E) to NODMA (152603N 0533359E), southeast of a line drawn direct from NODMA to ORBAT (140638N 0503924E) then from ORBAT to PAKER (115500N 0463500E), south of a line drawn direct from PAKER to PARIM (123142N 0432712E), and west of a line drawn direct from PARIM to RIBOK (154700N 0415230E). However, there continues to be an unacceptable level of risk to U.S. civil aviation operations in the remainder the specified areas of the Sanaa (OYSC) FIR, as described in this rule, resulting from terrorist and militant activity. Consequently, the FAA is also amending this SFAR to extend its expiration date until January 7, 2020. The FAA finds this action necessary due to continued hazards to U.S. civil aviation operations in these areas.
The FAA is responsible for the safety of flight in the U.S. and for the safety of U.S. civil operators, U.S.-registered civil aircraft, and U.S.-certificated airmen throughout the world. The FAA's authority to issue rules on aviation safety is found in title 49, U.S. Code. Subtitle I, sections 106(f) and (g), describe the authority of the FAA Administrator. Subtitle VII of title 49, Aviation Programs, describes in more detail the scope of the agency's authority. Section 40101(d)(1) provides that the Administrator shall consider in the public interest, among other matters, assigning, maintaining, and enhancing
This rulemaking is promulgated under the authority described in Subtitle VII, Part A, subpart III, section 44701, General requirements. Under that section, the FAA is charged broadly with promoting safe flight of civil aircraft in air commerce by prescribing, among other things, regulations and minimum standards for practices, methods, and procedures that the Administrator finds necessary for safety in air commerce and national security.
This regulation is within the scope of FAA's authority under the statutes cited previously, because it continues to prohibit the persons described in paragraph (a) of SFAR No. 115, § 91.1611, from conducting flight operations in specified areas of the Sanaa (OYSC) FIR due to the continued hazards to the safety of such persons' flight operations, as described in the Background section of this final rule.
Title 5 U.S.C. 553(b)(3)(B) authorizes agencies to dispense with notice and comment procedures for rules when the agency for “good cause” finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Section 553(d) also authorizes agencies to forgo the delay in the effective date of the final rule for good cause found and published with the rule. In this instance, the FAA finds good cause to forgo notice and comment, because notice and comment would be impracticable and contrary to the public interest. To the extent that the rule is based upon classified information, such information is not permitted to be shared with the general public. Also, threats to U.S. civil aviation and intelligence regarding these threats are fluid. As a result, the agency's original proposal could become unsuitable for minimizing the hazards to U.S. civil aviation in the affected airspace during or after the notice and comment process. The FAA further finds an immediate need to address the continued hazard to U.S. civil aviation that exists in specified areas of the Sanaa (OYSC) FIR from terrorist and militant activity. This hazard is further described in the Background section of this rule. Finally, it is contrary to the public interest to delay this change in the boundaries of the SFAR to permit U.S. civil aviation operations on two jet routes that were previously prohibited, thereby potentially reducing travel time and costs.
For the reasons described previously, the FAA finds good cause to forgo notice and comment and any delay in the effective date for this rule. The FAA also finds that this action is fully consistent with the obligations under 49 U.S.C. 40105(b)(1)(A) to ensure that the FAA exercises its duties consistently with the obligations of the United States under international agreements.
On January 7, 2016, the FAA published a final rule to prohibit U.S. civil aviation operations in specified areas of the Sanaa (OYSC) FIR, excluding that airspace east and southeast of a line drawn direct from KAPET (163322N 0530614E) to NODMA (152603N 0533359E), then direct from NODMA to PAKER (115500N 0463500E), due to the hazardous situation faced by U.S. civil aviation from ongoing military operations, political instability, violence from competing armed groups, and the continuing terrorism threat from extremist elements associated with the fighting and instability in Yemen. 81 FR 727.
In taking that action, the FAA determined that international civil air routes that transit the specified areas of the Sanaa (OYSC) FIR and aircraft operating to and from Yemeni airports were at risk from terrorist and militant groups potentially employing anti-aircraft weapons, including Man-Portable Air Defense Systems (MANPADS), surface-to-air missiles (SAMs), small-arms fire, and indirect fire from mortars and rockets. Due to the fighting and instability, as of January 2016, the FAA stated that there was a risk of possible loss of state control over more advanced anti-aircraft weapons to terrorist and militant groups. Some of the weapons that the FAA was concerned about have the capability to target aircraft at higher altitudes and/or during approach and departure and have weapon ranges that could extend into the near off-shore areas along Yemen's coastline.
In the January 2016 final rule, the FAA also indicated that U.S. civil aviation was at risk from combat operations and other military-related activity associated with the fighting and instability and that there was an ongoing threat of terrorism. Al-Qa'ida in the Arabian Peninsula (AQAP) remained active in Yemen and had demonstrated the capability and intent to target U.S. and Western aviation interests. Various Yemeni airports had been attacked during the fighting, including Sanaa International Airport (OYSN) and Aden International Airport (OYAA), resulting in instances of damage to airport facilities and temporary closure of the airports.
Additionally, in the January 2016 final rule, the FAA assessed that there was a risk to U.S. civil aviation from potential strategic SAM systems. Some of these strategic air defense SAMs, at that time, posed a potential threat to civil aviation. On March 28, 2015, a probable SAM missile was launched from the vicinity of Al Hudaydah, Yemen, along the Red Sea. Collectively, the hazards previously described led the FAA to publish SFAR No. 115, § 91.1611, on January 7, 2016.
Over the last two years, the situation in Yemen has slightly improved, as a coalition of Yemeni government forces, supporting nations, and allied militia elements have successfully limited the area of opposition force control and reduced some of the opposition force weapon capabilities. Opposition elements in Yemen do not currently possess functional medium-/long-range strategic SAM capabilities. As a result, there is a reduced level of risk to U.S. civil aviation operations on certain international air routes that transit offshore areas of the Sanaa (OYSC) FIR. The FAA has determined that the risk to U.S. civil aviation in limited areas of the Sanaa (OYSC) FIR, including these international air routes, has been sufficiently reduced to allow the FAA to shrink the boundaries of its prohibition of U.S. civil aviation operations in specified areas of the Sanaa (OYSC) FIR.
Specifically, the FAA is revising SFAR No. 115, § 91.1611, to prohibit flight operations in the Sanaa (OYSC) FIR, excluding that airspace east of a line drawn direct from KAPET (163322N 0530614E) to NODMA (152603N 0533359E), southeast of a line drawn direct from NODMA to ORBAT (140638N 0503924E) then from ORBAT to PAKER (115500N 0463500E), south of a line drawn direct from PAKER to PARIM (123142N 0432712E), and west of a line drawn direct from PARIM to RIBOK (154700N 0415230E). This change will permit U.S. operators to use two jet routes, UT702 and M999, that they were previously prohibited from using under SFAR No. 115, § 91.1611. The FAA emphasizes that use of jet route UN303 remains prohibited.
Opposition forces and terrorist elements continue to operate in various locations with either ongoing fighting or the potential for combat operations to occur with little or no warning. Opposition and terrorist elements, such as AQAP and the Islamic State of Iraq and ash Sham (ISIS) in Yemen, possess
Therefore, as a result of the significant continuing risk to the safety of U.S. civil aviation in specified areas of the Sanaa (OYSC) FIR, with the revised boundaries previously described, the FAA also amends SFAR No. 115, § 91.1611, to extend its expiration date from January 7, 2018, to January 7, 2020, to maintain the prohibition on flight operations in those areas by all: U.S. air carriers; U.S. commercial operators; persons exercising the privileges of an airman certificate issued by the FAA, except when such persons are operating U.S.-registered aircraft for a foreign air carrier; and operators of U.S.-registered civil aircraft, except where the operator of such aircraft is a foreign air carrier.
The FAA will continue to actively monitor the situation and evaluate the extent to which U.S. civil operators may be able to safely operate in specified areas of the Sanaa (OYSC) FIR, with the revised boundaries previously described, in the future. Further amendments to SFAR No. 115, § 91.1611, may be appropriate if the risk to aviation safety and security changes. The FAA may amend or rescind SFAR No. 115, § 91.1611, as necessary, prior to its expiration date.
The FAA also republishes, with minor revisions, the approval process and exemption information for this SFAR, so that persons described in paragraph (a) of the rule will be able to refer to this final rule, rather than having to search through previous final rules to find the relevant approval process and exemption information. This approval process and exemption information is consistent with other similar SFARs and recent agency practice.
If a department, agency, or instrumentality of the U.S. Government determines that it has a critical need to engage any person covered under SFAR No. 115, § 91.1611, including a U.S. air carrier or a U.S. commercial operator, to conduct a charter to transport civilian or military passengers or cargo, or other operations, in the specified areas of the Sanaa (OYSC) FIR, that department, agency, or instrumentality may request that the FAA approve persons covered under SFAR No. 115, § 91.1611, to conduct such operations. An approval request must be made directly by the requesting department, agency or instrumentality of the U.S. Government to the FAA's Associate Administrator for Aviation Safety in a letter signed by an appropriate senior official of the requesting department, agency, or instrumentality. Requests for approval submitted to the FAA by anyone other than the requesting department, agency, or instrumentality will not be accepted and will not be processed. In addition, the senior official signing the letter requesting FAA approval on behalf of the requesting department, agency, or instrumentality must be sufficiently highly placed within the organization to demonstrate that the senior leadership of the requesting department, agency, or instrumentality supports the request for approval and is committed to taking all necessary steps to minimize operational risks to the proposed flights. The senior official must also be in a position to: (1) Attest to the accuracy of all representations made to the FAA in the request for approval and (2) ensure that any support from the requesting U.S. government department, agency, or instrumentality described in the request for approval is in fact brought to bear and is maintained over time. Unless justified by exigent circumstances, requests for approval must be submitted to the FAA no less than 30 calendar days before the date on which the requesting department, agency, or instrumentality wishes the proposed operations, if approved by the FAA, to commence.
The letter must be sent by the requesting department, agency, or instrumentality to the Associate Administrator for Aviation Safety, Federal Aviation Administration, 800 Independence Avenue SW, Washington, DC 20591. Electronic submissions are acceptable, and the requesting entity may request that the FAA notify it electronically as to whether the approval request is granted. If a requestor wishes to make an electronic submission to the FAA, the requestor should contact the Air Transportation Division, Flight Standards Service, at (202) 267-8166 to obtain the appropriate email address. A single letter may request approval from the FAA for multiple persons covered under SFAR No. 115, § 91.1611, and/or for multiple flight operations. To the extent known, the letter must identify the person(s) covered under the SFAR on whose behalf the U.S. Government department, agency, or instrumentality is seeking FAA approval, and it must describe—
• The proposed operation(s), including the nature of the mission being supported;
• The service to be provided by the person(s) covered by the SFAR;
• To the extent known, the specific locations in the specified areas of the Sanaa (OYSC) FIR where the proposed operation(s) will be conducted, including, but not limited to, the flight path and altitude of the aircraft while it is operating in the specified areas of the Sanaa (OYSC) FIR and the airports, airfields and/or landing zones at which the aircraft will take-off and land; and
• The method by which the department, agency, or instrumentality will provide, or how the operator will otherwise obtain, current threat information and an explanation of how the operator will integrate this information into all phases of the proposed operations (
The request for approval must also include a list of operators with whom the U.S. Government department, agency, or instrumentality requesting FAA approval has a current contract(s), grant(s), or cooperative agreement(s) (or with whom its prime contractor has a subcontract(s)) for specific flight operations in the specified areas of the Sanaa (OYSC) FIR. Additional operators may be identified to the FAA at any time after the FAA approval is issued. However, all additional operators must be identified to, and obtain an Operations Specification (OpSpec) or Letter of Authorization (LOA), as appropriate, from the FAA for operations in the specified areas of the Sanaa (OYSC) FIR, before such operators commence such operations. The approval conditions discussed below will apply to any such additional operators. Updated lists should be sent to the email address to be obtained from the Air Transportation Division by calling (202) 267-8166.
If an approval request includes classified information, requestors may contact Aviation Safety Inspector Michael Filippell for instructions on submitting it to the FAA. His contact information is listed in the For Further Information Contact section of this final rule.
FAA approval of an operation under SFAR No. 115, § 91.1611, does not relieve persons subject to this SFAR of their responsibility to comply with all other applicable FAA rules and regulations. Operators of civil aircraft must also comply with the conditions of their certificate, OpSpecs, and LOAs, as applicable. Operators must further comply with all rules and regulations of
If the FAA approves the request, the FAA's Aviation Safety Organization will send an approval letter to the requesting department, agency, or instrumentality informing it that the FAA's approval is subject to all of the following conditions:
(1) The approval will stipulate those procedures and conditions that limit, to the greatest degree possible, the risk to the operator, while still allowing the operator to achieve its operational objectives.
(2) Before any approval takes effect, the operator must submit to the FAA:
(a) A written release of the U.S. Government from all damages, claims, and liabilities, including without limitation legal fees and expenses, relating to any event arising out of or related to the approved operations in the specified areas of the Sanaa (OYSC) FIR; and
(b) the operator's agreement to indemnify the U.S. Government with respect to any and all third-party damages, claims, and liabilities, including without limitation legal fees and expenses, relating to any event arising out of or related to the approved operations in the specified areas of the Sanaa (OYSC) FIR.
(3) Other conditions that the FAA may specify, including those that may be imposed in OpSpecs or LOAs, as applicable.
The release and agreement to indemnify do not preclude an operator from raising a claim under an applicable non-premium war risk insurance policy issued by the FAA under chapter 443 of title 49, United States Code.
If the proposed operation(s) is approved, the FAA will issue an OpSpec or an LOA, as applicable, to the operator(s) identified in the original request authorizing them to conduct the approved operation(s), and will notify the department, agency, or instrumentality that requested the FAA's approval of any additional conditions beyond those contained in the approval letter. The requesting department, agency, or instrumentality must have a contract, grant, or cooperative agreement (or its prime contractor must have a subcontract) with the person(s) described in paragraph (a) of this SFAR No. 115, § 91.1611, on whose behalf the department, agency, or instrumentality requests FAA approval.
Any operations not conducted under an approval issued by the FAA through the approval process set forth previously must be conducted under an exemption from SFAR No. 115, § 91.1611. A request by any person covered under SFAR No. 115, § 91.1611, for an exemption must comply with 14 CFR part 11, and will require exceptional circumstances beyond those contemplated by the approval process set forth above. In addition to the information required by 14 CFR 11.81, at a minimum, the requestor must describe in its submission to the FAA—
• The proposed operation(s), including the nature of the operation;
• The service to be provided by the person(s) covered by the SFAR;
• The specific locations in the specified areas of the Sanaa (OYSC) FIR where the proposed operation(s) will be conducted, including, but not limited to, the flight path and altitude of the aircraft while it is operating in the specified areas of the Sanaa (OYSC) FIR and the airports, airfields and/or landing zones at which the aircraft will take-off and land;
• The method by which the operator will obtain current threat information, and an explanation of how the operator will integrate this information into all phases of its proposed operations (
• The plans and procedures that the operator will use to minimize the risks, identified in the Background section of this rule, to the proposed operations, so that granting the exemption would not adversely affect safety or would provide a level of safety at least equal to that provided by this SFAR. The FAA has found comprehensive, organized plans and procedures of this nature to be helpful in facilitating the agency's safety evaluation of petitions for exemption from other flight prohibition SFARs.
Additionally, the release and agreement to indemnify, as referred to above, will be required as a condition of any exemption that may be issued under SFAR No. 115, § 91.1611.
The FAA recognizes that operations that may be affected by SFAR No. 115, § 91.1611, including this amendment, may be planned for the governments of other countries with the support of the U.S. Government. While these operations will not be permitted through the approval process, the FAA will process exemption requests for such operations on an expedited basis and prior to any private exemption requests.
Changes to Federal regulations must undergo several economic analyses. First, Executive Orders 12866 and 13563 direct that each Federal agency shall propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs. Second, the Regulatory Flexibility Act of 1980 (Pub. L. 96-354), as codified in 5 U.S.C. 603
In conducting these analyses, the FAA has determined that this final rule has benefits that justify its costs and is a “significant regulatory action” as defined in section 3(f) of Executive Order 12866, because it raises novel policy issues contemplated under that Executive Order. The rule is also “significant” as defined in DOT's Regulatory Policies and Procedures. The final rule will not have a significant economic impact on a substantial number of small entities, will not create unnecessary obstacles to the foreign commerce of the United States, and will not impose an unfunded mandate on State, local, or tribal governments, or on the private sector, by exceeding the threshold identified previously.
Department of Transportation Order 2100.5 prescribes policies and procedures for simplification, analysis, and review of regulations. If the expected cost impact is so minimal that a proposed or final rule does not warrant a full evaluation, this order
Due to the significant hazards to U.S. civil aviation described in the Background section of this rule, this rule extends the prohibition against U.S. civil flights in specified areas of the Sanaa (OYSC) FIR, as described in this rule. Since there has been a reduction in the level of risk to U.S. civil aviation operations in limited portions of the specified areas of the Sanaa (OYSC) FIR in which the FAA had previously prohibited such operations, this action amends SFAR No. 115, § 91.1611, to reduce the amount of airspace in which U.S. civil flight operations are prohibited. This change will permit U.S. operators to use two jet routes that they were previously prohibited from using under SFAR No. 115, § 91.1611: UT702 and M999.
The FAA believes there are very few U.S. operators who wish to operate in the specified areas of the Sanaa (OYSC) FIR where U.S. civil aviation operations will continue to be prohibited. The FAA has not received any requests for approval or exemption to conduct flight operations in the specified areas of the Sanaa (OYSC) FIR covered by this regulation. Consequently, the FAA estimates the costs of this rule to be minimal. These minimal costs are exceeded by the benefits of avoided deaths, injuries, and property damage that could result from a U.S. operator's aircraft being shot down (or otherwise damaged) due to the hazards described in the Background section of this final rule. In addition, allowing U.S. civil aviation to use the M999 and UT702 routes will benefit U.S. operators who regularly transit the Middle East area, since they will no longer be required to use less direct routes. This change may reduce flight times and certain operating expenses, such as fuel, resulting in potential cost savings for affected U.S. operators. Consequently, the FAA estimates that the benefits of this rule will exceed the costs.
The Regulatory Flexibility Act of 1980 (Pub. L. 96-354) (RFA) establishes “as a principle of regulatory issuance that agencies shall endeavor, consistent with the objectives of the rule and of applicable statutes, to fit regulatory and informational requirements to the scale of the businesses, organizations, and governmental jurisdictions subject to regulation. To achieve this principle, agencies are required to solicit and consider flexible regulatory proposals and to explain the rationale for their actions to assure that such proposals are given serious consideration.” The RFA covers a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions.
Agencies must perform a review to determine whether a rule will have a significant economic impact on a substantial number of small entities. If the agency determines that it will, the agency must prepare a regulatory flexibility analysis as described in the RFA. However, if an agency determines that a rule is not expected to have a significant economic impact on a substantial number of small entities, section 605(b) of the RFA provides that the head of the agency may so certify and a regulatory flexibility analysis is not required. The certification must include a statement providing the factual basis for this determination, and the reasoning should be clear. As discussed above, the FAA estimates the costs of this rule to be minimal. Moreover, few, if any, operators will be affected by this rule, as the FAA believes that most operators do not wish to operate in specified areas of the Sanaa (OYSC) FIR in which U.S. civil flight operations will continue to be prohibited, due to the hazards described in the Background section of this rule. Additionally, this rule will allow U.S. civil aviation to use the M999 and UT702 routes, and, to that extent, it may benefit small U.S. operators if they regularly transit the Middle East area, since they will no longer be required to use less direct routes. This change may reduce flight times and certain operating expenses, such as fuel, resulting in potential cost savings for affected small U.S. operators.
Therefore, as provided in section 605(b), the head of the FAA certifies that this rulemaking will not result in a significant economic impact on a substantial number of small entities.
The Trade Agreements Act of 1979 (Pub. L. 96-39) prohibits Federal agencies from establishing standards or engaging in related activities that create unnecessary obstacles to the foreign commerce of the United States. Pursuant to this Act, the establishment of standards is not considered an unnecessary obstacle to the foreign commerce of the United States, so long as the standard has a legitimate domestic objective, such as the protection of safety, and does not operate in a manner that excludes imports that meet this objective. The statute also requires consideration of international standards and, where appropriate, that they be the basis for U.S. standards.
The FAA has assessed the effect of this final rule and determined that its purpose is to protect the safety of U.S. civil aviation from a hazard to their operations in specified areas of the Sanaa (OYSC) FIR, a location outside the U.S. Therefore, the rule is in compliance with the Trade Agreements Act.
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) requires each Federal agency to prepare a written statement assessing the effects of any Federal mandate in a proposed or final agency rule that may result in an expenditure of $100 million or more (in 1995 dollars) in any one year by State, local, and tribal governments, in the aggregate, or by the private sector; such a mandate is deemed to be a “significant regulatory action.” The FAA currently uses an inflation-adjusted value of $155.0 million in lieu of $100 million.
This final rule does not contain such a mandate. Therefore, the requirements of Title II of the Act do not apply.
The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) requires that the FAA consider the impact of paperwork and other information collection burdens imposed on the public. The FAA has determined that there is no new requirement for information collection associated with this final rule.
In keeping with U.S. obligations under the Convention on International Civil Aviation, it is FAA's policy to conform to International Civil Aviation Organization (ICAO) Standards and Recommended Practices to the maximum extent practicable. The FAA has determined that there are no ICAO Standards and Recommended Practices that correspond to this regulation.
The FAA has analyzed this action under Executive Order 12114, Environmental Effects Abroad of Major Federal Actions (44 FR 1957, January 4, 1979), and DOT Order 5610.1C, Paragraph 16. Executive Order 12114 requires the FAA to be informed of environmental considerations and take those considerations into account when
In accordance with FAA Order 1050.1F, “Environmental Impacts: Policies and Procedures,” paragraph 8-6(c), FAA has prepared a memorandum for the record stating the reason(s) for this determination; this memorandum has been placed in the docket for this rulemaking.
The FAA has analyzed this final rule under the principles and criteria of Executive Order 13132, Federalism. The agency has determined that this action would not have a substantial direct effect on the States, or the relationship between the Federal Government and the States, or on the distribution of power and responsibilities among the various levels of government, and, therefore, would not have Federalism implications.
The FAA analyzed this final rule under Executive Order 13211, Actions Concerning Regulations that Significantly Affect Energy Supply, Distribution, or Use (May 18, 2001). The agency has determined that it would not be a “significant energy action” under the executive order and would not be likely to have a significant adverse effect on the supply, distribution, or use of energy.
Executive Order 13609, Promoting International Regulatory Cooperation, (77 FR 26413, May 4, 2012) promotes international regulatory cooperation to meet shared challenges involving health, safety, labor, security, environmental, and other issues and to reduce, eliminate, or prevent unnecessary differences in regulatory requirements. The FAA has analyzed this action under the policies and agency responsibilities of Executive Order 13609, and has determined that this action would have no effect on international regulatory cooperation.
This rule is not subject to the requirements of E.O. 13771 (82 FR 9339, February 3, 2017) because it is issued with respect to a national security function of the United States.
An electronic copy of rulemaking documents may be obtained from the internet by—
• Searching the Federal eRulemaking Portal (
• Visiting the FAA's Regulations and Policies web page at
• Accessing the Government Publishing Office's web page at
Copies may also be obtained by sending a request (identified by amendment or docket number of this rulemaking) to the Federal Aviation Administration, Office of Rulemaking, ARM-1, 800 Independence Avenue SW, Washington, DC 20591, or by calling (202) 267-9677. Please identify the docket or amendment number of this rulemaking in your request.
Except for classified material, all documents the FAA considered in developing this rule, including economic analyses and technical reports, may be accessed from the internet through the Federal eRulemaking Portal referenced above.
The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires FAA to comply with small entity requests for information or advice about compliance with statutes and regulations within its jurisdiction. A small entity with questions regarding this document may contact its local FAA official, or the person listed under the
Air traffic control, Aircraft, Airmen, Airports, Aviation safety, Freight, Yemen.
In consideration of the foregoing, the Federal Aviation Administration amends chapter I of title 14, Code of Federal Regulations as follows:
49 U.S.C. 106(f), 106(g), 1155, 40101, 40103, 40105, 40113, 40120, 44101, 44111, 44701, 44704, 44709, 44711, 44712, 44715, 44716, 44717, 44722, 46306, 46315, 46316, 46504, 46506-46507, 47122, 47508, 47528-47531, 47534, Pub. L. 114-190, 130 Stat. 615 (49 U.S.C. 44703 note); articles 12 and 29 of the Convention on International Civil Aviation (61 Stat. 1180), (126 Stat. 11).
(a)
(1) All U.S. air carriers and U.S. commercial operators;
(2) All persons exercising the privileges of an airman certificate issued by the FAA, except when such persons are operating U.S.-registered aircraft for a foreign air carrier; and
(3) All operators of U.S.-registered civil aircraft, except where the operator of such aircraft is a foreign air carrier.
(b)
(c)
(d)
(e)
Consumer Product Safety Commission.
Direct final rule.
The Children's Gasoline Burn Prevention Act (CGBPA or the Act) adopted as a consumer product safety rule, the child-resistance requirements for closures on portable gasoline containers published in the ASTM voluntary standard,
This rule will be effective on January 12, 2018, unless the Commission receives significant adverse comment by December 28, 2017. If we receive timely significant adverse comments, we will publish notification in the
You may submit comments, identified by Docket No. CPSC-2015-0006, by any of the following methods:
John Boja, Office of Compliance and Field Operations, Consumer Product Safety Commission, 4330 East West Highway, Bethesda, MD 20814-4408; telephone (301) 504-7300;
The Children's Gasoline Burn Prevention Act. The CGBPA was enacted on July 17, 2008. The Act established as a consumer product safety rule ASTM International's (ASTM) F2517-05's child-resistance requirements for closures on portable gasoline containers. All portable gasoline containers manufactured on or after January 17, 2009 for sale to consumers in the United States must conform to ASTM F2517's child-resistance requirements. By mandating closures that resist access by children up to 51 months of age (4 years and 3 months), the Act seeks to reduce hazards to children, including children ingesting gasoline and inhaling gasoline fumes, and the risk of burns from fires and explosions that may occur when children access gasoline stored in portable gasoline containers. The Act did not require the Commission to undertake any action for the Act's provisions to take effect; rather, ASTM 2715-05's child-resistance requirements were made mandatory through operation of law. The Children's Gasoline Burn Prevention Act, Public Law 110-278; 122 Stat. 2602, Sec. 2(b) (July 17, 2008), codified as a note to 15 U.S.C. 2056.
CGBPA Provisions Regarding Updates to ASTM F2517. Under the Act, ASTM must notify the Commission of any revision to the child-resistance requirements for closures contained in ASTM F2517. Once ASTM notifies the CPSC of ASTM's revisions to this voluntary standard, the revisions will be incorporated by operation of law and will become the consumer product safety standard within 60 days after such notice. However, the Commission can prevent such incorporation if the Commission determines that revisions to the voluntary standard do not carry
On February 11, 2015, ASTM gave notice to CPSC of revisions to ASTM F2517-05. The revised standard was designated as ASTM F2517-15. The Commission determined that the revisions to the voluntary standard stated in ASTM F2517-15 carried out the purposes of the child-resistance requirements for closures on portable gasoline containers. Accordingly, by operation of law, the revisions became effective 60 days after February 11, 2015, on April 13, 2015. So that the Code of Federal Regulations would include the standard, the Commission published a direct final rule, 80 FR 16961 (March 31, 2015), codifying the Commission's incorporation by reference of ASTM F2517-15 at 16 CFR part 1460.
2017 Revisions to ASTM F2517. On November 13, 2017, ASTM notified the Commission that it has again revised ASTM F2517. On October 1, 2017, ASTM approved publication of ASTM F2517-17, and published the standard in November 2017. Unless the Commission determines that the revisions to ASTM F2517-17 fail to carry out the purposes of the child-resistance requirements for closures on portable gasoline containers specified in ASTM F2517, and notifies ASTM of this determination, the revisions to ASTM F2517 become a mandatory consumer product safety standard by operation of law, effective January 12, 2018.
As set forth in this preamble, the Commission has determined that the revisions made to ASTM F2517 carry out the purposes of the child-resistance requirements for closures on portable gasoline containers. Accordingly, by operation of law, the requirements for closures on portable gasoline containers, as specified in ASTM F2517-17, are mandatory for all such containers sold or imported into the United States that were manufactured on or after January 12, 2018. To provide clarity to the regulated industry, the Commission will revise our regulation at 16 CFR part 1460 to reflect the incorporation by reference of this revised voluntary standard.
The rule codifies the child-resistance requirements for closures on portable gasoline containers as stated in ASTM F2517-17. These requirements are mandatory effective January 12, 2018. The Commission is publishing this direct final rule incorporating by reference ASTM F2517-17 so that the Code of Federal Regulations will reflect the current version of this mandatory standard.
Revisions to ASTM F2517 in the 2017 update increase the stringency of the testing requirements or refine the testing environment to aid in test reliability. These changes are described in more detail in the Staff's Briefing Memorandum.
• Reducing the amount of water required in a tested container from a half-filled container to a quarter-filled container. Decreasing the amount of liquid required for the test makes the container weigh less, increasing the likelihood that children are able to manipulate a container to access the liquid.
• For containers with multiple closures, removing the requirement to seal off closures not being tested. Manufacturers report that children are distracted by sealing mechanisms on closures not being tested. Accordingly, this revision removes the distraction and focuses the children's attention on attempting to open, or “get the liquid out” of the closure being tested. Although children are instructed to try and open one closure at a time on the container, the test is strengthened by failing a container if a child is able to access liquid from any closure during testing.
• Adding requirements to measure and document the torque needed to secure a closure. Currently, the standard requires testing on new portable gasoline containers that have not been exposed to fuel or residue. ASTM members are concerned that degradation of a portable gasoline container could occur after exposure to fuel, which may affect the torque value of the child-resistant closures. This requirement is intended to aid in consideration of a future provision that would limit the change in torque value after exposure to fuel.
• Clarifying test instructions and requirements to remove possible ambiguities in the test procedure. ASTM F2517-17 adds information and instructions regarding how manufacturers should seek consent for testing children at daycare facilities. The revised standard also updates instructions given to the children during testing to reflect newer child resistant closure technology that does not necessarily “open” in the traditional sense. Children are now instructed: “Please try to open this for me or get the liquid out.”
• Allowing the option to use central location testing. Previously, testing was primarily conducted at daycare facilities. Manufacturers expressed frustration with the decreasing number of daycare facilities willing to participate in testing portable gasoline containers. ASTM F2517-17 allows the option to conduct testing at a central location, providing a more feasible testing venue and allowing the industry to continue to develop newer child-safe products. Additionally, a new Appendix to ASTM F2517-17 provides non-mandatory recommendations for laboratory testing procedures that are intended to prevent fraud in testing.
After reviewing the changes to the child-resistance requirements in F2517-17, as outlined above, the Commission determines that the revised standard carries out the purposes of the Act for closures on portable gasoline containers. Each revision increases the stringency of the testing requirements or refines the testing environment to aid in test reliability. Accordingly, the 2017 revisions to the child-resistance requirements of ASTM F2517 will be incorporated into the CPSC mandatory rule, as provided in the Act. However, because the scope of the consumer product safety rule is established by the CGBPA, this rule does not incorporate by reference the scope section of ASTM F2517-17 or Appendix X2 that relates to the scope section of ASTM F2517-17.
The Commission is issuing this rule as a direct final rule. The Administrative Procedure Act (APA) generally requires notice and comment rulemaking except when the agency, for good cause, finds that notice and public procedure are “impracticable, unnecessary, or contrary to the public interest.” The Administrative Conference of the United States (ACUS) endorsed direct final rulemaking as an appropriate procedure to expedite promulgation of rules that are noncontroversial and that are not expected to generate significant adverse comment. ACUS also recommended using direct final rulemaking when an agency concludes that notice and comment is “unnecessary” under the APA's good cause exemption.
This rule will revise the reference at 16 CFR part 1460 to refer to ASTM F2517-17, which will be in full force and effect by operation of law on January 12, 2018. In these circumstances, where the substantive
Unless we receive a significant adverse comment by December 28, 2017, the rule will become effective on January 12, 2018. In accordance with ACUS's recommendation, the Commission considers a significant adverse comment to be one in which the commenter explains why the rule would be inappropriate, including an assertion challenging the rule's underlying premise or approach, or a claim that the rule would be ineffective or unacceptable without change. Should the Commission receive a significant adverse comment, the Commission would withdraw this direct final rule. Depending on the comments and other circumstances, the Commission may then incorporate the adverse comment into a subsequent direct final rule or publish a notice of proposed rulemaking providing an opportunity for public comment.
Section 1460.3 of the final rule provides that closures on portable gasoline containers must comply with the child-resistance requirements of ASTM F2517-17. The Office of the Federal Register (OFR) has regulations concerning incorporation by reference. 1 CFR part 51. The OFR's regulation requires that, for a final rule, agencies must discuss in the rule's preamble ways that the materials the agency incorporates by reference are reasonably available to interested persons and how interested parties can obtain the materials. In addition, the preamble to the rule must summarize the material. 1 CFR 51.5(b).
In accordance with the OFR's requirements, section II of this preamble summarizes the provisions of ASTM F2517-17. Interested persons may purchase a copy of ASTM F2517-17 from ASTM, either through ASTM's website or by mail at the address provided in the rule. One may also inspect a copy of the standard at the CPSC's Office of the Secretary, U.S. Consumer Product Safety Commission.
As discussed in the preceding section, this is a direct final rule. Unless the Commission receives a significant adverse comment by December 28, 2017, the rule will become effective on January 12, 2018. Portable gasoline containers manufactured or imported on or after January 12, 2018 must comply with the child-resistance requirements for closures on portable gasoline containers in ASTM F2517-17.
The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the APA or any other statutes unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603 and 605. This rule updates the reference in part 1460 to reflect requirements in the revised voluntary standard, ASTM F2517-17, that will take effect through operation of law, as specified in the CGBPA. Because the rule does not impose any requirements beyond those put in place by the CGBPA, the rule does not create new substantive obligations for any entity, including any small entity. Accordingly, the Commission certifies that the rule will not have a significant impact on a substantial number of small entities.
The Commission's regulations provide a categorical exclusion for the Commission's rules from any requirement to prepare an environmental assessment or an environmental impact statement because they “have little or no potential for affecting the human environment.” 16 CFR 1021.5(c)(2). This rule falls within the categorical exclusion, so no environmental assessment or environmental impact statement is required.
This direct final rule contains no collection of information. Therefore, clearance by the Office of Management and Budget under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) is not required.
Section 26(a) of the Consumer Product Safety Act (CPSA), 15 U.S.C. 2075(a), provides that where a “consumer product safety standard under [the CPSA]” is in effect and applies to a product, no state or political subdivision of a state may either establish or continue in effect a requirement dealing with the same risk of injury unless the state requirement is identical to the federal standard. As discussed above, under the CGBPA, the child-resistance requirements of ASTM F2517 are a consumer product safety standard under the CPSA. Children's Gasoline Burn Prevention Act, Public Law 110-278, Sec. 2(a) (July 17, 2008). The child-resistance requirements of ASTM F2517-17, which will be codified under this rule, will invoke the preemptive effect of section 26(a) of the CPSA.
Section 14(a) of the CPSA requires that products subject to a consumer product safety rule under the CPSA, or to a similar rule, ban, standard, or regulation under any other act enforced by the Commission, be certified as complying with all applicable CPSC requirements. 15 U.S.C. 2063(a). Such certification must be based on a test of each product, or on a reasonable testing program. Because ASTM F2517-17 is a consumer product safety rule under the CPSA, portable gasoline containers manufactured or imported on or after January 12, 2018, are subject to the testing and certification requirements of section 14 of the CPSA with respect to ASTM F2517-17.
Consumer protection, Gasoline, Incorporation by reference, Safety.
For the reasons stated above, the Commission amends 16 CFR part 1460 as follows:
Sec. 2, Pub. L. 110-278, 122 Stat. 2602.
Each portable gasoline container manufactured on or after January 12, 2018 for sale in the United States shall conform to the child-resistance requirements for closures on portable gasoline containers specified in sections 2 through 6 of ASTM F2517-17 (including Appendices X1, X3, and X4),
Securities and Exchange Commission.
Notification of compliance date.
The Securities and Exchange Commission (“Commission”) is publishing this document to inform the public that it has set a compliance date for its previously-adopted exhibit hyperlinking requirements for Form 10-Ds that require hyperlinks to any exhibits filed with Form ABS-EE. The Commission on March 1, 2017 required registrants that file registration statements and reports subject to the exhibit requirements under Item 601 of Regulation S-K, or that file Forms F-10 or 20-F, to include a hyperlink to each exhibit listed in the exhibit index of these filings, but deferred setting a compliance date with respect to any Form 10-D that will require hyperlinks to any exhibits filed with Form ABS-EE until the Commission announced that technical programming changes to allow issuers to include Form 10-D and Form ABS-EE in a single submission had been completed, and published a notification of the compliance date for Form 10-D in the
The compliance date with respect to any Form 10-D that will require hyperlinks to any exhibits filed with Form ABS-EE is June 1, 2018.
Kayla Roberts, Special Counsel, at (202) 551-3850, in the Office of Structured Finance, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
On March 1, 2017, the Commission adopted rule and form amendments requiring registrants that file registration statements and reports subject to the exhibit requirements under Item 601 of Regulation S-K,
The amendments took effect on September 1, 2017 for most registrants. Registrants that are “smaller reporting companies,” as defined in Rule 405
Any registrant filing a Form 10-D on or after June 1, 2018, must include a hyperlink to any exhibit filed with Form ABS-EE that is included in the exhibit index of Form 10-D.
By the Commission.
Securities and Exchange Commission.
Temporary final rule.
The Securities and Exchange Commission (the “Commission”) is adopting a temporary final rule that requires funds in larger fund groups to maintain in their records the information that is required to be included in Form N-PORT, in lieu of filing reports with the Commission, until April 2019. As a result, larger funds groups will be required to begin submitting reports on Form N-PORT on the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system by April 30, 2019, and smaller fund groups will be required to begin submitting reports on Form N-PORT by April 30, 2020. The information that funds in larger fund groups maintain in their records will be subject to examination by the Commission. In addition, the Commission is delaying the rescission of current Form N-Q and delaying the effectiveness of certain amendments to other rules and forms.
Effective January 16, 2018 until March 31, 2026. The effective date for the amendments to 17 CFR 232.401, 249.332, 270.8b-33, 270.30a-2,
J. Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Branch Chief, or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Rulemaking Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
The Commission is adopting new temporary rule 30b1-9(T) [17 CFR 270.30b1-9(T)] under the Investment Company Act of 1940 [15 U.S.C. 80a-1
In recognition of the importance of sound data security practices and protocols for sensitive, nonpublic information, the Commission is modifying its approach to the requirement to submit reports on Form N-PORT on the EDGAR system. Funds in larger fund groups would have been required to submit reports on Form N-PORT in EDGAR no later than July 30, 2018. The Commission is adopting a temporary final rule that requires funds in larger fund groups to maintain in their records the information that is required to be included in Form N-PORT beginning no later than July 30, 2018. This information will be subject to examination by Commission staff. As a result, funds in larger fund groups must begin to submit reports on Form N-PORT on EDGAR by April 30, 2019, and smaller fund groups must begin to submit reports on Form N-PORT by April 30, 2020. In addition, the Commission is delaying the rescission of current Form N-Q and delaying the effectiveness of certain amendments to other rules and forms.
On October 13, 2016, the Commission adopted new rules and forms as well as amendments to its rules and forms to modernize the reporting and disclosure of information by registered investment companies.
As the Commission stated in the Adopting Release, Form N-PORT, as well as new rules, other forms, and amendments to existing rules and forms will, among other things, improve the information that the Commission receives from investment companies and assist the Commission, in its role as primary regulator of investment companies, to better fulfill its mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. Investors and other potential users can also utilize this information to help them make more informed investment decisions.
Form N-PORT is a new portfolio holdings reporting form that will be filed by all registered management investment companies, other than money market funds and small business investment companies, and by unit investment trusts that operate as exchange-traded funds (collectively, “funds”).
Certain information reported on Form N-PORT will be kept nonpublic. As we noted in the Adopting Release, we recognize that more frequent portfolio disclosure than was currently required could potentially harm fund shareholders by expanding the opportunities for professional traders to engage in predatory trading practices.
When we adopted the Form N-PORT filing requirement, we provided for an effective date of January 17, 2017, with a tiered set of compliance dates based
As we noted in the Adopting Release, we recognize the importance of sound data security practices and protocols for sensitive, nonpublic information, including information that may be competitively sensitive.
In May 2017, the Commission's Chairman initiated an assessment of the Commission's internal cybersecurity risk profile and its approach to cybersecurity.
Certain of these measures, which will be designed to improve EDGAR's functionality and security, could negatively affect EDGAR's ability to validate and accept Form N-PORT filings in a timely manner, in particular during peak filing periods. Efforts to address any such potential effects on performance are underway, but we have determined to delay by nine months the requirement that funds file reports on Form N-PORT through the EDGAR system in order to provide time to complete this review and to implement and test any resulting modifications to the EDGAR system.
To effectuate the nine-month delay, we have determined to adopt temporary rule 30b1-9(T), which will have the effect of delaying the EDGAR submission requirements associated with Form N-PORT for larger fund groups until April 2019. As a result, funds in larger fund groups that previously would have been required to submit their first reports on Form N-PORT on EDGAR for the period ending June 30, 2018 (no later than July 30, 2018) will now be required to submit their first reports on EDGAR by April 30, 2019.
The Adopting Release delayed compliance for smaller fund groups by one year so that they could benefit from the lessons learned by the larger fund groups' earlier compliance date.
In order for investors and other users to continue to receive at the least the same information that they currently receive regarding fund portfolio holdings, we are requiring funds to continue filing public reports on Form N-Q until they begin filing reports on Form N-PORT using EDGAR (
As a result of this delay of the compliance date for filing reports on Form N-PORT for smaller fund groups by nine months, smaller fund groups will now satisfy their final filing requirements for Form N-Q by May 1, 2020. We are therefore delaying the effective date for the rescission of Form N- Q until May 1, 2020.
In the Adopting Release, the Commission determined that having a six-month time period where larger fund groups are required to file reports on Form N-PORT with the Commission, but where those reports are not disclosed publicly, will allow funds and the Commission to make adjustments to fine-tune the technical specifications and data validation processes.
We note that our action today does not affect requirements with respect to Form N-CEN.
The Administrative Procedure Act (“APA”) generally requires an agency to publish notice of a rulemaking in the
In addition, providing immediate certainty to funds is critical because we
For these reasons, the Commission finds that good cause exists to dispense with notice and comment regarding the delay of the requirement to submit reports on Form N-PORT on EDGAR and the associated changes outlined above.
The Commission is sensitive to the economic effects, including the benefits and costs and the effects on efficiency, competition, and capital formation that will result from this temporary final rule and from the nine-month delay of the requirement that funds submit reports on Form N-PORT through EDGAR, the associated delay for the same period of the rescission of Form N-Q, the delay of the semi-annual certification requirement in Form N-CSR, the delay of the effectiveness of certain amendments to other rules and forms, and the change in the six-month period during which filed reports on Form N-PORT with the Commission will be kept nonpublic.
The Commission relies on information included in reports filed by funds to monitor trends, identify risks, and inform its regulatory functions. Similarly, investors and other market participants rely on funds' public filings to assist in their investment decisions and understanding of financial markets. Form N-PORT, which requires reporting of a fund's complete portfolio holdings on a monthly basis with every third month available to the public, will contribute substantially to information made available to the Commission and the public by funds. As the Commission has previously stated,
The Commission has now determined to delay the requirement that funds submit Form N-PORT through the EDGAR system by nine months to provide time to complete the necessary adjustments to the technical specifications and data validation processes and to complete the necessary functionality, performance, and security enhancements. The Commission's implementation of this delay, while facilitating changes to the EDGAR system, will impose certain costs on market participants, including costs associated with delayed access to structured portfolio holdings data, costs associated with continuing to file Form N-Q, and recordkeeping costs associated with Form N-PORT for larger fund groups. The economic effects of the delay are discussed in more detail below.
The current required reporting of information by funds (
The entities affected by the delay of the EDGAR submission requirement for reports on Form N-PORT are generally the funds that will report using Form N-PORT; those entities that currently report using Form N-Q and would have ceased doing so as of the applicable Form N-PORT compliance date; and those entities that will rely on either filed information, including the Commission and current and future users of investment company portfolio information including investors, third-party information providers, and other interested potential users.
As of the end of 2016, approximately 95.8 million individuals owned shares of registered investment companies, representing 55.9 million or 44.4% of U.S. households.
We are mindful of the costs and benefits of the delay in filings on Form N-PORT, the new recordkeeping requirement, and the associated delays in the effectiveness of certain amendments and rescissions. The Commission notes that, where possible, it has sought to quantify the benefits and costs, and effects on efficiency, competition, and capital formation expected to result from the delay in the date for submitting Form N-PORT on EDGAR, the related delay in the rescission of Form N-Q, and the other changes made in this release. However, the Commission is unable to quantify
The EDGAR submission requirement was designed to enhance the Commission's ability to access efficiently and timely monthly investment portfolio information of a large number of funds in a structured format, and to also enhance investors' ability to make more informed investment decisions. The delay in the requirement to submit Form N-PORT on EDGAR will benefit reporting funds as well as funds' current and prospective investors, because it will allow the Commission time to make progress in the EDGAR system review and to implement and test resulting modifications to the EDGAR system.
The Commission acknowledges, however, that there are costs to a delay in the receipt of Form N-PORT information. The delay in the EDGAR submission requirement could potentially temporarily affect the Commission's ability to readily incorporate Form N-PORT information into its mission through better informed policy decisions and oversight, more specific guidance and comments in the disclosure review process, and more targeted examination and enforcement efforts.
The nine-month delay of the EDGAR submission requirement will also delay the ability of current and future users of investment company portfolio information, including investors, third-party information providers, and academics, to access additional publicly available data in a structured format. This delay in the Form N-PORT submission will defer the increase in the transparency of a fund's investment strategies and will also postpone the increase in the ability of investors and other potential users to more efficiently identify the funds' risk exposures, differentiate investment companies based on their investment strategies, and make more informed investment decisions. Any costs of such a temporary delay are partially mitigated by the fact that users of investment company portfolio information will continue to have access to relevant investment company information via the reports on Form N-Q and N-CSR for the duration of the Form N-PORT submission delay.
To the extent that the delay in the requirement to submit Form N-PORT on EDGAR for larger fund groups and the delay in the requirement to file Form N-PORT for smaller fund groups change costs borne by fund groups, these changes will come in the form of a reduction in the cost of submitting reports on Form N-PORT on EDGAR. For larger fund groups, there will be a cost saving associated with the nine-month delay in the requirement to prepare the funds' systems to accommodate the XML-based reports to the extent those fund groups choose another format to prepare and maintain the information that is required to be included in Form N-PORT during the delay period.
Based on the cost estimates in the Adopting Release for compiling and submitting Form N-PORT on EDGAR, we believe that the cost savings for larger fund groups associated with the delay in submitting Form N-PORT on EDGAR and the delay in preparing the funds' systems to accommodate the XML Form N-PORT format requirement will be minimal. While filing with the Commission is delayed for nine months, temporary rule 30b1-9(T) will still require larger fund groups to compile the information that is required to be included in Form N-PORT during the nine months that the EDGAR submission requirement is delayed and these funds will incur the additional cost of maintaining the information required by Form N-PORT in the funds' records in an easily accessible place as required by the temporary final rule. We believe that the cost savings for smaller fund groups associated with the delay in preparing and submitting Form N-PORT on EDGAR for nine months will be likely higher compared to the cost savings for larger fund groups. These cost savings likely comprise a nine-month deferral of initial costs associated with preparing the necessary systems and processes for Form N-PORT filings and a reduction in ongoing costs associated with preparing, reviewing, and filing reports on Form N-PORT for nine months.
The nine-month delay in the Form N-PORT submission on EDGAR likely imposes additional costs to funds required to file reports on Form N-Q for an additional nine months. First, the requirement to submit Form N-Q for an additional nine months as well as prepare and maintain the information that is required to be included in a larger fund group's report on Form N-PORT will impose filing costs for Form N-Q and some duplicative preparation and recordkeeping costs on larger fund groups that will be required to prepare and maintain information that is included in both forms. Using estimates from the Adopting Release, we calculate that preparing and filing Form N-Q imposes annual total cost of $78,518,160 for all funds, or $6,804 per fund annually.
Second, the delay in the Form N-PORT submission requirement will impose an additional cost on funds that must continue seeking certification of the Form N-Q for nine more months until Form N-Q is rescinded.
Market participants rely on the ability of EDGAR to perform effectively in order to provide the Commission and investors with timely reporting. The Commission prioritizes a secure and fully functional EDGAR for receiving information about its registrants and providing that information to market participants. The delay in the Form N-PORT submission requirement and the resulting delay in the Form N-Q rescission will provide the Commission with time to make progress in the EDGAR system review and to implement and test resulting modifications to the EDGAR system to allow EDGAR to accept new, large, and complex structured data disclosures made by funds effectively, with additional security measures in place, thereby facilitating the ready accessibility of the disclosures by investors and other market participants.
The Commission acknowledges, however, that the delay will temporarily prevent the Commission, investors, and other market participants from accessing the more comprehensive and structured portfolio information that would be made available by funds filing Form N-PORT. The enhanced disclosures in Form N-PORT would allow the Commission to better monitor industry trends and identify industry outliers, provide guidance and comments to improve disclosure, identify risks, inform policy and rulemaking, and assist the Commission in its oversight efforts. The enhanced disclosures in Form N-PORT would also allow investors and other market participants to more efficiently analyze investment portfolio information, better differentiate investment companies based on their investment strategies and other activities, select funds based on security selection, industry focus, level of diversification, and the use of leverage and derivatives. The enhanced disclosures therefore would ultimately allow investors to allocate capital across reporting funds more in line with their risk preferences and increase the competition among funds for investor capital. Hence, the delay in the Form N-PORT submission requirement might temporarily negatively impact investors; the fair, orderly, and efficient functioning of the markets; and capital formation. Importantly, however, this temporary negative impact is mitigated by delaying the rescission of Form N-Q until May 1, 2020 so that funds will continue to provide some fund portfolio holdings information on Form N-Q.
The delay may have an incremental competitive effect on larger fund groups, which remain subject to the requirement to prepare the information required by Form N-PORT and Form N-Q, but to retain the former and submit the latter, for an additional nine months, while smaller fund groups are not subject to the costs of preparing and retaining the information required by Form N-PORT. These effects are likely small, given the relative size of the larger fund groups to the smaller fund groups and will only last for nine months.
As an alternative to the nine-month delay of the EDGAR submission requirement for reports on Form N-PORT, we considered a longer or shorter delay period. While a shorter period would have reduced the costs to the Commission and other current and future users of investment company portfolio information of not receiving investment portfolio information in a more timely manner, the Commission believes that a shorter period would be inadequate for review and testing of the EDGAR system's ability to validate and accept Form N-PORT filings effectively. At this time, the Commission also believes that a longer period is not necessary and would increase the costs to the Commission and other users of
As an alternative to the tiered EDGAR submission requirement on Form N-PORT for larger and smaller fund groups, we considered a nine-month delay in the Form N-PORT submission requirement only for larger fund groups. Such a delay would not allow smaller fund groups to benefit from the extra time to comply with the new requirements and potentially benefit from the lessons learned by larger fund groups. As discussed above, we are not revisiting the decision made in the Adopting Release to maximize the potential for smaller fund groups (and any external vendors that would be used by both larger and smaller fund groups) to benefit from lessons learned by larger fund groups, and therefore we are preserving a tiered requirement for the Form N-PORT EDGAR submission process.
As an alternative to the delay in the rescission of Form N-Q, we considered not delaying the rescission of Form N-Q while delaying the N-PORT EDGAR submission requirement by nine months. Such an alternative would decrease the information that is available to the Commission and various market participants, such as investors, about fund portfolio performance. Such a reduction in information availability could adversely impact investors, market efficiency, and capital formation.
We did not revisit the decision made in the Adopting Release to require that funds prepare the information that must be included on Form N-PORT by June 1, 2018 for larger fund groups. The sole purpose of the nine-month delay is to allow the Commission time to make progress in the EDGAR system review and to implement and test resulting modifications to the EDGAR system to allow EDGAR to accept new, large, and complex structured data disclosures made on Form N-PORT by funds effectively, with additional security measures in place.
The Commission is delaying the requirement to submit reports on Form N-PORT on the EDGAR system by nine months for larger fund groups from July 30, 2018 to April 30, 2019 and for smaller fund groups from July 30, 2019 to April 30, 2020. The Commission is also adopting rule 30b1-9(T) that requires funds in larger fund groups to maintain in their records the information required in Form N-PORT during that nine-month delay. In addition, the Commission is delaying the rescission of current Form N-Q and delaying the effectiveness of certain amendments to other rules and forms. We do not believe that any of these changes will make any substantive modifications to any existing collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
Rule 30b1-9(T) will require larger fund groups, during the nine-month delay, to satisfy their reporting obligation by maintaining in their records the information required to be included in Form N-PORT instead of submitting the information via EDGAR. We believe that the burden associated with preserving the information required by Form N-PORT in the fund's records in an easily accessible place is similar to the burden associated with submitting the prepared report on EDGAR. Moreover,we believe that some of the burden for smaller fund groups associated with filing Form N-PORT will be deferred for nine months, but because many of the burdens associated with preparing Form N-PORT will be incurred by funds before then, we believe that there will be no substantive modification to the existing collection of information for Form N-PORT. As a result, the Commission believes that the current PRA burden estimates for the existing collection of information requirements remain appropriate.
As discussed in the Adopting Release, in connection with our adoption of Form N-PORT, we determined to rescind Form N-Q effective August 1, 2019 in order to eliminate unnecessarily duplicative reporting requirements once smaller funds began reporting on Form N-PORT.
We are delaying the effective date of technical and conforming changes to Forms N-1A, N-2, and N-3 referring to the availability of portfolio holdings schedules to May 1, 2020, the same day the rescission of Form N-Q will now be effective.
In the Adopting Release, we did not estimate a change to burden hours or the external costs related to the technical and conforming amendments related to the availability of portfolio holdings schedules. Therefore, we do not believe that there is a change to burden hours or the external costs resulting from the delay of the effective date of these amendments. Accordingly, the Commission believes that the current PRA burden estimates for the existing collection of information requirements remain appropriate.
As discussed in the Adopting Release, in connection with the rescission of Form N-Q, we also adopted amendments to Form N-CSR, the reporting form used by management companies to file certified shareholder reports under the Investment Company Act and the Exchange Act.
In the Adopting Release, we estimated that the amendments to the certification requirements of Form N-CSR would not change the annual hour burden or external costs associated with Form N-CSR.
We are adopting the rules contained in this document under the authority set forth in the Securities Act [15 U.S.C. 77a
Administrative practice and procedure, Reporting and recordkeeping requirements, Securities.
Reporting and recordkeeping requirements, Securities.
Reporting and recordkeeping requirements, Securities.
Investment companies, Reporting and recordkeeping requirements, Securities.
For reasons set forth in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows:
15 U.S.C. 80a-1
(a) Until April 1, 2019, each registered management investment company subject to § 270.30b1-9 of this chapter must satisfy its reporting obligation under that section by maintaining in its records the information that is required to be included in Form N-PORT (§ 274.150 of this chapter).
(b) The information maintained in the registered management investment company's records under paragraph (a) of this section shall be treated as a record under section 31(a)(1) of the Act [15 U.S.C. 80a-30(a)(1)] and § 270.31a-1(b) of this chapter subject to the requirements of § 270.31a-2(a)(2) of this chapter.
(c) This section will expire and no longer be effective on March 31, 2026.
By the Commission.
Under Secretary of Defense for Personnel and Readiness, Department of Defense.
Interpretive rule; amendment.
The Department of Defense (Department) is amending its interpretive rule for the Military Lending Act (the MLA). The MLA, as implemented by the Department, limits the military annual percentage rate (MAPR) that a creditor may charge to a maximum of 36 percent, requires certain disclosures, and provides other substantive consumer protections on “consumer credit” extended to Service members and their families. On July 22, 2015, the Department amended its regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products (the July 2015 Final Rule). On August 26, 2016, the Department issued the first set of interpretations of that regulation in the form of questions and answers; the present interpretive rule amends and adds to those questions and answers to provide guidance on certain questions the Department has received regarding compliance with the July 2015 Final Rule.
Andrew Cohen, 703-692-5286.
In July 2015, the Department of Defense (Department) issued a final rule
Subsequently, the Department received requests to clarify its interpretation of points raised in the July 2015 Final Rule. The Department elected to inform the public of its views by issuing an interpretive rule in the form of questions and answers to assist industry in complying with the July 2015 Final Rule. The Department issued the first set of such interpretations on August 26, 2016 (August 26, 2016 Interpretive Rule).
The following questions and answers represent official interpretations of the Department on issues related to 32 CFR
In order to provide further guidance to industry and the public on the Department's view of its existing regulation, the Department amends its guidance on three questions and provides one additional question and answer. The numbering of this document follows the numbering of the questions and answers provided in the August 26, 2016 Interpretive Rule.
2.
Section 232.3(f)(1) defines “consumer credit” as credit offered or extended to a covered borrower primarily for personal, family, or household purposes that is subject to a finance charge or payable by written agreement in more than four installments. Section 232.3(f)(2) provides a list of exceptions to paragraph (f)(1), including an exception for any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased and an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.
A credit transaction that finances the object itself, as well as any costs expressly related to that object, is covered by the exceptions in § 232.3(f)(2)(ii) and (iii), provided it does not also finance any credit-related product or service. For example, a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the exception under § 232.3(f)(2)(ii). Moreover, if a covered borrower trades in a motor vehicle with negative equity as part of the purchase of another motor vehicle, and the credit transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle, the entire credit transaction is eligible for the exception under § 232.3(f)(2)(ii) because the trade-in of the first motor vehicle is expressly related to the purchase of the second motor vehicle. Similarly, a credit transaction that finances the purchase of an appliance (and is secured by that appliance), and also finances the delivery and installation of that appliance, is eligible for the exception under § 232.3(f)(2)(iii).
In contrast, a credit transaction that also finances a credit-related product or service rather than a product or service expressly related to the motor vehicle or personal property is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii). For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under § 232.3(f)(2)(ii) or (iii). Similarly, a hybrid purchase money and cash advance credit transaction is not expressly intended to finance the purchase of a motor vehicle or personal property because the credit transaction provides additional financing that is unrelated to the purchase. Therefore, any credit transaction that provides purchase money secured financing of a motor vehicle or personal property along with additional “cashout” financing is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth in the MLA regulation.
Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers. Borrowers may convey security interests for all types of consumer credit covered by the MLA regulation.
Creditors should also note, however, that 32 CFR 232.7(a) provides that the MLA does not preempt any State or Federal law, rule or regulation to the extent that such law, rule or regulation provides greater protection to covered borrowers than the protections provided by the MLA. For example, although the MLA regulation does not prohibit borrowers from conveying security interests in all types of consumer credit covered by the regulation, including credit card accounts, such accounts may also be subject to other laws, rules and regulations governing offsets and security interests.
As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) serves to prohibit a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a postdated check provided at or around the time credit is extended. Section 232.8(e)(3) describes a permissible activity under § 232.8(e). However, the fact that § 232.8(e)(3) specifies a particular time when a creditor may take a security interest in funds deposited in an account does not change the general effect of the prohibition in § 232.8(e). Therefore, § 232.8(e) does not impede a creditor from—for example—exercising a statutory right to take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by other applicable law and the creditor complies with all other provisions of the MLA regulation, including the limitation on the MAPR to 36 percent.
Creditors may exercise the right to take a security interest in funds deposited into a covered borrower's account in connection with all types of consumer credit covered by the MLA regulation, including credit card accounts, provided the creditor's actions are not prohibited by other State or Federal law, rule or regulation that provides greater protection to covered borrowers than the protections provided in the MLA. For example, although the MLA regulation does not prohibit borrowers from conveying security interests in all types of consumer credit covered by the regulation, including credit card accounts, such accounts may also be subject to other laws, rules and regulations governing offsets and security interests.
Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. It has been determined that this is not a significant rule. This interpretive rule will not have an annual effect of $100 million or more on the economy, or adversely affect productivity, competition, jobs, the environment, public health or safety, or State or local governments. This rulemaking will not interfere with an action taken or planned by another agency, or raise new legal or policy issues. Finally, this rulemaking will not alter the budgetary impacts of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients of such programs.
This amended interpretive rule does not change the regulation implementing the MLA, but merely states the Department's preexisting interpretations of an existing regulation. Moreover, the Department's interpretive views do not further prohibit or limit the sale of credit and ancillary credit-related products beyond any limits that may be set forth in the final rule. For example, under the final rule as issued, the inclusion of ancillary credit products in a hybrid transaction makes the credit transaction ineligible for the exemption from “consumer credit” under 32 CFR 232.3(f)(2)(ii) and (iii). This amended interpretive rule merely provides guidance on how the rule applies when such products are included in a credit transaction. Neither the final rule nor this amended interpretive rule prohibits the sale of ancillary credit products by the creditor as part of the credit transaction or as a separate transaction, nor does either prohibit a covered borrower from purchasing such products from the creditor or from another source. The Department estimates there remains a variety of venues for creditors to offer ancillary credit products and covered borrowers to acquire such ancillary credit products.
In evaluating any potential economic impact, the Department has consulted with the Consumer Financial Protection Bureau (“Bureau”)
Based on available data, the Department estimates the annual total market revenue for these products at $6,116.5 and $3,761.7 million, respectively, or a total of $9,878.1 million. The Department estimates that the covered borrower market for these products is .95 percent of the total market for these products, as covered borrower households represent .95 percent of total U.S. households, which implies a total possible market for covered borrowers of approximately $93.8 million. Of these covered borrowers, the Department estimates that only a very small portion of these consumers could include the Service members and their families covered by the MLA. As an example, if the typical consumer of such a product is an enlisted Service member under 25, does not have a college degree, and owns a car, the possible market value relevant to the MLA and this interpretive rule might be more like $21.7 million.
Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532) requires agencies to assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2014, that threshold is approximately $141 million. This rule will not mandate any requirements for State, local, or tribal governments, nor will it affect private sector costs.
The Department of Defense certifies that this rule is not subject to the Regulatory Flexibility Act (5 U.S.C. 601) because it would not, if promulgated, have a significant economic impact on a substantial number of small entities. Therefore, the Regulatory Flexibility Act, as amended, does not require us to prepare a regulatory flexibility analysis.
This rule does not impose reporting and record keeping requirements under the Paperwork Reduction Act of 1995.
This rule was analyzed in accordance with the principles and criteria contained in Executive Order 13132 (“Federalism”). It has been determined that it does not have sufficient Federalism implications to warrant the preparation of a Federalism summary impact statement. This rule has no substantial effect on the States, or on the current Federal-State relationship, or on the current distribution of power and responsibilities among the various local officials. Nothing in this rule preempts any State law or regulation. Therefore, the Department did not consult with State and local officials because it was not necessary.
Coast Guard, DHS.
Interim rule and request for comments.
This interim rule modifies and extends the effective period of the existing temporary safety zone encompassing all navigable waters within a 250-yard radius of Commerce Construction vessels and machinery conducting diving and pipeline removal operations in the Delaware River, in the vicinity of Anchorage 7, near Marcus Hook, PA. The safety zone is needed to protect personnel, vessels, and the marine environment from potential hazards created by diving and pipeline removal operations. Entry of vessels or persons into this zone is prohibited unless specifically authorized by the Captain of the Port Delaware Bay. We invite your comments on this rulemaking.
This rule is effective without actual notice from December 14, 2017. For the purposes of enforcement, actual notice will be used from December 9, 2017, through December 14, 2017. Comments and related material must be received by the Coast Guard on or before January 16, 2018.
Documents mentioned in this preamble are part of Docket Number USCG-2017-1053. To view documents mentioned in this preamble as being available in the docket, go to
If you have questions about this rulemaking, call or email Petty Officer Amanda Boone, Waterways Management Branch, U.S. Coast Guard Sector Delaware Bay; telephone (215) 271-4889, email
On November 28, 2017, the Coast Guard published a temporary safety zone titled Safety Zone; Delaware River, Pipeline Removal, Marcus Hook, PA (82 FR 56170). The temporary safety zone established a safety zone from November 21, 2017, through December 8, 2017. The safety zone covers all navigable waters within 250 yards of vessels and machinery being used by personnel to conduct diving and pipe removal operations. Due to unforeseen issues with the operation, the expected dates of work have been changed and extended to February 28, 2018.
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the
The Coast Guard is issuing this rule under authority in 33 U.S.C. 1231. The Captain of the Port Delaware Bay has determined that potential hazards associated with diving and pipe removal operations currently underway in the Delaware River, will be a safety concern for anyone within a 250-yard radius of diving and pipe removal vessels and machinery. This rule is needed to protect personnel, vessels, and the marine environment in the navigable waters within the safety zone while the operations are being conducted.
Only two changes have been made to the existing temporary rule. First, the original end date for enforcement of the safety zone was December 8, 2017, and the end date for the enforcement of the safety zone is being changed to February 28, 2018. Second, the enforcement period regulatory text, paragraph (d), has been amended to indicate what time of day the zone will be enforced. This timeframe was discussed in the regulatory analyses statements of the temporary final rule but was not included in the regulatory text itself.
This rule establishes a safety zone from December 9, 2017, through February 28, 2018. The safety zone will cover all navigable waters within 250 yards of vessels and machinery being used by personnel to conduct diving and pipe removal operations.
We developed this rule after considering numerous statutes and executive orders (E.O.s) related to rulemaking. Below we summarize our analyses based on a number of these statutes and E.O.s and we discuss First Amendment rights of protestors.
E.O.s 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. E.O. 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under E.O. 12866. Accordingly, the rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of E.O. 13771.
This regulatory action determination is based on the size, location and duration of the security zone. Vessel traffic will be able to safely transit around this safety zone which would impact a small designated area of the Delaware River from December 9, 2017, through February 28, 2018. Moreover, the Coast Guard will issue a Broadcast Notice to Mariners via VHF-FM marine channel 16, Local Notice to Mariners, and Marine Safety Information Bulletin about the zone, and the rule would allow vessels to seek permission to enter the zone.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule would not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels that intend to transit the security zone may be small entities, for the reasons stated in section V.A above this rule would not have a significant economic impact on any vessel owner or operator.
If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
This rule would not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under E.O. 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under E.O. 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule would not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a safety zone that will prohibit entry within 250 yards of vessels and machinery being used by personnel to conduct diving and pipe removal operations. It is categorically excluded from further review under paragraph L60(d) of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. A Record of Environmental Consideration (REC) is available in the docket where indicated under
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
We view public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number USCG-2017-1053 for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation.
We encourage you to submit comments through the Federal eRulemaking Portal at
We accept anonymous comments. All comments received will be posted without change to
Documents mentioned in this rule as being available in the docket, and all public comments, will be in our online docket at
Harbors, Marine safety, Navigation (water), Reporting and recordkeeping requirements, Security measures, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 165 as follows:
33 U.S.C. 1231; 50 U.S.C. 191; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1.
(a)
(b)
(2)
(c)
(1) Entry into or transiting within either safety zone is prohibited unless vessels obtain permission from the Captain of the Port via VHF-FM channel 16, or make satisfactory passing arrangements via VHF-FM channels 13 or 80 with the towing vessel JOKER per this section and the rules of the Road (33 CFR subchapter E). Vessels requesting to transit shall contact the towing vessel JOKER on channel 13 or 80 at least 1 hour, as well as 30 minutes, prior to arrival.
(2) Vessels granted permission to enter and transit the safety zone must do so in accordance with any directions or orders of the Captain of the Port, his designated representative, or the towing vessel JOKER. No person or vessel may enter or remain in a safety zone without permission from the Captain of the Port or the towing vessel JOKER.
(3) There are three sections of pipeline that will be removed. The first two sections of pipeline to be removed are in Anchorage No. 7, Marcus Hook Anchorage, in the Delaware River. During removal of these sections of pipeline, the safety zone will restrict vessels from anchoring in the lower portion of Anchorage No. 7.
(4) During removal of the third section of pipeline, operations will be conducted within the main navigational channel and vessels will be required to transit through the lower portion of Anchorage No. 7. The Coast Guard will issue a Broadcast Notice to Mariners via VHF-FM marine channel 16, Local Notice to Mariners, and Marine Safety Information Bulletin further defining specific work locations and traffic patterns.
(5) All vessels must operate at the minimum safe speed necessary to maintain steerage and reduce wake.
(6) This section applies to all vessels that intend to transit through the safety
(d)
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA) is taking final action finding that Washington State failed to submit an infrastructure State Implementation Plan (SIP) to satisfy certain interstate transport requirements of the Clean Air Act (CAA) with respect to the 2012 annual fine particles (PM
This final rule is effective on January 16, 2018.
The EPA has established a docket for this action under Docket ID No. EPA-R10-OAR-2017-0677. All documents in the dockets are listed on
Jeff Hunt, Air Planning Unit, Office of Air and Waste (OAW-150), EPA, Region 10, 1200 Sixth Ave., Suite 900, Seattle, Washington 98101; (206) 553-0256;
Section 553 of the APA, 5 U.S.C. 553(b)(3)(B), provides that, when an agency for good cause finds that notice and public procedure are impracticable, unnecessary or contrary to the public interest, the agency may issue a rule without providing notice and an opportunity for public comment. The EPA has determined that there is good cause for making this rule final without prior proposal and opportunity for comment because no significant EPA judgment is involved in making a finding of failure to submit SIPs, or elements of SIPs, required by the CAA, where states have made no submissions or incomplete submissions, to meet the requirement. Thus, notice and public procedure are unnecessary. The EPA finds that this constitutes good cause under 5 U.S.C. 553(b)(3)(B).
CAA section 110(a) imposes an obligation upon states to submit SIPs that provide for the implementation, maintenance and enforcement of a new or revised NAAQS within 3 years following the promulgation of that NAAQS. Section 110(a)(2) lists specific requirements that states must meet in these SIP submissions, as applicable. The EPA refers to this type of SIP submission as the “infrastructure” SIP because it ensures that states can implement, maintain and enforce the air standards. Within these requirements, section 110(a)(2)(D)(i) contains requirements to address interstate transport of NAAQS pollutants. A SIP revision submitted for this sub-section is referred to as an “interstate transport SIP.” In turn, section 110(a)(2)(D)(i)(I) requires that such a plan contain adequate provisions to prohibit emissions from the state that will contribute significantly to nonattainment of the NAAQS in any other state (“prong 1”) or interfere with maintenance of the NAAQS in any other state (“prong 2”). Interstate transport prongs 1 and 2, also called the “good neighbor” provisions, are the requirements relevant to this finding.
Pursuant to CAA section 110(k)(1)(B), the EPA must determine no later than 6 months after the date by which a state is required to submit a SIP whether a state has made a submission that meets the minimum completeness criteria established per section 110(k)(1)(A). The EPA refers to the determination that a state has not submitted a SIP submission that meets the minimum completeness criteria as a “finding of failure to submit.” If the EPA finds a state has failed to submit a SIP to meet its statutory obligation to address section 110(a)(2)(D)(i)(I), pursuant to section 110(c)(1) the EPA has not only the authority, but the obligation, to promulgate a FIP within 2 years to address the CAA requirement. This finding therefore starts a 2-year clock for promulgation by the EPA of a FIP, in accordance with section 110(c)(1), unless prior to such promulgation the state submits, and the EPA approves, a submittal from the state to meet the requirements of section 110(a)(2)(D)(i)(I) for the 2012 annual PM
On December 14, 2012, the EPA promulgated a revised primary annual PM
To date, Washington State has not submitted a good neighbor SIP for the 2012 annual PM
This notice is making a procedural finding that Washington State has failed to submit a SIP to address CAA section 110(a)(2)(D)(i)(I) for the 2012 annual PM
This action is not a significant regulatory action and was therefore not submitted to the Office of Management and Budget (OMB) for review.
This action is not an Executive Order 13771 regulatory action because it is not a significant regulatory action under Executive Order 12866.
This action does not impose an information collection burden under the provisions of the PRA, 44 U.S.C. 3501
This action is not subject to the RFA. The RFA applies only to rules subject to notice and comment rulemaking requirements under the APA, 5 U.S.C. 553, or any other statute. This rule is not subject to notice and comment requirements because the agency has invoked the APA “good cause” exemption under 5 U.S.C. 553(b).
This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action implements mandates specifically and explicitly set forth in the CAA under section 110(a) without the exercise of any policy discretion by the EPA.
This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.
This action does not have tribal implications as specified in Executive Order 13175. This rule responds to the requirement in the CAA for states to submit SIPs under section 110(a) to address CAA section 110(a)(2)(D)(i)(I) for the 2012 annual PM
The EPA interprets Executive Order 13045 as applying only to those regulatory actions that concern environmental health or safety risks that the EPA has reason to believe may disproportionately affect children, per the definition of “covered regulatory action” in section 2-202 of the Executive Order. This action is not subject to Executive Order 13045 because it does not concern an environmental health risk or safety risk.
This action is not subject to Executive Order 13211, because it is not a significant regulatory action under Executive Order 12866.
This rulemaking does not involve technical standards.
The EPA believes the human health or environmental risk addressed by this action will not have potential disproportionately high and adverse human health or environmental effects on minority, low-income or indigenous populations because it does not affect the level of protection provided to human health or the environment. The EPA's evaluation of environmental justice considerations is contained in section IV of this document.
This action is subject to the CRA, and the EPA will submit a rule report to each House of the Congress and to the Comptroller General of the United States. This action is not a “major rule” as defined by 5 U.S.C. 804(2).
Under section 307(b)(1) of the CAA, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by February 12, 2018. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Interstate transport, Particulate matter, Reporting and recordkeeping requirements.
42 U.S.C. 7401
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA or “Agency”) is taking final action to determine that the deficiency that formed the basis for a disapproval of the contingency measures submitted for the San Joaquin Valley nonattainment area for the 1997 fine particulate matter (PM
This final rule is effective December 14, 2017.
The EPA has established a docket for this action under Docket No. EPA-R09-OAR-2017-0580. All documents in the docket are listed on the
Rory Mays, EPA Region IX, (415) 972-3227,
Throughout this document, whenever “we,” “us,” or “our” is used, we mean the EPA.
On October 23, 2017 (82 FR 48944) (herein “proposed rule”), we proposed to determine that the deficiency that formed the basis for a disapproval of the contingency measures submitted for the San Joaquin Valley
Our proposed rule provides a detailed background section that describes the relevant NAAQS, area designations, the relevant SIP submittal requirements, and the relevant SIP revisions submitted and either approved or disapproved by the EPA under Clean Air Act (CAA or “Act”) section 110.
In short, under CAA section 172(c)(9), SIPs for areas designated as nonattainment for a NAAQS must be revised to provide for the implementation of specific measures (“contingency measures”) to take effect if the area fails to make reasonable further progress (RFP) or fails to attain by the applicable attainment date. The EPA disapproved the contingency measure element of a set of SIP revisions collectively referred to as the “2008 PM
In response to the EPA's disapproval of the contingency measure element of the 2008 PM
The EPA approved,
Since the disapproval of the 2013 Contingency Measure SIP, we have approved the waiver measures as
For a more detailed discussion of the regulatory context and rationale for our action, please see the proposed rule.
The EPA's proposed action provided a 30-day public comment period which ended on November 22, 2017. During this period, we received no comments.
For the reasons given in our proposed rule and summarized herein, the EPA is making a final determination that the deficiency that formed the basis of our disapproval of the 2013 Contingency Measure SIP for the San Joaquin Valley for the 1997 PM
In accordance with 5 U.S.C. 553(d), the EPA finds there is good cause for this action to become effective immediately upon publication. This is because a delayed effective date is unnecessary due to the nature of the determination made herein that a deficiency in a previous SIP approval has been corrected. The immediate effective date for this action is authorized under both 5 U.S.C. 553(d)(1), which provides that rulemaking actions may become effective less than 30 days after publication if the rule “grants or recognizes an exemption or relieves a restriction,” and section 553(d)(3), which allows an effective date less than 30 days after publication “as otherwise provided by the agency for good cause found and published with the rule.” The purpose of the 30-day waiting period prescribed in section 553(d) is to give affected parties a reasonable time to adjust their behavior and prepare before the final rule takes effect. This rulemaking, however, does not create any new regulatory requirement such that affected parties would need time to prepare before the rule takes effect. Rather, today's rule makes a determination that has the effect of permanently stopping sanctions clocks triggered by a previous SIP disapproval action. For these reasons, the EPA finds good cause under 5 U.S.C. 553(d)(3) for this action to become effective on the date of publication of this action.
This action is a determination that a deficiency that is the basis for sanctions has been corrected and imposes no additional requirements. For that reason, this action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Order 12866 (58 FR 51735, October 4, 1993);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• Does not provide the EPA with the discretionary authority to address disproportionate human health or environmental effects with practical, appropriate, and legally permissible methods under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, this action does not have Tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the federal government and Indian tribes, or on the distribution of power and responsibilities between the federal government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
The Congressional Review Act, 5 U.S.C. 801
Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by February 12, 2018. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen oxides, Sulfur oxides, Particulate matter.
42 U.S.C. 7401
In rule document 2017-20023 beginning on page 43858 in the issue of Wednesday, September 20, 2017, make the following correction:
Federal Communications Commission.
Final rule.
The Federal Communications Commission (Commission) eliminates historic preservation review of replacement utility poles that support communications equipment, subject to conditions that ensure no effects on historic properties. The Commission also consolidates historic preservation requirements in a single new rule.
Effective January 16, 2018.
David Sieradzki,
This is a summary of the Commission's Report and Order in WT Docket No. 17-79; FCC 17-153, adopted November 16, 2017, and released on November 17, 2017. The document is available for download at
1. Enhancing the nation's wireless infrastructure is essential to meeting the exploding demand for robust mobile services and delivering the next generation of applications using transformative new network technologies. Review of deployment proposals pursuant to Section 106 of the National Historic Preservation Act (NHPA), 54 U.S.C. 306108, generally serves the public policy objective of preserving the nation's historic heritage. Not all infrastructure deployments, however, have the potential to affect historic properties. Where such potential effects do not exist, requiring an individual historic preservation review can impose needless burdens and slow infrastructure deployment.
2. Section 106 of the NHPA, 54 U.S.C. 306108, requires federal agencies to take into account the effect (if any) of their proposed undertakings on historic properties before proceeding with such undertakings. Agencies are responsible for deciding whether or not particular types of activities qualify as undertakings under the definitions in the regulations of the Advisory Council on Historic Preservation (ACHP).
3. In 2004, the Commission, the ACHP, and the National Conference of State Historic Preservation Officers agreed to the establishment of the
4. In the Notice of Proposed Rulemaking in the present proceeding, the Commission initiated a broad examination of the regulatory impediments to wireless network infrastructure investment and deployment, and how we may remove or reduce such impediments, consistent with the law and the public interest, in order to promote the rapid deployment of advanced wireless broadband service to all Americans.
5. Pursuant to 36 CFR 800.3(a)(1), the Commission concludes that, in the circumstances specified below, replacement of a pole that was constructed with a sole or primary purpose other than supporting communications antennas with a pole that will support such antennas would have no potential to affect historic properties. The Commission therefore revises its rules to provide that the construction of such replacement poles will be excluded from Section 106 review when all the following conditions are met. First, paragraph (b)(3)(i) of the new rule provides that this new exclusion applies only if the original structure is a pole that can hold utility, communications, or related transmission lines; was not originally erected for the sole or primary purpose of supporting antennas that operate pursuant to a spectrum license or authorization issued by the Commission; and is not itself a historic property.
6. In addition, paragraph (b)(3)(ii)(A) specifies that, to qualify for this new exclusion, the replacement pole must be located no more than 10 feet away from the original pole, based on the distance between the centerpoint of the replacement pole and the centerpoint of the original pole; provided that construction of the replacement pole in place of the original pole entails no new ground disturbance (either laterally or in depth) outside previously disturbed areas, including disturbance associated with temporary support of utility, communications, or related transmission lines. For purposes of paragraph (b)(3)(ii)(A), “ground disturbance” means any activity that moves, compacts, alters, displaces, or penetrates the ground surface of previously undisturbed soils.
7. Moreover, paragraph (b)(3)(ii)(B) of the new rule provides that a replacement pole qualifies for this exclusion only if its height does not exceed the height of the original pole by more than 5 feet or 10 percent of the height of the original pole, whichever is greater. Paragraph (c)(ii)(C) establishes that the appearance of such a replacement pole must be consistent with the quality and appearance of the original pole. Notably, antennas separately deployed on a replacement pole that is exempted under the rule adopted here remain subject to existing historic preservation rules about antenna deployments, including the exemptions for equipment that is limited in size set forth in 47 CFR part 1, sections VI.A.5, VII.B.2 & 3.
8. The Commission concludes that, where all of these conditions are met, the construction of a replacement utility pole—
9. The Commission anticipates that adoption of this exclusion will provide significant efficiencies in the deployment of replacement facilities. The record indicates that pole replacements are often required to support small cell facilities, which increasingly will be needed to support the rollout of next-generation services. Small cell antennas are much smaller and less obtrusive than traditional antennas mounted on macro cell towers, but a far larger number of them will be needed to accomplish the network densification that providers need, both in order to satisfy the exploding consumer demand for wireless data for existing services and in order to implement advanced technologies such as 5G. We find that excluding the pole replacements at issue here from review under section 106 of the NHPA will allow providers to complete these deployments more efficiently. In addition, creating an exclusion for replacement of utility poles will make more consistent the process that carriers and pole constructors must follow to comply with our historic preservation review requirements and those they must follow when building replacement poles that are subject to the requirements of other agencies applying the ACHP's 2017
10. In implementing large-scale network densification projects that require deployment of large numbers of facilities within a relatively brief period of time, use of existing structures, where feasible, can both promote efficiency and avoid adverse impacts on the human environment. Utility poles may be an appealing option for such deployments, since they often are the appropriate height for small cell antennas and are ubiquitous in many metropolitan areas. When existing utility poles cannot support additional equipment, however, pole replacement is required. Wooden utility poles, in particular, frequently need to be replaced because of their age and condition. For example, over time, wooden poles typically begin to rot from the top, where additional antennas associated with small cell facilities are usually attached, and frequently need to be replaced to have sufficient strength to support additional attachments. A pole also may need to be replaced if it is not sturdy enough or if it lacks sufficient space to mount new small cell antennas above utility infrastructure already installed on the pole, such as electric cables, telephone lines, cable television wires, or other equipment.
11. Replacement poles placed in essentially the same previously disturbed locations as the original structures will be sturdier than the preexisting poles, but will not necessarily be substantially taller or occupy appreciably more space on or in the ground than the original poles. In those circumstances, there is no likelihood that such pole replacements could affect historic properties. Nonetheless, under current rules, only replacements for poles meeting the definition of a “tower” are excluded from Section 106 review while other types of pole replacements continue to require review.
12. The Commission limits the replacement pole exclusion, as discussed below, to ensure that such pole replacements have no potential to affect historic properties. These limitations address the concerns raised by some parties about the potential effect of a broad, unlimited exclusion for replacement poles and ensure that the exclusion established in this rule satisfies the strict standard in the ACHP's rules. In adopting these conditions, we rely on, and incorporate, the Commission's and the ACHP's analyses in support of recent similar exclusions, including the exclusion of utility pole replacements in section VIII.B of the ACHP's 2017
13. The new exclusion established here focuses only on utility pole replacements. Accordingly, paragraph (b)(3)(i)(A) of the rule describes the new exclusion using terminology consistent with that in section III.O of the
14. Paragraph (b)(3)(i)(B) makes clear that replacements for structures that section III.B of the
15. The new rule's limitations regarding location, size, quality, and appearance of replacement poles address the concerns raised by some Tribal Nations, State Historic Preservation Officers, and preservation advocates. Consistent with commenters' concerns, the Commission finds that excluding replacement poles that are substantially larger than or that differ in other material ways from the poles being replaced might compromise the integrity of historic properties and districts. The Commission therefore excludes from historic preservation review only those replacement poles that are situated no more than ten feet away from the original hole; are no more than 10 percent or five feet taller than the original pole, whichever is greater; and are consistent with the quality and appearance of the original pole.
16. The provision limiting the exclusion to a new pole located no more than 10 feet from the original structure ensures that the new pole is truly a “replacement” and that the replacement will not substantially alter the setting of any historic properties that may be nearby. The Commission finds that the minimal change in location permitted here, which will make pole replacements easier to construct as a practical matter, creates no risk of effects on historic properties in light of the fact that no new ground disturbance will be permitted. Moreover, the Commission finds that the deployment of a replacement pole no more than 10 feet from the original pole has no potential to cause effects on historic properties that might be present, because of the close proximity to the original pole and the
17. For purposes of this new exclusion, we use a size definition that differs from the definition of “substantial increase in the size of the tower” in 47 CFR part 1, section 1.E.1 and in 47 CFR part 1, sections III.A and III.B, because that definition allows for increasing the height by either 10 percent or 20 feet plus the height of an antenna array, whichever is greater. Utility poles are typically 25 to 40 feet tall, and we find that an increase in height limited to 10 percent or five feet would be
18. The Commission cannot reach the same conclusion as to a height increase of 20 feet or more, however, because it cannot conclude at this time that a replacement pole that is so much taller than the preexisting structure would have no potential for effects on any historic properties that may be nearby, as is required under 36 CFR 800.3(a)(1) for an agency to act unilaterally. On the other hand, the Commission disagrees with the contention raised by some parties that allowing even small increases in height without historic preservation review ultimately could have effects due to the possibility that multiple incremental replacements over time eventually would result in significantly larger poles. The Commission does not find this speculative concern persuasive: it is aware of no evidence of such repeated “stacked” replacements of utility poles occurring under existing program alternatives, and it believes the likelihood such activities will occur in the future is remote due to the substantial cost of removing and replacing poles.
19. The phrase “consistent with the quality and appearance of the originals” in paragraph (b)(3)(ii)(C) is imported from the corresponding exclusion in section VIII.B.3 of the
20. The Commission adopts an additional limitation as part of paragraph (b)(3)(ii)(A) of the rule to ensure that the pole replacement project—including the removal of the original pole as well as construction of the replacement pole—will entail no new ground disturbance. This limitation recognizes that construction-related ground disturbance or excavation may affect properties that are historic due to the presence of archeological resources, including those of cultural or religious significance to a Tribal Nation or Native Hawaiian organization, which are included within the definition of historic property in 36 CFR 800.16(
21. The Commission continues to require that if, after construction commences, the party discovers any human or burial remains or other historic properties (despite the previous ground disturbance), construction must cease immediately, and the party must promptly notify and consult with the Commission, the State Historic Preservation Officer/Tribal Historic Preservation Officer, and any affected Tribal Nation or Native Hawaiian organization to evaluate the discovery and develop any appropriate measures to handle it.
22. All the conditions described above must be satisfied in order for a replacement pole to be excluded from historic preservation review. The Commission concludes that, taken together, these provisions will ensure protection for historic properties and guard against replacements that would be out of scale with preexisting utility poles in a particular area. By adopting this new exclusion subject to these limitations, the Commission continues to fulfill its statutory responsibilities regarding historic preservation, while removing an unnecessary impediment to the rapid deployment of sorely needed small cell facilities and other wireless infrastructure across the country.
23. In this order, the Commission also reorganizes existing historic preservation regulations into a single rule section that will be clearer, more accessible, and easier to understand. Section 1.1307(a)(4) of the Commission's rules, 47 CFR 1.1307(a)(4), previously commingled detailed provisions implementing the historic preservation review process under section 106 of the NHPA with the provisions implementing the National Environmental Policy Act, 45 U.S.C. 4321-4355. To provide more clarity, the Commission is moving the historic preservation review provisions into a new rule, 47 CFR 1.1320, that more clearly sets forth the existing requirements governing that historic preservation review process; and within that rule, the Commission adopts a paragraph (b)(3) establishing the replacement utility pole exclusion described above.
24. The Commission finds that notice and comment are unnecessary and that it has good cause to make these clarifying revisions without expressly seeking comment on them. Except for paragraph (b)(3)'s addition of a pole replacement exclusion, new section 1.1320 makes no substantive changes to the existing requirements implementing the historic preservation review process under section 106 of the NHPA and adds no new obligations, but merely simplifies the way the Commission's regulations describe them by collecting existing requirements in one place and organizing them in a more straightforward fashion. Moreover, the delay engendered by a round of comment would be contrary to the public interest. The simpler presentation of our requirements in the new rule should make it easier for licensees and applicants to understand and comply with our historic preservation review requirements, and thus may expedite the completion of such review, thus facilitating more expeditious deployment of wireless infrastructure.
25. Paragraph (a) of the new rule incorporates into the Commission's rules the existing provisions in the ACHP's regulations (
26. Paragraphs (a)(1) and (a)(2) of the new section 1.1320 clarify the procedures that apply to historic preservation review of categories of undertakings. Paragraph (a)(1) clarifies that the ACHP's regulations (36 CFR 800.3-800.13) establish the default procedures that generally apply to Commission undertakings, unless the undertakings are subject to one of the Commission's program alternatives, such as those listed in paragraph (a)(2), in which case they are reviewed using the procedures described in the applicable program alternative.
27. Paragraph (b) of the new rule lists Commission undertakings that are not subject to any FCC historic preservation review process. Paragraph (b)(1) refers to undertakings for which an agency other than the Commission is the lead Federal agency that is primarily responsible for historic preservation review. Paragraph (b)(2) recognizes that the Commission's program alternatives not only establish streamlined procedures but also exempt some categories of undertakings from review. Paragraph (b)(3) of the new rule sets forth the new utility pole replacement exclusion adopted in this order, and paragraph (b)(4) of the new rule is identical to paragraph (a)(4)(ii) of section 1.1307 of the preexisting rules, setting forth the exclusion for the collocation of antennas and related equipment on buildings other than towers or utility poles. Paragraph (c) of the new rule provides that Commission applicants and licensees are responsible for compliance with the historic preservation review procedures established in 47 CFR part 1, sections III-X. Paragraph (d) adopts definitions of the terms “antenna,” “applicant,” “collocation,” “tower,” and “undertaking” based on the preexisting definitions of these terms set forth, respectively, in 47 CFR part 1, section I.A; 47 CFR part 1, sections II.A.2, II.A.4, and II.A 14; and 36 CFR 800.16(y).
28. As required by the Regulatory Flexibility Act of 1980, as amended (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the Notice of Proposed Rulemaking (NPRM). The Commission sought written public comment on the proposals in the NPRM, including comment on the IRFA. This present Final Regulatory Flexibility Analysis (FRFA) conforms to the RFA.
29. In the Order, the Commission adopts rules that streamline the process of deploying next-generation wireless broadband infrastructure by eliminating the need for historic preservation review pursuant to the National Historic Preservation Act (NHPA) in certain instances where there is no potential effect on historic properties. Specifically, the Commission finds that the construction of poles that can support antennas or other wireless communications equipment to replace pre-existing utility poles that are substantially identical, under specified conditions, has no potential to affect historic properties, and therefore, the historical preservation review process is unnecessary in this context. This order also reorganizes the rules governing the Commission's historic preservation
30. No parties filed comments that specifically addressed the rules and policies proposed in the IRFA. One party—the Smart Cities and Special Districts Coalition—filed comments arguing that some small local governments, special districts, property owners, or small developers might be harmed if the Commission were to adopt certain policy changes discussed in the NPRM relating to (i) batches of zoning applications filed with state or local governments, (ii) the maximum reasonable time for state or local governments to process zoning applications (“shot clock” rules and “deemed granted” remedies), or (iii) limitations on proprietary properties or regulation of their use. The present order does not deal with any of the issues in the NPRM that the Smart Cities and Special Districts Coalition addressed in the cited portions of its comments. The Commission will address these comments when it acts on the relevant issues in a future order.
31. Pursuant to the Small Business Jobs Act of 2010, the Commission is required to respond to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration (SBA), and to provide a detailed statement of any change made to the proposed rules as a result of those comments. The Chief Counsel did not file any comments in response to the proposed rules in this proceeding.
32. The RFA directs agencies to provide a description of, and where feasible, an estimate of the number of small entities that may be affected by the rules adopted herein The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.” In addition, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. A “small business concern” is one which: (1) Is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). Below, the Commission provides a description of such small entities, as well as an estimate of the number of such small entities, where feasible.
33.
34. Wireless Telecommunications Carriers (except Satellite). This industry comprises establishments engaged in operating and maintaining switching and transmission facilities to provide communications via the airwaves. Establishments in this industry have spectrum licenses and provide services using that spectrum, such as cellular services, paging services, wireless internet access, and wireless video services. The appropriate size standard under SBA rules is that such a business is small if it has 1,500 or fewer employees. For this industry, U.S. Census data for 2012 show that there were 967 firms that operated for the entire year. Of this total, 955 firms had employment of 999 or fewer employees and 12 had employment of 1000 employees or more. Thus, under this category and the associated size standard, the Commission estimates that the majority of wireless telecommunications carriers (except satellite) are small entities.
35. The Commission's own data—available in its Universal Licensing System—indicate that, as of October 25, 2016, there are 280 Cellular licensees that will be affected by our actions today. The Commission does not know how many of these licensees are small, as the Commission does not collect that information for these types of entities. Similarly, according to Commission data, 413 carriers reported that they were engaged in the provision of wireless telephony, including cellular service, Personal Communications Service (PCS), and Specialized Mobile Radio (SMR) Telephony services. Of this total, an estimated 261 have 1,500 or fewer employees and 152 have more than 1,500 employees. Thus, using available data, the Commission estimates that the majority of wireless firms can be considered small.
36.
37.
38.
39.
40. With respect to the first category, Profit-based Spectrum use, the size standards established by the Commission define “small entity” for MAS licensees as an entity that has average annual gross revenues of less than $15 million over the three previous calendar years. A “Very small business” is defined as an entity that, together with its affiliates, has average annual gross revenues of not more than $3 million over the preceding three calendar years. The SBA has approved these definitions. The majority of MAS operators are licensed in bands where the Commission has implemented a geographic area licensing approach that requires the use of competitive bidding procedures to resolve mutually exclusive applications. The Commission's licensing database indicates that, as of April 16, 2010, there were a total of 11,653 site-based MAS station authorizations. Of these, 58 authorizations were associated with common carrier service. In addition, the Commission's licensing database indicates that, as of April 16, 2010, there were a total of 3,330 Economic Area market area MAS authorizations. The Commission's licensing database also indicates that, as of April 16, 2010, of the 11,653 total MAS station authorizations, 10,773 authorizations were for private radio service. In 2001, an auction for 5,104 MAS licenses in 176 EAs was conducted. Seven winning bidders claimed status as small or very small businesses and won 611 licenses. In 2005, the Commission completed an auction (Auction 59) of 4,226 MAS licenses in the Fixed Microwave Services from the 928/959 and 932/941 MHz bands. Twenty-six winning bidders won a total of 2,323 licenses. Of the 26 winning bidders in this auction, five claimed small business status and won 1,891 licenses.
41. With respect to the second category, Internal Private Spectrum use consists of entities that use, or seek to use, MAS spectrum to accommodate their own internal communications needs, MAS serves an essential role in a range of industrial, safety, business, and land transportation activities. MAS radios are used by companies of all sizes, operating in virtually all U.S. business categories, and by all types of public safety entities. For the majority of private internal users, the definition developed by the SBA would be more appropriate than the Commission's definition. The applicable definition of small entity is the “Wireless Telecommunications Carriers (except satellite)” definition under the SBA rules. Under that SBA category, a business is small if it has 1,500 or fewer employees. For this category, U.S. Census data for 2012 show that there were 967 firms that operated for the entire year. Of this total, 955 firms had employment of 999 or fewer employees and 12 had employment of 1000 employees or more. Thus, under this category and the associated small business size standard, the Commission estimates that the majority of wireless telecommunications carriers (except satellite) are small entities that may be affected by our action.
42.
43.
44. In 2009, the Commission conducted Auction 86, the sale of 78 licenses in the BRS areas. The Commission offered three levels of bidding credits: (i) A bidder with attributed average annual gross revenues that exceed $15 million and do not exceed $40 million for the preceding three years (small business) received a 15 percent discount on its winning bid; (ii) a bidder with attributed average annual gross revenues that exceed $3 million and do not exceed $15 million for the preceding three years (very small business) received a 25 percent discount on its winning bid; and (iii) a bidder with attributed average annual gross revenues that do not exceed $3 million for the preceding three years (entrepreneur) received a 35 percent discount on its winning bid. Auction 86 concluded in 2009 with the sale of 61 licenses. Of the ten winning bidders, two bidders that claimed small business status won 4 licenses; one bidder that claimed very small business status won three licenses; and two bidders that claimed entrepreneur status won six licenses.
45.
46.
47.
48. The Commission has estimated the number of licensed commercial television stations to be 1,384. Of this total, 1,264 stations (or about 91 percent) had revenues of $38.5 million or less, according to Commission staff review of the BIA Kelsey Inc. Media Access Pro Television Database (BIA) on February 24, 2017, and therefore these licensees qualify as small entities under the SBA definition. In addition, the Commission has estimated the number of licensed noncommercial educational (NCE) television stations to be 394. Notwithstanding, the Commission does not compile and otherwise does not have access to information on the revenue of NCE stations that would permit it to determine how many such stations would qualify as small entities.
49. The Commission notes, however, that in assessing whether a business concern qualifies as “small” under the above definition, business (control) affiliations must be included. Our estimate, therefore likely overstates the number of small entities that might be affected by our action, because the revenue figure on which it is based does not include or aggregate revenues from affiliated companies. In addition, another element of the definition of “small business” requires that an entity not be dominant in its field of operation. The Commission is unable at this time to define or quantify the criteria that would establish whether a specific television broadcast station is dominant in its field of operation. Accordingly, the estimate of small businesses to which rules may apply does not exclude any television station from the definition of a small business on this
50. Radio Stations. This Economic Census category “comprises establishments primarily engaged in broadcasting aural programs by radio to the public. Programming may originate in their own studio, from an affiliated network, or from external sources.” The SBA has established a small business size standard for this category as firms having $38.5 million or less in annual receipts. Economic Census data for 2012 shows that 2,849 radio station firms operated during that year. Of that number, 2,806 operated with annual receipts of less than $25 million per year, 17 with annual receipts between $25 million and $49,999,999 million and 26 with annual receipts of $50 million or more. Therefore, based on the SBA's size standard the majority of such entities are small entities.
51. According to Commission staff review of the BIA Publications, Inc. Master Access Radio Analyzer Database as of June 2, 2016, about 11,386 (or about 99.9 percent) of 11,395 commercial radio stations had revenues of $38.5 million or less and thus qualify as small entities under the SBA definition. The Commission has estimated the number of licensed commercial radio stations to be 11,415. The Commission notes that it has also estimated the number of licensed NCE radio stations to be 4,101. Nevertheless, the Commission does not compile and otherwise does not have access to information on the revenue of NCE stations that would permit it to determine how many such stations would qualify as small entities.
52. The Commission also notes, that in assessing whether a business entity qualifies as small under the above definition, business control affiliations must be included. The Commission's estimate therefore likely overstates the number of small entities that might be affected by its action, because the revenue figure on which it is based does not include or aggregate revenues from affiliated companies. In addition, to be determined a “small business,” an entity may not be dominant in its field of operation. Tthe Commission further notes, that it is difficult at times to assess these criteria in the context of media entities, and the estimate of small businesses to which these rules may apply does not exclude any radio station from the definition of a small business on these basis, thus our estimate of small businesses may therefore be over-inclusive.
53.
54.
55.
56.
57.
58. According to Commission data in the Universal Licensing System (ULS) as of September 22, 2015 there were approximately 61,970 common carrier fixed licensees, 62,909 private and public safety operational-fixed licensees, 20,349 broadcast auxiliary radio licensees, 412 LMDS licenses, 35 DEMS licenses, 870 39 GHz licenses, and five 24 GHz licenses, and 408 Millimeter Wave licenses in the microwave services. The Commission notes that the number of firms does not necessarily track the number of licensees. The Commission estimates that virtually all of the Fixed Microwave licensees (excluding broadcast auxiliary licensees) would qualify as small entities under the SBA definition.
59.
60. As of March 1, 2017, the ASR database includes approximately 122,157 registration records reflecting a “Constructed” status and 13,987 registration records reflecting a “Granted, Not Constructed” status. These figures include both towers registered to licensees and towers registered to non-licensee tower owners. The Commission does not keep information from which it can easily determine how many of these towers are registered to non-licensees or how many non-licensees have registered towers. Regarding towers that do not require ASR registration, the Commission does not collect information as to the number of such towers in use and therefore cannot estimate the number of tower owners that would be subject to the rules on which the Commission seeks comment. Moreover, the SBA has not developed a size standard for small businesses in the category “Tower Owners.” Therefore, the Commission is unable to determine the number of non-licensee tower owners that are small entities. The Commission believes, however, that when all entities owning 10 or fewer towers and leasing space for collocation are included, non-licensee tower owners number in the thousands, and that nearly all of these qualify as small businesses under the SBA's definition for “All Other Telecommunications.” The SBA has developed a small business size standard for “All Other Telecommunications,” which consists of all such firms with gross annual receipts of $32.5 million or less. For this category, U.S. Census data for 2012 show that there were 1,442 firms that operated for the entire year. Of these firms, a total of 1,400 had gross annual receipts of less than $25 million. Thus, a majority of “All Other Telecommunications” firms potentially affected by our action can be considered small. In addition, there may be other non-licensee owners of other wireless infrastructure, including Distributed Antenna Systems (DAS) and small cells, that might be affected by the measures on which the Commission seeks comment. The Commission does not have any basis for estimating the number of such non-licensee owners that are small entities.
61. The Commission is not imposing any additional reporting or record keeping requirements. Rather, as discussed in the next section, the Commission is reducing National Historic Preservation Act compliance burdens, including those on small entities, by eliminating the historic preservation review requirement for construction of replacement utility poles that are capable of supporting antennas or other wireless communications equipment and are substantially similar to the preexisting poles, subject to certain conditions. The Commission is also reorganizing the rules governing its historic preservation review procedures by consolidating them into a single new Rule 1.1320. This should clarify the rules and make compliance easier for small entities.
62. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): “(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities.”
63. This Order streamlines the process of deploying next-generation wireless broadband by eliminating the need for historic preservation review for construction of replacement utility poles in certain circumstances. The Commission anticipates that adoption of this replacement pole exclusion will provide significant efficiencies in the deployment of such facilities, particularly for small entities that may not have the compliance resources and economies of scale of larger entities, while still avoiding adverse impacts on historic properties. The exclusion will also make more consistent the process that carriers and pole construction companies must follow to comply with our historic preservation review requirements and those they must follow when building replacement poles that are subject to the requirements of other agencies pursuant to the Advisory Council on Historic Preservation's Program Comment for Communications Projects on Federal Lands and Property. By adopting this new exclusion, the Commission continues to fulfill our statutory responsibilities regarding historic preservation, while reducing the burden on small entities by removing unnecessary impediments to the rapid deployment of small cell facilities and other wireless infrastructure across the country.
64. Further, the Order incorporates the new exclusion for replacement poles into our rules in a manner that more clearly articulates licensees' and applicants' obligations not only as to this specific issue, but more generally as to the entire historic preservation review process. Thus, the Commission is reorganizing its existing regulations to clarify the general requirements regarding historic preservation review, as well as to specify the contours of the
65. As discussed above, the overall approach the Commission has taken is to remove regulatory requirements associated with NHPA compliance with respect to one specified category of undertakings and to simplify and clarify the existing requirements applicable in other contexts. In crafting this regulatory relief, the Commission has not identified any additional steps that itcould take with respect to small entities that could not also be applied to all entities that construct or deploy wireless infrastructure. While the new exclusion for replacement utility poles is not specifically directed at small entities, the Commission recognizes that our actions in the Order can potentially decrease costs for all those subject to NHPA obligations, including small entities.
66. The Commission will send a copy of the Report and Order, including this FRFA, in a report to be sent to Congress pursuant to the Congressional Review Act. In addition, the Commission will send a copy of the Report and Order, including this FRFA, to the Chief Counsel for Advocacy of the SBA. The Report and Order and FRFA (or summaries thereof) also will be published in the
67. The Report and Order does not contain new or revised information collection requirements subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. In addition, therefore, it does not contains any substantive new or modified information collection burden for small business concerns with fewer than 25 employees, pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198;
68. The Commission will send a copy of the Report and Order in a report to be sent to Congress and the Government Accountability Office pursuant to the Congressional Review Act (CRA),
69. Accordingly,
70.
71.
Communications common carriers, Communications equipment, Environmental protection, Historic preservation, Radio, Telecommunications.
For the reasons discussed in the preamble, the Federal Communications Commission amends 47 CFR part 1 as follows:
47 U.S.C. 151, 154(i), 155, 157, 225, 303(r), 309, 1403, 1404, 1451, and 1452.
(a) * * *
(4) Facilities that may affect districts, sites, buildings, structures or objects, significant in American history, architecture, archeology, engineering or culture, that are listed, or are eligible for listing, in the National Register of Historic Places (
(a)
(1) The procedures set forth in regulations of the Advisory Council on Historic Preservation, 36 CFR800.3-800.13, or
(2) If applicable, a program alternative established pursuant to 36 CFR 800.14, including but not limited to the following:
(i) The Nationwide Programmatic Agreement for the Collocation of Wireless Antennas, as amended, Appendix B of this part.
(ii) The Nationwide Programmatic Agreement for Review of Effects on Historic Properties for Certain Undertakings, Appendix C of this part.
(iii) The Program Comment to Tailor the Federal Communications Commission's Section 106 Review for Undertakings Involving the Construction of Positive Train Control Wayside Poles and Infrastructure, 79 FR 30861 (May 29, 2014).
(b)
(1)
(2)
(3)
(i) The original structure—
(A) Is a pole that can hold utility, communications, or related transmission lines;
(B) Was not originally erected for the sole or primary purpose of supporting antennas that operate pursuant to the Commission's spectrum license or authorization; and
(C) Is not itself a historic property.
(ii) The replacement pole—
(A) Is located no more than 10 feet away from the original pole, based on the distance between the centerpoint of the replacement pole and the centerpoint of the original pole;
(B) Has a height that does not exceed the height of the original pole by more than 5 feet or 10 percent of the height of the original pole, whichever is greater; and
(C) Has an appearance consistent with the quality and appearance of the original pole.
(4)
(i) There is an existing antenna on the building or structure;
(ii) One of the following criteria is met:
(A)
(B)
(
(
(
(
(
(C)
(
(
(
(
(
(iii) The new antenna complies with all zoning conditions and historic preservation conditions applicable to existing antennas in the same vicinity that directly mitigate or prevent effects, such as camouflage or concealment requirements;
(iv) The deployment of the new antenna involves no new ground disturbance; and
(v) The deployment would otherwise require the preparation of an Environmental Assessment under 1.1304(a)(4) solely because of the age of the structure.
A non-visible new antenna is in the “same vicinity” as a pre-existing antenna if it will be collocated on the same rooftop, façade or other surface. A visible new antenna is in the “same vicinity” as a pre-existing antenna if it is on the same rooftop, façade, or other surface and the centerpoint of the new antenna is within ten feet of the centerpoint of the pre-existing antenna. A deployment causes no new ground disturbance when the depth and width of previous disturbance exceeds the proposed construction depth and width by at least two feet.
(c)
(d)
Federal Communications Commission.
Final rule; announcement of effective date.
In this document, the Commission announces that the Office of Management and Budget (OMB) has approved, for a period of three years, the information collection associated with the Commission's Terrestrial Use of the 2473-2495 MHz bands for Low-Power Mobile Broadband Networks; Amendments to Rules for the Ancillary Terrestrial Component of Mobile Satellite Service Systems Report and Order's (Order) modified rules for the operation of an Ancillary Terrestrial Component. This document is consistent with the Order, which stated that the Commission would publish a document in the
The amendments to 47 CFR 25.149 published at 82 FR 8814, January 31, 2017, are effective December 14, 2017.
Stephen Duall, Satellite Division, International Bureau, at 202-418-1103 or via email at
This document announces that, on June 28, 2017, OMB approved, for a period of three years, the information collection requirements relating to the access stimulation rules contained in the Commission's Order, FCC 16-181, published at 82 FR 8814, January 31, 2017. The OMB Control Number is 3060-0994. The Commission publishes this document as an announcement of the effective date of the rules. If you have any comments on the burden estimates listed below, or how the Commission can improve the collections and reduce any burdens caused thereby, please contact Cathy Williams, Federal Communications Commission, Room 1-C823, 445 12th Street SW, Washington, DC 20554. Please include the OMB Control Number, 3060-0298, in your correspondence. The Commission will also accept your comments via email at
To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to
As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the FCC is notifying the public that it received final OMB approval on June 28, 2017, for the information collection requirements contained in the modifications to the Commission's rules in 47 CFR part 25.
Under 5 CFR part 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.
No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number. The OMB Control Number is 3060-0994.
The foregoing notice is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.
The total annual reporting burdens and costs for the respondents are as follows:
The purposes of the existing information collection are to obtain information necessary for licensing operators of Mobile-Satellite Service (MSS) networks to provide ancillary services in the U.S. via terrestrial base stations (Ancillary Terrestrial Components, or ATCs); obtain the legal and technical information required to facilitate the integration of ATCs into MSS networks in the L-Band and the 1.6/2.4 GHz Bands; and to ensure that ATC licensees meet the Commission's legal and technical requirements to develop and maintain their MSS networks and operate their ATC systems without causing harmful interference to other radio systems.
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Temporary rule; Swordfish General Commercial permit retention limit inseason adjustment for the Northwest Atlantic, Gulf of Mexico, and U.S. Caribbean regions.
NMFS is adjusting the Swordfish (SWO) General Commercial permit retention limits for the Northwest Atlantic, Gulf of Mexico, and U.S. Caribbean regions for January through June of the 2018 fishing year, unless otherwise later noticed. The SWO General Commercial permit retention limit in each of these regions is increased from the regulatory default limits (either two or three fish) to six swordfish per vessel per trip. The SWO General Commercial permit retention limit in the Florida SWO Management Area will remain unchanged at the default limit of zero swordfish per vessel per trip. These adjustments apply to SWO General Commercial permitted vessels and Highly Migratory Species (HMS) Charter/Headboat permitted vessels when on a non-for-hire trip. This action is based upon consideration of the applicable inseason regional retention limit adjustment criteria.
The adjusted SWO General Commercial permit retention limits in the Northwest Atlantic, Gulf of Mexico, and U.S. Caribbean regions are effective from January 1, 2018, through June 30, 2018.
Rick Pearson or Randy Blankinship, 727-824-5399.
Regulations implemented under the authority of the Atlantic Tunas Convention Act (ATCA; 16 U.S.C. 971
In 2017, ICCAT recommended that the overall North Atlantic swordfish total allowable catch (TAC) be set at 9,925 metric tons (mt) dressed weight (dw) (13,200 mt whole weight (ww)) through 2021. Consistent with scientific advice, this was a reduction of 500 mt ww (375.9 mt dw) from previous ICCAT-recommended TACs. However, of this TAC, the United States' baseline quota remained at 2,937.6 mt dw (3,907 mt ww) per year. The Recommendation also continued to limit underharvest carryover to 15 percent of a contracting party's baseline quota. Thus, the United States could carry over a maximum of 440.6 mt dw (586.0 mt ww) of underharvest. Absent adjustments, the codified baseline quota is 2,937.6 mt dw for 2018. At this time, given the extent of underharvest in 2017, we anticipate carrying over the maximum allowable 15 percent (440.6 mt dw), which would result in a final adjusted North Atlantic swordfish quota for the 2018 fishing year equal to 3,378.2 mt dw (2,937.6 + 440.6 = 3,378.2 mt dw). Also as in past years, we anticipate allocating from the adjusted quota, 50 mt dw to the Reserve category for inseason adjustments and research, and 300 mt dw to the Incidental category, which includes recreational landings and landings by incidental swordfish permit holders, per § 635.27(c)(1)(i). This would result in an allocation of 3,028.2 mt dw for the directed fishery, which would be split equally (1,514.1 mt dw) between the two semi-annual periods in 2018 (January through June, and July through December).
The 2018 North Atlantic swordfish fishing year, which is managed on a calendar-year basis and divided into two equal semi-annual quotas, begins on January 1, 2018. Landings attributable to the SWO General Commercial permit are counted against the applicable semi-annual directed fishery quota. Regional default retention limits for this permit have been established and are automatically effective from January 1 through December 31 each year, unless changed based on the inseason regional retention limit adjustment criteria at § 635.24(b)(4)(iv). The default retention limits established for the SWO General Commercial permit are: (1) Northwest Atlantic region—three swordfish per vessel per trip; (2) Gulf of Mexico region—three swordfish per vessel per trip; (3) U.S. Caribbean region—two swordfish per vessel per trip; and, (4) Florida SWO Management Area—zero swordfish per vessel per trip. The default retention limits apply to SWO General Commercial permitted vessels and to HMS Charter/Headboat permitted vessels when fishing on non for-hire trips. As a condition of these permits, vessels may not possess, retain, or land any more swordfish than is specified for the region in which the vessel is located.
Under § 635.24(b)(4)(iii), NMFS may increase or decrease the SWO General Commercial permit vessel retention limit in any region within a range from zero to a maximum of six swordfish per vessel per trip. Any adjustments to the retention limits must be based upon a consideration of the relevant criteria provided in § 635.24(b)(4)(iv), which include: The usefulness of information obtained from biological sampling and monitoring of the North Atlantic swordfish stock; the estimated ability of vessels participating in the fishery to land the amount of swordfish quota available before the end of the fishing year; the estimated amounts by which quotas for other categories of the fishery might be exceeded; effects of the adjustment on accomplishing the objectives of the fishery management plan and its amendments; variations in seasonal distribution, abundance, or migration patterns of swordfish; effects of catch rates in one region precluding vessels in another region from having a reasonable opportunity to harvest a portion of the overall swordfish quota; and, review of dealer reports, landing
NMFS has considered these criteria as discussed below and their applicability to the SWO General Commercial permit retention limit in all regions for January through June of the 2018 North Atlantic swordfish fishing year and has determined that the SWO General Commercial permit retention limits in the Northwest Atlantic, Gulf of Mexico, and U.S. Caribbean regions applicable to persons issued a SWO General Commercial permit or HMS Charter/Headboat permit (when on a non for-hire trip) should be increased from the default levels that would otherwise automatically become effective on January 1, 2018, to six swordfish per vessel per trip from January 1 through June 30, 2018, unless otherwise later noticed.
Among the regulatory criteria for inseason adjustments to retention limits, and given the rebuilt status of the stock and availability of quota, is the requirement that NMFS consider the “effects of the adjustment on accomplishing the objectives of the fishery management plan and its amendments.” One consideration in deciding whether to increase the retention limit, in this case, is the objective of providing opportunities to harvest the full North Atlantic directed swordfish quota without exceeding it based upon the 2006 Consolidated HMS FMP goal to, consistent with other objectives of this FMP, “manage Atlantic HMS fisheries for continuing optimum yield so as to provide the greatest overall benefit to the Nation, particularly with respect to food production, providing recreational opportunities, preserving traditional fisheries, and taking into account the protection of marine ecosystems.” Another consideration, consistent with the FMP and its amendments, is to continue to provide protection to important swordfish juvenile areas and migratory corridors.
The regulatory criteria also require NMFS to consider the estimated ability of vessels participating in the fishery to land the amount of swordfish quota available before the end of the fishing year. In considering these criteria and their application here, NMFS examined electronic dealer reports, which provide accurate and timely monitoring of landings, and considered recent landing trends and information obtained from biological sampling and monitoring of the North Atlantic swordfish stock. A six swordfish per vessel per trip limit for SWO General Commercial permit holders was in effect in the Northwest Atlantic, Gulf of Mexico, and U.S. Caribbean regions for the entire 2016 fishing season as a result of actions adjusting those limits upwards in January and July (80 FR 81770 and 81 FR 38966). Even with these higher retention limits, 2016 total annual directed swordfish landings through December 31, 2016, were approximately 1,079.0 mt dw, or 32.6 percent of the 3,009.4 mt dw annual adjusted directed swordfish quota. Similarly, with higher retention limits during both semi-annual quota periods in 2017, preliminary total directed swordfish landings through October 31, 2017, are approximately 744.2 mt dw, or 24.7 percent of the 3,009.4 mt dw annual adjusted directed swordfish quota established for 2017.
The total available directed swordfish quota has not been harvested for several years and, based upon current landing trends, is not likely to be harvested or exceeded during 2018. This information indicates that sufficient directed swordfish quota should be available from January 1 through June 30, 2018, at the higher retention levels, within the limits of the scientifically-supported TAC and consistent with the goals of the FMP.
The regulatory criteria for inseason adjustments also require NMFS to consider the estimated amounts by which quotas for other categories of the fishery might be exceeded. Based upon recent landings rates from dealer reports, an increase in the vessel retention limit for SWO General Commercial permit holders is not likely to cause quotas for other categories of the fishery to be exceeded as the directed category quota has been significantly underharvested in recent years and landings trends are not expected to vary significantly in 2018. Similarly, regarding the criteria that NMFS consider the effects of catch rates in one region precluding vessels in another region from having a reasonable opportunity to harvest a portion of the overall swordfish quota, NMFS expects there to be sufficient swordfish quota for 2018, and thus increased catch rates in these three regions as a result of this action would not be expected to preclude vessels in the other region (
Finally, in making adjustments to the retention limits NMFS must consider variations in seasonal distribution, abundance, or migration patterns of swordfish, and the availability of swordfish on the fishing grounds. With regard to swordfish abundance, the 2017 report by ICCAT's Standing Committee on Research and Statistics indicated that the North Atlantic swordfish stock is not overfished (B
NMFS also has determined that the retention limit for the SWO General Commercial permit will remain at zero swordfish per vessel per trip in the Florida SWO Management Area at this time. As discussed above, NMFS considered consistency with the 2006 Consolidated HMS FMP and its amendments, and the importance for NMFS to continue to provide protection to important swordfish juvenile areas and migratory corridors. As described in Amendment 8 to the 2006 Consolidated HMS FMP (78 FR 52012), the area off the southeastern coast of Florida, particularly the Florida Straits, contains oceanographic features that make the area biologically unique. It provides important juvenile swordfish habitat, and is essentially a narrow migratory corridor containing high concentrations of swordfish located in close proximity to high concentrations of people who may fish for them. Public comment on Amendment 8, including from the Florida Fish and Wildlife Conservation Commission, indicated concern about the resultant high potential for the improper rapid growth of a commercial fishery, increased catches of undersized swordfish, the potential for larger numbers of fishermen in the area, and the potential for crowding of fishermen, which could lead to gear and user conflicts. These concerns remain valid. NMFS will continue to collect information to evaluate the appropriateness of the retention limit in the Florida SWO Management Area and other regional retention limits. This action therefore maintains a zero-fish retention limit in the Florida Swordfish Management Area.
These adjustments are consistent with the 2006 Consolidated HMS FMP as amended, ATCA, and the Magnuson-
NMFS will continue to monitor the swordfish fishery closely during 2018 through mandatory landings and catch reports. Dealers are required to submit landing reports and negative reports (if no swordfish were purchased) on a weekly basis.
Depending upon the level of fishing effort and catch rates of swordfish, NMFS may determine that additional retention limit adjustments or closures are necessary to ensure that available quota is not exceeded or to enhance fishing opportunities. Subsequent actions, if any, will be published in the
The Assistant Administrator for NMFS (AA) finds that it is impracticable and contrary to the public interest to provide prior notice of, and an opportunity for public comment on, this action for the following reasons:
The regulations implementing the 2006 Consolidated HMS FMP, as amended, provide for inseason retention limit adjustments to respond to changes in swordfish landings, the availability of swordfish on the fishing grounds, the migratory nature of this species, and regional variations in the fishery. Based on available swordfish quota, stock abundance, fishery performance in recent years, and the availability of swordfish on the fishing grounds, among other considerations, adjustment to the SWO General Commercial permit retention limits from the default levels of two or three fish to six SWO per vessel per trip as discussed above is warranted, while maintaining a zero-fish retention limit in the Florida SWO Management Area. Analysis of available data shows that adjustment to the swordfish retention limit from the default levels would result in minimal risk of exceeding the ICCAT-allocated quota. NMFS provides notification of retention limit adjustments by publishing the notification in the
This action is being taken under 50 CFR 635.24(b)(4) and is exempt from review under Executive Order 12866.
16 U.S.C. 971
Board of Governors of the Federal Reserve System.
Policy statement; request for comment.
The Board of Governors of the Federal Reserve System (“Board”) is requesting comment on proposed changes to part II of the Federal Reserve Policy on Payment System Risk (“PSR policy”) related to procedures for determining the net debit cap and maximum daylight overdraft capacity of a U.S. branch or agency of a foreign banking organization (“FBO”). Under the PSR policy, an FBO's strength of support assessment (“SOSA”) ranking can affect its eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity. Additionally, an FBO that is a financial holding company (“FHC”) can generally receive a higher net debit cap than an FBO that is not an FHC, and is generally eligible to request a streamlined procedure to obtain maximum daylight overdraft capacity. The proposed changes to the PSR policy would remove references to the SOSA ranking; remove references to FBOs' FHC status; and adopt alternative methods for determining an FBO's eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity. The Board recognizes that the proposed changes would reduce net debit caps for some FBOs, but the Board believes that the adjusted FBO net debit caps would be better tailored to FBOs' actual usage of intraday credit and would not constrain FBOs' U.S. operations.
Comments on the proposed changes must be received on or before February 12, 2018.
You may submit comments, identified by Docket No. OP-1589, by any of the following methods:
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All public comments are available from the Board's website at
Jeffrey Walker, Assistant Director (202-721-4559), Jason Hinkle, Manager (202-912-7805), or Alex So, Senior Financial Services Analyst (202-452-2300), Division of Reserve Bank Operations and Payment Systems; or Evan Winerman, Counsel (202-872-7578), Legal Division, Board of Governors of the Federal Reserve System. For users of Telecommunications Device for the Deaf (TDD) only, please call 202-263-4869.
Part II of the PSR policy establishes the maximum levels of daylight overdrafts that depository institutions (“institutions”) may incur in their Federal Reserve accounts.
An institution's net debit cap is the maximum amount of uncollateralized daylight overdrafts that the institution can incur in its Federal Reserve account. The PSR policy generally requires that an institution be “financially healthy” to be eligible for a positive net debit cap.
Assuming that an institution qualifies for a positive net debit cap, the size of its net debit cap equals the institution's “capital measure” multiplied by its “cap multiple.”
An FBO's SOSA ranking can affect both its cap category and its capital measure. An FBO's status as an FHC can affect its capital measure.
1. Cap categories and cap multiples.
Under Section II.D.2 of the PSR policy, an institution's “cap category” is one of six classifications—high, above average, average, de minimis, exempt-from-filing, and zero. In order to establish a cap category of high, above average, or average, an institution must perform a self-assessment of its own creditworthiness, intraday funds management and control, customer credit policies and controls, and operating controls and contingency procedures. Other cap categories do not require a self-assessment.
An FBO's SOSA ranking can affect its cap category (and thus its cap multiple). As noted above, an institution that wishes to establish a net debit cap category of high, above average, or average must perform a self-assessment of, among other things, its own creditworthiness. Under Part II.D.2.a of the PSR policy, “[t]he assessment of creditworthiness is based on the institution's supervisory rating and Prompt Corrective Action (PCA) designation.” Part VII.A of the Guide includes a matrix for assessing
Similarly, while an FBO is not required to perform a self-assessment if it requests a cap category of de minimis or wishes to be assigned a cap category of exempt-from-filing by the Reserve Bank, the Reserve Banks rely on the minimum standards set by the creditworthiness matrix when they evaluate FBO requests for
In certain situations, the Reserve Banks require institutions to perform a full assessment of their creditworthiness instead of using the relevant self-assessment matrix (
2. Capital measures.
Under Section II.D.3 of the PSR policy, an institution's “capital measure” is a number derived (under most circumstances) from the size of its capital base. The determination of the capital measure, however, differs between domestic institutions and FBOs. A domestic institution's capital measure equals 100 percent of the institution's risk-based capital. Conversely, an FBO's capital measure (also called “U.S. capital equivalency”)
Section II.E of the PSR policy allows certain institutions with self-assessed net debit caps to pledge collateral to their Administrative Reserve Bank to secure daylight overdraft capacity in excess of their net debit caps. An institution's maximum daylight overdraft capacity (“max cap”) equals its net debit cap plus its additional collateralized capacity. The max cap policy is “intended to provide extra liquidity through the pledge of collateral by the few institutions that might otherwise be constrained from participating in risk-reducing payment system initiatives.”
Institutions that wish to obtain a max cap must generally provide (1) documentation of the business need for collateralized capacity and (2) an annual board of directors' resolution approving any collateralized capacity. Under Section II.E.2 of the PSR policy, however, an FBO that has a SOSA ranking of 1 or is an FHC may request a streamlined procedure for obtaining a max cap.
The SOSA ranking was originally established to provide input to the development and maintenance of a comprehensive supervisory strategy for the U.S. activities of an FBO, but Federal Reserve supervisors no longer use SOSA rankings for this purpose.
Additionally, for reasons discussed below, the Board no longer believes that an FBO should receive greater daylight overdraft capacity because it is an FHC. The Board therefore proposes to remove references to FBOs' FHC status in the PSR policy.
The Board proposes to adopt alternative methods for determining an FBO's eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain a max cap. As described more fully below:
• Many undercapitalized FBOs, and all significantly or critically undercapitalized FBOs, would have “below standard” creditworthiness and would generally be ineligible for a positive net debit cap.
• An FBO's creditworthiness self-assessment would generally be based on the FBO's U.S. Operations Supervisory Composite Rating and the PCA designation that would apply to the FBO if it were subject to the Board's Regulation H.
• The capital measure of an FBO would equal 10 percent of its worldwide capital.
• An FBO that is well capitalized could request the streamlined procedure for obtaining a max cap.
The Board requests comment on all aspects of the proposal, including whether FBOs would require a transition period to adjust to the proposed changes.
As discussed above, SOSA-3 ranked FBOs are presumptively ineligible for a positive net debit cap. Because the proposal would remove all references to the SOSA ranking in the PSR policy, FBOs that currently hold a SOSA-3 ranking would not be—on that basis—presumptively ineligible for a positive net debit cap. Some of those FBOs would be ineligible for positive net debit caps for other reasons, however. First, the revised creditworthiness self-assessment matrix in the Guide (discussed further below) would continue to assume that FBOs that have U.S. Operations Supervisory Composite Ratings of “marginal” or “unsatisfactory” have “below standard” creditworthiness and are generally ineligible for a positive net debit cap.
As discussed above, an institution that wishes to establish a net debit cap category of high, above average, or average must perform a self-assessment of, among other things, its own creditworthiness. The Board is proposing to revise the PSR policy to provide that, if an FBO is based in a jurisdiction that adheres to the BCA, the FBO's creditworthiness self-assessment will be based on (1) the FBO's U.S. Operations Supervisory Composite Rating and (2) the PCA designation that would apply to the FBO if it were subject to the Board's Regulation H.
The Board believes that an FBO's equivalent PCA designation would serve the same purpose as the SOSA ranking in the creditworthiness self-assessment matrix. The SOSA ranking has been useful for assessing FBO creditworthiness because it provides insight into whether an FBO's home office has the ability to support its U.S. branch or agency. Similarly, an equivalent PCA designation would provide insight into an FBO's worldwide financial profile and its ability to support its U.S. branch or agency.
Replacing the SOSA ranking with an equivalent PCA designation would also align the creditworthiness self-assessment for FBOs with the existing creditworthiness self-assessment for domestic institutions.
The Board does not expect that the proposed changes to the creditworthiness self-assessment matrix would significantly affect FBOs' access to Reserve Bank intraday credit. If the proposed changes were to take effect, only four of the eleven FBOs that currently maintain a self-assessed cap category might qualify for a higher creditworthiness self-assessment rating and thus a higher cap category. These four entities would also need to satisfy the other criteria of the cap category self-assessment (intraday funds management and control, customer credit policies and controls, and operating controls and contingency procedures) to qualify for a higher cap category.
The Board does not believe that it will be burdensome for FBOs to calculate an equivalent PCA designation. The Board's FR Y-7Q report currently requires that FBOs with total consolidated assets of $50 billion or more report the numerators and denominators of all four ratios in the PCA determination. The FR Y-7Q report also requires that FBOs with total consolidated assets below $50 billion report the numerators and denominators of all ratios in the PCA determination except the common equity tier 1 capital ratio. FBOs with total consolidated assets below $50 billion that are based in BCA-adhering jurisdictions already calculate their common equity tier 1 capital ratios under home country standards.
As discussed above, while an FBO is not required to perform a self-assessment if it requests a cap category of de minimis or wishes to be assigned a cap category of exempt-from-filing by the Reserve Bank, the Reserve Banks currently rely on the minimum standards set by the creditworthiness matrix when they evaluate an FBO's eligibility for
The Board is also proposing to revise the PSR policy to provide that, if an FBO is
As discussed above, under the PSR policy, the determination of an FBO's capital measure is based on the FBO's capital base, SOSA ranking, and FHC status. The Board is proposing to (1) eliminate references to SOSA rankings and FHC status in calculating an FBO's capital measure and (2) replace the existing four-tier structure for calculating an FBO's capital measure with a simplified fixed-rate calculation that depends solely on the FBO's capital base. Specifically, the proposed change would provide that the capital measure of an FBO equals 10 percent of its worldwide capital.
For the reasons described below, the Board believes that it is unnecessary to replace the SOSA ranking with an alternative supervisory rating for purposes of calculating an FBO's capital measure. The Board also believes that an FBO's status as an FHC should not allow the FBO to qualify for a higher capital measure. While the proposed fixed-rate FBO capital measure calculation would reduce net debit caps for many FBOs, the Board believes that the adjusted FBO net debit caps would be better tailored to FBOs' actual usage of intraday credit and generally would not constrain FBOs' U.S. operations. Finally, while FBOs operating in the United States should be, generally, treated no less favorably than similarly-situated U.S. banking organizations, the Board continues to believe that it is reasonable to calculate an FBO's capital measure as a fraction of its worldwide capital, notwithstanding that the capital measure of a domestic institution generally equals 100 percent of the institution's risk-based capital.
1. It is unnecessary to replace the SOSA ranking with an alternative supervisory rating for purposes of calculating an FBO's capital measure.
a. The Board and the Reserve Banks now have better supervisory information regarding FBOs.
Before the Board adopted the current capital measure calculation process in 2002, an FBO's capital measure depended solely on whether the FBO was based in a country that adhered to the BCA.
Since the Board adopted the current FBO capital measure calculation in February 2002, Federal Reserve staff have gained access to new internal and external resources that allow the Federal Reserve to better monitor FBOs on an ongoing basis.
b. Other elements of the net debit cap calculation consider an FBO's overall financial condition.
As discussed above, an FBO's net debit cap is determined by its capital measure and cap category. Under the Board's proposed changes to the FBO creditworthiness self-assessment procedures (described above), an FBO's worldwide capital ratios would affect its creditworthiness (and thus its cap category). Additionally, the FBO creditworthiness self-assessment procedures would continue to consider FBOs' U.S. Operations Supervisory Composite ratings. Given that other elements of the net debit cap calculation already consider an FBO's supervisory ratings (and will consider an FBO's overall financial condition if the proposed changes take effect), the Board believes that it is unnecessary to replace the SOSA ranking with an alternative supervisory rating in the FBO capital measure calculation.
2. An FBO should not qualify for a higher capital measure because it is an FHC.
When the Board adopted the current FBO capital measure calculation in 2002, it believed that an FBO's status as an FHC indicated that the FBO was financially and managerially strong, and that the FBO should accordingly qualify for a higher capital measure than a non-FHC FBO. Since 2002, however, the Board has recognized the limitations of FHC status in measuring an FBO's health. In particular, FBOs can maintain nominal FHC status (though with reduced ability to use their FHC powers) even when they are out of compliance with the requirement that they remain well capitalized. Accordingly, the Board no longer believes that an FBO should qualify for a higher capital measure because it is an FHC.
3. The adjusted FBO net debit caps would be better tailored to FBOs' actual usage of intraday credit and generally would not constrain FBOs' U.S. operations.
While the Board's proposed fixed-rate capital measure calculation would reduce net debit caps for twenty of the 49 FBOs that currently maintain a positive net debit cap,
The Board recognizes that daylight overdrafts may currently occur less frequently because many institutions hold excess reserves and thus have higher opening balances in their Federal Reserve accounts. The Board believes, however, that FBOs' adjusted net debit caps would not constrain most FBOs' U.S. operations even if FBOs hold lower reserves in the future. The Board has reached this conclusion by comparing FBOs' projected net debit caps under the proposed fixed-rate capital measure calculation to FBOs' actual daylight overdrafts between 2003 and 2007, when FBOs generally maintained lower reserves.
The Board also notes that FBO net debit caps are large when compared to the net debit caps of peer domestic institutions. For example, the average net debit cap of an FBO with between $10 billion and $50 billion in U.S.-based assets is $2.6 billion, while the average net debit cap of a domestic institution with between $10 billion and $50 billion in assets is $1.4 billion; similarly, the average net debit cap of an FBO with between $50 billion and $150 billion in U.S.-based assets is $28.2 billion, while the average net debit cap of a domestic institution with between $50 billion and $150 billion in assets is $10.5 billion.
The Board recognizes that its proposed changes to the capital measure calculation may increase the instances in which FBOs need additional daylight overdraft capacity. An FBO with a de minimis cap could request a higher net debit cap by applying for a self-assessed cap.
4. National treatment considerations.
Under the principle of national treatment, FBOs operating in the United States should be, generally, treated no less favorably than similarly-situated U.S. banking organizations.
In international financial transactions, the overall risk borne by each party is affected not only by the governing law set out in the contract, but also by the law governing the possible insolvency of its counterparty. The insolvency of an international bank presents significant legal issues in enforcing particular provisions of a financial contract (such as close-out netting or irrevocability provisions) against third parties (such as the liquidator or supervisor of the failed bank). The insolvent party's national law also may permit the liquidator to subordinate other parties' claims (such as by permitting the home country tax authorities to have first priority in bankruptcy), may reclassify or impose a stay on the right the nondefaulting party has to collateral pledged by the defaulting party in support of a particular transaction, or may require a separate proceeding to be initiated against the head office in addition to any proceeding against the branch.
It is not practicable for the Federal Reserve to undertake and keep current extensive analysis of the legal risks presented by the insolvency law(s) applicable to each FBO with a Federal Reserve account in order to quantify precisely the legal risk that the Federal Reserve incurs by providing intraday credit to that institution. It is reasonable, however, for the Federal Reserve to recognize that FBOs generally present additional legal risks to the payments system and, accordingly, limit its exposure to these institutions.
The Board continues to believe that FBOs present legal risks to the Federal Reserve that are above and beyond the risks posed by domestic institutions when FBOs incur daylight overdrafts. Accordingly, the Board continues to believe that it is reasonable to calculate an FBO's capital measure as a fraction of its worldwide capital, notwithstanding that the capital measure of a domestic institution generally equals 100 percent of the institution's risk-based capital. Nevertheless, as discussed above, the proposed fixed-rate capital measure calculation would allow FBOs to obtain net debit caps that would be well tailored to FBOs' actual usage of intraday credit and generally would not constrain FBOs' U.S. operations.
As discussed above, an FBO that has a SOSA-1 ranking or is an FHC may request a streamlined procedure for obtaining a max cap. The Board is proposing to remove the SOSA-1 ranking and FHC status as factors in determining whether FBOs can request the streamlined procedure. The Board instead proposes to allow FBOs that are well capitalized to request the streamlined procedure for obtaining a max cap.
The Board believes that allowing well-capitalized FBOs to request the streamlined max cap procedure would serve a similar purpose as allowing SOSA-1 ranked FBOs and FBOs with FHC status to request the streamlined procedure. The Board originally allowed SOSA-1 ranked FBOs and FBOs with FHC status to request the streamlined max cap procedure because the Board believed that such FBOs raised fewer supervisory concerns.
The streamlined max cap procedure would provide well-capitalized FBOs with a straightforward process for obtaining collateralized intraday overdraft capacity, which could offset the reduction to FBO net debit caps that would result from the proposed changes to the FBO capital measure calculation. Any FBO that is not well capitalized and wishes to establish a max cap could continue to use the general procedure for requesting a max cap.
Congress enacted the Regulatory Flexibility Act (“RFA”) (5 U.S.C. 601
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As discussed above, the Board is issuing this proposal to remove references to the SOSA ranking and FBOs' FHC status in the PSR policy. Discontinuing the SOSA ranking would streamline the Federal Reserve's FBO supervision program by eliminating the need for Federal Reserve supervisors to provide supervisory rankings that only serve a purpose for Reserve Bank credit decisions for many FBOs—including FBOs that have not requested positive net debit caps. Removing references to FHC status in the PSR policy would align the policy with the Board's view that an FBO's status as an FHC is not a suitable factor for determining the FBO's eligibility for intraday credit.
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As noted above, the Board does not believe that it will be burdensome for an FBO to calculate an equivalent PCA designation or determine whether it is well capitalized. The Board's FR Y-7Q report currently requires that FBOs with total consolidated assets of $50 billion or more report the numerators and denominators of all four ratios in the PCA determination. The FR Y-7Q report also requires that FBOs with total consolidated assets below $50 billion report the numerators and denominators of all ratios in the PCA determination except the common equity tier 1 capital ratio. FBOs with total consolidated assets below $50 billion that are based in BCA-adhering jurisdictions already calculate their common equity tier 1 capital ratios under home country standards.
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In two places—specifically, in the capital measure calculation process and in the eligibility criteria for a streamlined max cap procedure—the proposed changes would delete references to SOSA without replacing those references with an alternative supervisory rating. For the reasons described above, the Board believes that it is unnecessary to substitute another supervisory rating.
Finally, the proposed changes would replace SOSA rankings in the creditworthiness self-assessment matrix with an equivalent PCA designation. This change would require an FBO to calculate its equivalent PCA designation using worldwide capital ratios. Alternatively, the Board could simply delete the SOSA ranking and judge an FBO's creditworthiness solely on the basis of its U.S. operations supervisory composite rating. The Board believes, however, that using equivalent PCA designations in conjunction with supervisory ratings will better protect the Reserve Banks from credit risk, because an equivalent PCA designation would provide insight into an FBO's worldwide financial profile and its ability to support its U.S. branches and agencies.
The Board conducts a competitive impact analysis when it considers a rule or policy change that may have a substantial effect on payment system participants. Specifically, the Board determines whether there would be a direct or material adverse effect on the ability of other service providers to compete with the Federal Reserve due to differing legal powers or due to the Federal Reserve's dominant market position deriving from such legal differences.
The Board believes that the proposed modifications to the PSR policy will have no adverse effect on the ability of other service providers to compete with the Reserve Banks in providing similar services. While the Board expects that the proposed modifications would reduce net debit caps for many FBOs, the Board does not believe this will have a significant effect on FBOs because (as explained above) the adjusted FBO net debit caps would still provide ample levels of intraday credit. The Board therefore believes that most FBOs would retain sufficient access to Reserve Bank intraday credit if the proposed modifications take effect, and accordingly does not expect the proposed modifications would have a significant effect on FBOs' use of Federal Reserve Bank services. Additionally, the proposed modifications will have no effect on intraday credit access for domestic institutions, which comprise the vast majority of Reserve Bank account holders.
In accordance with section 3512 of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) (“PRA”), the Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (“OMB”) control number. The OMB control number is 7100-0217. The Board reviewed the PSR policy changes it is considering under the authority delegated to the Board by the OMB.
Comments are invited on:
(a) Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;
(b) The accuracy of the estimates of the burden of the information collections, including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the
The Board proposes to revise Section II.D of the “Federal Reserve Policy on Payment System Risk” as follows:
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In order to establish a net debit cap category of high, above average, or average, an institution must perform a self-assessment of its own creditworthiness, intraday funds management and control, customer credit policies and controls, and operating controls and contingency procedures.
Many institutions incur relatively small overdrafts and thus pose little risk to the Federal Reserve. To ease the burden on these small overdrafters of engaging in the self-assessment process and to ease the burden on the Federal Reserve of administering caps, the Board allows institutions that meet reasonable safety and soundness standards to incur de minimis amounts of daylight overdrafts without performing a self-assessment.
Institutions that only rarely incur daylight overdrafts in their Federal Reserve accounts that exceed the lesser of $10 million or 20 percent of their capital measure are excused from performing self-assessments and filing board of directors resolutions with their Reserve Banks.
For U.S. branches and agencies of foreign banks, net debit caps on daylight overdrafts in Federal Reserve accounts are calculated by applying the cap multiples for each cap category to the FBO's U.S. capital equivalency measure.
An FBO that is well capitalized (calculated as if the FBO were subject to the Board's Regulation H
The Board proposes to revise Section II.E of the “Federal Reserve Policy on Payment System Risk” as follows:
An institution with a self-assessed net debit cap that wishes to expand its daylight overdraft capacity by pledging collateral should consult with its administrative Reserve Bank. The Reserve Bank will work with an institution that requests additional daylight overdraft capacity to determine the appropriate maximum daylight overdraft capacity level. In considering the institution's request, the Reserve Bank will evaluate the institution's rationale for requesting additional daylight overdraft capacity as well as its financial and supervisory information. The financial and supervisory information considered may include, but is not limited to, capital and liquidity ratios, the composition of balance sheet assets, and CAMELS or other supervisory ratings and assessments. An institution approved for a maximum daylight overdraft capacity level must submit at least once in each twelve-month period a board of directors resolution indicating its board's approval of that level. * * *
An FBO that is well capitalized (calculated as if the FBO were subject to the Board's Regulation H
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
We propose to supersede Airworthiness Directive (AD) 2015-15-13, which applies to certain Airbus Model A319 series airplanes; Model A320-211, -212, -214, -231, -232, and -233 airplanes; and Model A321-111, -112, -131, -211, -212, -213, -231, and -232 airplanes. AD 2015-15-13 requires modification of the potable water service panel and waste water service panel, including doing applicable related investigative and corrective actions. Since we issued AD 2015-15-13, further investigations linked to widespread fatigue damage (WFD) analysis highlighted that, to meet the WFD requirements, it is necessary that the affected modification not be accomplished before reaching a certain threshold. This proposed AD would require modification of the waste water and potable water service panels with new compliance times. This proposed AD would also remove certain airplanes from the applicability and add Model A320-216 airplanes to the applicability. We are proposing this AD to address the unsafe condition on these products.
We must receive comments on this proposed AD by January 29, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
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For service information identified in this NPRM, contact Airbus, Airworthiness Office—EIAS, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email
You may examine the AD docket on the internet at
Sanjay Ralhan, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone 425-227-1405; fax 425-227-1149.
We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the
We will post all comments we receive, without change, to
Fatigue damage can occur locally, in small areas or structural design details, or globally, in widespread areas. Multiple-site damage is widespread damage that occurs in a large structural element such as a single rivet line of a lap splice joining two large skin panels. Widespread damage can also occur in multiple elements such as adjacent frames or stringers. Multiple-site damage and multiple-element damage cracks are typically too small initially to be reliably detected with normal inspection methods. Without intervention, these cracks will grow, and eventually compromise the structural integrity of the airplane. This condition is known as WFD. It is associated with general degradation of large areas of structure with similar structural details and stress levels. As an airplane ages, WFD will likely occur, and will certainly occur if the airplane is operated long enough without any intervention.
The FAA's WFD final rule (75 FR 69746, November 15, 2010) became effective on January 14, 2011. The WFD rule requires certain actions to prevent structural failure due to WFD throughout the operational life of certain existing transport category airplanes and all of these airplanes that will be certificated in the future. For existing and future airplanes subject to the WFD rule, the rule requires that DAHs establish a limit of validity (LOV) of the engineering data that support the structural maintenance program. Operators affected by the WFD rule may not fly an airplane beyond its LOV, unless an extended LOV is approved.
The WFD rule (75 FR 69746, November 15, 2010) does not require identifying and developing maintenance actions if the DAHs can show that such actions are not necessary to prevent WFD before the airplane reaches the LOV. Many LOVs, however, do depend on accomplishment of future maintenance actions. As stated in the WFD rule, any maintenance actions necessary to reach the LOV will be mandated by airworthiness directives through separate rulemaking actions.
In the context of WFD, this action is necessary to enable DAHs to propose LOVs that allow operators the longest operational lives for their airplanes, and still ensure that WFD will not occur. This approach allows for an implementation strategy that provides flexibility to DAHs in determining the timing of service information development (with FAA approval), while providing operators with certainty regarding the LOV applicable to their airplanes.
We issued AD 2015-15-13, Amendment 39-18223 (80 FR 45857, August 3, 2015) (“AD 2015-15-13”), for certain Airbus Model A319 series airplanes; Model A320-211, -212, -214, -231,-232, and -233 airplanes; and Model A321 series airplanes. AD 2015-15-13 was prompted by reports of cracks that could be initiated at the waste water service panel area and the potable water service panel area. AD 2015-15-13 requires modification of the potable water service panel and waste water service panel, including doing applicable related investigative and corrective actions. We issued AD 2015-15-13 to prevent any cracking at the waste water service panel area and the potable water service panel area, which could affect the structural integrity of the airplane.
Since we issued AD 2015-15-13, further investigations linked to WFD analysis highlighted that, to meet the WFD requirements, it is necessary that the affected modification is not accomplished before reaching a certain threshold by imposing a “window of embodiment.”
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2017-0098, dated June 7, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Airbus Model A319 series airplanes; Airbus Model A320-211, -212, -214, -216, -231, -232, and -233 airplanes; and Airbus Model A321-111, -112, -131, -211, -212, -213, -231, and -232 airplanes. The MCAI states:
During the full scale fatigue test on A320-200, it was noticed that, due to fatigue, cracks could initiate at the potable water and waste water service panel areas.
This condition, if not detected and corrected, could affect the structural integrity of the aeroplane.
Prompted by these findings, Airworthiness Limitation Section (ALS) Part 2 tasks were introduced for the affected aeroplanes. Since those actions were taken, Airbus developed production mod 160055 and mod 160056 to embody reinforcements (cold working on certain rivet rows) of the potable water and waste water service panels, and published associated Airbus Service Bulletin (SB) A320-53-1272 and Airbus SB A320-53-1267 for in-service embodiment. Complementary design office studies highlighted that the “Sharklets” installation on certain aeroplanes has a significant impact on the aeroplane structure (particularly, A319 and A320 post-mod 160001, A320 post-SB A320-57-1193 (mod 160080), and A321 post-mod 160021), leading to different compliance times, depending on aeroplane configuration.
Consequently, EASA issued AD 2014-0081 [which corresponds to FAA AD 2015-15-13] to require reinforcement of the potable water and waste water service panels. Accomplishment of these modifications cancelled the need for the related ALS Part 2 Tasks.
Since that AD was issued, further investigations linked to the Widespread Fatigue Damage (WFD) analysis highlighted that, to meet the WFD requirements, it is necessary that the affected modification is not accomplished before reaching a certain threshold, by imposing a so-called “window of embodiment”. Consequently, Airbus revised SB A320-53-1272 (now at revision (Rev.) 04) and SB A320-53-1267 (now at Rev. 05).
For the reasons described above, this [EASA] AD retains the requirements of EASA AD 2014-0081, which is superseded, and introduces additional compliance times for those actions.
This proposed AD would also remove Model A319 series airplanes on which modification 28162, 28238, and 28342 have been embodied (“Corporate Jet” modifications) from the applicability because production modifications
You may examine the MCAI in the AD docket on the internet at
Airbus has issued Service Bulletin A320-53-1267, Revision 05, dated November 29, 2016, which describes procedures for modifying the waste water service panel. Airbus has also issued Service Bulletin A320-53-1272, Revision 04, dated November 29, 2016, which describes procedures for modifying the potable water service panel. Both modifications include a check of the diameter of the holes of removed fasteners, a related investigative action (rotating probe inspection for cracking on the holes of the removed fasteners) and a corrective action (repair). This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.
The compliance time for the replacement specified in this proposed AD for addressing WFD was established to ensure that discrepant structure is replaced before WFD develops in airplanes. Standard inspection techniques cannot be relied on to detect WFD before it becomes a hazard to flight. We will not grant any extensions of the compliance time to complete any AD-mandated service bulletin related to WFD without extensive new data that would substantiate and clearly warrant such an extension.
We estimate that this proposed AD affects 851 airplanes of U.S. registry.
We also estimate that it would take about 27 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $700 per product. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $2,548,745, or $2,995 per product.
We have received no definitive data that would enable us to provide cost estimates for the on-condition actions specified in this proposed AD.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this proposed regulation:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
We must receive comments by January 29, 2018.
This AD replaces AD 2015-15-13, Amendment 39-18223 (80 FR 45857, August 3, 2015) (“AD 2015-15-13”).
This AD applies to the airplanes identified in paragraphs (c)(1), (c)(2), and (c)(3) of this AD, certificated in any category, except for those airplanes on which Airbus modification 160055 or modification 160056 has been embodied in production, and except for Model A319 series airplanes on which modification 28162, 28238, and 28342 have been embodied (“Corporate Jet”).
(1) Airbus Model A319-111, -112, -113, -114, -115, -131, -132, and -133 airplanes.
(2) Airbus Model A320-211, -212, -214, -216, -231, -232, and -233 airplanes.
(3) Airbus Model A321-111, -112, -131, -211, -212, -213, -231, and -232 airplanes.
Air Transport Association (ATA) of America Code 53, Fuselage.
This AD was prompted by an evaluation by the design approval holder (DAH) indicating
Comply with this AD within the compliance times specified, unless already done.
(1) Within the compliance times specified in Table 1 to paragraphs (g)(1) and (i) of this AD, as applicable, modify the potable water service panel, including doing a check of the diameter of the holes of removed fasteners, and do all applicable related investigative and corrective actions, in accordance with the Accomplishment Instructions of Airbus Service Bulletin A320-53-1272, Revision 04, dated November 29, 2016, except as required by paragraph (g)(2) of this AD. Do all applicable related investigative and corrective actions before further flight.
(2) Where Airbus Service Bulletin A320-53-1272, Revision 04, dated November 29, 2016, specifies to contact Airbus for appropriate action, and specifies that action as “RC” (Required for Compliance): Before further flight, accomplish corrective actions in accordance with the procedures specified in paragraph (m)(2) of this AD.
(1) Within the compliance times specified in Table 2 to paragraphs (h)(1) and (i) of this AD, as applicable, modify the waste water service panel, including doing a check of the diameter of the holes of removed fasteners, and do all applicable related investigative and corrective actions in accordance with the Accomplishment Instructions of Airbus Service Bulletin A320-53-1267, Revision 05, dated November 29, 2016, except as required by paragraph (h)(2) of this AD. Do all applicable related investigative and corrective actions before further flight.
(2) Where Airbus Service Bulletin A320-53-1267, Revision 05, dated November 29, 2016, specifies to contact Airbus for appropriate action, and specifies that action as “RC” (Required for Compliance): Before further flight, accomplish corrective actions in accordance with the procedures specified in paragraph (m)(2) of this AD.
For airplanes on which the modification, as required by paragraph (g) or (h) of this AD,
Modification of an airplane as required by paragraph (g) of this AD terminates the requirement for accomplishing the ALS Part 2 task for that airplane as specified in Table 3 to paragraph (j) of this AD, as applicable.
Modification of an airplane as required by paragraph (h) of this AD terminates the requirement for accomplishing the ALS Part 2 task for that airplane as specified in Table 4 to paragraph (k) of this AD, as applicable.
(1) This paragraph provides credit for actions required by paragraph (g) of this AD if those actions were performed before the effective date of this AD using the service information in paragraphs (l)(1)(i) through (l)(1)(iv) of this AD.
(i) Airbus Service Bulletin A320-53-1272, Revision 00, dated January 10, 2013, which is not incorporated by reference in this AD.
(ii) Airbus Service Bulletin A320-53-1272, Revision 01, dated August 6, 2013, which is not incorporated by reference in this AD.
(iii) Airbus Service Bulletin A320-53-1272, Revision 02, dated May 19, 2014, which was incorporated by reference in AD 2015-15-13.
(iv) Airbus Service Bulletin A320-53-1272, Revision 03, dated November 26, 2015, which is not incorporated by reference in this AD.
(2) This paragraph provides credit for actions required by paragraph (h) of this AD if those actions were performed before the effective date of this AD using the service information in paragraphs (l)(2)(i) through (l)(2)(v) of this AD.
(i) Airbus Service Bulletin A320-53-1267, Revision 00, dated June 24, 2013, which is not incorporated by reference in this AD.
(ii) Airbus Service Bulletin A320-53-1267, Revision 01, dated October 2, 2013, which is not incorporated by reference in this AD.
(iii) Airbus Service Bulletin A320-53-1267, Revision 02, dated May 19, 2014, which was incorporated by reference in AD 2015-15-13.
(iv) Airbus Service Bulletin A320-53-1267, Revision 03, dated November 26, 2015, which is not incorporated by reference in this AD.
(v) Airbus Service Bulletin A320-53-1267, Revision 04, dated February 1, 2016, which is not incorporated by reference in this AD.
(1)
(2)
(3)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2017-0098, dated June 7, 2017, for related information. This MCAI may be found in the AD docket on the internet at
(2) For more information about this AD, contact Sanjay Ralhan, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 1601 Lind Avenue SW, Renton, WA 98057-3356; telephone 425-227-1405; fax 425-227-1149.
(3) For service information identified in this AD, contact Airbus, Airworthiness Office—EIAS, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email
Office of the Secretary, Department of Transportation.
Proposed rule; withdrawal.
The Department of Transportation (the Department) is withdrawing a notice of proposed rulemaking (NPRM) published on July 15, 2011 that proposed to collect detailed revenue information regarding airline imposed fees from those air carriers meeting the definition of a large certificated air carrier. We are withdrawing this rulemaking in light of the comments we received. The withdrawal of this rulemaking corresponds with the Department's and Administration's priorities and is consistent with the Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, January 30, 2017.
Amendatory instructions 3 through 6 of the proposed rule published July 15, 2011 (76 FR 41726), are withdrawn as of December 14, 2017.
Zeenat Iqbal and Blane A. Workie, Office of Aviation Enforcement and Proceedings, 1200 New Jersey SE, Room W96-414, Washington, DC 20590, (202) 366-9893,
On July 7, 2011, the Office of the Secretary issued a notice of proposed rulemaking (NPRM) proposing to collect detailed information about ancillary fees paid by airline consumers to determine the total amount of fees carriers collect through the
In the NPRM, the Department proposed to create two stand-alone reporting forms, designated P-9 and P-9.1, to capture ancillary revenues. Specifically, air carriers with annual reporting revenue of $20 million or more would be required to submit the P-9 form quarterly and air carriers with annual reporting revenue below $20 million would be required to submit the form P-9.1 on a semiannual basis. The information required by the two proposed schedules was identical; they differed only in the required reporting frequency. The NPRM also proposed to define ancillary revenues as those charges paid by airline passengers that are not included in the standard ticket fare. The Department solicited comments on which items should be specifically identified as ancillary revenues, and proposed to collect data on 19 separate charges for optional services. The categories included: (1) Booking fees, (2) priority check-in and security screening, (3) baggage, (4) in-flight medical equipment, (5) in-flight entertainment/internet access, (6) sleep sets, (7) in-flight food/non-alcoholic drinks, (8) alcoholic drinks, (9) pets, (10) seating assignments, (11) reservation cancellation and change fees; (12) charges for lost ticket; (13) unaccompanied minor/passenger assistance fee; (14) frequent flyer points/points acceleration; (15) commissions on travel packages; (16) travel insurance; (17) duty-free and retail sales; (18) one-time access to lounges and (19) other.
In response to the 2011 NPRM, the Department received approximately 280 comments from airlines, airports, trade associations, unions, consumer groups and private citizens who use this data. There was wide support among consumers and consumer rights groups for the proposed rule's reporting requirements. Consumers and consumer rights groups, as well as ACI-NA and Southwest Airlines, commented that the reporting requirement would bring the benefits of both increased transparency and improved data corroboration regarding the impact of ancillary fees on the Airport and Airway Trust Fund.
On the other hand, most airlines and industry organizations commented that the proposed rule will not benefit the public because the Department has not demonstrated a need for this information. They asserted that the rule will not increase the transparency of pricing for airline revenues. Airlines also commented that if the justification for this rule is to tax ancillary revenues, the Department must state that justification. In addition, several airlines and industry groups suggested that the Department underestimated the proposed rule's economic burden on industry.
With regard to the proposed 19 categories, industry groups, consumer groups and airlines commented that the Department failed to justify the proposed categories and suggested various changes to the list of 19 charges for which air carriers would have to report revenues under the proposed rule. Carriers also expressed concern that the proposed reporting requirements would require carriers to reveal proprietary information to their competitors. Some carriers suggested that there is no correlation between a carrier's disclosure of itemized aggregate revenue data and consumer concerns regarding fare transparency. Southwest Airlines, which supported the Department's stated goal of making ticket pricing more transparent for
The purpose of this rulemaking was to make airline pricing more transparent to consumers and airline analysts. Although we believe there would be benefits of collecting and publishing the proposed aviation data, the Department also takes seriously industry concerns about the potential burden of this rule. The Department is withdrawing this rulemaking proposal. The withdrawal of this rulemaking corresponds with the Department's and Administration's priorities and is consistent with the Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, January 30, 2017.
Office of the Secretary (OST), U.S. Department of Transportation (DOT).
Notice of withdrawal of proposed rulemaking.
The Department is withdrawing the supplemental notice of proposed rulemaking (SNPRM) on Transparency of Airline Ancillary Service Fees issued on January 9, 2017. The SNPRM proposed to require air carriers, foreign air carriers, and ticket agents to clearly disclose to consumers at all points of sale customer-specific fee information, or itinerary-specific information if a customer elects not to provide customer-specific information, for a first checked bag, a second checked bag, and one carry-on bag wherever fare and schedule information is provided to consumers. The withdrawal of this rulemaking corresponds with the Department's and Administration's priorities and is consistent with Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, January 30, 2017.
December 14, 2017.
You may send comments by sending an email to Kimberly Graber (
Kimberly Graber or Blane A. Workie, Office of the Assistant General Counsel for Aviation Enforcement and Proceedings, U.S. Department of Transportation, 1200 New Jersey Ave. SE, Washington, DC 20590, 202-366-9342 (phone),
On January 9, 2017, the Department issued an SNPRM that proposed to require air carriers, foreign air carriers, and ticket agents to clearly disclose to consumers at all points of sale customer-specific fee information, or itinerary-specific information if a customer elects not to provide customer-specific information, for a first checked bag, a second checked bag, and one carry-on bag wherever fare and schedule information is provided to consumers (
On March 2, 2017, the Department suspended the comment period, which had been scheduled to close on March 20, 2017. The suspension of the comment period was to allow the President's appointees the opportunity to review and consider this action. After a careful review, the Department has determined to withdraw the SNPRM. The Department is committed to protecting consumers from hidden fees and to ensuring transparency. However, we do not believe that Departmental action is necessary to meet this objective at this time. The Department's existing regulations already provide consumers some information regarding fees for ancillary services. The withdrawal corresponds with the Department's and Administration's priorities and is consistent with the Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, January 30, 2017.
Department of State.
Proposed rule.
This proposed rule provides various changes and updates to the Department of State passport rules. The proposed rule incorporates statutory passport denial and revocation requirements for certain convicted sex offenders. It notes that, notwithstanding the legal bases for denial or revocation of a passport, the Department may issue a passport for direct return to the United States. It sets out the Department's procedures for denying and cancelling Consular Reports of Birth Abroad. Finally, the proposed rule provides additional information relating to the conduct of review hearings.
The Department will accept comments on the proposed regulation up to February 12, 2018.
Submit comments by any of the following methods:
•
•
•
Anita Mody, Office of Legal Affairs, Passport Services, (202) 485-6500. Hearing- or speech-impaired persons
The Department is proposing to amend various sections of Subparts A, E, and F within Part 51 and Subpart A within Part 50 of Title 22 of the CFR.
Consistent with 22 U.S.C. 211a, the proposed rule in § 51.4(g)(1) revises the previous rule to now state that a passport is invalid when the passport revocation notification is approved. This revision leaves unchanged the Department's obligation, set forth at § 51.65(a), to send notification of the revocation, and the reasons therefor, in writing.
The proposed new provision in § 51.4(g)(8) provides that a passport is invalid when a Certificate of Loss of Nationality is approved. This provision, consistent with 8 U.S.C. 1481(a), specifies that a passport is not valid once the Department approves the bearer's formal renunciation of nationality.
The proposed rule incorporates statutory passport denial and revocation requirements for certain convicted sex offenders as codified at 22 U.S.C. 212a.
Proposed § 51.60(h) requires denial of a passport to an individual convicted under 18 U.S.C. 2423 and who used a passport or otherwise crossed an international border in committing the underlying offense. In accordance with 22 U.S.C. 212a, upon timely notification by the Attorney General, such an individual's passport application will be denied during the period covering the date of conviction and ending on the later of (1) the date on which the individual is released from a sentence of imprisonment relating to the offense; or (2) the end of a period of parole or other supervised release of the covered individual relating to the offense. However the Department may issue a passport in emergency circumstances or for humanitarian reasons, or may issue a limited passport valid only for direct return to the United States.
Proposed § 51.60(i) notes the Department's authority, consistent with 22 U.S.C. 217a, to, as appropriate, issue limited validity passports good only for direct return to the United States, notwithstanding any prior revocation or denial.
Proposed § 51.62(d) requires revocation of a passport previously issued to an individual convicted under 18 U.S.C. 2423 and who used a passport or otherwise crossed an international border in committing the underlying offense. In accordance with 22 U.S.C. 212a, upon timely notification by the Attorney General, such an individual's passport will be revoked once convicted and until the later of (1) the date on which the individual is released from a sentence of imprisonment relating to the offense; or (2) the end of a period of parole or other supervised release of the covered individual relating to the offense.
Proposed § 51.62(c), deriving from the Department's existing statutory authority including under 8 U.S.C. 1504, sets out that the Department may cancel Consular Reports of Birth Abroad that were obtained illegally, fraudulently or erroneously; were created through illegality or fraud; have been fraudulently altered or misused; or where the bearer of the document is not a U.S. national. Specific reference to cancellation of Consular Reports of Birth Abroad has been added to the provisions on revocation or limitation of passports at § 51.62, notification of such action at § 51.65, the surrendering of passports at § 51.66, and the right to a hearing in certain circumstances at § 51.70(a).
The proposed rule in § 51.62(a)(1) also removes the reference to § 51.28 concerning passports for minors, thereby removing the Department's discretion to revoke in circumstances where a U.S. passport may be denied under § 51.28. Once parental consent is properly given and a passport issued, the Department has consistently taken the position that such a properly issued passport may not be revoked upon a subsequent withdrawal of parental consent.
The proposed rule in § 51.70(b) revises the non-exhaustive list of provisions under which a hearing will not be provided if the Department denies, restricts, revokes, cancels or invalidates a passport or Consular Report of Birth Abroad under §§ 51.60(a), 51.60(f), 51.60(g), 51.61(a), 51.62(b), 51.62(c)(3), 51.62(d), or 51.64, such that it is consistent with other revisions made as a part of this notice. Section 51.60(a) refers to instances where the Department may not issue a passport because the applicant is in default on a repatriation loan or certified to be in arrears of child support. In accordance with § 51.60(f), the Department may deny an application if the individual has failed to provide his or her social security number on a passport application, or purposefully provides an incorrect number. In accordance with § 51.60(g), the Department shall not issue a passport to a covered sex offender as defined by 22 U.S.C. 212b(c)(1). Section 51.61(a) specifies that the Department may not issue a passport to an applicant subject to imprisonment or supervised release as a result of a federal or state felony drug offense, if the individual used the passport or crossed an international border in committing the offense. Sections 51.62(b) and 51.62(c)(3) address where the Department revokes a passport, or cancels a Consular Report of Birth Abroad, after determining the individual is not a U.S. national, or revokes the passport after being on notice that an individual's certificate of citizenship or naturalization has been cancelled. Under § 51.62(d), the Department revokes a U.S. passport for individuals convicted of illicit sexual conduct under 18 U.S.C. 2423, during the covered period defined by 22 U.S.C. 212a, and who used a passport or crossed an international border in committing the offense. Section 51.64 refers to specially validated passports for travel to restricted areas.
The proposed rule amends § 50.7(d), which currently includes procedures for cancellation of Consular Reports of Birth Abroad and hearings for such cancellations, to include a reference to § 51.60 through § 51.74.
The proposed rule in § 51.65(a)-(c) notes that the procedures for providing notification of denials, revocation, or cancellation of passports also applies to Consular Reports of Birth Abroad, and specifies in proposed § 51.65(c) that the Department may exercise its discretion to administratively re-open a previously filed passport or Consular Report of Birth Abroad application in order to issue the passport or Consular Report of Birth Abroad.
In order to provide the public with additional information regarding the denial/revocation review hearing process, the proposed rule also provides further details and requirements for the conduct of review hearings and specifies that the set of circumstances for which hearings may be held include certain cancellations of Consular Reports of Birth Abroad. The proposed rule provides at § 51.70(e) that the individual requesting the hearing may obtain one continuance of up to ninety days upon written request; and advises at § 51.71 that the Department will provide copies of the evidence relied upon in denying, revoking, or cancelling the passport or Consular Report of Birth Abroad prior to the hearing. It specifies in § 51.71(a) that the hearing officer will generally be a Department employee from the Bureau of Consular Affairs and that the hearing officer makes only preliminary findings of fact and recommendations and submits them to the Deputy Assistant Secretary for
The proposed rule also amends § 50.11 to include further instruction on where to submit an appeal arising out of a denial of an application for a certificate of identity.
The Department is publishing this rule as a proposed rule, with 60 days for public comments.
The Department certifies that this proposed rule is not expected to have a significant impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act, 5 U.S.C. 601
This proposed rule is not a major rule, as defined by 5 U.S.C. 804, for purposes of congressional review of agency rulemaking. This rule would not result in an annual effect on the economy of $100 million or more; a major increase in costs or prices; or adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based companies to compete with foreign-based companies in domestic and export markets.
Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532 generally requires agencies to prepare a statement before proposing any rule that may result in an annual expenditure of $100 million or more by State, local, or tribal governments, or by the private sector. This proposed rule does not result in any such expenditure nor will it significantly or uniquely affect small governments.
This proposed rule does not have substantial direct effects on the States, on the relationship between the national government and the States, or the distribution of power and responsibilities among the various levels of government. Nor will the rule have federalism implications warranting the application of Executive Orders 12372 and 13132.
The Department has reviewed this proposed rule to ensure its consistency with the regulatory philosophy and principles set forth in Executive Order 12866, and determined that the benefits of the proposed rule justify its costs. The Department does not consider the proposed rule to be an economically significant regulatory action within the scope of section 3(f)(1) of the Executive Order. The Department has considered this proposed rule in light of Executive Order 13563 and affirms that this proposed rule is consistent with the guidance therein.
The proposed rule revises the Department's determination of when a passport is considered invalid when a passport is revoked or a Certificate of Loss of Nationality is approved. Further, the proposed rule presents the public with additional information regarding passport and Consular Report of Birth Abroad denial, cancellation and revocation hearings. These changes supply the public with more details regarding the place, requirements, procedures and purpose of such hearings. The proposed rule also provides the public with further instruction on where to submit an appeal arising out of a denial of an application for a certificate of identity.
The proposed rule provides further information to the public about the procedures for cancelling a Consular Reports of Birth Abroad. The proposed rule also notifies the public of the Department's statutory obligation to deny or revoke U.S. passports for certain convicted sex offenders as codified at 22 U.S.C. 212a. The Department finds that this proposed rulemaking implements Congressional intent as reflected in the Immigration and Naturalization Act, and that the benefits of the proposed rulemaking outweigh any costs to the public. The Office of Information and Regulatory Affairs has designated this proposed rule as non-significant within the meaning of Executive Order 12866. Consequently, no actions are required pursuant to Executive Order 13771.
The Department has reviewed the proposed rule in light of sections 3(a) and 3(b)(2) of Executive Order 12988 to eliminate ambiguity, minimize litigation, establish clear legal standards, and reduce burden.
The Department has determined that this proposed rule will not have tribal implications, will not impose substantial direct compliance costs on Indian tribal governments, and will not pre-empt tribal law. Accordingly, the requirements of Section 5 of Executive Order 13175 do not apply to this rulemaking.
This proposed rule does not revise or impose any collections of information requirements subject to the PRA.
Citizenship and naturalization.
Administrative practice and procedure; Drug traffic control; Passports and visas; Reporting and recordkeeping requirements.
Accordingly, for the reasons set forth in the preamble, the Department proposes to amend 22 CFR parts 50 and 51 as follows:
22 U.S.C. 2651a; 8 U.S.C. 1104 and 1401 through 1504.
(d) A Consular Report of Birth Abroad may be cancelled in accordance with applicable provisions in 22 CFR 51.60 through 51.74.
(b) When a diplomatic or consular officer denies an application for a certificate of identity under this section, the applicant may submit a written appeal to the Secretary through the U.S. embassy or consulate where the individual applied for the certificate of identity, stating the pertinent facts, the grounds upon which U.S. nationality is claimed, and his or her reasons for considering that the denial was not justified.
8 U.S.C. 1504; 18 U.S.C. 1621, 2423; 22 U.S.C. 211a, 212, 212a, 212b, 213, 213n (Pub. L. 106-113 Div. B, Sec. 1000(a)(7) [Div. A, Title II, Sec. 236], 113 Stat. 1536, 1501A-430); 214, 214a, 217a, 218, 2651a, 2671(d)(3), 2705, 2714, 2721, 3926; 26 U.S.C. 6039E; 31 U.S.C. 9701; 42 U.S.C. 652(k) [Div. B, Title V of P. L. 103-317, 108 Stat. 1760]; E.O. 11295, FR 10603; Pub. L. 114-119, 130 Stat. 15; Sec. 1 of P. L. 109-210, 120 Stat. 319; Sec. 2 of P. L. 109-167, 119 Stat. 3578; Sec. 5 of P. L. 109-472, 120 Stat. 3554; P. L. 108-447, Div. B, Title IV 118 Stat. 2896; P. L. 108-458, 118 Stat. 3638, 3823.
(g)
(1) The Department approves the revocation notification pursuant to § 51.65(a); or
(8) The Department approves a Certificate of Loss of Nationality for the passport holder pursuant to § 50.40 and 8 U.S.C. 1481.
(h) The Department may not issue a passport, except a limited validity passport for direct return to the United States or in instances where the Department finds that emergency circumstances or humanitarian reasons exist, in any case in which the Department is notified by the Attorney General that, during the covered period as defined by 22 U.S.C. 212a:
(1) The applicant was convicted of a violation of 18 U.S.C. 2423, and
(2) The individual used a passport or passport card or otherwise crossed an international border in committing the underlying offense.
(i) In appropriate circumstances, where an individual's passport application is denied or passport revoked consistent with this part, the Department may issue a limited validity passport good only for direct return to the United States.
(a) The Department may revoke or limit a passport when:
(1) The bearer of the passport may be denied a passport under 22 CFR 51.60 or 51.61 or any other applicable provision contained in this part;
(2) The passport was illegally, fraudulently or erroneously obtained from the Department; or was created through illegality or fraud practiced upon the Department; or
(3) The passport has been fraudulently altered or misused.
(b) The Department may revoke a passport when the Department has determined that the bearer of the passport is not a U.S. national, or the Department is on notice that the bearer's certificate of citizenship or certificate of naturalization has been cancelled.
(c) The Department may cancel a Consular Report of Birth Abroad when:
(1) The Consular Report of Birth Abroad was illegally, fraudulently or erroneously obtained from the Department, or was created through illegality or fraud practiced upon the Department;
(2) The Consular Report of Birth Abroad has been fraudulently altered or misused; or
(3) The Department has determined that the bearer of the Consular Report of Birth Abroad is not a U.S. national, or the Department is on notice that the bearer's certificate of citizenship has been cancelled.
(d) The Department shall revoke a U.S. passport in any case in which the Department is notified by the Attorney General, that during the covered period as defined by 22 U.S.C. 212a:
(1) The applicant was convicted of a violation of 18 U.S.C. 2423, and
(2) The individual used a passport or otherwise crossed an international border in committing the underlying offense.
(3) Notwithstanding paragraph (d)(1) and (d)(2), the Department may issue a limited validity passport for direct return to the United States.
(a) The Department will send notice in writing to any person whose application for issuance of a passport or Consular Report of Birth Abroad has been denied, whose passport has been revoked, or whose Consular Report of Birth Abroad has been cancelled. The notification will set forth the specific reasons for the denial, revocation or cancellation and, if applicable, the procedures for review available under 22 CFR 51.70 through 51.74.
(b) An application for a passport or Consular Report of Birth Abroad will be denied if an applicant fails to meet his or her burden of proof under the applicable regulations or otherwise does not provide documentation sufficient to establish entitlement to a passport or a Consular Report of Birth Abroad, or does not provide additional information as requested by the Department within the time provided in the notification by the Department that additional information is required. Thereafter, if an
(c) The Department may, in its sole discretion, administratively re-open a previously filed passport or Consular Report of Birth Abroad application in order to issue a passport or Consular Report of Birth Abroad.
The bearer of a passport that is revoked or of a Consular Report of Birth Abroad that is cancelled must surrender it to the Department or its authorized representative upon demand.
(a) A person whose passport has been denied or revoked under 22 CFR 51.60(b)(1) through (10), 51.60(c), 51.60(d), 51.61(b), 51.62(a)(1), or 51.62(a)(2), or whose Consular Report of Birth Abroad is cancelled under § 51.62(c)(1) or 51.62(c)(2), may request a hearing to review the basis for the denial, revocation, or cancellation, provided that the Department receives such a request, in writing, from such person or his or her attorney within 60 days of his or her receipt of the notice of the denial, revocation, or cancellation. Failure to timely request a hearing means the denial, revocation, or cancellation is the Department's final action.
(b) The provisions of §§ 51.70 through 51.74 do not apply to any action of the Department denying, restricting, revoking, cancelling or invalidating a passport or Consular Report of Birth Abroad, or in any other way adversely affecting the ability of a person to receive or use a passport or Consular Report of Birth Abroad, for reasons not set forth in § 51.70(a), including, as applicable, those listed at:
(1) Section 51.60(a) (instances where the Department may not issue a passport, except for direct return to the United States);
(2) Section 51.60(f) (failure to provide a social security number, or purposefully providing an incorrect number);
(3) Section 51.60(g) (denial of passports to certain convicted sex offenders);
(4) Section 51.61(a) (denial of passports to certain convicted drug traffickers);
(5) Section 51.62(b) (revocation of passports for non-U.S. nationals or where a certificate of citizenship or naturalization has been cancelled);
(6) Section 51.62(c)(3) (cancellation of a Consular Report of Birth Abroad upon the Department's determination that the bearer is not a U.S. national or where a certificate of citizenship has been cancelled);
(7) Section 51.62(d) (revocation of passports issued to certain convicted sex offenders);
(8) Section 51.64 (specially validated passports);
(9) Any other provision not listed at § 51.70(a).
(c) If a timely request for a hearing is made by a person seeking a hearing in accordance with these regulations, the Department will make reasonable efforts to hold the hearing within 90 days of the date the Department receives the request.
(d) Within a reasonable period of time prior to the hearing, the Department will give the person requesting the hearing written notice of the date, time and place of the hearing and copies of the evidence relied on in denying, revoking, or cancelling the passport or Consular Report of Birth Abroad.
(e) The person requesting the hearing may obtain one continuance, not to exceed an additional 90 days, upon written request. The request for a continuance must be received by the Department as soon as practicable and in no case less than five business days prior to the scheduled hearing date. Any further continuances are within the sole discretion of the Department.
(a) The Department will name a hearing officer, who will generally be a Department employee from the Bureau of Consular Affairs. The hearing officer will make only preliminary findings of fact and submit recommendations based on the record of the hearing, as defined in 22 CFR 51.72, to the Deputy Assistant Secretary for Passport Services, or his or her designee, in the Bureau of Consular Affairs.
(b) The hearing shall take place in Washington, DC or, if the person requesting the hearing is overseas, at the appropriate U.S. diplomatic or consular post. The person requesting the hearing must appear in person or with or through his or her attorney. Failure to appear at the scheduled hearing will constitute an abandonment of the request for a hearing, and the Department's revocation, cancellation or denial will be considered the Department's final action.
(c) Any attorney appearing at a hearing must be admitted to practice in any state of the United States, the District of Columbia, or any territory or possession of the United States, or be admitted to practice before the courts of the country in which the hearing is to be held.
(d) There is no right to subpoena witnesses or to conduct discovery. However, the person requesting the hearing may testify in person, offer evidence in his or her own behalf, present witnesses, and make arguments at the hearing. The person requesting the hearing is responsible for all costs associated with the presentation of his or her case, including the cost of interpreters, who must be certified in accordance with standards established for federal courts under 18 U.S.C. 1827. The Department may present witnesses, offer evidence, and make arguments in its behalf. The Department is responsible for all costs associated with the presentation of its case.
(e) The hearing is informal and permissive. As such, the provisions of 5 U.S.C. 554
(f) If any witness is unable to appear, the hearing officer may, in his or her discretion, accept an affidavit or sworn deposition testimony of the witness, the cost for which will be the responsibility of the requesting party, subject to such limits as the hearing officer deems appropriate.
(g) The person requesting the hearing and the Department of State may submit written briefs or argument prior to the hearing, but it is not required. The hearing officer will specify the date and schedule for the parties to submit written briefs, should they choose to do so.
(h) The purpose of the hearing is to provide the person requesting the hearing an opportunity to challenge the basis for the Department's decision to deny or revoke the passport, or cancel the Consular Report of Birth Abroad. The burden of production is on the Department, and the Department shall provide the evidence it relied upon in revoking or denying the passport, or cancelling the Consular Report of Birth Abroad, prior to the hearing. The
A qualified reporter, provided by the Department, will make a complete verbatim transcript of the hearing. The person requesting the hearing or his or her attorney may review and purchase a copy of the transcript directly from the reporter. The hearing transcript and all the information and documents received by the hearing officer, whether or not deemed relevant, will constitute the record of the hearing. The hearing officer's preliminary findings and recommendations are deliberative, and shall not be considered part of the record unless adopted by the Deputy Assistant Secretary for Passport Services, or his or her designee.
Only the person requesting the hearing, his or her attorney, an interpreter, the hearing officer, the reporter transcribing the hearing, and employees of the Department concerned with the presentation of the case may be present at the hearing. Witnesses may be present only while actually giving testimony or as otherwise directed by the hearing officer.
After reviewing the record of the hearing and the preliminary findings of fact and recommendations of the hearing officer, and considering legal and policy considerations he or she deems relevant, the Deputy Assistant Secretary for Passport Services, or his or her designee, will decide whether to uphold the denial or revocation of the passport or cancellation of the Consular Report of Birth Abroad. The Department will promptly notify the person requesting the hearing of the decision in writing. If the decision is to uphold the denial, revocation, or cancellation, the notice will contain the reason(s) for the decision. The decision is final and is not subject to further administrative review.
National Labor Relations Board.
Request for information.
The National Labor Relations Board (the Board) is seeking information from the public regarding its representation election regulations (the Election Regulations), with a specific focus on amendments to the Board's representation case procedures adopted by the Board's final rule published on December 15, 2014 (the Election Rule or Rule). As part of its ongoing efforts to more effectively administer the National Labor Relations Act (the Act or the NLRA) and to further the purposes of the Act, the Board has an interest in reviewing the Election Rule to evaluate whether the Rule should be: Retained without change, retained with modifications, or rescinded, possibly while making changes to the prior Election Regulations that were in place before the Rule's adoption. Regarding these questions, the Board believes it will be helpful to solicit and consider public responses to this request for information.
Responses to this request for information must be received by the Board on or before February 12, 2018. No late responses will be accepted. Responses are limited to 25 pages.
You may submit responses by the following methods:
The Board requests that responses include full citations or internet links to any authority relied upon. All responses submitted to
Roxanne Rothschild, Deputy Executive Secretary, National Labor Relations Board, 1015 Half Street SE, Washington, DC 20570, (202) 273-2917 (this is not a toll-free number), 1-866-315-6572 (TTY/TDD).
On December 15, 2014, the Board published the Election Rule, which amended the Board's prior Election Regulations. 79 FR 74308 (December 15, 2014). The Election Rule was adopted after public comment periods in which tens of thousands of public comments were received. The Rule was approved by a three-member Board majority, with two Board members expressing dissenting views. Thereafter, the Rule was submitted for review by Congress pursuant to the Congressional Review Act. In March 2015, majorities in both houses of Congress voted in favor of a joint resolution disapproving the Board's rule and declaring that it should have no force or effect. President Obama vetoed this resolution on March 31, 2015. The amendments adopted by the final rule became effective on April 14, 2015, and have been applicable to all representation cases filed on or after that date. Multiple parties initiated lawsuits challenging the facial validity of the Election Rule, and those challenges were rejected. See
Agencies have the authority to reconsider past decisions and rules and to retain, revise, replace, and rescind decisions and rules. See
The Election Rule has been in effect for more than 2 years. The current five-member Board includes only two members who participated in the 2014 rulemaking: Member Pearce, who joined the majority vote to adopt the final rule, and Chairman Miscimarra, who joined former Member Johnson in dissent. In addition to the proceedings described above, and other congressional hearings and proposed legislation, numerous cases litigated before the Board have presented significant issues concerning application of the Election Rule. See,
The Board invites information relating to the following questions:
1. Should the 2014 Election Rule be retained without change?
2. Should the 2014 Election Rule be retained with modifications? If so, what should be modified?
3. Should the 2014 Election Rule be rescinded? If so, should the Board revert to the Election Regulations that were in effect prior to the 2014 Election Rule's adoption, or should the Board make changes to the prior Election Regulations? If the Board should make changes to the prior Election Regulations, what should be changed?
It is surprising that the Board lacks unanimity about merely posing three questions about the 2014 Election Rule, when none of the questions suggests a single change in the Board's representation-election procedures. Nonetheless, two dissenting colleagues object to the request for information regarding the Election Rule because, among other things, they believe that (i) the Election Rule has worked effectively (or even, in Member Pearce's estimation, essentially flawlessly), (ii) any request for information from the public about the Rule is premature, (iii) merely requesting information reveals a predetermination on our part to revise or rescind the Election Rule, and (iv) future changes will be based on “alternative facts” and “manufactur[ed]” rationales.
It is the Board's duty to periodically conduct an objective and critical review of the effectiveness and appropriateness of our rules. In any event, our dissenting colleagues would answer the above Question 1 in the affirmative: They believe the Election Rule should be retained without change. That is their opinion. However, the Board is seeking the opinions of others: Unions, employers, associations, labor-law practitioners, academics, members of Congress, and anyone from the general public who wishes to provide information relating to the questions posed above. In addition, we welcome the views of the General Counsel and also the Regional Directors, whose experience working with the 2014 Election Rule makes them a valuable resource.
One thing is clear: Issuing the above request for information is unlike the process followed by the Board majority that adopted the 2014 Election Rule. The rulemaking process that culminated in the 2014 Election Rule (like the process followed prior to issuance of the election rule adopted by Members Pearce and Becker in 2011) started with a lengthy proposed rule that outlined dozens of changes in the Board's election procedures, without any prior request for information from the public regarding the Board's election procedures. By contrast, the above request does not suggest even a single specific change in current representation-election procedures. Again, the Board merely poses three questions, two of which contemplate the possible retention of the 2014 Election Rule.
Member Pearce, dissenting.
I dissent from the Notice and Request for Information, which should more aptly be titled a “Notice and Quest for Alternative Facts.” It ignores the Final Rule's success in improving the Board's representation-case procedures and judicial rejection of dissenting Members Miscimarra and Johnson's legal pronouncements about the Final Rule.
Some two and a half years ago, the National Labor Relations Board concluded lengthy rulemaking pursuant to the Administrative Procedure Act to reexamine our representation-case procedures. We had proposed a number of targeted solutions to discrete problems identified with the Board's methods of processing petitions for elections with a goal of removing unnecessary barriers to the fair and expeditious resolution of representation cases. The rulemaking sought to simplify representation-case procedures, codify best practices, increase transparency and uniformity across regions, eliminate duplicative and unnecessary litigation, and modernize rules concerning documents and communication in light of changing technology. After a painstaking three and a half year process, involving the consideration of tens of thousands of comments generated over two separate comment periods totaling 141 days, and 4 days of hearings with live questioning by the Board Members, we issued a final rule that became effective on April 14, 2015.
The Final Rule was careful and comprehensive—spanning over 100 pages of the
Complying with the rulemaking process, and dealing with the deluge of public comments generated, was not an easy task for our Agency. Thousands of staff hours were expended; research and training was required into statutes and procedures with which we were unfamiliar; expensive licensing was purchased for software to sort, and websites to house, the tens of thousands of comments received; and contributions were made from all corners of the Agency. Through this extensive process, the fundamental questions were asked and answered. The amended procedures have now been in place for some two and a half years, and my colleagues show no serious justification for calling them into question.
Indeed, it is with some irony that I am reminded of the sentiment expressed in dissent to the Final Rule in 2014 that “the countless number of hours spent by Board personnel in rulemaking” would be better spent expeditiously processing cases. 79 FR at 74457. Yet, in the past 9 months, the Board's case output has fallen precipitously,
As a consequence, our attention will be diverted from case processing to explore the rollback of a Final Rule that has provided a bounty of beneficial changes, and which applies equally to initial organizing campaigns and efforts to decertify incumbent unions. A non-exhaustive list includes:
• Parties may now use modern technology to electronically file and serve petitions and other documents, thereby saving time and money, and affording non-filing parties the earliest possible notice.
• Petitions and election objections must be supported, and must be served on other parties.
• Board procedures are more transparent, and more meaningful information is more widely available at earlier stages of our proceedings.
• Issues in dispute are clarified, and parties are enabled to make more informed judgments about whether to enter into election agreements.
• Across regions, employees' Section 7 rights are afforded more equal treatment, the timing of hearings is more predictable, and litigation is more efficient and uniform.
• Parties are more often spared the expense of litigating, and the Board is more often spared the burden of deciding, issues that are not necessary to determine whether a question of representation exists, and which may be mooted by election results.
• The Board enjoys the benefit of a regional director decision in all representation cases.
• Board practice more closely adheres to the statutory directive that requests for review not stay any action of the regional director unless specifically ordered by the Board.
• Nonemployer parties are able to communicate about election issues with voters using modern means of communication such as email, texts and cell phones, and are less likely to challenge voters out of ignorance.
• Notices of Election are more informative, and more often electronically disseminated.
• Employees voting subject to challenge are more easily identified, and the chances are lessened of their ballots being comingled.
And all of this has been accomplished while processing representation cases more expeditiously from petition, to election, to closure.
So why would the majority suggest rescinding all of these benefits to the Agency, employees, employers, and unions? In evaluating that question, it is worthwhile to remind ourselves of a basic tenet of administrative law: while an agency rule, once adopted, is not frozen in place, the agency must offer valid reasons for changing it and must fairly account for the benefits lost as a result of the change.
None of the reasons offered by today's majority constitutes a persuasive justification for requesting information from the public, let alone for rescinding or modifying the Final Rule. The majority notes that the Final Rule has been in effect for more than two years. But the fact that two years have transpired since the Final Rule was adopted hardly constitutes a reason for rescinding or modifying it. The Board has a wealth of casehandling information that can be obtained through an analysis of our own records. And because the Board has access to all regional director pre- and post-election decisions, and because parties may request Board review of any action taken by the regional directors, the Board already is aware of the nature of any complaints about how the Final Rule has worked in particular cases. As for reverting to the prior representation rules, the public already had the opportunity to comment on whether they should be maintained or modified.
The majority next points to a change in Board member composition, but by itself, that is not a sufficient reason for rescinding, modifying, or requesting information from the public concerning the Final Rule. The majority also cites a grand total of four cases (out of the many cases) applying the Final Rule, but none provides any reason to invite public comment on the Final Rule, much less for the Board to reconsider it. While the majority also cites congressional efforts to overturn the Final Rule, they did not succeed, and cannot be used to demonstrate that the Final Rule contravenes our governing statute. As the courts have recognized, “It is well-established that `the view of a later Congress cannot control the interpretation of an earlier enacted statute.' ”
In evaluating the appropriateness of the Notice and Request for Information, it is also worth journeying back in time to consider the pronouncements and dire predictions voiced by then-Members Miscimarra and Johnson about the Final Rule when it issued. In considering these matters, the reader need not take my word, for the dissent appears in the
Suffice it to say that the Final Rule's dissenters were so wrong about so much. They did not simply disagree with the Board's judgments, but instead claimed that the Final Rule violated the NLRA, the APA, and the U.S. Constitution.
The Final Rule dissent pronounced that the Rule's amendments contradicted our statute and were otherwise impermissibly arbitrary. 79 FR at 74431. It was wrong on both counts. See
The Final Rule dissent pronounced that the Rule's primary purpose and effect was to shorten the time from the filing of petition to the conduct of the election, and that this violated the NLRA and was otherwise arbitrary or capricious. 79 FR at 74430, 74433-74435. It was wrong on all three counts. See
The Final Rule dissent pronounced that the Rule's granting regional directors discretion to defer litigation of individual eligibility issues at the pre-election hearing was contrary to the statute and was arbitrary and capricious in violation of the APA. 79 FR at 74430, 74436-74438, 74444-74446. The courts rejected those arguments. See
The Final Rule dissent pronounced that the Rule violated the Act and the Constitution by infringing on protected speech and by providing an insufficient time period for employees to understand the issues before having to vote, thereby compelling them to vote now, understand later. (79 FR at 74430-74431, 74436, 74438). But these claims were also rejected by the courts. See
The Final Rule dissent pronounced that the Rule ran afoul of the APA because the Board failed to demonstrate a need for the amendments. 79 FR 74431, 74434. Here again, the courts rejected that contention. See,
The Final Rule dissent pronounced that the Rule's accelerated deadlines and hearing provisions violated employers' due process rights and the NLRA's appropriate hearing requirement. 79 FR at 74431-74442, 74451. Wrong. See
The Final Rule dissent pronounced that the Rule's provision making Board review of regional director post-election determinations discretionary contravened the Board's duty to oversee the election process and was arbitrary and capricious. 79 FR at 74431, 74449-74451. Wrong again. See
The Final Rule dissent pronounced that the Rule's voter list provisions were not rationally justified or consistent with the Act, did not adequately address privacy concerns, and imposed unreasonable compliance burdens on employers. 79 FR at 74452, 74455. Wrong on all counts. See
Apart from their wrong-headed views concerning the legal merits of the Rule, the Final Rule dissenters made a number of erroneous predictions regarding how the Final Rule would work in practice. But as far-fetched as I found these speculations in 2014, one can now see that these predictions are refuted by the Board's actual experience administering the Final Rule. A quick review of several published agency statistics shows some of their most notable speculations of dysfunction to be completely unfounded.
The Final Rule dissenters speculated that the changes made by the Rule would drive down the Board's historically high rate of elections conducted by agreement of the parties either because the Final Rule does not provide enough time to reach agreement, 79 FR 74442, or because parties can no longer stipulate to mandatory Board review of post-election disputes, 79 FR 74450. They argued, “[e]ven if the percentage of election agreements decreases by a few points, the resulting increase in pre- and post-election litigation will likely negate any reduction of purported delay due to the Final Rule's implementation.” 79 FR at 74450. But they were wrong. Following the Final Rule's implementation, the Board's election agreement rate has actually increased.
Additionally, the Final Rule dissenters claimed that the Rule would do little to address those few representation cases that in their view involved too much delay, namely those cases that take more than 56 days to process from petition to election. 79 FR at 74456-57.
The Final Rule dissent further hypothesized that whatever time-savings might be achieved in processing cases from petition to election, there was a likelihood that “the overall time needed to resolve post-election issues will increase.” 79 FR at 74435. Here again, the dissent was wrong. The Agency's 100-day closure rate—which by definition takes into account a representation case's overall processing time—is better than ever. In FY 2017, the second fiscal year following the Final Rule's implementation, the Agency achieved a historic high of closing 89.9% of its representation cases within 100 days of a petition's filing. And in FY 2016, the first fiscal year following the Final Rule's implementation, the Agency's representation case closure rate of 87.6% outpaced all but one of the six years preceding the Final Rule.
All of the foregoing raises the question: If the Final Rule dissent's claims of statutory infirmity have been roundly rejected by the courts, and the predictions that the Final Rule would cause procedural dysfunction have been undercut by agency experience, why is comment being solicited as to whether the Final Rule should be further amended or rescinded? The answer would appear to be all too clear. When the actual facts do not support the current majority's preferred outcome, the new Members join Chairman Miscimarra to look for “alternative facts” to justify rolling back the Agency's progress in the representation-case arena.
It is indeed unfortunate that when historians examine how our Agency functioned during this tumultuous time, they will have no choice but to conclude that the Board abandoned its role as an independent agency and chose to cast aside reasoned deliberation in pursuit of an arbitrary exercise of power.
Accordingly, I dissent.
On April 14, 2015—after thousands of public comments submitted over two periods spanning 141 days, four days of public hearings, and over a hundred, dense
While retaining the essentials of existing representation case procedures, these amendments remove unnecessary barriers to the fair and expeditious resolution of representation cases. They simplify representation-case procedures, codify best practices, and make them more transparent and uniform across regions. Duplicative and unnecessary litigation is eliminated. Unnecessary delay is reduced. Procedures for Board review are simplified. Rules about documents and communications are modernized in light of changing technology.
During the short, two-and-a-half years since the Rule's implementation, there has been nothing to suggest that the Rule is either failing to accomplish these objectives or that it is causing any of the harms predicted by its critics. As Member Pearce catalogs in his dissent, by every available metric the Rule appears to have met the Board's expectations, refuting predictions about the Rule's supposedly harmful consequences. The majority makes no effort to rebut Member Pearce's comprehensive analysis. The preliminary available data thus indicates that the rule is achieving its intended goals—without altering the “playing field” for unions or employers in the election process.
Nonetheless, today a new Board majority issues a Request for Information (RFI) seeking public opinion about whether to retain, repeal, or modify the Rule—and signaling its own desire to reopen the Rule. Of course, administrative agencies ought to evaluate the effectiveness of their actions, whether in the context of rulemaking or adjudication, and public input can serve an important role in conducting such evaluations.
I.
Initially, it seems premature to seek public comment on the Rule a mere two-and-a-half years after the Rule's
Nevertheless, as stated, I am not opposed to genuine efforts to meaningfully evaluate the Rule's performance to date. But I believe that any useful request for information would have to seek comprehensive information on the precise effects of the specific changes made by the Rule.
The majority's request is not framed to solicit detailed data, or even informed feedback. The broad questions it poses, absent any empirical context, amount to little more than an open-ended “raise-your-hand-if-you-don't-like-the-Rule” straw poll. That is hardly a sound approach to gathering meaningful feedback.
The irony, of course, is that, if the majority were sincerely interested in beginning to assess the Rule's effectiveness, the best initial source of empirical, objective data lies
In any event, although I was not a participant in the earlier rulemaking process, it is clear from the Notice of Proposed Rulemaking that the Board based its proposals on a thorough, pre-rulemaking analysis of relevant data and agency experience that enabled it to seek public comment on specific, carefully-crafted policy proposals. In short, the Board did its homework before seeking public participation. The majority's current effort is utterly lacking the same foundation. The majority curiously seems to view this as an
Unfortunately, in addition to framing a vague, unfounded inquiry that is unlikely to solicit useful information, the majority's request also establishes an unnecessarily rushed comment process that is likely to frustrate those interested parties who might actually hope to provide meaningful input. To the extent members of the public wish to provide informed feedback on the Rule, they will need information. In the absence of a comprehensive analysis from the General Counsel, outside parties are likely to seek relevant data on the Rule's functioning through a Freedom of Information Act (FOIA) request. The public's acquisition and analysis of such data through the FOIA process will involve the assembly and submission of FOIA requests, which in turn may require the agency to survey and compile extensive data for each such request. Thereafter parties will have to take stock of any data acquired through FOIA before being in a position to give informed feedback on the Rule. This process could take far more than the 60 days provided for comment by the RFI. Indeed, during the 2014 rulemaking process leading up to the Election Rule, the Chamber of Commerce, well into the 60-day comment period, sought an extension to give it more time to both request and analyze FOIA data. While it was ultimately determined that the comment period should not be extended under the circumstances at the time, the Chamber's effort highlights the relevance of FOIA data and the time-intensiveness of parties' analysis of such data. My colleagues' failure to allot time to account for the parties' information-gathering process only confirms that the RFI is not designed to solicit and yield well-informed responses that might genuinely assist the Board's evaluation of the Rule.
II.
As emphasized, I fully support the notion that the Board should take care to ensure that its rules and regulations are serving their intended purposes. I would welcome a genuine opportunity to receive and review meaningful information on the Rule's performance at an appropriate time. But this hurried effort to solicit a “show of hands” of public opinion without the benefit of meaningful data (or even thoughtfully framed points of inquiry) bears none of the hallmarks of a genuine effort at regulatory review.
But the open-ended solicitation we have here, without the benefit of data or analysis, is not a productive way to enlist public opinion. As the dissenters to the Election Rule observed, including Chairman Miscimarra, the rulemaking was of “immense scope and highly technical nature,” and it generated “an unprecedented number of comments, espousing widely divergent views.” 79 FR 74430, 74459. It is accurate to say that the Rule is both comprehensive and technical, and that the public holds polarized views thereon. Yet now the majority broadly seeks public opinion on the fate of the Rule without offering any data or analysis of its own to provide a foundation for the public's assessment. Ultimately, they provide no persuasive explanation of how soliciting public input in the absence of any agency analysis or proposals—input that, as noted, is tantamount to a “thumbs up or thumbs down” movie review—will provide a foundation for an effective rulemaking process.
The Supreme Court has made clear that, when an agency is considering modifying or rescinding a valid existing rule, it must treat the governing rule as the status quo and must provide “good reasons” to justify a departure from it. See
If this RFI asked the public specific, well-crafted questions geared toward a neutral assessment of the Rule's functioning—and was based on a foundation of internal evidence or experience suggesting there was a problem with the Rule's implementation thus far—there would be far less basis to doubt the majority's reasons for revisiting it.
Further, in the preamble to this RFI the majority has failed to identify, much less establish, any “good reasons” to revisit or to consider reopening the Rule at this time. The majority summarily cites congressional votes, hearings, and proposed (but never-passed) legislation as reasons to issue this RFI. Although such congressional actions might raise concern over a rule's actual effectiveness in other circumstances, here—where criticism was leveled in the absence of any meaningful experience under the Rule—they seem to signify little more than partisan opposition to the Rule.
The majority also asserts that “numerous” cases litigated before the Board have raised “significant” issues concerning its application. Of course, many issues concerning the proper interpretation and application of the Rule can and should be resolved in adjudication, where they arise. In fact, the four recent cases the majority cites involved case-specific applications of the Rule that offer little if any insight into how well the Rule is working overall.
In any event, a better measure of the Rule's early effectiveness, which I advocate for below, would be a thorough internal Agency review of all the cases processed under the Rule, including those that have
Last, although not mentioned by the majority, no one has petitioned the Board to revisit the Rule or for new rulemaking on the Board's election processes. Perhaps the absence of such a petition is attributable to all of the
The only remaining asserted justification for considering revisiting the Rule at this early stage is the majority's express reliance on the change in the composition of the Board.
As a result, it should come as no surprise to the majority if a court called upon to review any changes ultimately made to the Rule looks back skeptically at the origins of the rulemaking effort. The RFI is easily viewed as simply a scrim through which the majority is attempting to project a distorted view of the Rule's current functioning and thereby justify a partisan effort to roll it back. Cf.
The Board invites interested parties to submit responses during the public response period and welcomes pertinent information regarding the above questions.
Environmental Protection Agency (EPA).
Proposed rule; reopening of public comment period.
The Environmental Protection Agency (EPA) is reopening the comment period for a proposed rulemaking notice published in the
The comment period for the proposed rule published October 13, 2017 (82 FR 47662), reopened. Comments must be received on or before January 16, 2018. In a future final action based on the proposed rule, EPA will address all public comments received, including the adverse comment received on the direct final rule.
Submit your comments, identified by Docket ID No. EPA-R04-OAR-2017-0500 at
Andres Febres, Air Regulatory Management Section, Air Planning and Implementation Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960. Mr. Febres can be reached via telephone at (404) 562-8966 or via electronic mail at
EPA published a proposed rulemaking on October 13, 2017 (82 FR 47662), which accompanied a direct final rulemaking published on the same date (82 FR 47636). The proposed revision includes amendments to three F.A.C. rule sections, as well as the removal of one F.A.C. rule section from the Florida SIP, in order to eliminate redundant language and make updates to the requirements for emissions monitoring
Food and Nutrition Service, USDA.
Request for information.
The National School Lunch Program, School Breakfast Program, Child and Adult Care Food Program, and Summer Food Service Program (Child Nutrition Programs), which are administered by the United States Department of Agriculture (USDA), Food and Nutrition Service (FNS), play a critical role in ensuring that America's children have access to the nutritious food they need to learn and succeed in the classroom, afterschool, and during the summer. It is FNS' responsibility to establish and support the meal patterns and nutrition standards (collectively referred to as meal patterns) in the Child Nutrition Programs that advance the goals of providing nutritious and satisfying meals to a broad population of children. At the same time, FNS works to simplify the menu planning process for Program operators to promote the efficient use of Program funds and provide a wide variety of food choices to menu planners and children.
In order to claim Federal reimbursement, Child Nutrition Program operators must serve meals and snacks that meet the minimum meal pattern requirements of the respective Program. Crediting is the process designed by FNS to specify how individual food items contribute to the Child Nutrition Programs' meal patterns. Several factors impact how food products can credit toward reimbursable meals, such as volume, weight, and overall nutrient profile.
The purpose of this Request for Information is to help FNS gather feedback from a wide variety of stakeholders on how FNS' crediting system can best address today's evolving food and nutrition environment, as well as to offer first-rate customer service to those operating and benefitting from the Child Nutrition Programs. FNS welcomes comments from all interested stakeholders. While FNS is interested in your general comments about the crediting process, FNS also invites comments on the crediting of several specific food products. FNS is especially interested in understanding both the possible benefits and any negative impacts associated with potential changes to how certain foods may or may not credit.
To be assured of consideration, written information must be submitted or postmarked on or before February 12, 2018.
The Food and Nutrition Service, USDA, invites the submission of the requested information through one of the following methods:
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All information properly and timely submitted, using one of the two methods described above, in response to this Request for Information will be included in the record and will be made available to the public on the internet at
Tina Namian, Branch Chief, Policy and Program Development, Child Nutrition Programs, Food and Nutrition Service at (703) 305-2590.
One of the United States Department of Agriculture (USDA), Food and Nutrition Service's (FNS) highest priorities is to ensure that participants in the National School Lunch Program (NSLP), School Breakfast Program (SBP), Child and Adult Care Food Program (CACFP), and Summer Food Service Program (SFSP) (collectively referred to as the Child Nutrition Programs) receive wholesome, nutritious, and tasty meals. The Richard B. Russell National School Lunch Act (NSLA) and the Child Nutrition Act of 1966 (CNA) authorize FNS to establish meal patterns and nutrition standards (collectively referred to as meal patterns) for the Child Nutrition Programs. The NSLA requires FNS to develop meal patterns that are consistent with the recommendations of the most recent Dietary Guidelines for Americans (Dietary Guidelines) and current nutrition research.
The Child Nutrition Programs' meal patterns establish the foods and minimum serving sizes that must be served for a meal or snack to be reimbursable. The meal patterns are currently based on food groups (components), not individual nutrients. A reimbursable meal or snack includes a certain amount (or combination) of vegetables, fruits, fluid milk, grains, and meats or meat alternates (
Crediting is the process established by FNS to determine how individual foods contribute to the Child Nutrition Programs' meal patterns. A food is considered creditable when it meets the minimum standards that count toward a reimbursable meal or snack. Generally, this means foods are grouped into categories of similar foods which are credited in a similar way.
The main focus of FNS' crediting system is to provide simple information that allows Child Nutrition Program operators to (1) easily plan menus with foods and quantities that meet the meal patterns, and (2) offer foods in a way that encourages healthy habits and
A number of factors impact how foods credit toward a reimbursable meal. It is critical that crediting decisions be made on the fullest range of factors possible to ensure transparency and consistency in the crediting process. The overall nutrient profile of a food is a primary consideration. Foods in each food component are based on a range of nutrients instead of an individual food's nutrient profile. For example, foods in the meats/meat alternates component are grouped based on a collection of nutrients that include protein, B vitamins, selenium, choline, phosphorus, zinc, and copper. Therefore, different varieties of meat (
In addition, foods that credit toward a reimbursable meal in the Child Nutrition Programs sometimes have a Federal standard of identity. Standards of identity are established by the U.S. Food and Drug Administration (FDA) and the USDA Food Safety and Inspection Service (FSIS). They are mandatory requirements that determine what a food must contain to be marketed under a certain name. For example, for a product to be labeled peanut butter, it must meet the standard of identity requirements that specify the amount and type of ingredients that may be included. Standards of identity assist FNS in crediting because they provide a common standard under which specific foods are made. This allows FNS to set crediting policy with confidence that products from all manufacturers will have the same characteristics and, thus, make a consistent contribution to the meal patterns. There are some products on the commercial market that do not have an FDA or FSIS standard of identity, but have industry-defined standards. FNS first considers Federal standards of identity when making crediting decisions. When a Federal standard of identity does not exist, then FNS may use industry standards for production to better understand the manufacturing process.
FNS also considers the customary use of a product. For example, some foods are typically consumed as a snack food and have not been considered appropriate for including as part of a meal in the Child Nutrition Programs. Therefore, they are currently not creditable. This is discussed more in section II. Questions and Answers. Finally, FNS considers the role of the Child Nutrition Program in teaching children healthy eating habits when making crediting decisions.
FNS' objective in issuing this Request for Information is to receive input from a broad spectrum of stakeholders to assist FNS in making informed decisions on how FNS' crediting system can best address today's evolving food and nutrition environment, ensure children have access to the nutrition they need, and offer excellent customer service to those operating and benefitting from the Child Nutrition Programs. It is important that FNS' crediting system balances the nutritional needs of the Child Nutrition Programs' participants, as recommended by the Dietary Guidelines, and the need to offer flexibility and a wide range of choices. FNS recognizes that new or reformulated food products are regularly entering the food market. These new or reformulated food products can offer more choices to menu planners and children.
FNS is especially interested in understanding both the possible benefits and any negative impacts associated with potential changes to how certain foods may or may not credit. As such, FNS is seeking feedback from all interested stakeholders on the questions listed below. Some questions address specific foods due to a high volume of interest in those products. However, FNS is open to feedback about the creditability of other food products as well (see Questions 20-25) and crediting process in general. Additionally, while all comments are welcome, FNS is particularly interested in comments that are consistent with the current statutory framework for the Child Nutrition Programs.
FNS currently considers the following factors when making crediting decisions:
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1. Is it appropriate to continue to credit foods based on the volume or weight served, with the few exceptions discussed above? Why or why not?
2. What are the benefits and negative impacts of having different crediting values for different forms of vegetables and fruits?
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3. Should fortification play a role in determining if and how a food is credited in the Child Nutrition Programs? Why or why not?
4. Is the presence of certain nutrients more important than other nutrients when determining if and how a food credits in the Child Nutrition Programs? Why or why not?
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5. If a food product does not have a Federal standard of identity or industry standards for production, how could these food products credit in the Child Nutrition Programs? Please be as specific as possible.
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6. Is it appropriate to continue to consider the customary use of a product when determining how a food credits in the Child Nutrition Programs? Why or why not?
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7. What role should such educational considerations play in determining the creditability of a food in the Child Nutrition Programs?
8. Are there other factors FNS should consider in determining how foods credit in the Child Nutrition Programs? Why or why not?
9. Are there additional ways FNS can make the crediting process more simple, fair, or transparent? Please be as specific as possible.
10. Are Child Nutrition Program operators currently offering any of these foods as an extra item that does not contribute to the Child Nutrition Programs' meal patterns? If so, which ones?
10a. If yes, how are they being served (
11. Should FNS allow any of these foods to contribute to the Child Nutrition Programs' meal patterns? Why or why not?
12. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, how should they be credited? Be as specific as possible, such as the volume or weight needed, or a specific nutrient content.
12a. Is there an ingredient or processing method that would qualify or disqualify these products?
13. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, would Child Nutrition Program operators incorporate these foods into menus to meet the meats/meat alternates requirement? Why or why not?
13a. If yes, how would they be served (
14. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, how would this impact the Child Nutrition Programs, including its participants and operators? What are the potential benefits and negative impacts?
15. Are Child Nutrition Program operators currently offering high protein yogurt as part of a reimbursable meal?
16. Should FNS create a separate crediting standard for high protein yogurt that is different than the crediting standard for traditional yogurt for the Child Nutrition Programs? Why or why not?
17. If high protein yogurt is allowed to contribute differently to the Child Nutrition Programs' meal patterns than traditional yogurt, how should high protein yogurt be credited? Be as specific as possible, such as the volume or weight needed.
17a. Is there an ingredient or processing method that could qualify or disqualify a particular yogurt from crediting in the Child Nutrition Programs (
18. If high protein yogurt is allowed to contribute differently to the Child Nutrition Programs' meal patterns than traditional yogurt, would Child Nutrition Program operators take advantage of using it to meet the meats/meat alternates requirement? Why or why not?
18a. If yes, how would Child Nutrition Program operators serve it (
19. If high protein yogurt is allowed to contribute differently to the Child Nutrition Programs' meal patterns than traditional yogurt, how would this impact the Child Nutrition Programs, including its participants and operators, as well as food manufacturers? What are the potential benefits and negative impacts?
In the past, FNS has chosen not to credit a small number of other foods in the Child Nutrition Programs because these foods do not meet the requirement for any food component in the Child Nutrition Programs' meal patterns. For
20. Are Child Nutrition Program operators currently offering any of these foods as an extra item that does not contribute to the Child Nutrition Programs' meal patterns? If so, which ones?
21. Should FNS allow any of these foods to contribute to the Child Nutrition Programs' meal patterns? Why or why not? If so, which ones?
22. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, how should they be credited? Be as specific as possible, such as the volume or weight needed, or a specific nutrient content.
22a. Is there an ingredient, processing method, or nutrient standard (
23. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, would Child Nutrition Program operators incorporate them into menus to meet the Child Nutrition Programs' meal patterns? Why or why not?
23a. If yes, how would they be served (
24. If any of these foods are allowed to contribute to the Child Nutrition Programs' meal patterns, how would this impact the Child Nutrition Programs, including its participants and operators, as well as food manufacturers? What are the potential benefits and negative impacts?
25. Are there additional products not mentioned in this request for information that are currently not creditable, but you would wish to provide comments on? Please be as specific as possible.
FNS appreciates your thoughtful and responsive comments. FNS welcomes comments from all interested stakeholders and will consider all of them carefully. Your comments are essential to enabling FNS to provide first rate customer service to those we serve.
Traxys Cometals Processing, Inc. (Traxys Cometals), submitted a notification of proposed production activity to the FTZ Board for its facility in Burnsville, Mississippi. The notification conforming to the requirements of the regulations of the FTZ Board (15 CFR 400.22) was received on November 27, 2017.
The applicant indicates that it will be submitting a separate application for FTZ designation at the Traxys Cometals facility under FTZ 158. The facility will be used to produce high-grade manganese and aluminum alloying agents to be supplied to steel and aluminum production plants. Pursuant to 15 CFR 400.14(b), FTZ activity would be limited to the specific foreign-status materials and components and specific finished products described in the submitted notification (as described below) and subsequently authorized by the FTZ Board.
Production under FTZ procedures could exempt Traxys Cometals from customs duty payments on the foreign-status components used in export production. On its domestic sales, for the foreign-status materials/components noted below, Traxys Cometals would be able to choose the duty rates during customs entry procedures that apply to carbon-free manganese briquettes, low-carbon manganese briquettes, manganese powder, MnAl (manganese/aluminum) briquettes, and CrAl (chromium/aluminum) briquettes (duty rate ranges from 1.4% to 14%). Traxys Cometals would be able to avoid duty on foreign-status components which become scrap/waste. Customs duties also could possibly be deferred or reduced on foreign-status production equipment.
The components and materials sourced from abroad include electrolytic manganese flakes, chromium powder, and chromium waste (duty rate ranges from duty-free to 14%).
Public comment is invited from interested parties. Submissions shall be addressed to the Board's Executive Secretary at the address below. The closing period for their receipt is January 23, 2018.
A copy of the notification will be available for public inspection at the Office of the Executive Secretary, Foreign-Trade Zones Board, Room 21013, U.S. Department of Commerce, 1401 Constitution Avenue NW, Washington, DC 20230-0002, and in the “Reading Room” section of the Board's website, which is accessible via
For further information, contact Christopher Wedderburn at
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice of public meeting (webinar).
The Pacific Fishery Management Council's (Pacific Council) will host the Area 2A Pacific Halibut Managers Coordination Meeting via webinar. The meeting is open to the public.
The webinar meeting will be held on Wednesday, January 3, 2018, from 10 a.m. until business for the day has been completed.
The meeting will be held via webinar. A public listening station is available at the Pacific Council office (address below). To attend the webinar (1) join the meeting by visiting this link
Ms. Robin Ehlke, Pacific Council; telephone: (503) 820-2410.
The primary purpose of the Area 2A Pacific halibut manager's meeting is to prepare and develop recommendations for the January 22-26, 2018, International Pacific Halibut Commission's (IPHC) annual meeting in Portland, Oregon. Recommendations generated from the meeting will be communicated to the IPHC by the Pacific Council's representative, Mr. Phil Anderson. Attendees may also address other topics relating to Pacific halibut management. No management actions will be decided by the attendees. The meeting will be open to the public, and the agenda, which will be posted on the PFMC website prior to the meeting, will provide for a public comment period.
Although non-emergency issues not contained in the meeting agenda may be discussed, those issues may not be the subject of formal action during this meeting. Action will be restricted to those issues specifically listed in this document and any issues arising after publication of this document that require emergency action under section 305(c) of the Magnuson-Stevens Fishery Conservation and Management Act, provided the public has been notified of the intent to take final action to address the emergency.
This meeting is physically accessible to people with disabilities. Requests for sign language interpretation or other auxiliary aids should be directed to Mr. Kris Kleinschmidt (503) 820-2411 at least 10 business days prior to the meeting date.
Deputy Chief Management Officer, Department of Defense.
Notice of Federal Advisory Committee meeting.
The Department of Defense (DoD) is publishing this notice to announce that the following Federal Advisory Committee meeting of the Vietnam War Commemoration Advisory Committee will take place.
Thursday, February 8, 2018, from 8:30 a.m. to 4:00 p.m.
241 18th Street South, Room 101, Arlington, VA 22202.
Mrs. Marcia L. Moore, 703-571-2005 (Voice), 703-692-4691 (Facsimile),
This meeting is being held under the provisions of the Federal Advisory Committee Act (FACA) of 1972 (5 U.S.C., Appendix, as amended), the Government in the Sunshine Act of 1976 (5 U.S.C. 552b, as amended), and 41 CFR 102-3.140 and 102-3.150.
Pursuant to 5 U.S.C. 552b and 41 CFR 102-3.140 through 102-3.165, and the availability of space, this meeting is open to the public. All members of the public who wish to attend the public meeting must contact Mrs. Marcia Moore or Mr. Mark Franklin at the number listed in the
Defense Finance and Accounting Service (DFAS), Department of Defense.
30-day information collection notice.
The Department of Defense has submitted to OMB for clearance, the following proposal for collection of information under the provisions of the Paperwork Reduction Act.
Consideration will be given to all comments received by January 16, 2018.
Comments and recommendations on the proposed information collection should be emailed to Ms. Jasmeet Seehra, DoD Desk Officer, at
Fred Licari, 571-372-0493.
You may also submit comments and recommendations, identified by Docket ID number and title, by the following method:
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Written requests for copies of the information collection proposal should be sent to Mr. Licari at WHS/ESD Directives Division, 4800 Mark Center Drive, East Tower, Suite 03F09, Alexandria, VA 22350-3100.
Federal Student Aid (FSA), Department of Education (ED).
Notice.
In accordance with the Paperwork Reduction Act of 1995, ED is proposing an extension of an existing information collection.
Interested persons are invited to submit comments on or before February 12, 2018.
To access and review all the documents related to the information collection listed in this notice, please use
For specific questions related to collection activities, please contact Tammy Gay, 816-804-0848.
The Department of Education (ED), in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)), provides the general public and Federal agencies with an opportunity to comment on proposed, revised, and continuing collections of information. This helps the Department assess the impact of its information collection requirements and minimize the public's reporting burden. It also helps the public understand the Department's information collection requirements and provide the requested data in the desired format. ED is soliciting comments on the proposed information collection request (ICR) that is described below. The Department of Education is especially interested in public comment addressing the following issues: (1) Is this collection necessary to the proper functions of the Department; (2) will this information be processed and used in a timely manner; (3) is the estimate of burden accurate; (4) how might the Department enhance the quality, utility, and clarity of the information to be collected; and (5) how might the Department minimize the burden of this collection on the respondents, including through the use of information technology. Please note that written comments received in response to this notice will be considered public records.
The data collected for the development of the Teacher Cancellation Low Income Directory provides web-based access to a list of all elementary and secondary schools, and educational service agencies that serve a total enrollment of more than 30 percent low income students (as defined under Title I, Part A of the Elementary and Secondary Education Act of 1965, as amended). The Directory allows post-secondary institutions to determine whether or not a teacher, who received a Federal Perkins Loan, Direct Loan, or Federal Family Education Loan at their school, is eligible to receive loan cancellation or forgiveness or that a teacher who received a TEACH Grant is meeting the service obligation.
Federal Student Aid (FSA), Department of Education (ED).
Notice.
In accordance with the Paperwork Reduction Act of 1995, ED is proposing a new information collection.
Interested persons are invited to submit comments on or before February 12, 2018.
To access and review all the documents related to the information collection listed in this notice, please use
For specific questions related to collection activities, please contact Tammy Gay, 816-804-0848.
The Department of Education (ED), in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)), provides the general public and Federal agencies with an opportunity to comment on proposed, revised, and continuing collections of information. This helps the Department assess the impact of its information collection requirements and minimize the public's reporting burden. It also helps the public understand the Department's information collection requirements and provide the requested data in the desired format. ED is soliciting comments on the proposed information collection request (ICR) that is described below. The Department of Education is especially interested in public comment addressing the following issues: (1) Is this collection necessary to the proper functions of the Department; (2) will this information be processed and used in a timely manner; (3) is the estimate of burden accurate; (4) how might the Department enhance the quality, utility, and clarity of the information to be collected; and (5) how might the Department minimize the burden of this collection on the respondents, including through the use of information technology. Please note that written comments received in response to this notice will be considered public records.
Federal Student Aid (FSA), Department of Education (ED).
Notice.
In accordance with the Paperwork Reduction Act of 1995, ED is proposing a new information collection.
Interested persons are invited to submit comments on or before February 12, 2018.
To access and review all the documents related to the information collection listed in this notice, please use
For specific questions related to collection activities, please contact Tammy Gay, 816-804-0848.
The Department of Education (ED), in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)), provides the general public and Federal agencies with an
On December 1, 2017, the City of Fitchburg, Massachusetts, filed a notice of intent to construct a qualifying conduit hydropower facility, pursuant to section 30 of the Federal Power Act (FPA), as amended by section 4 of the Hydropower Regulatory Efficiency Act of 2013 (HREA). The proposed Narrows Road Pressure Reduction Valve (PRV) Station Project would have an installed capacity of up to 10 kilowatts (kW), and would be located along an existing municipal water supply line within the Narrows Road PRV station near the City of Fitchburg, Worcester County, Massachusetts.
A qualifying conduit hydropower facility is one that is determined or deemed to meet all of the criteria shown in the table below.
Deadline for filing motions to intervene is 30 days from the issuance date of this notice.
Anyone may submit comments or a motion to intervene in accordance with the requirements of Rules of Practice and Procedure, 18 CFR 385.210 and 385.214. Any motions to intervene must be received on or before the specified deadline date for the particular proceeding.
The Commission strongly encourages electronic filing. Please file motions to intervene and comments using the Commission's eFiling system at
Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
This is a supplemental notice in the above-referenced proceeding of EnPowered's application for market-based rate authority, with an accompanying rate tariff, noting that such application includes a request for blanket authorization, under 18 CFR part 34, of future issuances of securities and assumptions of liability.
Any person desiring to intervene or to protest should file with the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211 and 385.214). Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant.
Notice is hereby given that the deadline for filing protests with regard to the applicant's request for blanket authorization, under 18 CFR part 34, of future issuances of securities and assumptions of liability, is December 27, 2017.
The Commission encourages electronic submission of protests and interventions in lieu of paper, using the FERC Online links at
Persons unable to file electronically should submit an original and 5 copies of the intervention or protest to the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426.
The filings in the above-referenced proceeding are accessible in the Commission's eLibrary system by clicking on the appropriate link in the above list. They are also available for electronic review in the Commission's
Take notice that the Commission received the following electric corporate filings:
Take notice that the Commission received the following electric rate filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and § 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
The staff of the Office of Energy Projects (OEP) is revising Chapter 11—
Interested parties can help us determine the appropriate updates and improvements by providing: Meaningful comments or suggestions that focus on the specific sections requiring clarification; updates to reflect current laws and regulations; or improved measures for evaluating the safety of arch dams. The more specific your comments, the more useful they will be. A detailed explanation of your submissions and/or any references of scientific studies associated with your comments will greatly help us with this process. We will consider all timely comments on the revised
For your convenience, there are three methods which you can use to submit your comments to the Commission. In all instances please reference the docket number (AD18-6-000) on the first page of your submission. The Commission strongly encourages electronic filing.
(1) You can file your comments electronically using the eComment feature on the Commission's website (
(2) You can file your comments electronically using the eFiling feature on the Commission's website (
(3) In lieu of electronic filing, you can mail a paper copy of your comments to: Kimberly D. Bose, Secretary, Federal Energy Regulatory Commission, 888 First Street NE, Room 1A, Washington, DC 20426.
The OEP staff provided copies of revised Chapter 11—Arch Dams to federal and state agencies, licensees whose portfolio includes arch dams, independent consultants and inspectors, and other interested parties. In addition, all information related to the proposed updates to Chapter 11—Arch Dams and submitted comments can be found on the FERC website (
For assistance with filing or any of the Commission's online systems, please contact FERC Online Support at
The staff of the Federal Energy Regulatory Commission (FERC or Commission) will prepare an environmental assessment (EA) that will discuss the environmental impacts of the Cimarron Expansion Project involving construction and operation of facilities by Cimarron River Pipeline, LLC (Cimarron) in Beaver and Texas Counties, Oklahoma and Seward County, Kansas. The Commission will use this EA in its decision-making process to determine whether the Project is in the public convenience and necessity.
This notice announces the opening of the scoping process the Commission will use to gather input from the public and interested agencies on the Project. You can make a difference by providing us with your specific comments or concerns about the Project. Your comments should focus on the potential environmental effects, reasonable alternatives, and measures to avoid or lessen environmental impacts. Your input will help the Commission staff determine what issues they need to evaluate in the EA. To ensure that your comments are timely and properly recorded, please send your comments so that the Commission receives them in Washington, DC on or before January 8, 2018.
If you sent comments on this Project to the Commission before the opening of this docket on July 10, 2017, you will need to file those comments in Docket No. PF17-7-000 to ensure they are considered as part of this proceeding.
This notice is being sent to the Commission's current environmental mailing list for this Project. State and local government representatives should notify their constituents of this planned Project and encourage them to comment on their areas of concern.
If you are a landowner receiving this notice, a pipeline company representative may contact you about the acquisition of an easement to construct, operate, and maintain the planned facilities. The company would seek to negotiate a mutually acceptable agreement. However, if the Commission approves the Project, that approval conveys with it the right of eminent domain. Therefore, if easement negotiations fail to produce an agreement, the pipeline company could initiate condemnation proceedings where compensation would be determined in accordance with state law.
A fact sheet prepared by the FERC entitled “An Interstate Natural Gas Facility On My Land? What Do I Need To Know?” is available for viewing on the FERC website (
For your convenience, there are three methods you can use to submit your
(1) You can file your comments electronically using the
(2) You can file your comments electronically by using the
(3) You can file a paper copy of your comments by mailing them to the following address. Be sure to reference the Project docket number (PF17-7-000) with your submission:
Kimberly D. Bose, Secretary, Federal Energy Regulatory Commission, 888 First Street NE, Room 1A, Washington, DC 20426.
Cimarron plans to construct, own, operate, and maintain the Project facilities to provide up to an aggregate of 631 million standard cubic feet of natural gas per day of additional firm natural gas transportation capacity in order to support the growing demand for liquids-rich natural gas transportation service in the region to ensure that gas is properly treated and processed before it is distributed for market use.
Cimarron plans to expand its pipeline system by constructing about 49.3 miles of new natural gas pipeline in Beaver County, Oklahoma and Seward County, Kansas and leasing approximately 19.1 miles of an existing, currently idle 26-inch-diameter pipeline in Texas and Beaver Counties, Oklahoma.
A total of 23 miles of the Project would consist of 20-inch-diameter pipeline extending north from a proposed tie-in facility located near Cimarron's existing Beaver Compressor Station in Beaver County. At a new tie-in with the leased pipeline in Beaver County, the 20-inch-diameter pipeline would change to 30-inch-diameter pipeline and continue north about 24.3 miles through Seward County, Kansas before reaching a new drip valve site. Two 30-inch-diameter pipelines would then extend for approximately 1.5 miles and 0.6 mile, respectively, to the National Helium Gas Processing Plant. The planned Project also includes two new receipt point facilities, one at the beginning of the leased pipeline in Texas County, Oklahoma and one along the 0.6-mile-long 30-inch-diameter pipeline between the new drip valve site and the National Helium Gas Processing Plant. The Project also includes the construction of five new pig launcher and/or receiver facilities
The general location of the Project facilities is shown in appendix 1.
Construction of the planned facilities would disturb about 649.7 acres of land for the pipelines and aboveground facilities. Following construction, Cimarron would maintain about 339.2 acres for permanent operation of the Project facilities; the remaining acreage would be restored and revert to former uses. About 67 percent of the planned pipeline route is within or parallel to existing pipeline, utility, or road rights-of-way.
The National Environmental Policy Act (NEPA) requires the Commission to take into account the environmental impacts that could result from an action whenever it considers the issuance of a Certificate of Public Convenience and Necessity. NEPA also requires us
In the EA we will discuss impacts that could occur as a result of the construction and operation of the planned Project under these general headings:
• Geology and soils;
• land use;
• water resources, fisheries, and wetlands;
• cultural resources;
• vegetation and wildlife;
• air quality and noise;
• endangered and threatened species;
• public safety; and
• cumulative impacts.
We will also evaluate possible alternatives to the planned Project or portions of the Project, and make recommendations on how to lessen or avoid impacts on the various resource areas.
Although no formal application has been filed, we have already initiated our NEPA review under the Commission's pre-filing process. The purpose of the pre-filing process is to encourage early involvement of interested stakeholders and to identify and resolve issues before the FERC receives an application. As part of our pre-filing review, we have begun to contact some federal and state agencies to discuss their involvement in the scoping process and the preparation of the EA.
The EA will present our independent analysis of the issues. The EA will be available in the public record through eLibrary. Depending on the comments received during the scoping process, we may also publish and distribute the EA to the public for an allotted comment period. We will consider all comments on the EA before we make our recommendations to the Commission. To ensure we have the opportunity to consider and address your comments, please carefully follow the instructions in the Public Participation section, beginning on page 2.
With this notice, we are asking agencies with jurisdiction by law and/or special expertise with respect to the environmental issues related to this Project to formally cooperate with us in the preparation of the EA.
In accordance with the Advisory Council on Historic Preservation's implementing regulations for Section 106 of the National Historic Preservation Act, we are using this notice to initiate consultation with the applicable State Historic Preservation Office(s), and to solicit their views and those of other government agencies, interested Indian tribes, and the public on the Project's potential effects on historic properties.
The environmental mailing list includes federal, state, and local government representatives and agencies; elected officials; environmental and public interest groups; Native American Tribes; other interested parties; and local libraries and newspapers. This list also includes all affected landowners (as defined in the Commission's regulations) who are potential right-of-way grantors, whose property may be used temporarily for Project purposes, or who own homes within certain distances of aboveground facilities, and anyone who submits comments on the Project. We will update the environmental mailing list as the analysis proceeds to ensure that we send the information related to this environmental review to all individuals, organizations, and government entities interested in and/or potentially affected by the planned Project.
If we publish and distribute the EA, copies will be sent to the environmental mailing list for public review and comment. If you would prefer to receive a paper copy of the document instead of the CD version or would like to remove your name from the mailing list, please return the attached Information Request (appendix 2).
Once Cimarron files its application with the Commission, you may want to become an “intervenor” which is an official party to the Commission's proceeding. Intervenors play a more formal role in the process and are able to file briefs, appear at hearings, and be heard by the courts if they choose to appeal the Commission's final ruling. An intervenor formally participates in the proceeding by filing a request to intervene. Motions to intervene are more fully described at
Additional information about the Project is available from the Commission's Office of External Affairs, at (866) 208-FERC, or on the FERC website (
In addition, the Commission offers a free service called eSubscription which allows you to keep track of all formal issuances and submittals in specific dockets. This can reduce the amount of time you spend researching proceedings by automatically providing you with notification of these filings, document summaries, and direct links to the documents. Go to
Finally, public sessions or site visits will be posted on the Commission's calendar located at
Federal Communications Commission.
Notice and request for comments.
As part of its continuing effort to reduce paperwork burdens, and as required by the Paperwork Reduction Act of 1995 (PRA), the Federal Communications Commission (FCC or Commission) invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
The FCC may not conduct or sponsor a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the PRA that does not display a valid OMB control number.
Written comments should be submitted on or before February 12, 2018. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this notice, you should advise the contacts below as soon as possible.
Direct all PRA comments to Cathy Williams, FCC, via email:
For additional information about the information collection, contact Cathy Williams at (202) 418-2918.
As part of its continuing effort to reduce paperwork burdens, and as required by
The Commission seeks Office of Management and Budget (OMB) approval for an extension of the currently approved information collection for the coordination process adopted in the Commission's Report and Order, FCC 14-50 for such co-channel operations, in 47 CFR 74.802d(b)(2).
Federal Communications Commission.
Notice and request for comments.
As part of its continuing effort to reduce paperwork burdens, and as required by the Paperwork Reduction Act of 1995 (PRA), the Federal Communications Commission (FCC or Commission) invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
The FCC may not conduct or sponsor a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the PRA that does not display a valid OMB control number.
Written comments should be submitted on or before February 12, 2018. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this notice, you should advise the contacts below as soon as possible.
Direct all PRA comments to Cathy Williams, FCC, via email:
For additional information about the information collection, contact Cathy Williams at (202) 418-2918.
As part of its continuing effort to reduce paperwork burdens, and as required by the PRA, 44 U.S.C. 3501-3520, the FCC invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
Federal Communications Commission.
Notice and request for comments.
As part of its continuing effort to reduce paperwork burdens, and as required by the Paperwork Reduction Act of 1995 (PRA), the Federal Communications Commission (FCC or Commission) invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
The FCC may not conduct or sponsor a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the PRA that does not display a valid OMB control number.
Written comments should be submitted on or before February 12, 2018. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this notice, you should advise the contacts below as soon as possible.
Direct all PRA comments to Cathy Williams, FCC, via email:
For additional information about the information collection, contact Cathy Williams at (202) 418-2918.
As part of its continuing effort to reduce paperwork burdens, and as required by the PRA, 44 U.S.C. 3501-3520, the FCC invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
The information collection requirements contained in Section 80.413 require the licensee of an on-board station to keep equipment records which show:
(1) The ship name and identification of the on-board station;
(2) The number of and type of repeater and mobile units used on-board the vessel; and
(3) The date the type of equipment which is added or removed from the on-board station.
The information is used by FCC personnel during inspections and investigations to determine what mobile units and repeaters are associated with on-board stations aboard a particular vessel. If this information were not maintained, no means would be available to determine if this type of radio equipment is authorized or who is responsible for its operation. Enforcement and frequency management programs would be negatively affected if the information were not retained.
The information is used by FCC personnel during inspection and investigations to insure compliance with applicable rules. If this information was not available, enforcement efforts could be hindered; frequency congestion in certain bands could increase; and the financial viability of some public coast radiotelephone stations could be threatened.
The Federal Deposit Insurance Corporation (FDIC or Receiver), as Receiver for 10485, Bank of Wausau, Wausau, Wisconsin, has been authorized to take all actions necessary to terminate the Receivership Estate of Bank of Wausau (Receivership Estate); the Receiver has made all dividend distributions required by law.
The Receiver has further irrevocably authorized and appointed FDIC-Corporate as its attorney-in-fact to execute and file any and all documents that may be required to be executed by the Receiver which FDIC-Corporate, in its sole discretion, deems necessary, including but not limited to releases, discharges, satisfactions, endorsements, assignments, and deeds.
Effective December 1, 2017, the Receivership Estate has been terminated, the Receiver discharged, and the Receivership Estate has ceased to exist as a legal entity.
The companies listed in this notice have applied to the Board for approval, pursuant to the Bank Holding Company Act of 1956 (12 U.S.C. 1841
The applications listed below, as well as other related filings required by the Board, are available for immediate inspection at the Federal Reserve Bank indicated. The applications will also be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing on the standards enumerated in the BHC Act (12 U.S.C. 1842(c)). If the proposal also involves the acquisition of a nonbanking company, the review also includes whether the acquisition of the nonbanking company complies with the standards in section 4 of the BHC Act (12 U.S.C. 1843). Unless otherwise noted, nonbanking activities will be conducted throughout the United States.
Unless otherwise noted, comments regarding each of these applications must be received at the Reserve Bank indicated or the offices of the Board of Governors not later than January 8, 2018.
1.
Board of Governors of the Federal Reserve System.
The Board of Governors of the Federal Reserve System (Board) is adopting a proposal to extend for three years, without revision, the Reporting Requirements Associated with Regulation XX Concentration Limit (FR XX) and Financial Company (as defined) Report of Consolidated Liabilities (FR XX-1) (OMB No. 7100-0363).
Federal Reserve Board Clearance Officer—Nuha Elmaghrabi—Office of the Chief Data Officer, Board of Governors of the Federal Reserve System, Washington, DC 20551 (202) 452-3829. Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869, Board of Governors of the Federal Reserve System, Washington, DC 20551.
OMB Desk Officer—Shagufta Ahmed—Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW, Washington, DC 20503 or by fax to (202) 395-6974.
On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board authority under the Paperwork Reduction Act (PRA) to approve of and assign OMB control numbers to collection of information requests and
Section 251.6 and FR XX-1. As noted, the required reporting of calendar year-end liabilities under section 251.6 of Regulation XX can be satisfied by many financial companies through their continued reporting of consolidated financial information to the Board or other appropriate Federal banking agency though the various reports listed above. The information collected on those forms has been the subject of separate authorization and confidentiality determinations. With regard to the collection of the specific information at issue, calendar year-end liabilities (including as collected on the FR XX-1), such information generally is not considered confidential, but some information, depending on the circumstances, may be the type of confidential commercial and financial information that may be withheld under exemption 4 of the Freedom of Information Act (FOIA) (5 U.S.C 552(b)(4)). As required information, it may be withheld under exemption 4 on a case-by-case basis only if public disclosure could result in substantial competitive harm to the submitting institution. Any request from a submitter for confidential treatment should be accompanied by a detailed justification for confidentiality.
Section 251.4. The information collected under section 251.4 (under both its prior written consent provision for individual transactions and the general consent authority) consists of (1) a description of the acquisition and (2) the change in and resultant aggregate amount of financial company liabilities. The reported liabilities information, in like fashion to the liabilities information reported under section 251.6, generally is not considered confidential but, depending on the circumstances, may be the type of confidential commercial and financial information that may be withheld under exemption 4 of FOIA. The description of the individual acquisitions provided under the prior written consent provisions generally would not be deemed confidential, but that some such information may be of the type that could be withheld under exemption 4 on a case-by-case basis, under the standards enumerated above.
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA or Agency) is announcing an opportunity for public comment on the proposed collection of certain information by the Agency. Under the Paperwork Reduction Act of 1995 (PRA), Federal Agencies are required to publish notice in the
Submit either electronic or written comments on the collection of information by February 12, 2018.
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Domini Bean, Office of Operations, Food and Drug Administration, Three White Flint North, 10A-12M, 11601 Landsdown St., North Bethesda, MD 20852, 301-796-5733,
Under the PRA (44 U.S.C. 3501-3520), Federal Agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes Agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires Federal Agencies to provide a 60-day notice in the
With respect to the following collection of information, FDA invites comments on these topics: (1) Whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.
This information collection supports FDA regulations. Specifically, regulations codified at 21 CFR part 203 implement the Prescription Drug Marketing Act of 1987 (PDMA). The PDMA was intended to ensure safe and effective drug products and to avoid an unacceptable risk that counterfeit, adulterated, misbranded, subpotent, or expired drugs are sold to consumers. The reporting and recordkeeping requirements found in the regulations are intended to help achieve the following goals: (1) To ban the reimportation of prescription drugs produced in the United States, except when reimported by the manufacturer or under FDA authorization for emergency medical care; (2) to ban the sale, purchase, or trade, or the offer to sell, purchase, or trade, of any prescription drug sample; (3) to limit the distribution of drug samples to practitioners licensed or authorized to prescribe such drugs or to pharmacies of
We estimate the burden of the information collection as follows:
Based on a review of the information collection, we have retained the currently approved estimated burden.
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA or Agency) is announcing an opportunity for public comment on the proposed collection of certain information by the Agency. Under the Paperwork Reduction Act of 1995 (PRA), Federal Agencies are required to publish notice in the
Submit either electronic or written comments on the collection of information by February 12, 2018.
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before February 12, 2018. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Domini Bean, Office of Operations, Food and Drug Administration, Three White Flint North, 10-12M, 11601 Landsdown St., North Bethesda, MD 20852, 301-796-5733,
Under the PRA (44 U.S.C. 3501-3520), Federal Agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes Agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires Federal Agencies to provide a 60-day notice in the
With respect to the following collection of information, FDA invites comments on these topics: (1) Whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4)
This information collection supports FDA regulations. Specifically, under section 501(a)(2)(B) of the Federal Food, Drug, and Cosmetic Act (the FD&C Act) (21 U.S.C. 351(a)(2)(B)), a drug is adulterated if the methods used in or the facilities or controls used for its manufacture, processing, packing, or holding do not conform to or are not operated or administered in conformity with Current Good Manufacturing Practice (CGMP). The CGMP regulations help ensure drug products meet the statutory requirements for safety and have their purported or represented identity, strength, quality, and purity characteristics. The information collection requirements in the CGMP regulations provide FDA with the necessary information to perform its duty to protect public health and safety. CGMP requirements establish accountability for manufacturing and processing drug products, provide for meaningful FDA inspections, and enable manufacturers to improve the quality of drug products over time. The CGMP recordkeeping requirements also serve preventive and remedial purposes and provide crucial information if it is necessary to recall a drug product.
The general requirements for recordkeeping under part 211 (21 CFR part 211) are set forth in § 211.180. Any production, control, or distribution record associated with a batch and required to be maintained in compliance with part 211 must be retained for at least 1 year after the expiration date of the batch and, for certain over-the-counter (OTC) drugs, 3 years after distribution of the batch (§ 211.180(a)). Records for all components, drug product containers, closures, and labeling are required to be maintained for at least 1 year after the expiration date and 3 years for certain OTC products (§ 211.180(b)).
All part 211 records must be readily available for authorized inspections during the retention period (§ 211.180(c)), and such records may be retained either as original records or as true copies (§ 211.180(d)). Additionally, § 11.2(a) (21 CFR 11.2(a)) provides that “for records required to be maintained but not submitted to the Agency, persons may use electronic records in lieu of paper records or electronic signatures in lieu of traditional signatures, in whole or in part, provided that the requirements of this part are met.” To the extent this electronic option is used, the burden of maintaining paper records should be substantially reduced, as should any review of such records.
To facilitate improvements and corrective actions, records must be maintained so data can be used to evaluate the quality standards of each drug product on at least an annual basis and determine whether to change any drug product specifications or manufacturing or control procedures (§ 211.180(e)). Written procedures for these evaluations are to be established and include provisions for a review of a representative number of batches and, where applicable, records associated with the batch; provisions for a review of complaints, recalls, returned or salvaged drug products; and investigations conducted under § 211.192 for each drug product.
The specific information collection provisions are as follows:
• Section 211.34—Consultants advising on the manufacture, processing, packing, or holding of drug products must have sufficient education, training, and experience to advise on the subject for which they are retained. Records must be maintained stating the name, address, and qualifications of any consultants and the type of service they provide.
• Section 211.67(c)—Records must be kept of maintenance, cleaning, sanitizing, and inspection as specified in §§ 211.180 and 211.182.
• Section 211.68—Appropriate controls must be exercised over computer or related systems to assure that changes in master production and control records or other records are instituted only by authorized personnel.
• Section 211.68(a)—Records must be maintained of calibration checks, inspections, and computer or related system programs for automatic, mechanical, and electronic equipment.
• Section 211.68(b)—All appropriate controls must be exercised over all computers or related systems and control data systems to assure that changes in master production and control records or other records are instituted only by authorized persons.
• Section 211.72—Filters for liquid filtration used in the manufacture, processing, or packing of injectable drug products intended for human use must not release fibers into such products.
• Section 211.80(d)—Each container or grouping of containers for components or drug product containers or closures must be identified with a distinctive code for each lot in each shipment received. This code must be used in recording the disposition of each lot. Each lot must be appropriately identified as to its status.
• Section 211.100(b)—Written production and process control procedures must be followed in the execution of the various production and process control functions and must be documented at the time of performance. Any deviation from the written procedures must be recorded and justified.
• Section 211.105(b)—Major equipment must be identified by a distinctive identification number or code that must be recorded in the batch production record to show the specific equipment used in the manufacture of each batch of a drug product. In cases where only one of a particular type of equipment exists in a manufacturing facility, the name of the equipment may be used in lieu of a distinctive identification number or code.
• Section 211.122(c)—Records must be maintained for each shipment received of each different labeling and packaging material indicating receipt, examination, or testing.
• Section 211.130(e)—Inspection of packaging and labeling facilities must be made immediately before use to assure that all drug products have been removed from previous operations. Inspection must also be made to assure that packaging and labeling materials not suitable for subsequent operations have been removed. Results of inspection must be documented in the batch production records.
• Section 211.132(c)—Certain retail packages of OTC drug products must bear a statement that is prominently placed so consumers are alerted to the specific tamper-evident feature of the package. The labeling statement is required to be so placed that it will be unaffected if the tamper-resistant feature of the package is breached or missing. If the tamper-evident feature chosen is one that uses an identifying characteristic, that characteristic is required to be referred to in the labeling statement.
• Section 211.132(d)—A request for an exemption from packaging and labeling requirements by a manufacturer or packer is required to be submitted in the form of a citizen petition under 21 CFR 10.30.
• Section 211.137—Requirements regarding product expiration dating and compliance with 21 CFR 201.17.
• Section 211.160(a)—The establishment of any specifications, standards, sampling plans, test procedures, or other laboratory control mechanisms, including any change in such specifications, standards, sampling plans, test procedures, or other laboratory control mechanisms, must be drafted by the appropriate organizational unit and reviewed and approved by the quality control unit. These requirements must be followed and documented at the time of performance. Any deviation from the written specifications, standards, sampling plans, test procedures, or other laboratory control mechanisms must be recorded and justified.
• Section 211.165(e)—The accuracy, sensitivity, specificity, and reproducibility of test methods employed by a firm must be established and documented. Such validation and documentation may be accomplished in accordance with § 211.194(a)(2).
• Section 211.166—Stability testing program for drug products.
• Section 211.173—Animals used in testing components, in-process materials, or drug products for compliance with established specifications must be maintained and controlled in a manner that assures their suitability for their intended use. They must be identified, and adequate records must be maintained showing the history of their use.
• Section 211.180(e)—Written records required by part 211 must be maintained so that data can be used for evaluating, at least annually, the quality standards of each drug product to determine the need for changes in drug product specifications or manufacturing or control procedures. Written procedures must be established and followed for such evaluations and must include provisions for a representative number of batches, whether approved or unapproved or rejected, and a review of complaints, recalls, returned or salvaged drug products, and investigations conducted under § 211.192 for each drug product.
• Section 211.180(f)—Procedures must be established to assure that the responsible officials of the firm, if they are not personally involved in or immediately aware of such actions, are notified in writing of any investigations, conducted under § 211.198, § 211.204, or § 211.208, any recalls, reports of inspectional observations issued, or any regulatory actions relating to good manufacturing practices brought by FDA.
• Section 211.182—Specifies requirements for equipment cleaning records and the use log.
• Section 211.184—Specifies requirements for component, drug product container, closure, and labeling records.
• Section 211.186—Specifies master production and control records requirements.
• Section 211.188—Specifies batch production and control records requirement.
• Section 211.192—Specifies the information that must be maintained on the investigation of discrepancies found in the review of all drug product production and control records by the quality control staff.
• Section 211.194—Explains and describes laboratory records that must be retained.
• Section 211.196—Specifies the information that must be included in records on the distribution of the drug.
• Section 211.198—Specifies and describes the handling of all complaint files received by the applicant.
• Section 211.204—Specifies that records be maintained of returned and salvaged drug products and describes the procedures involved.
Written procedures, referred to here as standard operating procedures (SOPs), are required for many part 211 records. Current SOP requirements were initially provided in a final rule published in the
• Section 211.22(d)—Responsibilities and procedures of the quality control unit;
• Section 211.56(b)—Sanitation procedures;
• Section 211.56(c)—Use of suitable rodenticides, insecticides, fungicides, fumigating agents, and cleaning and sanitizing agents;
• Section 211.67(b)—Cleaning and maintenance of equipment;
• Section 211.68(a)—Proper performance of automatic, mechanical, and electronic equipment;
• Section 211.80(a)—Receipt, identification, storage, handling, sampling, testing, and approval or rejection of components and drug product containers or closures;
• Section 211.94(d)—Standards or specifications, methods of testing, and methods of cleaning, sterilizing, and processing to remove pyrogenic properties for drug product containers and closures;
• Section 211.100(a)—Production and process control;
• Section 211.110(a)—Sampling and testing of in-process materials and drug products;
• Section 211.113(a)—Prevention of objectionable microorganisms in drug products not required to be sterile;
• Section 211.113(b)—Prevention of microbiological contamination of drug products purporting to be sterile, including validation of any sterilization process;
• Section 211.115(a)—System for reprocessing batches that do not conform to standards or specifications to insure that reprocessed batches conform with all established standards, specifications, and characteristics;
• Section 211.122(a)—Receipt, identification, storage, handling, sampling, examination and/or testing of labeling and packaging materials;
• Section 211.125(f)—Control procedures for the issuance of labeling;
• Section 211.130—Packaging and label operations, prevention of mixup and cross contamination, identification and handling of filed drug product containers that are set aside and held in unlabeled condition, and identification of the drug product with a lot or control number that permits determination of the history of the manufacture and control of the batch;
• Section 211.142—Warehousing;
• Section 211.150—Distribution of drug products;
• Section 211.160—Laboratory controls;
• Section 211.165(c)—Testing and release for distribution;
• Section 211.166(a)—Stability testing;
• Section 211.167—Special testing requirements;
• Section 211.180(f)—Notification of responsible officials of investigations, recalls, reports of inspectional observations, and any regulatory actions relating to good manufacturing practice;
• Section 211.198(a)—Written and oral complaint procedures, including quality control unit review of any complaint involving specifications failures, and serious and unexpected adverse drug experiences;
• Section 211.204—Holding, testing, and reprocessing of returned drug products; and
• Section 211.208—Drug product salvaging.
In addition, the following regulations in parts 610 and 680 (21 CFR parts 610 and 680) reference certain CGMP regulations in part 211: §§ 610.12(g),
Although most CGMP provisions covered in this document were created many years ago, some existing firms expanding into new manufacturing areas and startup firms will need to create SOPs. As provided in table 1, FDA assumes approximately 50 firms will have to create up to 25 SOPs for a total of 1,250 records, estimating 20 hours per recordkeeper to create 25 new SOPs for a total of 25,000 hours.
FDA estimates the burden of this collection of information as follows:
The recordkeeping requirement estimates provided in table 2 are specific to medical gases. In particular, on June 29, 2017, FDA published a Notice of Availability (NOA) in the
The regulations addressed in table 2 are the same as those listed in table 1, but the estimated information collection burden differs and is specific to medical gas manufacturing. FDA estimates the burden of this collection of information as follows:
Food and Drug Administration, HHS.
Notice; correction.
The Food and Drug Administration is correcting a notice entitled “Safety Assessment for Investigational New Drug Safety Reporting; Public Workshop” that appeared in the
Lauren Wedlake, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 51, Rm. 6362, Silver Spring, MD 20993, 301-796-2728,
In the
1. On page 56036, in the first column, in the first sentence of the
Food and Drug Administration, HHS.
Notice of public workshop; request for comments.
The Food and Drug Administration (FDA or Agency) is announcing the following public workshop entitled “Patient-Focused Drug Development: Developing and Submitting Proposed Draft Guidance Relating to Patient Experience Data.” The purpose of the public workshop is to convene a discussion on how a person seeking to develop and submit proposed draft guidance relating to patient experience data for consideration by FDA may submit such proposed draft guidance to the Agency. This workshop will inform development of patient-focused drug development guidance as required by the 21st Century Cures Act (Cures Act). FDA plans to publish a background document approximately 2 weeks before the workshop date.
The public workshop will be held on March 19, 2018, from 1 p.m. to 5 p.m. Submit either electronic or written comments on this public workshop by May 18, 2018. See the
The public workshop will be held at FDA's White Oak Campus, 10903 New Hampshire Ave., Bldg. 31 Conference Center, the Great Room (Rm. 1503), Silver Spring, MD 20993. Entrance for the public workshop participants (non-FDA employees) is through Building 1 where routine security check procedures will be performed. For parking and security information, please refer to
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before May 18, 2018. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Meghana Chalasani, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 51, Rm. 1146, Silver Spring, MD 20993-0002, 240-402-6525, Fax: 301-847-8443,
This public workshop is intended to support FDA implementation of requirements for guidance development under section 3002 of the Cures Act (Pub. L. 114-255). Section 3002 of Title III, Subtitle A, of the Cures Act directs
In FDA's “Plan for Issuance of Patient-Focused Drug Development Guidance,” (the Plan) available at
FDA is announcing a public workshop to convene a discussion on topics related to developing and submitting proposed draft guidance relating to patient experience data by an external stakeholder. The purpose of this public workshop is to obtain input from stakeholders on considerations for development and submission of proposed draft guidance relating to patient experience data submitted by an external stakeholder, including: (1) Defining the scope of the proposed draft guidance, (2) developing the proposed draft guidance, and (3) submitting the proposed draft guidance to FDA, including the process and format. The Agency is seeking information and comments from a broad range of stakeholders, including patients, patient advocates, academic and medical researchers, expert practitioners, drug developers, and other interested persons. FDA will publish a background document outlining the topic areas that will be addressed in the draft guidance approximately 2 weeks before the workshop date at the following website:
After this public workshop, FDA will take into consideration the stakeholder input from the workshop and the public docket, and publish a draft guidance by the end of fiscal year 2018.
National Institutes of Health, HHS.
Notice.
The invention listed below is owned by an agency of the U.S. Government and is available for licensing to achieve expeditious commercialization of results of federally-funded research and development. Foreign patent applications are filed on selected inventions to extend market coverage for companies and may also be available for licensing.
Dr. Natalie Greco, 301-761-7898;
Technology description follows.
NIAID has a hybridoma available for non-exclusive licensing that produces a monoclonal antibody specific for DNA/RNA hybrids. This antibody, which has been extensively characterized by NIH researchers, is already a widely-used research tool. It is currently the only monoclonal antibody available that is specific for DNA/RNA hybrids, making it a unique reagent. It is used in immuno-fluorescence (IF) microscopy, where it can be used to detect sites of transcriptional activity and potentially sites of viral replication. It has also been used in DNA/RNA immunoprecipitation (DRIP) experiments by a variety of researchers.
Aside from its use as a research tool, this antibody has potential to be used in diagnostic kits for viral/bacterial infections, cancers, and a variety of other human diseases. DNA/RNA hybrids arise during normal cellular function, but they are typically present in cells at low levels. When DNA/RNA hybrids are found at high levels in a cell, it indicates that the cell is “abnormal”. For example, the cell may be cancerous or infected with a virus. NIH researchers have also incorporated the antibody into a micro-array platform, expanding its potential for use in diagnostic devices.
This technology is available for licensing for commercial development in accordance with 35 U.S.C. 209 and 37 CFR part 404, as well as for further development and evaluation under a research collaboration.
Research tool:
For use in diagnostic kits that detect:
S. Leppla, C. Leysath, D. Phillips, D. Garboczi, L. Lantz (all of NIAID).
National Institutes of Health, HHS.
Notice.
In compliance with the Paperwork Reduction Act of 1995, the National Institutes of Health (NIH) has submitted to the Office of Management and Budget (OMB) a request for review and approval of the information collection listed below.
Comments regarding this information collection are best assured of having their full effect if received within 30-days of the date of this publication.
Written comments and/or suggestions regarding the item(s) contained in this notice, especially regarding the estimated public burden and associated response time, should be directed to the: Office of Management and Budget, Office of Regulatory Affairs,
To request more information on the proposed project or to obtain a copy of the data collection plans and instruments, contact: Dr. Arlyn Garcia-Perez, Assistant Director, Office of Intramural Research, Office of the Director, National Institutes of Health, 1 Center Drive MSC 0140, Building 1, Room 160, MSC-0140, Bethesda, Maryland 20892 or call non-toll-free number (301) 496-1921 or (301) 496-1381 or Email your request, including your address to:
This proposed information collection was previously published in the
In compliance with Section 3507(a)(1)(D) of the Paperwork Reduction Act of 1995, the National Institutes of Health (NIH) has submitted to the Office of Management and Budget (OMB) a request for review and approval of the information collection listed below.
OMB approval is requested for 3 years. There are no costs to respondents other than their time. The total estimated annualized burden hours are 527.
Coast Guard, DHS.
60-Day notice requesting comments.
In compliance with the Paperwork Reduction Act of 1995, the U.S. Coast Guard intends to submit an Information Collection Request (ICR) to the Office of Management and Budget (OMB), Office of Information and Regulatory Affairs (OIRA), requesting an extension of its approval for the following collection of information: 1625-0011, Applications for Private Aids to Navigation and for Class I Private Aids to Navigation on Artificial Islands and Fixed Structures; without change. Our ICR describes the information we seek to collect from the public. Before submitting this ICR to OIRA, the Coast Guard is inviting comments as described below.
Comments must reach the Coast Guard on or before February 12, 2018.
You may submit comments identified by Coast Guard docket number [USCG-2017-0952] to the Coast Guard using the Federal eRulemaking Portal at
A copy of the ICR is available through the docket on the internet at
Contact Mr. Anthony Smith, Office of Information Management, telephone 202-475-3532, or fax 202-372-8405, for questions on these documents.
This Notice relies on the authority of the Paperwork Reduction Act of 1995; 44 U.S.C. chapter 35, as amended. An ICR is an application to OIRA seeking the approval, extension, or renewal of a Coast Guard collection of information (Collection). The ICR contains information describing the Collection's purpose, the Collection's likely burden on the affected public, an explanation of the necessity of the Collection, and other important information describing the Collection. There is one ICR for each Collection.
The Coast Guard invites comments on whether this ICR should be granted based on the Collection being necessary for the proper performance of Departmental functions. In particular, the Coast Guard would appreciate comments addressing: (1) The practical utility of the Collection; (2) the accuracy of the estimated burden of the Collection; (3) ways to enhance the quality, utility, and clarity of information subject to the Collection; and (4) ways to minimize the burden of the Collection on respondents, including the use of automated collection techniques or other forms of information technology. In response to your comments, we may revise this ICR or decide not to seek an extension of approval for the Collection. We will consider all comments and material received during the comment period.
We encourage you to respond to this request by submitting comments and related materials. Comments must contain the OMB Control Number of the ICR and the docket number of this request [USCG-2017-0952], and must be received by February 12, 2018.
We encourage you to submit comments through the Federal eRulemaking Portal at
We accept anonymous comments. All comments received will be posted without change to
The Paperwork Reduction Act of 1995; 44 U.S.C. Chapter 35, as amended.
U.S. Geological Survey, Department of the Interior.
Notice of intent to grant exclusive patent license; request for comments.
The U.S. Geological Survey (USGS), Department of the Interior, is contemplating the grant of an exclusive license in the United States of America, its territories, possessions and commonwealths, to USGS's interest in the invention embodied in U.S. Provisional Application No. 62/333,616, titled “Subsurface Environment Sampler,” to Montana Emergent Technologies (MET). USGS requests public comments on or objections to the proposed grant.
Comments or objections must be received by December 29, 2017.
Written comments or objections relating to the prospective license may be submitted by U.S. mail, facsimile, or email to James Mitchell, Patent and Licensing Manager, Office of Policy and Analysis, USGS, 12201 Sunrise Valley Drive, MS 153, Reston, VA 20192, (703) 648-4688 (fax);
James Mitchell, Patent and Licensing Manager, Office of Policy and Analysis, USGS, 12201 Sunrise Valley Drive, MS 153, Reston, VA 20192, (703) 648-4344 (phone), (703) 648-4688 (fax);
The prospective exclusive license will be royalty bearing and will comply with the terms and conditions of 35 U.S.C. 209 and 37 CFR 404.7. The prospective exclusive license may be granted unless, within fifteen (15) days from the date of this published Notice, USGS receives written evidence and argument which establish that the grant of the license would not be consistent with the requirements of 35 U.S.C. 209 and 37 CFR 404.7. The Provisional Patent Application was filed on March 9, 2016 and describes product sampler and methods for testing subsurface environment.
Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
35 U.S.C. 209.
Office of Surface Mining Reclamation and Enforcement, Interior.
Notice of information collection; request for comment.
In accordance with the Paperwork Reduction Act of 1995, we, the Office of Surface Mining Reclamation and Enforcement (OSMRE) are proposing to renew an information collection relating to Subsidence insurance program grants.
Interested persons are invited to submit comments on or before January 16, 2018.
Send written comments on this information collection request (ICR) to the Office of Management and Budget's Desk Officer for the Department of the Interior by email at
To request additional information about this ICR, contact John Trelease by email at
In accordance with the Paperwork Reduction Act of 1995, we provide the general public and other Federal agencies with an opportunity to comment on new, proposed, revised, and continuing collections of information. This helps us assess the impact of our information collection requirements and minimize the public's reporting burden. It also helps the public understand our information collection requirements and provides the requested data in the desired format.
A
We are again soliciting comments on the proposed ICR that is described below. We are especially interested in public comment addressing the following issues: (1) Is the collection necessary to the proper functions of OSMRE; (2) is the estimate of burden accurate; (3) how might OSMRE enhance the quality, utility, and clarity of the information to be collected; and (4) how might OSMRE minimize the burden of this collection on the respondents, including through the use of information technology.
Comments that you submit in response to this notice are a matter of public record. Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.
The authority for this action is the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Office of Surface Mining Reclamation and Enforcement, Interior.
Notice of information collection; request for comment.
In accordance with the Paperwork Reduction Act of 1995, we, the Office of Surface Mining Reclamation and Enforcement (OSMRE) are proposing to renew an information collection with revisions relating to abandoned mine reclamation funds.
Interested persons are invited to submit comments on or before January 16, 2018.
Send written comments on this information collection request (ICR) to the Office of Management and Budget's Desk Officer for the Department of the Interior by email at
To request additional information about this ICR, contact John Trelease by email at
In accordance with the Paperwork Reduction Act of 1995, we provide the general public and other Federal agencies with an opportunity to comment on new, proposed, revised, and continuing collections of information. This helps us assess the impact of our information collection requirements and minimize the public's reporting burden. It also helps the public understand our information collection requirements and provides the requested data in the desired format.
A
We are again soliciting comments on the proposed ICR that is described below. We are especially interested in public comment addressing the following issues: (1) Is the collection necessary to the proper functions of OSMRE; (2) is the estimate of burden accurate; (3) how might OSMRE enhance the quality, utility, and clarity of the information to be collected; and (4) how might OSMRE minimize the burden of this collection on the respondents, including through the use of information technology.
Comments that you submit in response to this notice are a matter of public record. Before including your address, phone number, email address, or other personal identifying
An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.
The authority for this action is the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Federal Bureau of Investigation, Department of Justice.
30-Day notice.
The Department of Justice (DOJ), Office of Justice Programs, Federal Bureau of Investigation, will be submitting the following information collection request to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act of 1995. This proposed information collection was previously published in the
Comments are encourages and will be accepted for an additional 30 day until January 16, 2018.
If you have additional comments especially on the estimated public burden or associated response time, suggestions, or need a copy of the proposed information collection instrument with instructions or additional information, please contact Leanna Ramsey, at 540-868-4292 FOIA Public Information Officer, Federal Bureau of Investigation, 170 Marcel Drive, Winchester, VA 22602.
Written comments and suggestions from the public and affected agencies concerning the proposed collection of information are encouraged. Your comments should address one or more of the following four points:
(1)
(2)
(3)
(4)
The general public who wish to make online FOIA request will be the most affected group. This information collection is to allow the Federal Bureau of Investigation to accept and responded to FOIA requester as defined in 28 CFR part 16.3.
(a) How made and addressed. You may make a request for records of the Department of Justice by writing directly to the Department component that maintains those records. You may find the Department's “Freedom of Information Act Reference Guide”—which is available electronically at the Department's World Wide website, and is available in paper form as well—helpful in making your request. For additional information about the FOIA, you may refer directly to the statute. If you are making a request for records about yourself, see § 16.41(d) for additional requirements. If you are making a request for records about another individual, either a written authorization signed by that individual permitting disclosure of those records to you or proof that that individual is deceased (for example, a copy of a death certificate or an obituary) will help the processing of your request. Your request should be sent to the component's FOIA office at the address listed in appendix I to part 16. In most cases, your FOIA request should be sent to a component's central FOIA office. For records held by a field office of the Federal Bureau of Investigation (FBI) or the Immigration and Naturalization Service (INS), however, you must write directly to that FBI or INS field office address, which can be found in most telephone books or by calling the component's central FOIA office. (The functions of each component are summarized in part 0 of this title and in the description of the
(c) Agreement to pay fees. If you make a FOIA request, it shall be considered an agreement by you to pay all applicable fees charged under § 16.11, up to $25.00, unless you seek a waiver of fees. The component responsible for responding to your request ordinarily will confirm this agreement in an acknowledgement letter. When making a request, you may specify a willingness to pay a greater or lesser amount.
(5)
(6)
If additional information is required contact: Melody Braswell, Department Clearance Officer, United States Department of Justice, Justice Management Division, Policy and Planning Staff, Two Constitution Square, 145 N Street NE, Suite 3E.405B, Washington, DC 20530.
National Endowment for the Humanities.
Notice of meetings.
The National Endowment for the Humanities will hold three meetings of the Humanities Panel, a federal advisory committee, during January, 2018. The purpose of the meetings is for panel review, discussion, evaluation, and recommendation of applications for financial assistance under the National Foundation on the Arts and Humanities Act of 1965.
See Supplementary Information section for meeting dates. The meetings will open at 8:30 a.m. and will adjourn by 5:00 p.m. on the dates specified below.
Please see
Elizabeth Voyatzis, Committee Management Officer, 400 7th Street SW, Room 4060, Washington, DC 20506; (202) 606-8322;
Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (5 U.S.C. App.), notice is hereby given of the following meetings:
1.
This meeting will discuss applications for Next Generation Humanities Ph.D.: Planning Grants, submitted to the Division of Education Programs. The meeting will be held at the NEH offices at 400 7th Street SW, Washington, DC 20506.
2.
This meeting will discuss applications on the subjects of the Americas and Europe: History, Social Sciences, Literature, and Studies Linguistics, for Kluge Fellowships, submitted to the Division of Research Programs. The meeting will be held at The Library of Congress, Jefferson Building, 10 First Street SE, RoomLJ-220, Washington, DC 20540.
2.
This meeting will discuss applications on the subjects of Africa, Asia, and Europe: History, Social Sciences, Literature, and Studies for Kluge Fellowships, submitted to the Division of Research Programs. The meeting will be held at The Library of Congress, Jefferson Building, 10 First Street SE, Room LJ-220, Washington, DC 20540.
Postal Regulatory Commission.
Notice.
The Commission is noticing a recent Postal Service filing for the Commission's consideration concerning a negotiated service agreement. This notice informs the public of the filing, invites public comment, and takes other administrative steps.
Submit comments electronically via the Commission's Filing Online system at
David A. Trissell, General Counsel, at 202-789-6820.
The Commission gives notice that the Postal Service filed request(s) for the Commission to consider matters related to negotiated service agreement(s). The request(s) may propose the addition or removal of a negotiated service agreement from the market dominant or the competitive product list, or the modification of an existing product currently appearing on the market dominant or the competitive product list.
Section II identifies the docket number(s) associated with each Postal Service request, the title of each Postal Service request, the request's acceptance date, and the authority cited by the Postal Service for each request. For each request, the Commission appoints an officer of the Commission to represent the interests of the general public in the proceeding, pursuant to 39 U.S.C. 505 (Public Representative). Section II also establishes comment deadline(s) pertaining to each request.
The public portions of the Postal Service's request(s) can be accessed via the Commission's website (
The Commission invites comments on whether the Postal Service's request(s) in the captioned docket(s) are consistent with the policies of title 39. For request(s) that the Postal Service states concern market dominant product(s), applicable statutory and regulatory requirements include 39 U.S.C. 3622, 39 U.S.C. 3642, 39 CFR part 3010, and 39 CFR part 3020, subpart B. For request(s) that the Postal Service states concern competitive product(s), applicable statutory and regulatory requirements include 39 U.S.C. 3632, 39 U.S.C. 3633, 39 U.S.C. 3642, 39 CFR part 3015, and 39 CFR part 3020, subpart B. Comment deadline(s) for each request appear in section II.
1.
2.
3.
4.
This notice will be published in the
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 8, 2017, it filed with the Postal Regulatory Commission a
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 8,
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 8, 2017, it filed with the Postal Regulatory Commission a
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 8, 2017, it filed with the Postal Regulatory Commission a
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Exchange proposes to a proposal[sic] to amend the Exchange's rules to make permanent a program that allows transactions to take place in open outcry trading at prices of at least $0 but less than $1 per option contract (“sub-dollar cabinet trades”).
The text of the proposed rule change is available on the Exchange's website at
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.
The Exchange proposes to amend Rule 1059 to make permanent a program that allows transactions to take place at a price that is below $1 per option contract.
An “accommodation” or “cabinet” trade refers to trades in listed options on the Exchange that are worthless or not actively traded. Trading is generally conducted in accordance with Exchange Rules, except as provided in Exchange Rule 1059, Accommodation Transactions (Cabinet Trades), which sets forth specific procedures for engaging in cabinet trades.
Rule 1059 provides that a “cabinet order” is a closing limit order at a price of $1 per option contract for the account of a customer, firm, specialist or ROT. An opening order is not a “cabinet order” but may in certain cases be matched with a cabinet order. Prior to the pilot program, only closing limit orders at a price of $1 per option contract for the accounts of customer, firm, specialists and Registered Options Traders (“ROTs”) could be placed in the cabinet.
Rule 1059 currently provides that cabinet transactions at a price of $1 per option contract may occur via open outcry in any options series open for trading on the Exchange. However, the $1 Cabinet Trading procedures are not available in Penny Pilot Program classes
The Exchange amended the Cabinet Trading procedures to allow transactions to take place in open outcry at a price of at least $0 but less than $1 per option contract. This amendment expires on January 5, 2018. These lower-priced transactions are permitted to be traded pursuant to the same procedures applicable to $1 Cabinet Trades, except that (i) bids and offers for opening transactions are only permitted to accommodate closing transactions, and (ii) transactions in option classes participating in the Penny Pilot Program are permitted. The Exchange believes that allowing a price of at least $0 but less than $1 better accommodates the closing of options positions in series that are worthless or not actively traded, particularly when there has been a significant move in the price of the underlying security, resulting in a large number of series being out-of-the-money. For example, a market participant might have a long position in a put series with a strike price of $30 and the underlying stock might be trading at $100. In such an instance, there is likely no market to close-out the position, even at the $1 cabinet price.
As with other accommodation liquidations under Rule 1059, transactions at prices less than $1 are not disseminated to the public on the consolidated tape. In addition, as with other accommodation liquidations under Rule 1059, the transactions are exempt from the Consolidated Options Audit Trail (“COATS”) requirements of Exchange Rule 1063(e)(i). However, Rule 1059 requires all transactions, including transaction for less than $1, to be reported to the Exchange following the close of each business day.
The Exchange notes that while the level of liquidation trades is not meaningful, such trades serve an essential purpose in that they allow market participants to close out options positions that are worthless or not actively trading. To illustrate, in 2016, there were a total of 442 Cabinet Trades comprising 244,734 contracts. Each contract was executed at a trade price of $ 0.01. The Exchange believes this level of trading demonstrates the benefit of the current program to market participants.
The current rule was adopted on a pilot basis to provide the Exchange time to evaluate the efficacy of the change and to address any operational issues that might arise in processing Cabinet trades. In support of making the program permanent, the Exchange represents that there are no operational issues in processing and clearing Cabinet Trades in penny and subpenny increments. The Exchange is also not aware of the Options Clearing Corporation (“OCC”) having operational issues with processing Cabinet trades submitted by the Exchange. Each Cabinet Trade is input manually into the clearing system, and then flows seamlessly for settlement at OCC. More specifically, upon receiving an order for a Cabinet Trade, a Floor Broker fills out a designated cabinet transaction form provided by the Exchange noting the order details. The Floor Broker subsequently calls for a market for the order by announcing the terms of the order to the trading crowd. The Floor Broker proceeds to execute the order and submits the designated cabinet transaction form to the Nasdaq Market Operations staff for clearance and reporting at the close of the business day. Nasdaq Market Operations staff then enter the transaction into the Phlx system, which transmits the trade to OCC for clearance and settlement.
At the time of adoption of the pilot the Phlx system permitted reporting a cabinet trade at a price as small as $0.0001, as it does today. The Exchange system allows Cabinet trades to be processed in a manner similar to how all other trades are processed by the exchange.
Additionally, the Exchange notes that members and member organizations have not raised any concerns with the processing of Cabinet Trades.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that approving the program on a permanent basis will not impact competition, as it will continue to facilitate members' ability to close positions in worthless or not actively traded series.
No written comments were either solicited or received.
Within 45 days of the date of publication of this notice in the
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:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 8, 2017, Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
FINRA is proposing to file Amendment No. 1 to SR-FINRA-2017-011 (the “Original Proposal”), pursuant to which FINRA proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of the proposed rule change is available on FINRA's website at
In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
Accordingly, on May 8, 2017, FINRA submitted the Original Proposal to propose the Consolidated Audit Trail Funding Fees, which would require Industry Members that are FINRA members to pay the CAT Fees determined by the Operating Committee. Each of the other Participants filed substantively identical fee filings in accordance with the Plan. The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model:
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
Accordingly, the funding model approved by the Operating Committee imposes fees on both Participants and Industry Members.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction in market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity Execution Venues and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member (except for Execution Venue ATSs), with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic in a way that is fair and equitable. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary, as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity Execution Venues and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity Execution Venues and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Exhibit 3 of the proposed rule change are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity Execution Venues and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity Execution Venues and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity Execution Venues and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
FINRA proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on FINRA's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 6897 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of SEC Regulation ATS under the Securities Exchange Act that operates pursuant to Rule 301 of SEC Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
FINRA proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, FINRA proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, FINRA proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, FINRA proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks were grouped in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to
In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, FINRA proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the OTC Equity Securities market share for Equity ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, FINRA proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, FINRA proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, FINRA proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity Execution Venues and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity Execution Venues and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity Execution Venues and Options
In developing the proposed allocation of CAT costs between Equity Execution Venues and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity Execution Venues and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, FINRA proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, FINRA proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, FINRA proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
FINRA has filed the proposed rule change for immediate effectiveness. FINRA will announce the implementation date of the proposed rule change in a
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,
FINRA believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist FINRA and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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
FINRA believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, FINRA believes that the total level of the CAT Fees is reasonable.
In addition, FINRA believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the funding model takes into consideration affiliations between CAT Reporters, imposing comparable fees on such affiliated entities.
Moreover, FINRA believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity Execution Venues and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75/25 division between Industry Members and Execution Venues maintains the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (
Finally, FINRA believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 15A(b)(9) of the Act,
Moreover, as previously described, FINRA believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, FINRA does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, FINRA does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, FINRA believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
On May 23, 2017, the Original Proposal was published for comment in the
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 16, 2017, Bats EDGA Exchange, Inc., n/k/a Cboe EDGA Exchange, Inc., (“Exchange” or “SRO”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange proposed rule change SR-BatsEDGA-2017-13 (the “Original Proposal”), pursuant to which SRO proposed to amend its Fee Schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of the proposed rule change is available at the Exchange's website at
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 parts of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, SRO proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
SRO proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on SRO's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 4.5 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
SRO proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. SRO will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, SRO proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, SRO proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, SRO proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, SRO proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, SRO proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, SRO proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
SRO believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,
SRO believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist SRO and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
SRO believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, SRO believes that the total level of the CAT Fees is reasonable.
In addition, SRO believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, SRO believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, SRO believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, SRO believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, SRO does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, SRO does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, SRO believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
SRO has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing,
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Exchange proposes to amend the Exchange's Pricing Schedule at Section II, “Multiply Listed Options Fees,”
The text of the proposed rule change is available on the Exchange's website at
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.
Phlx proposes to exclude options overlying NDX from the Monthly Market Maker Cap, the Market Access and Routing Subsidy or “MARS,” and Phlx's Price Improvement XL (“PIXL”) pricing. Each of the proposals are discussed in more detail below. The Exchange seeks to differentiate pricing for this exclusively-listed product from other multiply listed product pricing.
Today, Phlx Specialists
The Exchange proposes to amend the Monthly Market Maker Cap to exclude options overlying NDX from electronic Options Transaction Charges as subject to the Monthly Market Maker Cap. Transactions in NDX will not be subject to the the Monthly Market Maker Cap.
Today, the Exchange assess a $0.07 per contract PIXL Initiating Order Fee. However, if the member or member organization qualifies for the Tier 3, 4 or 5 Customer Rebate in Section B the member or member organization is assessed $0.05 per contract. If the member or member organization executes equal to or greater than 3.00% of National Customer Volume in Multiply-Listed equity and ETF Options Classes (excluding SPY Options) in a given month, the member or member organization is assessed no fee for Complex PIXL Orders. Any member or member organization under Common Ownership with another member or member organization that qualifies for a Customer Rebate Tier 4 or 5 in Section B, or executes equal to or greater than 3.00% of National Customer Volume in Multiply-Listed equity and ETF Options Classes (excluding SPY Options) in a given month receives one of the PIXL Initiating Order discounts as described above. Members or member organizations that qualify for Customer Rebate Tiers 2 through 6 or qualify for the Monthly Firm Fee Cap
Further, the Exchange has pricing noted for PIXL Order Executions in Section II Multiply Listed Options. When the PIXL Order is contra to the Initiating Order a Customer PIXL Order is assessed no fee and Non-Customer PIXL Orders will be assessed $0.30 per contract. When a PIXL Order is contra to a PIXL Auction Responder, a Customer PIXL Order is assessed no fee, other Non-Customer PIXL Orders are assessed $0.30 per contract in Penny Pilot Options or $0.38 per contract in Non-Penny Pilot Options. A Responder that is a Specialist or a Market Maker is assessed $0.25 per contract in Penny Pilot Options or $0.40 per contract in Non-Penny Pilot Options. Other Non-Customer Responders are assessed $0.48 per contract in Penny Pilot Options or $0.70 per contract in Non-Penny Pilot Options when contra to a PIXL Order. A Responder that is a Customer is assessed $0.00 per contract in Penny Pilot Options and Non-Penny Pilot Options. Finally, when a PIXL Order is contra to a resting order or quote a Customer PIXL Order is assessed no fee, other Non-Customers are assessed $0.30 per contract and the resting order or quote is assessed the appropriate Options Transaction Charge in Section II. All other fees discussed in Section II, including Marketing Fees and surcharges, apply as appropriate.
The Exchange proposes to exclude options overlying NDX from the PIXL Pricing in Section IV, Part A. NDX would be subject to Section II pricing, specifically the Options Transactions Charges in NDX as noted.
Today, MARS, pays a subsidy to Phlx members that provide certain order routing functionalities to other Phlx members and/or use such functionalities themselves. Generally, under MARS, Phlx pays participating Phlx members to subsidize their costs of providing routing services to route orders to Phlx. To qualify for MARS, a Phlx member's order routing functionality would be required to meet certain criteria.
Today, a MARS Payment would be made to Phlx members that have System Eligibility and have routed the requisite number of Eligible Contracts daily in a month, which were executed on Phlx. For the purpose of qualifying for the MARS Payment, Eligible Contracts include Firm,
Phlx members that have System Eligibility and have executed the requisite number of Eligible Contracts in a month are paid the following per contract rebates:
The Exchange proposes to exclude options overlying NDX from Eligible Contracts for purposes of qualifying for a MARS Payment. Only Eligible Contracts are paid rebates, therefore no MARS Payment would be paid on options overlying NDX.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that the proposed pricing changes to exclude options overlying NDX from the Monthly Market Maker Cap, MARS and PIXL pricing for NDX are reasonable, equitable and not unfairly discriminatory. NDX transitioned in 2017 to an exclusively-listed product. Similar to other proprietary products, the Exchange seeks to recoup the operational costs for listing proprietary products.
The Exchange's proposal to exclude electronic Options Transaction Charges for options overlying NDX from the Monthly Market Maker Cap is reasonable because Market Makers will continue to be able to utilize the cap to reduce electronic Option Transaction Charges, excluding surcharges, QCC transaction fees and Floor QCC Orders, despite the exclusion of NDX transactions. The Exchange's proposal to exclude electronic Options Transaction Charges for options overlying NDX from the Monthly Market Maker Cap is equitable and not unfairly discriminatory because the Exchange will uniformly exclude electronic options overlying NDX from the Monthly Market Maker Cap.
The Exchange's proposal to exclude options overlying NDX from the PIXL Pricing in Section IV, Part A is reasonable because the Exchange believes that the PIXL pricing continues to be competitive despite the exclusion of NDX. The Exchange's proposal to exclude options overlying NDX from the PIXL Pricing in Section IV, Part A is equitable and not unfairly discriminatory because the Exchange will uniformly exclude options overlying NDX from PIXL pricing.
The Exchange's proposal to exclude options overlying NDX from Eligible Contracts for purposes of qualifying for a MARS Payment is reasonable because the Exchange believes that despite the exclusion of NDX, MARS remains a competitive offering. The Exchange's proposal to exclude options overlying NDX from Eligible Contracts for purposes of qualifying for a MARS Payment is equitable and not unfairly discriminatory because the Exchange will uniformly exclude options overlying NDX from MARS.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In terms of inter-market competition, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive, or rebate opportunities available at other venues to be more favorable.
The Exchange's proposal to exclude electronic Options Transaction Charges for options overlying NDX from the Monthly Market Maker Cap does not impose an undue burden on intra-market competition because the Exchange will uniformly exclude electronic options overlying NDX from the Monthly Market Maker Cap. The Exchange's proposal to exclude options overlying NDX from the PIXL Pricing in Section IV, Part A does not impose an undue burden on intra-market competition because the Exchange will uniformly exclude options overlying NDX from PIXL pricing. The Exchange's proposal to exclude options overlying NDX from Eligible Contracts for purposes of qualifying for a MARS Payment does not impose an undue burden on intra-market competition because the Exchange will uniformly exclude options overlying NDX from MARS.
No written comments were either solicited or received.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
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:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On September 12, 2017, NYSE Arca, Inc. (“NYSE Arca” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
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 those 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 parts of such statements.
The Exchange proposes to list and trade shares (“Shares”) of the GraniteShares Platinum Trust (the “Trust”), under NYSE Arca Rule 8.201-E.
The Trust will not be registered as an investment company under the Investment Company Act of 1940, as amended,
The Sponsor of the Trust is GraniteShares LLC, a Delaware limited liability company. The Bank of New York Mellon is the trustee of the Trust (the “Trustee”)
The Commission has previously approved listing on the Exchange under NYSE Arca Rule 8.201-E of other precious metals and platinum-based commodity trusts, including the ETFS Platinum Trust,
The Exchange represents that the Shares satisfy the requirements of NYSE Arca Rule 8.201-E and thereby qualify for listing on the Exchange.
The investment objective of the Trust will be for the Shares to reflect the performance of the price of platinum, less the expenses and liabilities of the Trust. The Trust will issue Shares which represent units of fractional undivided beneficial interest in and ownership of the Trust.
The Trust will not hold or trade in any instrument or asset on any futures exchange or over the counter (“OTC”) other than physical platinum bullion. The Trust will take delivery of physical platinum bullion that complies with the LPPM platinum delivery rules.
The Shares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in platinum. Although the Shares are not the exact equivalent of an investment in platinum, they provide investors with an alternative that allows a level of participation in the platinum market through the securities market.
The global trade in platinum consists of OTC transactions in spot, forwards, and options and other derivatives, together with exchange traded futures and options.
According to the Registration Statement, most trading in physical platinum is conducted on the OTC market, predominantly in Zurich and London. The LPPM coordinates various OTC market activities, including clearing and vaulting, acts as the principal intermediary between physical platinum market participants and the relevant regulators, promotes good trading practices and develops standard market documentation. In addition, the LPPM promotes refining standards for the platinum market by maintaining the “London/Zurich Good Delivery List,” which are the lists of LPPM accredited melters and assayers of platinum.
The most significant platinum futures exchanges are the New York Mercantile Exchange, Inc. (“NYMEX”), a subsidiary of the Chicago Mercantile Exchange Group (the “CME Group”), and the Tokyo Commodity Exchange.
The basis for settlement and delivery of a spot trade is payment (generally in US dollars) two business days after the trade date against delivery. Delivery of the platinum can either be by physical delivery or through the clearing systems to an unallocated account. The unit of trade in London and Zurich is the troy ounce, whose conversion between grams is: 1,000 grams is equivalent to 32.1507465 troy ounces, and one troy ounce is equivalent to 31.1034768 grams.
A good delivery platinum plate or ingot is acceptable for delivery in settlement of a transaction on the OTC market (a “Good Delivery Platinum Plate or Ingot”). A Good Delivery Platinum Plate or Ingot must contain between 32 and 192 troy ounces of platinum with a minimum fineness (or purity) of 999.5 parts per 1,000 (99.95%). A Good Delivery Platinum Plate or Ingot must also bear the stamp of one of the melters and assayers who are on the LPPM approved list. Unless otherwise specified, the platinum spot price always refers to the “Good Delivery Standards” set by the LPPM.
The Trust will create and redeem Shares on a continuous basis in one or more blocks of 15,000 Shares (a block of 15,000 Shares is called a “Basket”). As described below, the Trust will issue Shares in Baskets to certain authorized participants (“Authorized Participants”) on an ongoing basis. Baskets of Shares will only be issued or redeemed in exchange for an amount of platinum represented by the aggregate number of Shares issued or redeemed. No Shares will be issued unless the Custodian has allocated to the Trust's account the corresponding amount of platinum. Initially, a Basket will require delivery of 1,500 ounces of platinum. The amount of platinum necessary for the creation of a Basket, or to be received upon redemption of a Basket, will decrease over the life of the Trust, due to the payment or accrual of fees and other expenses or liabilities payable by the Trust.
Baskets may be created or redeemed only by Authorized Participants. Orders must be placed by 3:59 p.m. Eastern Time (“E.T.”). The day on which a Trust receives a valid purchase or redemption order is the order date.
Each Authorized Participant must be a registered broker-dealer, a participant in Depository Trust Corporation (“DTC”), have entered into an agreement with the Trustee (the “Authorized Participant Agreement”) and have established a platinum unallocated account with the Custodian or another LPPM-approved platinum clearing bank. The Authorized Participant Agreement provides the procedures for the creation and redemption of Baskets and for the delivery of platinum in connection with such creations or redemptions.
According to the Registration Statement, Authorized Participants, acting on authority of the registered holder of Shares or on their own account, may surrender Baskets of Shares in exchange for the corresponding amount of platinum (measured in ounces) announced by the Trustee (the “Basket Amount”). Upon surrender of such Shares and payment of the Trustee's applicable fee and of any expenses, taxes or charges (such as stamp taxes or stock transfer taxes or fees), the Trustee will deliver to the order of the redeeming Authorized Participant the amount of platinum corresponding to the redeemed Baskets. Shares can only be surrendered for redemption in Baskets of 15,000 Shares each.
Before surrendering Baskets of Shares for redemption, an Authorized Participant must deliver to the Trustee a written request indicating the number of Baskets it intends to redeem. The date the Trustee receives that order determines the Basket Amount to be received in exchange. However, orders received by the Trustee after 3:59 p.m. E.T. on a business day or on a business day when the London Bullion Market Association (“LBMA”) Platinum Price PM or other applicable benchmark price is not announced, will not be accepted.
The redemption distribution from the Trust will consist of a credit to the redeeming Authorized Participant's unallocated account representing the amount of the platinum held by the Trust evidenced by the Shares being redeemed as of the date of the redemption order.
The NAV of the Trust will be calculated by subtracting the Trust's expenses and liabilities on any day from the value of the platinum owned by the Trust on that day; the NAV per Share will be obtained by dividing the NAV of the Trust on a given day by the number of Shares outstanding on that day. On each day on which the Exchange is open for regular trading, the Trustee will determine the NAV as promptly as practicable after 4:00 p.m. E.T. The Trustee will value the Trust's platinum on the basis of LBMA Platinum Price PM. If there is no LBMA Platinum Price PM on any day, the Trustee is authorized to use the LBMA Platinum Price AM announced on that day. If neither price is available for that day, the Trustee will value the Trust's platinum based on the most recently announced LBMA Platinum Price PM or LBMA Platinum Price AM. If the Sponsor determines that such price is inappropriate to use, the Sponsor will identify an alternate basis for evaluation to be employed by the Trustee by consulting other public sources of pricing information. For instance, the Sponsor could use the platinum spot price published by Bloomberg.
Authorized Participants will offer Shares in the secondary market at an offering price that will vary, depending on, among other factors, the price of platinum and the trading price of the Shares on the Exchange at the time of offer. Authorized Participants will not receive from the Trust, the Sponsor, the Trustee or any of their affiliates any fee or other compensation in connection with the offering of the Shares.
While the Trust seeks to reflect generally the performance of the price of platinum less the Trust's expenses and liabilities, Shares may trade at, above or below their NAV. The NAV of Shares will fluctuate with changes in the market value of the Trust's assets. The trading prices of Shares will fluctuate in accordance with changes in their NAV as well as market supply and demand. The amount of the discount or premium in the trading price relative to the NAV may be influenced by non-concurrent trading hours between the major platinum markets and the Exchange. While the Shares trade on the Exchange until 8:00 p.m. E.T., liquidity in the market for platinum may be reduced after the close of the major world platinum markets, including London, Zurich and NYMEX. As a result, during this time, trading spreads, and the resulting premium or discount, on Shares may widen.
Currently, the Consolidated Tape Plan does not provide for dissemination of the spot price of a commodity such as platinum over the Consolidated Tape. However, there will be disseminated over the Consolidated Tape the last sale price for the Shares, as is the case for all equity securities traded on the Exchange (including exchange-traded funds). In addition, there is a considerable amount of platinum price and market information available on
Investors may obtain platinum pricing information on a 24-hour basis based on the spot price for an ounce of platinum from various financial information service providers, such as Reuters and Bloomberg. Reuters and Bloomberg provide at no charge on their websites delayed information regarding the spot price of platinum and last sale prices of platinum futures, as well as information about news and developments in the platinum market. Reuters and Bloomberg also offer a professional service to subscribers for a fee that provides information on platinum prices directly from market participants. ICAP plc provides an electronic trading platform called EBS for the trading of spot platinum, as well as a feed of real-time streaming prices, delivered as record-based digital data from the EBS platform to its customer's market data platform via Bloomberg or Reuters.
Complete real-time data for platinum futures and options prices traded on the NYMEX are available by subscription from Reuters and Bloomberg. The NYMEX also provides delayed futures and options information on current and past trading sessions and market news free of charge on its website. There are a variety of other public websites providing information on platinum, ranging from those specializing in precious metals to sites maintained by major newspapers, such as The Wall Street Journal.
The intraday indicative value (“IIV”) per Share for the Shares will be disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session. The IIV will be calculated based on the amount of platinum held by the Trust and a price of platinum derived from updated bids and offers indicative of the spot price of platinum.
The website for the Trust (
The Trust will be subject to the criteria in NYSE Arca Rule 8.201-E(e) for initial and continued listing of the Shares.
A minimum of two Baskets or 30,000 Shares will be required to be outstanding at the start of trading, which is equivalent to 3,000 ounces of platinum. The Exchange believes that the anticipated minimum number of Shares outstanding at the start of trading is sufficient to provide adequate market liquidity.
The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange's existing rules governing the trading of equity securities. Trading in the Shares on the Exchange will occur during all three trading sessions in accordance with NYSE Arca Rule 7.34-E(a). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the minimum price variation (“MPV”) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for quoting and order entry is $0.0001.
Further, NYSE Arca Rule 8.201-E sets forth certain restrictions on ETP Holders acting as registered Market Makers in the Shares to facilitate surveillance. Under NYSE Arca Rule 8.201-E(g), an ETP Holder
As a general matter, the Exchange has regulatory jurisdiction over its ETP Holders and their associated persons, which include any person or entity controlling an ETP Holder. A subsidiary or affiliate of an ETP Holder that does business only in commodities or futures contracts would not be subject to Exchange jurisdiction, but the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member.
With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. Trading on the Exchange in the Shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which conditions in the underlying platinum market have caused disruptions and/or lack of trading, or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. In addition, trading in Shares will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange's “circuit breaker” rule.
The Exchange represents that trading in the Shares will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by the Financial Industry Regulatory Authority (“FINRA”) on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.
The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.
Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying platinum, platinum futures contracts, options on platinum futures, or any other platinum derivative, through ETP Holders acting as registered Market Makers, in connection with such ETP Holders' proprietary or customer trades through ETP Holders which they effect on any relevant market.
In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares of the Trust on the Exchange.
The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Trust is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Rule 5.5-E(m).
Prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Baskets (including noting that Shares are not individually redeemable); (2) NYSE Arca Rule 9.2-E(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) how information regarding the IIV is disseminated; (4) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (5) the possibility that trading spreads and the resulting premium or discount on the Shares may widen as a result of reduced liquidity of platinum trading during the Core and Late Trading Sessions after the close of the major world platinum markets; and (6) trading information. For example, the Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Trust. The Exchange notes that investors purchasing Shares directly from the Trust will receive a prospectus. ETP Holders purchasing Shares from the Trust for resale to investors will deliver a prospectus to such investors.
In addition, the Information Bulletin will reference that the Trust is subject to various fees and expenses as will be described in the Registration Statement. The Information Bulletin will also reference the fact that there is no regulated source of last sale information regarding physical platinum, that the Commission has no jurisdiction over the trading of platinum as a physical commodity, and that the CFTC has regulatory jurisdiction over the trading of platinum futures contracts and options on platinum futures contracts.
The Information Bulletin will also discuss any relief, if granted, by the Commission or the staff from any rules under the Act.
The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5)
The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.201-E. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. The most significant platinum futures exchange in the U.S. is the NYMEX, which is a member of ISG. U.S. futures exchanges are registered with the CFTC and seek to provide a neutral, regulated marketplace for the trading of derivatives contracts for commodities, such as futures, options and certain swaps. The platinum contract market is of significant size and liquidity.
The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that there is a considerable amount of platinum price and platinum market information available on public websites and
The NAV of the Trust will be published by the Sponsor on each day that the NYSE Arca is open for regular trading and will be posted on the Trust's website. The IIV relating to the Shares will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session. The Trust's website will also provide the Trust's prospectus, as well as the two most recent reports to stockholders. In addition, information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers' computer screens and other electronic services. Information regarding the previous day's closing price and trading volume information for the Shares will be published daily in the financial section of newspapers.
The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors will have ready access to information regarding platinum pricing.
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes the proposed rule change will enhance competition by accommodating Exchange trading of an additional exchange-traded product relating to physical platinum.
No written comments were solicited or received with respect to the proposed rule change.
After careful review, the Commission finds that the Exchange's proposed rule change, as modified by Amendment No. 2, to list and trade the Shares is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.
The Commission also finds that the proposal is consistent with Section 11A(a)(1)(C)(iii) of the Act,
The Commission believes that the proposed rule change is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately. NYSE Arca Rule 8.201-E(e)(2)(v) requires that an IIV (which is referred to in the rule as the “Indicative Trust Value”) be calculated and disseminated at least every 15 seconds. The IIV will be calculated based on the amount of platinum held by the Trust and a price of platinum derived from updated bids and offers indicative of the spot price of platinum.
Additionally, the NAV of the Trust will be published by the Sponsor on each day that the NYSE Arca is open for regular trading and will be posted on the Trust's website.
The Commission also believes that the proposal is reasonably designed to prevent trading when a reasonable degree of transparency cannot be assured. With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. Trading on the Exchange in the Shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which conditions in the underlying platinum market have caused disruptions or lack of trading, or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. In addition, trading in Shares will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange's “circuit breaker” rule.
Additionally, the Commission notes that market makers in the Shares would be subject to the requirements of NYSE Arca Rule 8.201-E(g), which allow the Exchange to ensure that they do not use their positions to violate the requirements of Exchange rules or applicable federal securities laws.
In support of this proposal, the Exchange has made the following additional representations:
(1) The Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.201-E.
(2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions.
(3) The Exchange deems the Shares to be equity securities.
(4) The Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees.
(5) Trading in the Shares will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws, and that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange.
(6) The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.
(7) Prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Baskets (including noting that Shares are not individually redeemable); (2) NYSE Arca Rule 9.2-E(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) how information regarding the IIV is disseminated; (4) ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (5) the possibility that trading spreads and the resulting premium or discount on the Shares may widen as a result of reduced liquidity of platinum trading during the Core and Late Trading Sessions after the close of the major world platinum markets; and (6) trading information.
(8) All statements and representations made in the Exchange's filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares of the Trust on the Exchange.
(9) The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the continued listing requirements and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Trust is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the NYSE Arca Rule 5.5-E(m).
For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with Section 6(b)(5) of the Act
Interested persons are invited to submit written data, views, and arguments concerning Amendment No.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 2, prior to the 30th day after the date of publication of notice of Amendment No. 2 in the
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 2, 2017, Nasdaq BX, Inc. (“Exchange” or “BX”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 2, 2017, Nasdaq BX, Inc. filed with the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule change SR-BX-2017-023 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
With this Amendment, the Exchange is including
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 6810 and Chapter IX, Section 8(a) (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the OTC Equity Securities market share for Equity ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA.
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
The Exchange has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 2 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues.
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 9, 2017, Investors Exchange LLC (“IEX” or “SRO”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 9, 2017, Investors Exchange LLC (“SRO”) filed with the Commission proposed rule change SR-IEX-2017-16 (the “Original Proposal”), pursuant to which SRO proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of the proposed rule change is available at the Exchange's website at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statement may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, SRO proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
SRO proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on SRO's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 11.610 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
SRO proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. SRO will provide Industry Members with details regarding the manner of payment of CAT Fees by Information Circular.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, SRO proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, SRO proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, SRO proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, SRO proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, SRO proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, SRO proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
SRO believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,
SRO believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist SRO and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
SRO believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, SRO believes that the total level of the CAT Fees is reasonable.
In addition, SRO believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, SRO believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, SRO believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, SRO believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, SRO does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, SRO does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, SRO believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
SRO has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 12, 2017, Nasdaq PHLX LLC (“Phlx” or “Exchange” or “BX”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 12, 2017, Nasdaq PHLX LLC filed with the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule change SR-Phlx-2017-37 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
With this Amendment, the Exchange is including
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities and the market share
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model,
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
Calculation of Annual Tier Fees for Equity Execution Venues (“EV”)
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 910A (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.”
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the OTC Equity Securities market share for Equity ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA.
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
The Exchange has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 2 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 10, 2017, NYSE Arca, Inc. (“Exchange” or “SRO”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange proposes to amend the NYSE Arca Equities Fees and Charges (“Arca Fee Schedule”), and the NYSE Arca Options Fees and Charges (“Arca Options Fee Schedule”), to adopt the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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 parts of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Add two additional CAT Fee tiers for Equity Execution Venues; (2) discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discount the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discount equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decrease the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focus
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
Accordingly, the funding model approved by the Operating Committee imposes fees on both Participants and Industry Members.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions on their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction in market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues,
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity Execution Venues and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity Execution Venues and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12%/60.88% split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in Exhibit 3 of the proposed rule change are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity Execution Venues and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity Execution Venues and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity Execution Venues and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to adopt the CAT Fees determined by the Operating Committee on the Exchange's Industry Members. The proposed fee change has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) sets forth the definitions applicable to the proposed Consolidated Audit Trail Funding Fees. Proposed paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 11.6810 (Consolidated Audit Trail—Definitions) of the CAT Compliance Rule.
The Exchange proposes to adopt different fees for Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the Exchange proposes to define the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) of the proposed rule change.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to adopt the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed rule change. Paragraph (b)(1) of the proposed rule change sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following
Paragraph (b)(2) of the proposed rule change sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed rule change states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed rule change, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by Trader Update.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposes to adopt paragraph (c)(2), which states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes to adopt paragraph (d) of the proposed rule change, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to 1%), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Exchange believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks were grouped in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would be subject to a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Exchange believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the proposed funding model included both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would be subject to a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Exchange believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed rule change to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed rule change.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees at the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity Execution Venues and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity Execution Venues and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity Execution Venues and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity Execution Venues and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity Execution Venues and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more Industry Members expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed rule change to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions on their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) to the proposed rule change to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission
The Operating Committee does not believe that decreasing cost per additional unit places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the revised funding model, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(4) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
For the foregoing reasons, the Exchange believes that the proposal is consistent with the Act.
Section 6(b)(8) of the Act
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Exchange believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Exchange believes that this Amendment addresses the competitive concerns raised by commenters.
No written comments were solicited or received with respect to the proposed rule change.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Exchange filed a proposal to amend the fee schedule applicable to Members
The text of the proposed rule change is available at the Exchange's website at
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 parts of such statements.
The Exchange proposes to amend its fee schedule to: (i) Reduce the rebate applicable to fee code ZA; and (ii) provide the enhanced rebate offered by the Investor Depth Tier under footnote 1 of the fee schedule to orders that yield fee code ZA where the Member satisfies the tier's required criteria.
Currently, the Exchange determines the liquidity adding rebate that it will provide to Members using the Exchange's fee code and tiered pricing structure. Fee code ZA is appended to Retail Orders
The Exchange offers additional rebates depending on the volume tiers for which such Member qualifies. As is the case with any rebate on the fee schedule, to the extent that a Member qualifies for higher rebates than those provided under a volume tier, the higher rebate shall apply. Footnote 1 offers volume tiered rebates ranging from $0.0025 to $0.0033 per share to orders yielding fee codes B,
The Exchange proposes to implement these amendments to its fee schedule as of December 1, 2017.
The Exchange believes that the proposed rule change is consistent with the objectives of Section 6 of the Act,
The Exchange believes it is equitable and reasonable to lower the rebate for Retail Orders that yield fee code ZA from $0.0034 to $0.0032 per share as the level of rebate is either equal to or greater than the rebate offered on another exchange.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Similarly, the Exchange does not believe that the proposed change to the Exchange's tiered pricing structure burdens competition, but instead, enhances competition by modifying pricing incentives to attract order flow and incentivize participants to increase their participation on the Exchange. The Exchange notes that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues if they deem fee structures to be unreasonable or excessive. The Exchange does not believe the proposed amendments would burden intramarket competition as they would be available to all Members uniformly.
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from Members or other interested parties.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
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:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 (“Act”),
The Exchange proposes to amend its rules in connection with the implementation of a new CFE trading system. The scope of this filing is limited solely to the application of the rule amendments to security futures traded on CFE. The only security futures that have been offered for trading on CFE were traded under Chapter 16 of CFE's Rulebook, which is applicable to Individual Stock Based and Exchange-Traded Fund Based Volatility Index security futures. CFE does not currently list any security futures for trading. The text of the proposed rule change is attached as Exhibit 4 to the filing but is not attached to the publication of this notice.
In its filing with the Commission, CFE 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. CFE has prepared
Cboe Global Markets, Inc. (formerly known as CBOE Holdings, Inc.) (“Cboe Global Markets”) is the parent company of CFE. On February 28, 2017, Cboe Global Markets completed the acquisition of Bats Global Markets, Inc. (“Bats”). In connection with this acquisition, all of the exchanges owned by Cboe Global Markets, including CFE, are migrating their trading platforms to trading systems based on Bats technology. CFE's new trading system will be referred to in CFE rules as the “CFE System”.
The Exchange is proposing to amend the following rule provisions as a result of changes for the CFE System: CFE Rule Chapter 1; CFE Rules 303A, 403, 414, 415, 603, 620, 714, 1602, 1802, and 1902; and CFE Policy and Procedure XVIII. These provisions set forth rules related to Authorized Reporters, Order Entry Operator IDs, Order Entry and Maintenance of Front-End Audit Trail Information, Exchange of Contract for Related Position (“ECRP”) transactions, Block Trades, Market Manipulation, Disruptive Trading Practices, Imposition of Fines for Minor Rule Violations, Reportable Trading Volume, and Contract Specifications. With one exception, the rule amendments included as part of this rule change are to apply to all products traded on CFE, including both non-security futures and security futures. CFE is making these rule amendments in conjunction with other rule amendments being made by CFE in connection with the implementation of the CFE System that are not required to be submitted to the Commission pursuant to Section 19(b)(7) of the Act
CFE Rule Chapter 1 includes definitions for terms used in CFE's rules. CFE is proposing to include in Chapter 1 a definition for the term “Authorized Reporter” which includes cross-references to proposed CFE Rules 414(i) and 415(f) in which the term “Authorized Reporter” is defined. Specifically, the proposed definition of an Authorized Reporter in proposed Rules 414(i) and 415(f) is an individual that is either a CFE Trading Privilege Holder (“TPH”) or a Related Party of a TPH and is pre-authorized by a CFE Clearing Member to report Exchange of Contract for Related Position transactions and Block Trades on behalf of the TPH.
CFE Rule 303A (Order Entry Operator IDs) sets forth that each TPH shall include an Order Entry Operator ID with every Order and the requirements applicable to Order Entry Operator IDs. CFE is proposing three changes to Rule 303A.
First, CFE is proposing to amend Rule 303A(a) to provide that an Order Entry Operator ID must be included on every Cancel Order and Cancel Replace/Modify Order and to provide that any Order that does not contain an Order Entry Operator ID will be rejected or canceled back to the sender by CFE's trading system.
Second, CFE is proposing to amend Rule 303A to remove references to quotes. A quote is a two-sided order that includes both a bid and an offer whereas an order only includes a bid or an offer. Most TPHs submit orders instead of quotes, and CFE will no longer accept quotes with the implementation of the CFE System.
Third, CFE is proposing to replace the term “CBOE System” (which is the term in CFE's current rules for CFE's trading system) with the term “CFE System”.
CFE Rule 403 (Order Entry) sets forth details regarding, among other things, how Orders must be entered into CFE's trading system, the information each Order must contain, and front-end audit trail information that must be maintained.
CFE is proposing to revise Rule 403(a) to describe how TPHs will connect to the CFE System by deleting current language which describes how TPHs sign onto the CBOE System by inputting the user identification assigned for such purpose and replacing that language with language that describes how TPHs will connect to the CFE System in a form and manner prescribed by the Exchange.
CFE is also updating Rule 403(a) to revise and reorder the list of items of information that must be included with every Order. Currently, Rule 403(a) provides that each Order must contain the following information: (i) Whether the Order is a buy or sell Order; (ii) Order type; (iii) commodity; (iv) contract expiration; (v) price; (vi) quantity; (vii) account type; (viii) account designation; (ix) in the case of Orders for Options, strike price, type of option (put or call), and expiration month; and (x) such additional information as may be prescribed from time to time by the Exchange. CFE is proposing to amend Rule 403(a) to provide that each Order must contain the following information: (i) Whether the Order is a buy or sell Order; (ii) Order type; (iii) price or premium (if the Order is not a Market Order); (iv) quantity; (v) Contract identifier or product and contract expiration(s); (vi) Client Order ID; (vii) Executing Firm ID (“EFID”); (viii) Order Entry Operator ID; (ix) Clearing Corporation origin code (C for Customer or F for Firm); (x) Customer Type Indicator code; (xi) manual Order indicator; (xii) account designation; (xiii) in the case of Orders for Options, either Contract identifier or each of strike price, type of option (put or call), and expiration; and (xiv) such additional information as may be prescribed from time to time by the Exchange.
Additionally, CFE is proposing to amend Rule 403(a) to provide that any Order that does not contain required information in a form and manner prescribed by the Exchange will be rejected or canceled back to the sender by the CFE System.
CFE is proposing to revise Rule 403(c) to reference that the CFE System identifies the Clearing Member for the execution of an Order by the EFID used in the Order submission. CFE is also proposing to replace the reference in Rule 403(c) to CBOE Market Interface (“CMi”) order structure with a reference to Binary Order Entry (“BOE”) Order message information since the BOE protocol will be replacing the CMi protocol. CFE is retaining the reference in Rule 403(c) to the Financial Information Exchange (“FIX”) protocol since TPHs will be able to interface with the CFE System either through the BOE protocol or the FIX protocol.
CFE is also proposing to amend Rule 403 to remove references to quotes, to replace the term “CBOE System” with the term “CFE System”, and to replace the term “CBOE Workstation” with the term “CFE Workstation” (which is any computer connected directly to the CFE System, including by means of an Exchange defined protocol, for the purpose of trading Contracts on the Exchange).
CFE Rule 414 (Exchange of Contract for Related Position) sets forth details regarding ECRP transactions. The proposed changes to Rule 414 included
First, CFE is proposing to set forth in proposed Rule 414(e) the Reporting Deadline and Permissible Reporting Period for ECRP transactions that will apply with the CFE System. CFE is proposing that the Reporting Deadline for an ECRP transaction be that an ECRP transaction must be fully reported to the Exchange without delay and by no later than thirty minutes after the transaction is agreed upon, unless otherwise specified in the rules governing the relevant Contract. The Reporting Deadline would be measured from the time the transaction is agreed upon to the time that the full report of the transaction is received by the CFE System matching engine. CFE is proposing that the Permissible Reporting Period for an ECRP transaction be that the ECRP transaction must be fully reported to the Exchange during Trading Hours, or a queuing period, for the Contract that comprises the Contract leg of the transaction, when that Contract is not suspended. A queuing period is a time frame in which the CFE System accepts Orders but they are not executable. Proposed Rule 414(e) also addresses when it is permissible to agree to an ECRP transaction (referred to as a Permissible Agreement Period). Accordingly, in order to satisfy the requirements of proposed Rule 414(e), the time periods in which an ECRP transaction may occur would be limited to those time periods in which the transaction is agreed to within a Permissible Agreement Period and the transaction is able to be fully reported to the Exchange within a Permissible Reporting Period by no later than the Reporting Deadline. Under CFE's current rules, the reporting deadline is the same as is proposed by this rule change but the permissible reporting periods are specified time frames that apply to all Contracts instead of having a permissible reporting period for each Contract based on its respective Trading Hours and queuing periods as is proposed.
Second, CFE is proposing to amend in proposed Rule 414(g) the list of items of information currently set forth in Rule 414(f) that must be recorded on an order ticket for an ECRP by a TPH that acts as agent for an ECRP. In particular, CFE is proposing to add to the items of information that must be recorded the arrangement time, if any, for the ECRP transaction (which is the time at which the parties agreed to enter into the transaction at a later time). CFE is also proposing to clarify and provide that the following information must be recorded for the Related Position: The identity, quantity, and price or premium of the Related Position (including the expiration, strike price, type of option (put or call), and delta in the case of an option).
Third, CFE is proposing to revise a provision in proposed Rule 414(h) to make clear that references to ECRP are to an ECRP transaction. This provision is in current Rule 414(g) and requires a TPH to maintain records evidencing compliance with the criteria in Rule 414 or be able to obtain those records from the TPH's Customer.
Fourth, CFE is proposing to amend provisions in proposed Rule 414(i) that are currently in Rule 414(h) to provide that an Authorized Reporter for an ECRP transaction must be an individual (and not an entity) and that a Clearing Member may only authorize an Authorized Reporter to report both ECRP transactions and Block Trades (and not one or the other).
Fifth, CFE is proposing to amend provisions in proposed Rule 414(j) that are currently in Rule 414(i) to no longer allow for notification of ECRP transactions to the Exchange to be made by email and to provide that the Contract legs of all ECRP transactions will be submitted for clearing on the Business Day during which the applicable transaction is fully reported to the Exchange. Current Rule 414(i) allows Authorized Reporters to designate either the calendar day of an ECRP transaction or the next Business Day as the Business Day for which the Contract leg of the transaction is submitted for clearing if an ECRP transaction is reported to the Exchange from 3:15 p.m. to 4:00 p.m. Chicago time Monday through Thursday. This will no longer be the case once ECRP transactions are reported directly to the CFE System (instead of by email) pursuant to proposed Rule 414(l) as described below.
Sixth, CFE is proposing to update provisions in proposed Rule 414(k) that are currently in Rule 414(j) to revise and reorder the list of items of information that must be included in the notification to the Exchange of an ECRP transaction. Currently, the notification of an ECRP transaction must include the following information: The identity, contract expiration, price or premium, quantity, and time of execution of the relevant Contract leg (
Seventh, CFE is also proposing to delete a provision from current Rule 414(k) which allows the Authorized Reporters and parties to an ECRP transaction thirty minutes from the time the CFE Help Desk transmits a transaction summary to the Authorized Reporters to notify the Help Desk of any inaccuracies in the content of the transaction summary. The Help Desk (which will be referred to as the Trade Desk with the implementation of the CFE System) will no longer transmit transaction summaries to Authorized Reporters since Authorized Reporters will be entering the information regarding ECRP transactions directly into the CFE System pursuant to proposed Rule 414(l) as described below and will no longer be relying on the Help Desk to manually enter into CFE's trading system the information included in the email notifications that the Help Desk currently receives from Authorized Reporters regarding an ECRP transaction. Accordingly, the notification provision which permits Authorized Reporters and parties to the transaction to notify the Help Desk of any inaccuracies in the transaction summary from the Help Desk would no longer have applicability.
Eighth, CFE proposes to provide in proposed Rule 414(l) that Authorized Reporters shall provide notification to the Exchange of ECRP transactions by reporting them to the CFE System in a form and manner prescribed by the
Ninth, CFE proposes to provide in proposed Rule 414(m) how CFE will measure adherence to Permissible Reporting Periods and the Reporting Deadline for ECRP transactions for timing purposes. Specifically, an ECRP transaction would be deemed to have been fully reported to the Exchange when the full report of the transaction has been received by the CFE System matching engine following notification to the CFE System of required information relating to the transaction by the initiating Authorized Reporter and acceptance and notification to the CFE System of required information relating to the transaction by the contra side Authorized Reporter.
Tenth, CFE proposes to provide in proposed Rule 414(n) that CFE may modify the timing requirements for and permissible manner of notification to CFE for ECRP transactions in the event of unusual circumstances. For example, this provision could be invoked if the CFE System is not accepting notifications of ECRP transactions due to a system malfunction.
CFE Rule 415 (Block Trading) (to be renamed Block Trades) sets forth details regarding Block Trades. CFE is proposing to make corollary changes to Rule 415 in relation to recordkeeping and reporting that are substantially equivalent to the changes being made to Rule 414. Those proposed changes are described below.
First, CFE is proposing to set forth in Rule 415(c) the Reporting Deadline and Permissible Reporting Period for Block Trades that will apply with the CFE System. CFE is proposing that the Reporting Deadline for a Block Trade be that a Block Trade must be fully reported to the Exchange without delay and by no later than ten minutes after the transaction is agreed upon, unless otherwise specified in the rules governing the relevant Contract. The Reporting Deadline would be measured from the time the transaction is agreed upon to the time that the full report of the transaction is received by the CFE System matching engine. CFE is proposing that the Permissible Reporting Period for a Block Trade in a Contract be that the Block Trade must be fully reported to the Exchange during Trading Hours, or a queuing period, for the Contract, when that Contract is not suspended. Proposed Rule 415(c) also addresses when it is permissible to agree to a Block Trade (referred to as a Permissible Agreement Period). Accordingly, in order to satisfy the requirements of proposed Rule 415(c), the time periods in which a Block Trade may occur would be limited to those time periods in which the transaction is agreed to within a Permissible Agreement Period and the transaction is able to be fully reported to the Exchange within a Permissible Reporting Period by no later than the Reporting Deadline. Under CFE's current rules, the reporting deadline is the same as is proposed by this rule change but the permissible reporting periods are specified time frames that apply to all Contracts instead of having a permissible reporting period for each Contract based on its respective Trading Hours and queuing periods as is proposed.
Second, CFE is proposing to amend in Rule 415(e) the list of items of information that must be recorded by a TPH on an order ticket for a Block Trade. In particular, CFE is proposing to add to the items of information that must be recorded the arrangement time, if any, for the Block Trade. CFE is also proposing to clarify and provide that the expiration, strike price, and type of option (put or call) must be recorded for the Block Trade if it involves an option.
Third, CFE is proposing to amend provisions in Rule 415(f) to provide that an Authorized Reporter for a Block Trade must be an individual (and not an entity) and that a Clearing Member may only authorize an Authorized Reporter to report both ECRP transactions and Block Trades (and not one or the other). Additionally, CFE is adding a provision to Rule 415(f) which is currently included in current Rule 414(h) in relation to ECRP transactions to make clear that both the parties to and Authorized Reporters for a Block Trade are obligated to comply with the requirements set forth in Rule 415, and any of these parties or Authorized Reporters may be held responsible by the Exchange for noncompliance with those requirements.
Fifth, CFE is proposing to amend provisions in proposed Rule 415(g) to no longer allow for notification of Block Trades to the Exchange to be made by email and to provide that Block Trades will be submitted for clearing on the Business Day during which the applicable transaction is fully reported to the Exchange. Current Rule 415(g) allows Authorized Reporters to designate either the calendar day of a Block Trade or the next Business Day as the Business Day for which the Block Trade is submitted for clearing if a Block Trade is reported to the Exchange from 3:15 p.m. to 4:00 p.m. Chicago time Monday through Thursday. This will no longer be the case once Block Trades are reported directly to the CFE System (instead of by email) pursuant to proposed Rule 415(i) as described below.
Sixth, CFE is proposing to update provisions in Rule 415(h) to revise and reorder the list of items of information that must be included in the notification to the Exchange of a Block Trade. Currently, the notification of a Block Trade must include the following information: relevant Contract, contract expiration, price or premium, quantity, time of execution (
Seventh, CFE is proposing to delete a provision from current Rule 415(i) which allows the Authorized Reporters and parties to a Block Trade thirty minutes from the time the CFE Help Desk transmits a transaction summary to the Authorized Reporters to notify the Help Desk of any inaccuracies in the content of the transaction summary. The Help Desk (which will be referred to as the Trade Desk with the implementation of the CFE System) will no longer transmit transaction summaries to Authorized Reporters since Authorized
Eighth, CFE proposes to provide in proposed Rule 415(i) that Authorized Reporters shall provide notification to the Exchange of Block Trades by reporting them to the CFE System in a form and manner prescribed by the Exchange. Proposed Rule 415(i) also describes how the CFE System includes a mechanism, in a form and manner provided by the Exchange, for the Authorized Reporter that is the initiator of a notification of a Block Trade to enter information regarding the transaction and for the Authorized Reporter for the contra side of the transaction to accept the notification to the Exchange of the transaction as entered by the initiating Authorized Reporter and enter contra side information for the transaction.
Ninth, CFE proposes to provide in proposed Rule 415(j) how CFE will measure adherence to Permissible Reporting Periods and the Reporting Deadline for Block Trades for timing purposes. Specifically, a Block Trade would be deemed to have been fully reported to the Exchange when the full report of the transaction has been received by the CFE System matching engine following notification to the CFE System of required information relating to the transaction by the initiating Authorized Reporter and acceptance and notification to the CFE System of required information relating to the transaction by the contra side Authorized Reporter.
Tenth, CFE proposes to provide in proposed Rule 415(k) that CFE may modify the timing requirements for and permissible manner of notification to CFE for Block Trades in the event of unusual circumstances. For example, this provision could be invoked if the CFE System is not accepting notifications of Block Trades due to a system malfunction.
CFE Rule 603 (Market Manipulation) prohibits manipulation of the market in any Contract traded on CFE. CFE is proposing to amend Rule 603 replace the term “CBOE System” with the term “CFE System”.
CFE Rule 620 (Disruptive Practices) sets forth prohibited disruptive trading practices, and Policy and Procedure XVIII (Disruptive Trading Practices (Rule 620) sets forth guidance regarding the factors the Exchange may use in assessing whether conduct violates Rule 620.
Since CFE will no longer accept quotes with the implementation of the CFE System, CFE is proposing to revise Rule 620 and Policy and Procedure XVIII to eliminate references to quotes and to replace references to the CBOE System with references to the CFE System.
CFE is proposing to revise Policy and Procedure XVIII(A) to eliminate reference to a category of other prices (such as an Expected Opening Price or EOP) since this concept does not exist with the CFE System.
CFE is proposing to amend Policy and Procedure XVIII(J) to revise the definition of actionable messages in relation to the CFE System to be messages that can be accepted by another party or lead to the execution of a trade or cancellation of an Order and to change a reference to an example of a non-actionable message from a request for quote (which will no longer exist with the elimination of quotes) to a heartbeat message transmitted to the CFE System.
CFE is proposing to amend Policy and Procedure XVIII(Q) and (U) to replace references to self-trade prevention functionality with references to match trade functionality (which is the name for this functionality with the CFE System).
CFE is proposing to revise Policy and Procedure XVIII(R) to eliminate reference to opening rotation periods since this concept does not exist with the CFE System, to replace reference to an EOP with reference to an expected opening price (since although an EOP is not a price that is disseminated by the CFE System, the concept of what market participants expect an opening price to be would still exist), and to revise the restriction regarding the submission of Trade at Settlement (“TAS”) Orders between Business Days for a product in which TAS Orders may be submitted. CFE is amending the restriction on the submission of TAS Orders to provide that the first pre-opening notice for a TAS Contract in a product establishes the time at which TAS Orders may be submitted for all TAS Contracts in that product. Currently, this restriction applies individually to each TAS Contract based on when the pre-opening notice for that particular TAS Contract is disseminated. A pre-opening notice is a notice disseminated by CFE of the commencement of a queuing state in a Contract during which Orders may be submitted to the CFE System prior to the commencement of trading hours for that Contact.
Additionally, the Exchange is proposing to amend Policy and Procedure XVIII(T) to eliminate a reference to user defined spreads and to change the title of the provision to better reflect the remaining portion of the provision which is not being deleted by this change. Although TPHs are currently not permitted to create user defined spreads, this prohibition is currently not systematically enforced by CFE's trading system. CFE is proposing to remove the rule text prohibiting user defined spreads since the CFE System will be able to systematically prevent TPHs from creating user defined spreads.
Rule 714 (Imposition of Fines for Minor Rule Violations) sets forth fine schedules for various violation types. The proposed changes to Rule 714 included as part of this rule change filing and which are described below are those amendments to Rule 714 that are related to recordkeeping or reporting.
Specifically, CFE is proposing (i) to modify the fine schedule in Rule 714(f)(i) regarding failure to include an Order Entry Operator ID with an Order submission to eliminate reference to quotes and to change a reference from CBOE System to CFE System; (ii) to modify the fine schedule in Rule 714(f)(ii) regarding failure to identify the correct account type in an Order submission to be more specific to reference failure to identify the correct Customer Type Indicator Code in the Order submission; and (iii) to modify the fine schedules in Rule 714(f)(iii), (iv), (viii), (ix), (x), and (xiv) to either re-number the rule cross-references in those fine schedules without changing their substance to reflect the new rule numbers for the cross-referenced provisions or to change references from CBOE System to CFE System.
Rule 1602(n)(ii) sets forth the reportable trading volume that triggers the requirement to report a volume threshold account to the CFTC for Individual Stock Based and Exchange
CFE is proposing to amend Rule 1602(n)(ii) to provide that the reportable trading volume that triggers the requirement to report a volume threshold account is 50 or more futures contracts in a Volatility Index futures contract during a single trading day or such other reportable trading volume threshold as may be designated by the CFTC. This proposed change is consistent with the comparable reportable trading volume rule language this is applicable in relation to other CFE products. CFE is proposing to add the additional phrase that the level may be “such other reportable trading volume threshold as may be designated by the CFTC”. Although the level currently designated in Rule 1602(n)(ii) is consistent with CFTC regulations, the CFTC has issued no-action letters with a different designated level and may do so in the future. The proposed additional language allows for reporting consistent with these CFTC designations when and if they are in effect.
CFE Rule 1802 sets forth contract specifications for Single Stock Futures, and CFE Rule 1902 sets forth contract specifications for Narrow-Based Stock Index Futures. CFE is proposing to amend Rules 1802 and 1902 to capitalize the term “Spread Order”, to replace the term “Help Desk” with the term “Trade Desk”, and to replace the term “CBOE System” with the term “CFE System”.
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,
• To prevent fraudulent and manipulative acts and practices;
• to foster cooperation and coordination with persons engaged in facilitating transactions in securities; and
• 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.
The proposed rule change is consistent with these provisions in that it revises CFE's rules, including CFE's recordkeeping and reporting requirements as they may relate to security futures, to conform to the functionality of the CFE System. In particular, the proposed amendments will align the changes resulting from the implementation of the CFE System with the rule provisions contained in CFE's rules.
CFE does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act in that the proposed rule changes to Chapter 1 of CFE's rules to include a definition for Authorized Reporter, to Rule 303A requiring the inclusion of an Order Entry Operator ID on every Cancel Order and Cancel Replace/Modify Order, to Rule 403 regarding the information that must be included with Order submissions and front-end audit trail information that must be maintained, to Rule 414 and 415 regarding ECRP transaction and Block Trade recordkeeping and reporting requirements, to Rule 603 to update terminology, to Rule 620 and Policy and Procedure XVIII to update guidance regarding disruptive trading conduct to conform to the way the CFE System will function, to Rule 714 to update the fine schedules for minor rule violations to conform to other CFE rule revisions, to Rule 1602(n) to update the reportable trading volume threshold requirements for Volatility Index futures, and to Rules 1802 and 1902 to update terminology will enhance CFE's ability to carry out its responsibilities as a self-regulatory organization. Additionally, CFE believes that the proposed amendments are equitable and not unfairly discriminatory because the changes will apply equally to all market participants.
No written comments were solicited or received with respect to the proposed rule change.
The proposed rule change will become operative on December 13, 2017. At any time within 60 days of the date of effectiveness of the proposed rule change, the Commission, after consultation with the CFTC, may summarily abrogate the proposed rule change and require that the proposed rule change be refiled in accordance with the provisions of Section 19(b)(1) of the Act.
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:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 1, 2017, Miami International Securities Exchange LLC (“MIAX Options” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 1, 2017 Miami International Securities Exchange, LLC (“MIAX Options” or “Exchange”), filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change SR-MIAX-2017-18 (the “Original Proposal”),
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Add two additional CAT Fee tiers for Equity Execution Venues; (2) discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discount the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discount equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decrease the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
Reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and the otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 1701 (Consolidated Audit Trail Compliance Rule—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposes to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that its proposal to amend its Fee Schedule is consistent with the provisions of Section 6(b)(5) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
Written comments were neither solicited nor received.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled Payment, Clearing and Settlement Supervision Act of 2010 (“Clearing Supervision Act”)
This advance notice is filed in connection with a proposed change would (1) revise OCC's By-Laws to adopt a new minimum cash requirement for the Clearing Fund; (2) revise OCC's By-Laws to provide for the pass-through of interest earned on Clearing Fund cash held in OCC's Federal Reserve bank account; (3) enact changes to OCC's Fee Policy that reflect the pass through of interest earned on Clearing Fund cash held in OCC's Federal Reserve bank account; and (4) make certain conforming changes to OCC's Rules and By-Laws to affect the aforementioned changes.
The proposed changes to OCC's By-Laws and Rules were submitted as Exhibits 5A and 5B of the filing, and OCC's Fee Policy was submitted as confidential Exhibit 5C of the filing.
In its filing with the Commission, OCC included statements concerning the purpose of and basis for the advance notice and discussed any comments it received on the advance notice. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections A and B below, of the most significant aspects of these statements.
Written comments were not and are not intended to be solicited with respect to the proposed rule change and none have been received. OCC will notify the Commission of any written comments received by OCC.
OCC proposes to establish a minimum cash contribution requirement for its Clearing Fund in order to increase the amount of qualifying liquid resources available to OCC to account for extreme scenarios that may result in liquidity demands exceeding OCC's current Cover 1 liquidity resources, as calculated under the current historically-based methodology, and provide for a more consistent level of cash resources in its available prefunded financial resources. The proposed rule change also would provide for the pass-through of interest income earned on such deposits to its Clearing Members. OCC's current practices and the proposed changes to such practices are described in more detail below.
Presently, Article VIII, Section 3(a) of OCC's By-Laws provides that Clearing Fund contributions shall be in the form of cash and Government securities, but neither OCC's By-Laws nor Rules
OCC proposes to establish a minimum cash contribution requirement for its Clearing Fund in order to increase the amount of highly liquid resources available to OCC to account for extreme scenarios that may result in liquidity demands exceeding OCC's current Cover 1 liquidity resources, as calculated under the current historically-based methodology, and provide for a more consistent level of cash resources in its available prefunded financial resources.
OCC has historically sized its liquidity resources based on historically observed liquidity demands and analysis of potential large forecasted liquidity demands over at least the next twelve months. OCC forecasts its future daily settlement activity under normal market conditions (
OCC has performed an analysis of its stress liquidity demands based on a 1-in-70 year hypothetical market event. OCC started its analysis by selecting the largest historical peak monthly settlements that occurred over the historical look back period of data generated by the stress test system. It then also selected certain large non-expiration days to supplement the analysis. From this it estimated the mark-to-market and cash settled exercise and assignment obligations for the members driving the historical peak demand under the proposed stress tests scenario to determine the stressed peak demand. Through this analysis, OCC observed that peak stressed liquidity demands of the largest 1 or 2 members, which normally occur in conjunction with certain monthly expirations, can exceed the size OCC's committed liquidity facilities (which currently total $3 billion). In these cases, while OCC did have cash in the Clearing Fund to supplement its liquidity resources, and the total of credit facilities and cash in the Clearing Fund did cover these peak stressed liquidity demands, OCC is unable to rely on these cash contributions to be present at any given time since there is no obligation on members to maintain any amount of their contribution in cash. As a result, OCC believes it is necessary to increase or otherwise ensure the availability of highly liquid resources in the Clearing Fund to account for extreme scenarios that may result in liquidity demands exceeding OCC's Cover 1 liquidity resources, as calculated under the current historically-based methodology. The proposed Cash Clearing Fund Requirement, when taken together with OCC's $3 billion in committed liquidity facilities, would provide liquidity resources sufficient to cover 100% of the peak stressed liquidity demands of the largest 1 or 2 members observed in OCC's analysis.
In addition, the proposed changes would allow OCC's Executive Chairman, Chief Administrative Officer (“CAO”), or Chief Operating Officer (“COO”), upon providing notice to the Risk Committee, to temporarily increase the amount of cash required to be maintained in the Clearing Fund up to an amount that includes the size of the Clearing Fund as determined in accordance with Rule 1001 for the month in question for the protection of OCC, clearing members or the general public. Any determination by the Executive Chairman, CAO and/or COO to implement a temporary increase in Clearing Fund size would (i) be based upon then-existing facts and circumstances, (ii) be in furtherance of the integrity of OCC and the stability of the financial system, and (iii) take into consideration the legitimate interests of Clearing Members and market participants.
The proposed rule change would require that any temporary increase in the Cash Clearing Fund Requirement be reviewed by the Risk Committee as soon as practicable, but in any event within 20 calendar days of the increase. In its review, the Risk Committee shall determine whether (1) the increase in the minimum Cash Clearing Fund Requirement is no longer required or (2) OCC's Clearing Fund contribution requirements and other related rules should be modified to ensure that OCC continues to maintain sufficient liquid resources to cover its largest aggregate payment obligations in extreme but plausible market conditions. In the event that the Risk Committee would determine to permanently increase the Cash Clearing Fund Requirement, OCC would initiate any regulatory approval process required to effect such a change.
These changes would be reflected in new paragraph (a)(i) of Section 3 of Article VIII of OCC's By-Laws, as well as in new Interpretation and Policy .04 to Section 3 of Article VIII.
In connection with the proposed Cash Clearing Fund Requirement, substantially all of OCC's Clearing Fund deposits consisting of cash would be held in an account established by OCC at a Federal Reserve Bank.
In order to accommodate the pass through of interest income, OCC would also amend its Fee Policy to add definitions for “Pass-Through Interest Revenue” and “Operating Expenses” to exclude from the calculation of the Business Risk Buffer projected interest revenue and expense, respectively, related to the pass-through of earned interest from OCC to Clearing Members.
In conjunction with the aforementioned changes, OCC is also proposing to make four related conforming changes. First, OCC proposes to revise Interpretation and Policy .01 of Rule 1001 to reflect that the new minimum Clearing Fund size is $3 billion (instead of $1 billion) plus 110% of the size of OCC's committed liquidity facilities, which conforms to the proposed new minimum cash requirement for the Clearing Fund. Second, OCC proposes to amend the definition of “Approved Custodian” in Article I, Section 1 of the By-Laws to clarify that the Federal Reserve Bank may also be an Approved Custodian, to the extent it is available to OCC. Third, OCC is proposing to delete existing Article VIII, Section 4(b), regarding the establishment of a segregated funds account for cash contributions to the Clearing Fund. The segregated funds account allows a Clearing Member to contribute cash to a bank or trust company account maintained in the name of OCC, subject to OCC's exclusive control, but the account also includes the name of the Clearing Member and any interest accrues to the Clearing Member rather than OCC. OCC proposes to eliminate the account type because Clearing Members have not expressed interest in using such an account, no such accounts are in use today, and moving forward, substantially all cash Clearing Fund contributions will held in OCC's account at the Federal Reserve Bank. Fourth, OCC proposes to introduce new language to Article VIII, Section 4(a) to clarify that cash contributions to the Clearing Fund that are deposited at approved custodians may be commingled with the Clearing Fund contributions of different Clearing Members.
The proposal is expected to improve OCC's liquidity risk management by establishing the Cash Clearing Fund Requirement and by permitting OCC to temporarily increase that requirement. The Cash Clearing Fund Requirement would increase the amount of highly liquid resources available to OCC to account for extreme scenarios that may result in liquidity demands exceeding OCC's current Cover 1 liquidity resources, as calculated under the current historically-based methodology. The Cash Clearing Fund Requirement also would provide a more consistent level of cash resources in OCC's available prefunded financial resources, thereby further strengthening OCC's liquidity risk management.
The proposed ability to allow OCC to temporarily increase its minimum Clearing Fund cash up to an amount that includes the size of the Clearing Fund as determined in accordance with Rule 1001 is expected to enhance OCC's liquidity risk management by providing a process to effectively replenish the liquid resources that OCC may employ during a stress event and would provide OCC with an additional means of addressing liquidity shortfalls that otherwise would not be covered by OCC's liquid resources and would provide a form of replenishment of OCC's liquid resources. OCC recognizes that exercising its authority to increase the minimum amount of cash in the Clearing Fund could potentially impose a liquidity constraint on its clearing members, and for this reason, OCC has limited its authority to increase the minimum amount of cash in the Clearing Fund to circumstances in which such increase would protect OCC, clearing members or the general public and required that any such increase be based upon then-existing facts and circumstances, be in furtherance of the integrity of OCC and the stability of the financial system, and take into consideration the legitimate interests of clearing members and market participants.
OCC expects that its proposal to pass through interest earned on Clearing Fund cash deposits at a Federal Reserve Bank ultimately may potentially benefit clearing members' by providing them with a comparatively higher rate of return on their deposited cash (as compared to a comparable account with a commercial bank). This potential increased rate of return may ultimately strengthen the financial position of certain of OCC's clearing members.
The stated purpose of the Clearing Supervision Act is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.
Section 805(a)(2) of the Clearing Supervision Act
• Promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader financial system.
The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and the Act in furtherance of these objectives and principles, including those standards adopted pursuant to the Commission rules cited below.
Rule 17Ad-22(e)(7)
Further, Rule 17Ad-22(e)(7)(viii)
The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date the proposed change was filed with the Commission or (ii) the date any additional information requested by the Commission is received. OCC shall not implement the proposed change if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission.
OCC shall post notice on its website of proposed changes that are implemented.
The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the advance notice is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC-2017-808 and
By the Commission.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Exchange proposes to amend the Exchange's transaction fees at Chapter XV, Section 2(1), which governs the pricing for Nasdaq Participants using the Nasdaq Options Market (“NOM”), Nasdaq's facility for executing and routing standardized equity and index options.
The text of the proposed rule change is available on the Exchange's website at
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.
The Exchange proposes to amend the Exchange's transaction fees at Chapter XV, Section 2(1) to introduce a new NOM Market Maker
In order to further incentivize NOM Market Makers to transact in Non-Penny Pilot Options on NOM, the Exchange proposes to introduce a new NOM Market Maker Rebate to Add Liquidity in Non Penny-Pilot Options, provided the Participant adds NOM Market Maker liquidity in Non-Penny Pilot Options of 10,000 or more ADV contracts per day in a month. The Participant would receive a $0.30 per contract Rebate to Add Liquidity in Non-Penny Pilot Options as a NOM Market Maker. Participants that qualify for this proposed rebate would not be charged the NOM Market Maker Fee for Adding Liquidity in Non-Penny Pilot Options by virtue of already having qualified for the discounted fee of $0.00 in note 5 (
In essence, the Exchange is creating a new volume threshold that is higher than the existing threshold with this proposal. As such, there will be two NOM Market Maker volume-based tiers for adding liquidity in Non-Penny Pilot Options, the lower of which would provide a discounted fee of $0.00 from $0.35 for the qualifying Participant, while the higher would provide a rebate of $0.30 for the qualifying Participant in lieu of the $0.35 fee. Accordingly, the Exchange proposes to amend the existing volume requirement for the discounted fee in note 5 to state that Participants that add NOM Market Maker liquidity in Non-Penny Pilot Options of 7,500 to 9,999 ADV contracts per day in a month will be assessed a $0.00 per contract Non-Penny Options Fee for Adding Liquidity in that month. Participants that add Non-Penny NOM Market Maker liquidity of 10,000 or more ADV contracts per day in a month will not be charged a Non-Penny Options Fee for Adding Liquidity and will instead receive the proposed $0.30 per contract Non-Penny Rebate to Add Liquidity. Finally, the Exchange proposes to clarify in note 5 that the $0.35 fee for adding liquidity will apply unless Participants meet the proposed volume thresholds, as described above.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The proposed change to offer Participants that send NOM Market Maker order flow the opportunity to receive a $0.30 per contract Non-Penny Rebate to Add Liquidity, provided the Participant adds NOM Market Maker liquidity in Non-Penny Pilot Options of 10,000 or more ADV contracts per day in a month, is reasonable because the Exchange seeks to further incentivize Participants to add NOM Market Maker liquidity in Non-Penny Pilot Options to obtain the rebate. The Exchange believes that its proposal will encourage Participants to select NOM as a venue and in turn benefit other market participants with the opportunity to interact with such liquidity. Other options exchanges also offer volume-based rebates to market makers for adding liquidity.
The Exchange also believes that the proposed NOM Market Maker Non-
The Exchange also believes that the proposed change to amend the existing NOM Market Maker Non-Penny volume threshold from “7,500 or more ADV contracts” to “7,500 to 9,999 ADV contracts” is reasonable because the Exchange is essentially adding a higher volume-based tier with this proposal. The Exchange believes that the proposed change would clarify how the two NOM Market Maker Non-Penny tiers are applied—meeting the volume threshold in the lower tier would qualify the Participant for a discounted fee, and meeting the volume threshold in the higher tier would qualify the Participant for a rebate in lieu of the fee, as described above. In the same vein, the proposed change to clarify in note 5 that the $0.35 fee for adding liquidity will apply unless Participants meet these volume thresholds is reasonable because it will clarify how the fee and rebate program proposed herein will apply.
The Exchange further believes that these clarifying changes to amend the existing NOM Market Maker Non-Penny volume threshold and describe how the $0.35 fee will apply are equitable and not unfairly discriminatory because the changes will apply to all qualifying Participants.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposed rebate and corresponding changes to the volume-based thresholds described above are all designed to increase competition by encouraging NOM Maker Makers to provide greater liquidity and maintain tight markets in Non-Penny Pilot Options. The Exchange operates in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive, or rebate opportunities available at other venues to be more favorable. In such an environment, the Exchange must continually adjust its fees to remain competitive. Because competitors are free to modify their own fees in response, and because market participants may readily adjust their order routing practices, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited.
No written comments were either solicited or received.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
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:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 3, 2017, Chicago Stock Exchange, Inc. (“Exchange” or “CHX”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 3, 2017, the Chicago Stock Exchange, Inc. (“Exchange” or “CHX”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule change SR-CHX-2017-08 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of this proposed rule change is available on the Exchange's website at (
In its filing with the Commission, the CHX included statements concerning the purpose of and basis for the proposed rule changes 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 CHX has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements.
The Exchange, BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Plan Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants. On November 9, 2017, the Exchange filed the First Amendment and proposed to amend the Original Proposal to reflect these changes.
The Exchange submits this Second Amendment to revise the proposal as set
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant.
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,
Section 6(b)(8) of the Act
The Exchange set forth responses to comments received regarding the Original Proposal in the First Amendment. In addition, the proposed changes set forth in this Second Amendment further respond to comments made regarding ATSs trading OTC Equity Securities.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal, as amended by Amendment No. 1 and Amendment No. 2, is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 2, 2017, The Nasdaq Stock Market LLC. (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 2, 2017, The Nasdaq Stock Market LLC filed with the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule change SR-NASDAQ-2017-046 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
With this Amendment No. 2, the Exchange is including
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and
The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
Calculation of Annual Tier Fees for Equity Execution Venues (“EV”)
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 6810 and Chapter IX, Section 8(a) (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the OTC Equity Securities market share for Equity ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA.
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
The Exchange has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 2 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 12, 2017, Nasdaq GEMX, LLC (“GEMX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 12, 2017, Nasdaq GEMX, LLC (“GEMX” or “Exchange”), filed with the Securities and Exchange Commission (“Commission” or “SEC”) proposed rule change SR-GEMX-2017-17 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
With this Amendment, the Exchange is including
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 900 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the OTC Equity Securities market share of Execution Venue ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the OTC Equity Securities market share for Equity ATSs trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will pay the
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA.
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
The Exchange has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 2 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
On May 1, 2017, MIAX PEARL, LLC (“MIAX PEARL” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
On May 1, 2017, MIAX PEARL, LLC (“MIAX PEARL” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change SR-PEARL-2017-20 (the “Original Proposal”),
The text of the proposed rule change is available on the Exchange's website at
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.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Add two additional CAT Fee tiers for Equity Execution Venues; (2) discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discount the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discount equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decrease the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commence invoicing CAT Reporters as promptly as possible following the latest operative date of the respective Consolidated Audit Trail Funding Fees filed or to be filed by each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) require the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
Reviews from varying time periods of current broker-dealer order and trading
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and the
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 1701 (Consolidated Audit Trail Compliance Rule—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposes to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67/33 allocation between Equity and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry
The Exchange believes that its proposal to amend its Fee Schedule is consistent with the provisions of Section 6(b)(5) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
Written comments were neither solicited nor received.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 10, 2017, NYSE MKT LLC
The Exchange proposes to amend the NYSE American Equities Price List (“Price List”) and the NYSE American Options Fee Schedule (“Fee Schedule”) to adopt the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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 parts of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Add two additional CAT Fee tiers for Equity Execution Venues; (2) discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discount the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discount equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decrease the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commence invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) require the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
Accordingly, the funding model approved by the Operating Committee imposes fees on both Participants and Industry Members.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions on their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction in market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic.
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity Execution Venues and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity Execution Venues and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12%/60.88% split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of cost recovery for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Equity Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share.
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in Exhibit 3 of the proposed rule change are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity Execution Venues and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity Execution Venues and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity Execution Venues and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. In accordance with the CAT NMS Plan, all CAT Reporters, including both Industry Members and Execution Venues (including Participants), will be invoiced as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the Plan amendment adopting CAT Fees for Participants.
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to adopt the CAT Fees determined by the Operating Committee on the Exchange's Industry Members. The proposed fee change has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) sets forth the definitions applicable to the proposed Consolidated Audit Trail Funding Fees. Proposed paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 6810 (Consolidated Audit Trail—Definitions) of the CAT Compliance Rule.
The Exchange proposes to adopt different fees for Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the Exchange proposes to define the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) of the proposed rule change.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to adopt the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed rule change. Paragraph (b)(1) of the proposed rule change sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following
Paragraph (b)(2) of the proposed rule change sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed rule change states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed rule change, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. The Exchange will provide Industry Members with details regarding the manner of payment of CAT Fees by Trader Update.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposes to adopt paragraph (c)(2), which states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, the Exchange proposes to adopt paragraph (d) of the proposed rule change, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to 1%), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Exchange believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks were grouped in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would be subject to a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Exchange believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed rule change to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the proposed funding model included both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would be subject to a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Exchange believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 of the Exchange Act. Moreover, the Exchange believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed rule change to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed rule change.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees at the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity Execution Venues and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity Execution Venues and Options Execution Venues enhances the level of fee comparability for the largest CAT Reporters. Specifically, the largest Equity Execution Venues and Options Execution Venues would pay a quarterly CAT Fee of approximately $81,000.
In developing the proposed allocation of CAT costs between Equity Execution Venues and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity Execution Venues and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more Industry Members expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed rule change to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions on their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, the Exchange proposes to add paragraph (d) to the proposed rule change to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission
The Operating Committee does not believe that decreasing cost per additional unit places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the revised funding model, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(4) of the Act,
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
For the foregoing reasons, the Exchange believes that the proposal is consistent with the Act.
Section 6(b)(8) of the Act
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Exchange believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Exchange believes that this Amendment addresses the competitive concerns raised by commenters.
No written comments were solicited or received with respect to the proposed rule change.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On October 13, 2017, the Municipal Securities Rulemaking Board (the “MSRB” or “Board”) filed with the Securities and Exchange Commission (the “SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Commission received one comment letter on the proposed rule change.
In the Notice of Filing, the MSRB stated that the proposed rule change would amend Form G-45 to collect additional information relating to fees and expenses to help ensure that the MSRB continues to receive comprehensive information regarding ABLE programs and 529 college savings plans.
As further described by the MSRB in the Notice of Filing, under the proposed rule change, an underwriter to an ABLE program or a 529 college savings plan would be required to submit data on Form G-45 about the following additional fees and expenses, as applicable:
• account opening fee;
• investment administration fee;
• change in account owner fee;
• cancellation/withdrawal fee;
• change in investment option/transfer fee;
• rollover fee;
• returned excess aggregate contributions fee;
• rejected ACH or EFT fee;
• overnight delivery fee;
• in-network ATM fee;
• out-of-network ATM fee;
• ATM mini statement fee;
• international POS/ATM transaction fee;
• foreign transaction fee;
• overdraft fee;
• copy of check or statement fee (per request);
• copy of check images mailed with monthly statement fee;
• check fee (
• returned check fee;
• checking account option fee;
• re-issue of disbursement check fee;
• stop payment fee;
• debit card fee;
• debit card replacement fee;
• outgoing wire fee;
• expedited debit card rush delivery fee;
• paper fee; and
• miscellaneous fee (to address any miscellaneous transactional fee that is not otherwise specified on Form G-45).
In addition, under the proposed rule change, the MSRB stated that it would collect data about any variance in the annual account maintenance fee due to the residency of the account owner.
The MSRB requested in the Notice of Filing that the proposed rule change be approved with an effective date of June 30, 2018.
As noted previously, the Commission received one comment letter on the proposed rule change, as well as the MSRB Response Letter. The commenter, SIFMA, stated that it was “supportive of the MSRB's efforts to fully understand the ABLE programs and 529 college savings plans market and fulfill its mission” but believed that municipal securities dealers who underwrite ABLE programs and 529 college savings plans “should only be required to submit the information required by Form G-45 to the extent it is within their possession, custody, or control”.
SIFMA stated that some of the information about fees that underwriters would be required to submit on MSRB Form G-45, under the proposed rule change, may be contained in ABLE program or 529 college savings plan disclosure documents and suggested that those underwriters could provide hyperlinks to those documents to the MSRB.
SIFMA suggested that the duty to submit information about the fees assessed by ABLE programs and 529 college savings plans on MSRB Form G-45 would create an undue burden because, in SIFMA's view, the MSRB's jurisdiction is limited to underwriters to dealer-sold ABLE programs or 529 college savings plans.
SIFMA stated that it believed dealers that underwrite ABLE programs and 529 college savings plans should only be required to submit information required by MSRB Form G-45 to the extent that such information is within their possession, custody and control.
The Commission has carefully considered the proposed rule change, the comment letter received, and the MSRB Response Letter. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the MSRB.
In particular, the proposed rule change is consistent with Sections 15B(b)(2)(C) of the Act.
The Commission believes that the proposed rule change would facilitate the MSRB's ability to better analyze the market for ABLE programs and 529 college savings plans as well as improve the MSRB's ability to evaluate trends and differences among ABLE programs and 529 college savings plans. Further,
The Commission believes that the MSRB or other regulators could use the information submitted on MSRB Form G-45 to, among other things, determine if the disclosure documents or marketing materials prepared or reviewed by underwriters are consistent with the data submitted to the MSRB for regulatory purposes.
In approving the proposed rule change, the Commission also has considered the impact of the proposed rule change on efficiency, competition, and capital formation.
For the reasons noted above, the Commission believes that the proposed rule change is consistent with the Act.
For the Commission, pursuant to delegated authority.
On May 3, 2017, the Chicago Stock Exchange, Inc. (“CHX” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
On May 3, 2017, the Exchange filed with the Commission a proposed rule change SR-CHX-2017-08 (the “Original Proposal”), pursuant to which the Exchange proposed to adopt a fee schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of this proposed rule change is available on the Exchange's website at (
In its filing with the Commission, the CHX included statements concerning the purpose of and basis for the proposed rule changes 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 CHX has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements.
The Exchange, BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Plan Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants. As discussed in detail below, the Exchange proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Plan Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated Exchange services.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis in order to allocate higher costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT and lower costs to those that contribute less.
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Plan Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Plan Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Plan Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities to adjust for the greater number of shares being traded in the OTC Equity Securities market, which is generally a function of a lower per share price for OTC Equity Securities when compared to NMS Stocks. In addition, the Operating Committee also proposes to discount Options Market Maker and equity market maker message traffic in recognition of their role in the securities markets. Furthermore, the funding model creates separate tiers for Equity and Options Execution Venues due to the different trading characteristics of those markets.
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Plan Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Plan Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Plan Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Plan Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Plan Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the “Industry Member Recovery Allocation”). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the “Equity Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of costs to be recovered from each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Plan Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Plan Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Plan Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
The Exchange proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on the Exchange's members. The proposed fee schedule (
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined under Article 23, Rule 1 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
The Exchange proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Plan Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Plan Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Plan Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, the Exchange proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants. Accordingly, the Exchange proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of June 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Plan Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Plan Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, the Exchange proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the Original Proposal, Broker-Dealer Firm ABC was placed in the first CAT Fee tier, which had a quarterly fee of $101,004. With the imposition of the proposed tier changes and the discount, Broker-Dealer Firm ABC, an options market maker, would be ranked in Tier 3 and would owe a quarterly fee of $40,899.
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, the Exchange proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, the Exchange proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original Proposal, 75% of Execution Venue CAT costs were allocated to Equity Execution Venues, and 25% of Execution Venue CAT costs were allocated to Options Execution Venues. To achieve the goal of increased comparability at the individual entity level, the Operating Committee analyzed a range of alternative splits for revenue recovery between Equity and Options Execution Venues, along with other changes in the proposed funding model. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Plan Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, the Exchange proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, the Exchange proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different metrics for calculating CAT Fees.
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Plan Participants. Specifically, the Exchange proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms of the total fees that they actually pay. In contrast to a tiered model using fixed fee percentages, the Operating Committee believes that strictly variable or metered funding models based on message traffic or share volume would be more likely to affect market behavior and may present administrative challenges (
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Plan Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act
The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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
The Exchange believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Plan Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, the Exchange believes that the total level of the CAT Fees is reasonable.
In addition, the Exchange believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Plan Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, the Exchange believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, the Exchange believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, the Exchange believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, the Exchange does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, the Exchange does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, the Exchange believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
No written comments were either solicited or received.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active tiers compared to the cost per unit in more active tiers creates regulatory economies of scale that favor larger competitors and, if so:
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On May 16, 2017, Bats BYX Exchange Inc., n/k/a Cboe BYX Exchange, Inc., (“Exchange” or “SRO”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange proposed rule change SR-BatsBYX-2017-11 (the “Original Proposal”), pursuant to which SRO proposed to amend its Fee Schedule to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of the proposed rule change is available at the Exchange's website at
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 parts of such statements.
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
The Commission published the Original Proposal for public comment in the
In response to the comments on the Original Proposal, the Operating Committee determined to make the following changes to the funding model: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA over-the-counter reporting facility (“ORF”) by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATS exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. As discussed in detail below, SRO proposes to amend the Original Proposal to reflect these changes.
The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model, as amended by this Amendment. A detailed description of the CAT funding model and the CAT Fees, as amended by this Amendment, as well as the changes made to the Original Proposal follows this executive summary.
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Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. In addition to a budget, Article XI of the CAT NMS Plan provides that the Operating Committee has discretion to establish funding for the Company, consistent with a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was “reasonable”
More specifically, the Commission stated in approving the CAT NMS Plan that “[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.”
The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.
Accordingly, the funding model approved by the Operating Committee imposes fees on both Participants and Industry Members.
As discussed in Appendix C of the CAT NMS Plan, in developing and approving the approved funding model, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.
In particular, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition.
In addition, reviews from varying time periods of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders per month and other broker-dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.
Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered
The CAT NMS Plan states that Industry Members (other than Execution Venue ATSs) will be charged based on message traffic, and that Execution Venues will be charged based on market share.
In contrast to Industry Members, which determine the degree to which they produce message traffic that constitute CAT Reportable Events, the CAT Reportable Events of the Execution Venues are largely derivative of quotations and orders received from Industry Members that they are required to display. The business model for Execution Venues (other than FINRA), however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Focusing on message traffic would make it more difficult to draw distinctions between large and small Execution Venues and, in particular, between large and small options exchanges. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
The CAT NMS Plan's funding model also is structured to avoid a “reduction in market quality.”
The funding model also is structured to avoid a reduction market quality because it discounts Options Market Maker and equity market maker quotes when calculating message traffic for Options Market Makers and equity market makers, respectively. As discussed in more detail below, the Operating Committee determined to discount the Options Market Maker quotes by the trade to quote ratio for options when calculating message traffic for Options Market Makers. Similarly, to avoid disincentives to quoting behavior on the equities side as well, the Operating Committee determined to discount equity market maker quotes by the trade to quote ratio for equities when calculating message traffic for equity market makers. The proposed discounts recognize the value of the market makers' quoting activity to the market as a whole.
The CAT NMS Plan is further structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members—the Participants. First, the Company will operate on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.
The funding model also is structured to take into account distinctions in the securities trading operations of Participants and Industry Members. For example, the Operating Committee designed the model to address the different trading characteristics in the OTC Equity Securities market. Specifically, the Operating Committee proposes to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by
Finally, by adopting a CAT-specific fee, the Operating Committee will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. The complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT Fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan.
Section 11.2 of the CAT NMS Plan sets forth the principles that the Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan:
• To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company;
• To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations;
• To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members);
• To provide for ease of billing and other administrative functions;
• To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and
• To build financial stability to support the Company as a going concern.
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing seven tiers results in an allocation of fees that distinguishes between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of seven tiers of fixed fees, based on “message traffic” for a defined period (as discussed below).
A seven tier structure was selected to provide a wide range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic from multiple time periods, generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (“OATS”), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. Furthermore, the selection of seven tiers establishes comparable fees among the largest CAT Reporters.
Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the “Industry Member Percentages”). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to ensure that the total CAT Fees collected recover the expected CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified seven tiers that would group firms with similar levels of message traffic.
The percentage of costs recovered by each Industry Member tier will be
The following chart illustrates the breakdown of seven Industry Member tiers across the monthly average of total equity and equity options orders, cancels, quotes and executions in the second quarter of 2017 as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is driven by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic over time. This approach also provides financial stability for the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(2)(I).
Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Industry Member Recovery Allocations:
For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term “message traffic” separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, “message traffic” will be comprised of historical equity and equity options orders, cancels, quotes and executions provided by each exchange and FINRA over the previous three months. Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as executions originated by a member of FINRA, and excluding order rejects, system-modified orders, order routes and implied orders.
After an Industry Member begins reporting to the CAT, “message traffic” will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.
Quotes of Options Market Makers and equity market makers will be included in the calculation of total message traffic for those market makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences.
The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting.
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is
The Operating Committee determined that ATSs should be included within the definition of Execution Venue. The Operating Committee believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges.
Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between such Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of four tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing four tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish four tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the four tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the selection of four tiers serves to help establish comparability among the largest CAT Reporters.
Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Equity Execution Venue Percentages”). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee reviewed historical market share of share volume for Execution Venues. Equity Execution Venue market shares of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (“Bats”). ATS market shares of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trade reporting facility (“TRF”) and ORF market share of share volume was sourced from market statistics made publicly available by FINRA. Based on data from FINRA and otcmarkets.com, ATSs accounted for 39.12% of the share volume across the TRFs and ORFs during the recent tiering period. A 39.12/60.88 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its market share of share volume.
The Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF in recognition of the different trading characteristics of the OTC Equity Securities market as compared to the market in NMS Stocks. Many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—per share and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA would likely be subject to higher tiers than their operations may warrant. To address this potential concern, the Operating Committee determined to discount the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and the market share of the FINRA ORF by multiplying such market share by the average shares per trade ratio between NMS Stocks and OTC Equity Securities in order to adjust for the greater number of shares being traded in the OTC Equity Securities market. Based on available data for the second quarter of 2017, the average shares per trade ratio between NMS Stocks and OTC Equity Securities is 0.17%.
Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share. The percentage of costs recovered by each Equity
Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations:
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number, because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Furthermore, the selection of two tiers served to establish comparable fees among the largest CAT Reporters.
Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the “Options Execution Venue Percentages”). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues.
The percentage of costs to be recovered from each Options Execution Venue tier will be determined by predefined percentage allocations (the “Options Execution Venue Recovery Allocation”). In determining the fixed percentage allocation of cost recovery for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and cost recovery per tier, the Operating Committee sought to include elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations:
The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution Venue ATS volumes will be sourced from market data made publicly available by FINRA and OTC Markets. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier.
After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period (with the discounting of market share of Execution Venue ATSs exclusively trading OTC Equity Securities, as described above). Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues.
In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below.
In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovery from such Industry Members and Execution Venues, including 80%/20%, 75%/25%, 70%/30% and 65%/35% allocations. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75%/25% division maintained the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Furthermore, the allocation of total CAT cost recovery recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 23 times more Industry Members expected to report to the CAT than Execution Venues (
The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70%/30%, 67%/33%, 65%/35%, 50%/50% and 25%/75% split. Based on this analysis, the Operating Committee determined to allocate 67 percent of Execution Venue costs recovered to Equity Execution Venues and 33 percent to Options Execution Venues. The Operating Committee determined that a 67%/33% allocation between Equity and Options Execution Venues maintained the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues. Specifically, Tier 1 Equity Execution Venues would pay a quarterly fee of $81,047 and Tier 1 Options Execution Venues would pay a quarterly fee of $81,379. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events.
The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000
The Plan Processor costs relate to costs incurred and to be incurred through November 21, 2017 by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development costs, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the Company's agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated cyber-insurance costs for the year. Based on discussions with potential cyber-insurance providers, assuming $2-5 million cyber-insurance premium on $100 million coverage, the Company has estimated $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category of non-Plan Processor costs is the CAT operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and cyber-insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds to establish the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need to replenish the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total estimated CAT costs of $50,700,000 for the covered period.
Based on these estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees:
For Industry Members (other than Execution Venue ATSs):
For Execution Venues for NMS Stocks and OTC Equity Securities:
For Execution Venues for Listed Options:
The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Fees assumes 52 Equity Execution Venues, 15 Options Execution Venues and 1,541 Industry Members (other than Execution Venue ATSs) as of June 2017.
The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to establish comparable fees for the top tier of Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues. Specifically, each Tier 1 CAT Reporter would be required to pay a quarterly fee of approximately $81,000.
Under Section 11.1(c) of the CAT NMS Plan, to fund the development and
Section 11.3(d) of the CAT NMS Plan states that “[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.” With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and to the extent that the total CAT costs increase, the fees would be adjusted upward.
The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. Any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, the assignment of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but also on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share.
For each periodic tier reassignment, the Operating Committee will review the new tier assignments, particularly those assignments for CAT Reporters that shift from the lowest tier to a higher tier. This review is intended to evaluate whether potential changes to the market or CAT Reporters (
The Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee determined to include an automatic sunsetting provision for the proposed fees. Specifically, the Operating Committee determined that the CAT Fees should automatically expire two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. The Operating Committee intends to monitor the operation of the funding model during this two year period and to evaluate its effectiveness during that period. Such a process will inform the Operating Committee's approach to funding the CAT after the two year period.
SRO proposes the Consolidated Audit Trail Funding Fees to impose the CAT Fees determined by the Operating Committee on SRO's members. The proposed fee schedule has four sections, covering definitions, the fee schedule for CAT Fees, the timing and manner of payments, and the automatic sunsetting of the CAT Fees. Each of these sections is discussed in detail below.
Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms “CAT”, “CAT NMS Plan,” “Industry Member,” “NMS Stock,” “OTC Equity Security”, “Options Market Maker”, and “Participant” are defined as set forth in Rule 4.5 (Consolidated Audit Trail—Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term “Equity ATS.” First, paragraph (a)(2) defines an “ATS” to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an “Execution Venue.” Then, paragraph (a)(4) defines an “Equity ATS” as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term “CAT Fee” to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule.
Finally, Paragraph (a)(6) defines an “Execution Venue” as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an “Equity Execution Venue” as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities.
SRO proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic (with discounts for equity market maker quotes and Options Market Maker quotes based on the trade to quote ratio for equities and options, respectively) for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 7. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter:
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.
Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. SRO will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular.
All CAT fees will be billed and collected centrally through the Company via the Plan Processor. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.
Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, SRO proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.
The Operating Committee has determined to require that the CAT Fees automatically sunset two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Accordingly, SRO proposes paragraph (d) of the fee schedule, which states that “[t]hese Consolidated Audit Trailing Funding Fees will automatically expire two years after the operative date of the amendment of the CAT NMS Plan that adopts CAT fees for the Participants.”
The proposed funding model set forth in this Amendment is a revised version of the Original Proposal. The Commission received a number of comment letters in response to the Original Proposal.
This Amendment makes the following changes to the Original Proposal: (1) Adds two additional CAT Fee tiers for Equity Execution Venues; (2) discounts the market share of Execution Venue ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF by the average shares per trade ratio between NMS Stocks and OTC Equity Securities (calculated as 0.17% based on available data from the second quarter of 2017) when calculating the market share of Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA; (3) discounts the Options Market Maker quotes by the trade to quote ratio for options (calculated as 0.01% based on available data for June 2016 through June 2017) when calculating message traffic for Options Market Makers; (4) discounts equity market maker quotes by the trade to quote ratio for equities (calculated as 5.43% based on available data for June 2016 through June 2017) when calculating message traffic for equity market makers; (5) decreases the number of tiers for Industry Members (other than the Execution Venue ATSs) from nine to seven; (6) changes the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; (7) adjusts tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs); (8) focuses the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities; (9) commences invoicing of CAT Reporters as promptly as possible following the latest of the operative date of the Consolidated Audit Trail Funding Fees for each of the Participants and the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants; and (10) requires the proposed fees to automatically expire two years from the operative date of the CAT NMS Plan amendment adopting CAT Fees for the Participants.
In the Original Proposal, the Operating Committee proposed to establish two fee tiers for Equity Execution Venues. The Commission and commenters raised the concern that, by establishing only two tiers, smaller Equity Execution Venues (
Specifically, the Original Proposal had two tiers of Equity Execution Venues. Tier 1 required the largest Equity Execution Venues to pay a quarterly fee of $63,375. Based on available data, these largest Equity Execution Venues were those that had equity market share of share volume greater than or equal to 1%.
To address concerns about the potential for the $38,820 quarterly fee to impose an undue burden on smaller Equity Execution Venues, the Operating Committee determined to move to a four tier structure for Equity Execution Venues. Tier 1 would continue to include the largest Equity Execution Venues by share volume (that is, based on currently available data, those with market share of equity share volume greater than or equal to one percent), and these Equity Execution Venues would be required to pay a quarterly fee of $81,048. The Operating Committee determined to divide the original Tier 2 into three tiers. The new Tier 2 Equity Execution Venues, which would include the next largest Equity Execution Venues by equity share volume, would be required to pay a quarterly fee of $37,062. The new Tier 3 Equity Execution Venues would be required to pay a quarterly fee of $21,126. The new Tier 4 Equity Execution Venues, which would include the smallest Equity Execution Venues by share volume, would be required to pay a quarterly fee of $129.
In developing the proposed four tier structure, the Operating Committee considered keeping the existing two tiers, as well as shifting to three, four or five Equity Execution Venue tiers (the maximum number of tiers permitted under the Plan), to address the concerns regarding small Equity Execution Venues. For each of the two, three, four and five tier alternatives, the Operating Committee considered the assignment of various percentages of Equity Execution Venues to each tier as well as various percentage of Equity Execution Venue recovery allocations for each alternative. As discussed below in more detail, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the four tier alternative addressed the spectrum of different Equity Execution Venues. The Operating Committee determined that neither a two tier structure nor a three tier structure sufficiently accounted for the range of market shares of smaller Equity Execution Venues. The Operating Committee also determined that, given the limited number of Equity Execution Venues, that a fifth tier was unnecessary to address the range of market shares of the Equity Execution Venues.
By increasing the number of tiers for Equity Execution Venues and reducing the proposed CAT Fees for the smaller Equity Execution Venues, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add the two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to group Execution Venues for OTC Equity Securities and Execution Venues for NMS Stocks in the same tier structure. The Commission and commenters raised concerns as to whether this determination to place Execution Venues for OTC Equity Securities in the same tier structure as Execution Venues for NMS Stocks would result in an undue or inappropriate burden on competition, recognizing that the application of share volume may lead to different outcomes as applied to OTC Equity Securities and NMS Stocks.
As commenters noted, many OTC Equity Securities are priced at less than one dollar—and a significant number at less than one penny—and low-priced shares tend to trade in larger quantities. Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks, which has the effect of overstating an Execution Venue's true market share when the Execution Venue is involved in the trading of OTC Equity Securities. Because the proposed fee tiers are based on market share calculated by share volume, Execution Venue ATSs trading OTC Equity Securities and FINRA may be subject to higher tiers than their operations may warrant.
The practical effect of applying such a discount for trading in OTC Equity Securities is to shift Execution Venue ATSs exclusively trading OTC Equity Securities to tiers for smaller Execution Venues and with lower fees. For example, under the Original Proposal, one Execution Venue ATS exclusively trading OTC Equity Securities was placed in the first CAT Fee tier, which had a quarterly fee of $63,375. With the imposition of the proposed tier changes and the discount, this ATS would be ranked in Tier 3 and would owe a quarterly fee of $21,126.
In developing the proposed discount for Equity Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA, the Operating Committee evaluated different alternatives to address the concerns related to OTC Equity Securities, including creating a separate tier structure for Execution Venues trading OTC Equity Securities (like the separate tier for Options Execution Venues) as well as the proposed discounting method for Execution Venue ATSs exclusively trading OTC Equity Securities and FINRA. For these alternatives, the Operating Committee considered how each alternative would affect the recovery allocations. In addition, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee did not adopt a separate tier structure for Equity Execution Venues trading OTC Equity Securities as they determined that the proposed discount approach appropriately addresses the concern. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the trading patterns and operations in the OTC Equity Securities markets, and is an objective discounting method.
By increasing the number of tiers for Equity Execution Venues and imposing a discount on the market share of share volume calculation for trading in OTC Equity Securities, the Operating Committee believes that the proposed fees for Equity Execution Venues would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Equity Execution Venues, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to indicate that the market share for Equity ATSs exclusively trading OTC Equity Securities as well as the market share of the FINRA ORF would be discounted. In addition, as discussed above, to address concerns related to smaller ATSs, including those that exclusively trade OTC Equity Securities, SRO proposes to amend paragraph (b)(2) of the proposed fee schedule to add two additional tiers for Equity Execution Venues, to establish the percentages and fees for Tiers 3 and 4 as described, and to revise the percentages and fees for Tiers 1 and 2 as described.
In the Original Proposal, the Operating Committee proposed to include both Options Market Maker quotes and equities market maker quotes in the calculation of total message traffic for such market makers for purposes of tiering for Industry Members (other than Execution Venue ATSs). The Commission and commenters raised questions as to whether the proposed treatment of Options Market Maker quotes may result in an undue or inappropriate burden on competition or may lead to a reduction in market quality.
In the Original Proposal, market maker quotes were treated the same as other message traffic for purposes of tiering for Industry Members (other than Execution Venue ATSs). Commenters noted, however, that charging Industry Members on the basis of message traffic will impact market makers disproportionately because of their continuous quoting obligations. Moreover, in the context of options market makers, message traffic would include bids and offers for every listed options strikes and series, which are not an issue for equities.
The practical effect of applying such discounts for quoting activity is to shift market makers' calculated message traffic lower, leading to the potential shift to tiers for lower message traffic and reduced fees. Such an approach would move sixteen Industry Member CAT Reporters that are market makers to a lower tier than in the Original Proposal. For example, under the
In developing the proposed market maker discounts, the Operating Committee considered various discounts for Options Market Makers and equity market makers, including discounts of 50%, 25%, 0.00002%, as well as the 5.43% for option market makers and 0.01% for equity market makers. Each of these options were considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined to adopt the proposed discount because it directly relates to the concern regarding the quoting requirement, is an objective discounting method, and has the desired potential to shift market makers to lower fee tiers.
By imposing a discount on Options Market Makers and equities market makers' quoting traffic for the calculation of message traffic, the Operating Committee believes that the proposed fees for market makers would not impose an undue or inappropriate burden on competition under Section 6 or Section 15A of the Exchange Act. Moreover, the Operating Committee believes that the proposed fees appropriately take into account the distinctions in the securities trading operations of different Industry Members, and avoid disincentives, such as a reduction in market quality, as required under the funding principles of the CAT NMS Plan.
Accordingly, with this Amendment, SRO proposes to amend paragraph (b)(1) of the proposed fee schedule to indicate that the message traffic related to equity market maker quotes and Options Market Maker quotes would be discounted. In addition, SRO proposes to define the term “Options Market Maker” in paragraph (a)(1) of the proposed fee schedule.
Under the Original Proposal, 75% of CAT costs were allocated to Industry Members (other than Execution Venue ATSs) and 25% of CAT costs were allocated to Execution Venues. This cost allocation sought to maintain the greatest level of comparability across the funding model, where comparability considered affiliations among or between CAT Reporters. The Commission and commenters expressed concerns regarding whether the proposed 75%/25% allocation of CAT costs is consistent with the Plan's funding principles and the Exchange Act, including whether the allocation places a burden on competition or reduces market quality. The Commission and commenters also questioned whether the approach of accounting for affiliations among CAT Reporters in setting CAT Fees disadvantages non-affiliated CAT Reporters or otherwise burdens competition in the market for trading services.
In response to these concerns, the Operating Committee determined to revise the proposed funding model to focus the comparability of CAT Fees on the individual entity level, rather than primarily on the comparability of affiliated entities. In light of the interconnected nature of the various aspects of the funding model, the Operating Committee determined to revise various aspects of the model to enhance comparability at the individual entity level. Specifically, to achieve such comparability, the Operating Committee determined to (1) decrease the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven; (2) change the allocation of CAT costs between Equity Execution Venues and Options Execution Venues from 75%/25% to 67%/33%; and (3) adjust tier percentages and recovery allocations for Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). With these changes, the proposed funding model provides fee comparability for the largest individual entities, with the largest Industry Members (other than Execution Venue ATSs), Equity Execution Venues and Options Execution Venues each paying a CAT Fee of approximately $81,000 each quarter.
In the Original Proposal, the proposed funding model had nine tiers for Industry Members (other than Execution Venue ATSs). The Operating Committee determined that reducing the number of tiers from nine tiers to seven tiers (and adjusting the predefined Industry Member Percentages as well) continues to provide a fair allocation of fees among Industry Members and appropriately distinguishes between Industry Members with differing levels of message traffic. In reaching this conclusion, the Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that seven tiers would group firms with similar levels of message traffic, while also achieving greater comparability in the model for the individual CAT Reporters with the greatest market share or message traffic.
In developing the proposed seven tier structure, the Operating Committee considered remaining at nine tiers, as well as reducing the number of tiers down to seven when considering how to address the concerns raised regarding comparability. For each of the alternatives, the Operating Committee considered the assignment of various percentages of Industry Members to each tier as well as various percentages of Industry Member recovery allocations for each alternative. Each of these options was considered in the context of its effects on the full funding model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the seven tier alternative provided the most fee comparability at the individual entity level for the largest CAT Reporters, while both providing logical breaks in tiering for Industry Members with different levels of message traffic and a sufficient number of tiers to provide for the full spectrum of different levels of message traffic for all Industry Members.
The Operating Committee also determined to adjust the allocation of CAT costs between Equity Execution Venues and Options Execution Venues to enhance comparability at the individual entity level. In the Original
In developing the proposed allocation of CAT costs between Equity and Options Execution Venues, the Operating Committee considered various different options for such allocation, including keeping the original 75%25% allocation, as well as shifting to a 70%/30%, 67%/33%, or 57.75%/42.25% allocation. For each of the alternatives, the Operating Committee considered the effect each allocation would have on the assignment of various percentages of Equity Execution Venues to each tier as well as various percentages of Equity Execution Venue recovery allocations for each alternative. Moreover, each of these options was considered in the context of the full model, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. The Operating Committee determined that the 67%/33% allocation between Equity and Options Execution Venues provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The Operating Committee determined to allocate 25% of CAT costs to Execution Venues and 75% to Industry Members (other than Execution Venue ATSs), as it had in the Original Proposal. The Operating Committee determined that this 75%/25% allocation, along with the other changes proposed above, led to the most comparable fees for the largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs). The largest Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) would each pay a quarterly CAT Fee of approximately $81,000.
As a preliminary matter, the Operating Committee determined that it is appropriate to allocate most of the costs to create, implement and maintain the CAT to Industry Members for several reasons. First, there are many more broker-dealers expected to report to the CAT than Participants (
In developing the proposed allocation of CAT costs between Execution Venues and Industry Members (other than Execution Venue ATSs), the Operating Committee considered various different options for such allocation, including keeping the original 75%/25% allocation, as well as shifting to an 80%/20%, 70%/30%, or 65%/35% allocation. Each of these options was considered in the context of the full model, including the effect on each of the changes discussed above, as changes in each variable in the model affect other variables in the model when allocating the total CAT costs among CAT Reporters. In particular, for each of the alternatives, the Operating Committee considered the effect each allocation had on the assignment of various percentages of Equity Execution Venues, Options Execution Venues and Industry Members (other than Execution Venue ATSs) to each relevant tier as well as various percentages of recovery allocations for each tier. The Operating Committee determined that the 75%/25% allocation between Execution Venues and Industry Members (other than Execution Venue ATSs) provided the greatest level of fee comparability at the individual entity level for the largest CAT Reporters, while still providing for appropriate fee levels across all tiers for all CAT Reporters.
The funding principles set forth in Section 11.2 of the Plan require that the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). The proposed funding model satisfies this requirement. As discussed above, under the proposed funding model, the largest Equity Execution Venues, Options Execution Venues, and Industry Members (other than Execution Venue ATSs) pay approximately the same fee. Moreover, the Operating Committee believes that the proposed funding model takes into consideration affiliations between or among CAT Reporters as complexes with multiple CAT Reporters will pay the appropriate fee based on the proposed fee schedule for each of the CAT Reporters in the complex. For example, a complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member will a pay the same as another complex with a Tier 1 Equity Execution Venue and Tier 2 Industry Member.
Accordingly, with this Amendment, SRO proposes to amend paragraphs (b)(1) and (2) of the proposed fee schedule to reflect the changes discussed in this section. Specifically, SRO proposes to amend paragraph (b)(1) and (2) of the proposed fee schedule to update the number of tiers, and the fees and percentages assigned to each tier to reflect the described changes.
In the Original Proposal, the Operating Committee proposed to charge Execution Venues based on market share and Industry Members (other than Execution Venue ATSs) based on message traffic. Commenters questioned the use of the two different
In drafting the Plan and the Original Proposal, the Operating Committee expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they described as producing similar amounts of message traffic regardless of size. The Operating Committee believed that charging Execution Venues based on message traffic would result in both large and small Execution Venues paying comparable fees, which would be inequitable, so the Operating Committee determined that it would be more appropriate to treat Execution Venues differently from Industry Members in the funding model. Upon a more detailed analysis of available data, however, the Operating Committee noted that Execution Venues have varying levels of message traffic. Nevertheless, the Operating Committee continues to believe that a bifurcated funding model—where Industry Members (other than Execution Venue ATSs) are charged fees based on message traffic and Execution Venues are charged based on market share—complies with the Plan and meets the standards of the Exchange Act for the reasons set forth below.
Charging Industry Members based on message traffic is the most equitable means for establishing fees for Industry Members (other than Execution Venue ATSs). This approach will assess fees to Industry Members that create larger volumes of message traffic that are relatively higher than those fees charged to Industry Members that create smaller volumes of message traffic. Since message traffic, along with fixed costs of the Plan Processor, is a key component of the costs of operating the CAT, message traffic is an appropriate criterion for placing Industry Members in a particular fee tier.
The Operating Committee also believes that it is appropriate to charge Execution Venues CAT Fees based on their market share. In contrast to Industry Members (other than Execution Venue ATSs), which determine the degree to which they produce the message traffic that constitutes CAT Reportable Events, the CAT Reportable Events of Execution Venues are largely derivative of quotations and orders received from Industry Members that the Execution Venues are required to display. The business model for Execution Venues, however, is focused on executions in their markets. As a result, the Operating Committee believes that it is more equitable to charge Execution Venues based on their market share rather than their message traffic.
Similarly, focusing on message traffic would make it more difficult to draw distinctions between large and small exchanges, including options exchanges in particular. For instance, the Operating Committee analyzed the message traffic of Execution Venues and Industry Members for the period of April 2017 to June 2017 and placed all CAT Reporters into a nine-tier framework (
In addition, the Operating Committee also believes that it is appropriate to treat ATSs as Execution Venues under the proposed funding model since ATSs have business models that are similar to those of exchanges, and ATSs also compete with exchanges. For these reasons, the Operating Committee believes that charging Execution Venues based on market share is more appropriate and equitable than charging Execution Venues based on message traffic.
In the Original Proposal, the Operating Committee did not impose any time limit on the application of the proposed CAT Fees. As discussed above, the Operating Committee developed the proposed funding model by analyzing currently available historical data. Such historical data, however, is not as comprehensive as data that will be submitted to the CAT. Accordingly, the Operating Committee believes that it will be appropriate to revisit the funding model once CAT Reporters have actual experience with the funding model. Accordingly, the Operating Committee proposes to include a sunsetting provision in the proposed fee model. The proposed CAT Fees will sunset two years after the operative date of the CAT NMS Plan amendment adopting CAT Fees for Participants. Specifically, SRO proposes to add paragraph (d) of the proposed fee schedule to include this sunsetting provision. Such a provision will provide the Operating Committee and other market participants with the opportunity to reevaluate the performance of the proposed funding model.
In the Original Proposal, the Operating Committee determined to use a tiered fee structure. The Commission and commenters questioned whether the decreasing cost per additional unit (of message traffic in the case of Industry Members, or of share volume in the case of Execution Venues) in the proposed fee schedules burdens competition by disadvantaging small Industry Members and Execution Venues and/or by creating barriers to entry in the market for trading services and/or the market for broker-dealer services.
The Operating Committee does not believe that decreasing cost per additional unit in the proposed fee schedules places an unfair competitive burden on Small Industry Members and Execution Venues. While the cost per unit of message traffic or share volume necessarily will decrease as volume increases in any tiered fee model using fixed fee percentages and, as a result, Small Industry Members and small Execution Venues may pay a larger fee per message or share, this comment fails to take account of the substantial differences in the absolute fees paid by Small Industry Members and small Execution Venues as opposed to large Industry Members and large Execution Venues. For example, under the fee proposals, Tier 7 Industry Members would pay a quarterly fee of $105, while Tier 1 Industry Members would pay a quarterly fee of $81,483. Similarly, a Tier 4 Equity Execution Venue would pay a quarterly fee of $129, while a Tier 1 Equity Execution Venue would pay a quarterly fee of $81,048. Thus, Small Industry Members and small Execution Venues are not disadvantaged in terms
In addition to the various funding model alternatives discussed above regarding discounts, number of tiers and allocation percentages, the Operating Committee also discussed other possible funding models. For example, the Operating Committee considered allocating the total CAT costs equally among each of the Participants, and then permitting each Participant to charge its own members as it deems appropriate.
Commenters expressed concern regarding the level of Industry Member input into the development of the proposed funding model, and certain commenters have recommended a greater role in the governance of the CAT.
Commenters also raised concerns regarding Participant conflicts of interest in setting the CAT Fees.
Commenters also argued that they could not adequately assess whether the CAT Fees were fair and equitable because the Operating Committee has not provided details as to what the Participants are receiving in return for the CAT Fees.
Commenters also questioned the authority of the Operating Committee to impose CAT Fees on Industry Members.
SRO believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,
SRO believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist SRO and its Industry Members in meeting regulatory obligations pursuant to the Plan. 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.”
SRO believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, SRO believes that the total level of the CAT Fees is reasonable.
In addition, SRO believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the fee structure takes into consideration distinctions in securities trading operations of CAT Reporters, including ATSs trading OTC Equity Securities, and equity and options market makers.
Moreover, SRO believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75%/25% division between Industry Members (other than Execution Venue ATSs) and Execution Venues maintains the greatest level of comparability across the funding model. For example, the cost allocation establishes fees for the largest Industry Members (
Finally, SRO believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.
Section 6(b)(8) of the Act
Moreover, as previously described, SRO believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and/or market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, SRO does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, SRO does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, SRO believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market.
In addition, the Operating Committee believes that the proposed changes to the Original Proposal, as discussed above in detail, address certain competitive concerns raised by commenters, including concerns related to, among other things, smaller ATSs, ATSs trading OTC Equity Securities, market making quoting and fee comparability. As discussed above, the Operating Committee believes that the proposals address the competitive concerns raised by commenters.
SRO has set forth responses to comments received regarding the Original Proposal in Section 3(a)(4) above.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. In particular, the Commission seeks comment on the following:
(1) Commenters' views as to whether the allocation of CAT costs is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality.”
(2) Commenters' views as to whether the allocation of 25% of CAT costs to the Execution Venues (including all the Participants) and 75% to Industry Members, will incentivize or disincentivize the Participants to effectively and efficiently manage the CAT costs incurred by the Participants since they will only bear 25% of such costs.
(3) Commenters' views on the determination to allocate 75% of all costs incurred by the Participants from November 21, 2016 to November 21, 2017 to Industry Members (other than Execution Venue ATSs), when such costs are development and build costs and when Industry Member reporting is scheduled to commence a year later, including views on whether such “fees, costs and expenses . . . [are] fairly and reasonably shared among the Participants and Industry Members” in accordance with the CAT NMS Plan.
(4) Commenters' views on whether an analysis of the ratio of the expected Industry Member-reported CAT messages to the expected SRO-reported CAT messages should be the basis for determining the allocation of costs between Industry Members and Execution Venues.
(5) Any additional data analysis on the allocation of CAT costs, including any existing supporting evidence.
(6) Commenters' views on the shift in the standard used to assess the comparability of CAT Fees, with the emphasis now on comparability of individual entities instead of affiliated entities, including views as to whether this shift is consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to establish a fee structure in which the fees charged to “CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”
(7) Commenters' views as to whether the reduction in the number of tiers for Industry Members (other than Execution Venue ATSs) from nine to seven, the revised allocation of CAT costs between Equity Execution Venues and Options Execution Venues from a 75%/25% split to a 67%/33% split, and the adjustment of all tier percentages and recovery allocations achieves comparability across individual entities, and whether these changes should have resulted in a change to the allocation of 75% of total CAT costs to Industry Members (other than Execution Venue ATSs) and 25% of such costs to Execution Venues.
(8) Commenters' views as to whether the discounts for options market-makers, equities market-makers, and Equity ATSs trading OTC Equity Securities are clear, reasonable, and consistent with the funding principle expressed in the CAT NMS Plan that requires the Operating Committee to “avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality,”
(9) Commenters' views as to whether the amendment provides sufficient information regarding the amount of costs incurred from November 21, 2016 to November 21, 2017, particularly, how those costs were calculated, how those costs relate to the proposed CAT Fees, and how costs incurred after November 21, 2017 will be assessed upon Industry Members and Execution Venues;
(10) Commenters' views as to whether the timing of the imposition and collection of CAT Fees on Execution Venues and Industry Members is reasonably related to the timing of when the Company expects to incur such development and implementation costs.
(11) Commenters' views on dividing CAT costs equally among each of the Participants, and then each Participant charging its own members as it deems appropriate, taking into consideration the possibility of inconsistency in charges, the potential for lack of transparency, and the impracticality of multiple SROs submitting invoices for CAT charges.
(12) Commenters' views as to whether the allocation of 75% of CAT costs to Industry Members (other than Execution Venue ATSs) imposes any burdens on competition to Industry Members, including views on what baseline competitive landscape the Commission should consider when analyzing the proposed allocation of CAT costs.
(13) Commenters' views on the burdens on competition, including the relevant markets and services and the impact of such burdens on the baseline competitive landscape in those relevant markets and services.
(14) Commenters' views on any potential burdens imposed by the fees on competition between and among CAT Reporters, including views on which baseline markets and services the fees could have competitive effects on and whether the fees are designed to minimize such effects.
(15) Commenters' general views on the impact of the proposed fees on economies of scale and barriers to entry.
(16) Commenters' views on the baseline economies of scale and barriers to entry for Industry Members and Execution Venues and the relevant markets and services over which these economies of scale and barriers to entry exist.
(17) Commenters' views as to whether a tiered fee structure necessarily results in less active tiers paying more per unit than those in more active tiers, thus creating economies of scale, with supporting information if possible.
(18) Commenters' views as to how the level of the fees for the least active tiers would or would not affect barriers to entry.
(19) Commenters' views on whether the difference between the cost per unit (messages or market share) in less active
(a) How those economies of scale compare to operational economies of scale; and
(b) Whether those economies of scale reduce or increase the current advantages enjoyed by larger competitors or otherwise alter the competitive landscape.
(20) Commenters' views on whether the fees could affect competition between and among national securities exchanges and FINRA, in light of the fact that implementation of the fees does not require the unanimous consent of all such entities, and, specifically:
(a) Whether any of the national securities exchanges or FINRA are disadvantaged by the fees; and
(b) If so, whether any such disadvantages would be of a magnitude that would alter the competitive landscape.
(21) Commenters' views on any potential burden imposed by the fees on competitive quoting and other liquidity provision in the market, including, specifically:
(a) Commenters' views on the kinds of disincentives that discourage liquidity provision and/or disincentives that the Commission should consider in its analysis;
(b) Commenters' views as to whether the fees could disincentivize the provision of liquidity; and
(c) Commenters' views as to whether the fees limit any disincentives to provide liquidity.
(22) Commenters' views as to whether the amendment adequately responds to and/or addresses comments received on related filings.
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
Small Business Administration.
30-day notice and request for comments.
The U.S. Small Business Administration (SBA) is submitting a Generic Information Collection Request (Generic ICR): “Generic Clearance for the Collection of Qualitative Feedback on Agency Service Delivery” to the Office of Management and Budget (OMB) for approval under the Paperwork Reduction Act (PRA). This information collection is part of a Federal Government-wide effort to streamline the process to seek feedback from the public on the agency's service delivery. SBA previously published a 60-day notice soliciting public comment on the proposed information collection. This 30-day notice, as required by the PRA, provides an additional opportunity for public comment on the Generic ICR.
Comments must be submitted January 16, 2018.
Send all comments to Curtis B. Rich, Agency Clearance Officer, Small Business Administration, 409 3rd Street, 5th Floor, Washington, DC 20416. (202) 205-7030
Amber Chaudhry, Presidential Management Fellow, Office of Communications and Public Liaison,
Feedback collected under this generic clearance will provide useful information, but it will not yield data that can be generalized to the overall population. This type of generic clearance for qualitative information will not be used for quantitative information collections that are designed to yield reliably actionable results, such as monitoring trends over time or documenting program performance. Such data uses require more rigorous designs that address: The target population to which
The Agency did not receive any comments in response to the 60-day public comment notice published in the
Below we provide the SBA's projected average annual estimates for the next three years:
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB Control Number.
The City and County of Denver, Colo. (the City), a political subdivision of the State of Colorado and a noncarrier, has filed a verified notice of exemption under 49 CFR 1150.31 to acquire from the Western Stock Show Association (WSSA) the real property underlying two lines of railroad for a total distance of approximately 1.2 miles in the Denver Stockyards in the City (the Lines). The Lines consist of two corridors of rail line: (1) The National Western Drive Corridor (NWD Corridor), which is adjacent to National Western Drive, from the south right-of-way line of East 47th Avenue, extending northeast and then north to the northeastern right-of-way line of Race Court; and (2) the River Corridor, which is adjacent to the east bank of the South Platte River, from the intersection with the NWD Corridor at a point just north of that corridor's southern endpoint, extending north and then northeast to an intersection with the NWD Corridor just south of Race Court.
The City states that it will acquire no right or obligation to provide freight rail service over the Lines.
The City explains that it is acquiring the property to implement a comprehensive redevelopment plan of the Denver Stockyards to: (a) Provide improved facilities for Denver's annual National Western Stock Show and Rodeo; (b) develop, in conjunction with Colorado State University (CSU), an equine sport medicine facility and stock animal research complex; (c) create additional mixed-use facilities, and (d) establish a public park. In connection with the real property acquisition and development project, the City states that the City, WSSA, and CSU entered into a Framework Agreement. As part of the agreement, the parties entered into a Real Property Conveyance Agreement that will govern the transfers of real property including the real property associated with the Lines.
The City certifies that, because it will not conduct any rail carrier operations on the Line, its projected revenues from freight operations will not result in the creation of a Class I or Class II carrier.
The City states that it expects to consummate the proposed transaction in approximately the second quarter of 2018. The earliest this transaction may be consummated is December 28, 2017, the effective date of the exemption (30 days after the verified notice of exemption was filed).
If the notice contains false or misleading information, the exemption is void ab initio. Petitions to revoke the exemption under 49 U.S.C. 10502(d) may be filed at any time. The filing of a petition to revoke will not automatically stay the effectiveness of the exemption. Petitions for stay must be filed no later than December 21, 2017 (at least seven days before the exemption becomes effective).
An original and 10 copies of all pleadings, referring to Docket No. FD 36157, must be filed with the Surface Transportation Board, 395 E Street SW, Washington, DC 20423-0001. In addition, a copy of each pleading must be served on Charles A. Spitulnik, Kaplan Kirsch & Rockwell LLP, 1001 Connecticut Ave. NW, Suite 800, Washington, DC 20036.
Board decisions and notices are available on our website at
By the Board, Scott M. Zimmerman, Acting Director, Office of Proceedings.
Federal Highway Administration (FHWA), DOT.
Notice, request for comment.
The Surface Transportation Project Delivery Program allows a State to assume FHWA's environmental responsibilities for review, consultation, and compliance for Federal highway projects. When a State assumes these Federal responsibilities, the State becomes solely responsible and liable for carrying out the responsibilities it has assumed, in lieu of FHWA. Prior to the Fixing America's Surface Transportation (FAST) Act of 2015, the Program required semiannual audits during each of the first 2 years of State participation to ensure compliance by each State participating in the Program. This notice announces and solicits comments on the fourth audit report for the Texas Department of Transportation's (TxDOT) participation in accordance with these pre-FAST Act requirements.
Comments must be received on or before January 16, 2018.
Mail or hand deliver comments to Docket Management Facility: U.S. Department of Transportation, 1200 New Jersey Avenue SE, Room W12-140, Washington, DC 20590. You may also submit comments electronically at
Dr. Owen Lindauer, Office of Project Development and Environmental Review, (202) 366-2655,
An electronic copy of this notice may be downloaded from the specific docket page at
The Surface Transportation Project Delivery Program allows a State to assume FHWA's environmental responsibilities for review, consultation, and compliance for Federal highway projects. This provision has been codified at 23 U.S.C. 327. Since December 16, 2014, TxDOT has assumed FHWA's responsibilities under National Environmental Policy Act and the responsibilities for reviews under other Federal environmental requirements under this authority.
Prior to December 4, 2015, 23 U.S.C. 327(g) required the Secretary to conduct semiannual audits during each of the first 2 years of State participation, annual audits during years 3 and 4, and monitoring each subsequent year of State participation to ensure compliance by each State participating in the program. The results of each audit were required to be presented in the form of an audit report and be made available for public comment. On December 4, 2015, the President signed into law the FAST Act, Pub. L. 114-94, 129 Stat. 1312 (2015). Section 1308 of the FAST Act amended the audit provisions by limiting the number of audits to one audit each year during the first 4 years of a State's participation. This notice announces the availability of the report for the fourth audit for TxDOT conducted prior to the FAST Act and solicits public comment onit.
Section 1313 of Public Law 112-141; Section 6005 of Public Law 109-59; Public Law 114-94; 23 U.S.C. 327; 49 CFR 1.85.
This report summarizes the results of FHWA's fourth audit review (Audit #4) to assess the performance by the Texas Department of Transportation (TxDOT) regarding its assumption of responsibilities assigned by Federal Highway Administration (FHWA), under a memorandum of understanding (MOU) that took effect on December 16, 2014. TxDOT assumed FHWA's National Environmental Policy Act (NEPA) responsibilities and other environmental review responsibilities related to Federal-aid highway projects in Texas. The status of FHWA's observations from the third audit review (Audit #3), including any TxDOT self-imposed corrective actions, is detailed at the end of this report. The FHWA Audit #4 team (team) appreciates the cooperation and professionalism of TxDOT staff in conducting this review.
The team was formed in October 2016 and met regularly to prepare for the audit. Prior to the on-site visit, the team: (1) performed reviews of project files in TxDOT's Environmental Compliance Oversight System (ECOS), (2) examined TxDOT's responses to FHWA's information requests, and (3) developed interview questions. Interviews of TxDOT and resource agency staff occurred during the on-site portion of this audit, conducted on May 22-26, 2017.
The TxDOT continues to develop, revise, and implement procedures and processes required to carry out the NEPA Assignment Program. Based on information provided by TxDOT and from interviews, TxDOT is committed to maintaining a successful program. This report describes two (2) categories of non-compliance observations and eight (8) observations that represent opportunities for TxDOT to improve its program. It also includes brief status updates of the Audit #3 conclusions.
The TxDOT has continued to make progress toward meeting the responsibilities it has assumed in
The Surface Transportation Project Delivery Program (NEPA Assignment Program) allows a State to assume FHWA's environmental responsibilities for review, consultation, and compliance for highway projects. This program is codified at 23 U.S.C. 327. When a State assumes these Federal responsibilities for NEPA project decision-making, the State becomes solely responsible and liable for carrying out these obligations in lieu of, and without further NEPA related approval by, FHWA.
The State of Texas was assigned the responsibility for making project NEPA approvals and the responsibility for making other related environmental decisions for highway projects on December 16, 2014. In enacting Texas Transportation Code, § 201.6035, the State has waived its sovereign immunity under the 11th Amendment of the U.S. Constitution and consents to defend against any actions brought by its citizens for NEPA decisions it has made in Federal court.
The FHWA project-specific environmental review responsibilities assigned to TxDOT are specified in the MOU. These responsibilities include: compliance with the Endangered Species Act (ESA), Section 7 consultations with the U.S. Fish and Wildlife Service (USFWS) and the National Oceanic and Atmospheric Administration's National Marine Fisheries Service, and Section 106 consultations with the Texas Historical Commission (THC) regarding impacts to historic properties. Other responsibilities may not be assigned and remain with FHWA. They include: (1) responsibility for project-level conformity determinations under the Clean Air Act, and (2) the responsibility for government-to-government consultation with federally-recognized Indian tribes. Based on 23 U.S.C. 327(a)(2)(D), any responsibility not explicitly assigned in the MOU is retained by FHWA.
The MOU specifies that FHWA is required to conduct six audit reviews. These audits are part of FHWA's oversight responsibility for the NEPA Assignment Program. The reviews are to assess a State's compliance with the provisions of the MOU. They also are used to evaluate a State's progress toward achieving its performance measures as specified in the MOU; to evaluate the success of the NEPA Assignment Program; and to inform the administration of the findings regarding the NEPA Assignment Program. In December 2015, statutory changes in Section 1308 of the Fixing America's Surface Transportation Act (FAST Act) reduced the frequency of these audit reviews to one audit per year during the first four years of state participation in the program. This audit is the fourth completed in Texas. The 5th and final audit is planned for 2018.
The overall scope of this audit review is defined both in statute (23 U.S.C. 327) and the MOU (Part 11). An audit generally is defined as an official and careful examination and verification of accounts and records, especially of financial accounts, by an independent, unbiased body. Regarding accounts or financial records, audits may follow a prescribed process or methodology, and be conducted by “auditors” who have special training in those processes or methods. The FHWA considers this review to meet the definition of an audit because it is an unbiased, independent, official, and careful examination and verification of records and information about TxDOT's assumption of environmental responsibilities. Principal members of the team that conducted this audit have completed special training in audit processes and methods.
The diverse composition of the team and the process of developing the review report and publishing it in the
Audits, as stated in the MOU (Parts 11.1.1 and 11.1.5), are the primary mechanism used by FHWA to oversee TxDOT's compliance with the MOU, evaluate TxDOT's progress toward achieving the performance measures identified in the MOU (Part 10.2), and collect information needed for the Secretary's annual report to Congress. These audits also consider TxDOT's technical competency and organizational capacity, adequacy of the financial resources committed by TxDOT to administer the responsibilities assumed, quality assurance/quality control process, attainment of performance measures, compliance with the MOU requirements, and compliance with applicable laws and policies in administering the responsibilities assumed.
This audit reviewed processes and procedures (i.e., toolkits and handbooks) TxDOT staff use to process and make NEPA approvals. The information the team gathered that served as the basis for this audit came from three primary sources: (1) TxDOT's response to a pre-audit #4 information request (PAIR #4), (2) a review of both a judgmental and random sample of project files in ECOS with approval dates after February 1, 2016, and (3) interviews with TxDOT and the USFWS staff. The TxDOT provided information in response to FHWA pre-audit questions and requests for documents and provided a written clarification to FHWA thereafter. That material covered the following six topics: program management, documentation and records management, quality assurance/quality control, legal sufficiency review, performance measurement, and training. In addition to considering these six topics, the team also considered the following topics: Endangered Species Act (ESA) compliance, consideration of noise impacts and noise mitigation (Noise), and adherence to the TxDOT Public Involvement plan.
The intent of the review was to check that TxDOT has the proper procedures in place to implement the responsibilities assumed through the MOU, ensure that the staff is aware of those procedures, and make certain the staff implements the procedures appropriately to achieve compliance with NEPA and other assigned responsibilities. The review did not second guess project-specific decisions, as such decisions are the sole responsibility of TxDOT. The team focused on whether the procedures TxDOT followed complied with all Federal statutes, regulation, policy, procedure, process, guidance, and guidelines.
The team defined the timeframe for highway project environmental approvals subject to this fourth audit to be between February 1, 2016, and January 31, 2017. The project file review effort occurred in two phases: approvals made during Round 1 (Feb 1, 2016-July 31, 2016) and Round 2 (Aug 1, 2016-Jan 31, 2017). One important note is that this audit project file review time frame spans a full 12 months, where previous
The interviews conducted by the team focused on TxDOT's leadership and staff at the Environmental Affairs Division (ENV) Headquarters in Austin and staff in four of TxDOT's Districts. The team interviewed the Austin District and then divided into two groups (the next day) to complete the face-to-face interviews of District staff in Waco and San Antonio. Members of the team interviewed staff from the Ft. Worth District via teleconference. The team used the same ECOS project document review form but updated interview questions for Districts and ENV staff with new focus areas to gather data.
The TxDOT continues to make progress in the implementation of its program that assumes FHWA's NEPA project-level decision responsibility and other environmental responsibilities. The team acknowledges TxDOT's effort to refine and, when necessary, establish additional written internal policies and procedures. The team found evidence of TxDOT's continuing efforts to train staff in clarifying the roles and responsibilities of TxDOT staff, and in educating staff in an effort to assure compliance with all of the assigned responsibilities.
The team identified two non-compliant observations in this audit that TxDOT will need to address through corrective actions. These non-compliance observations come from a review of TxDOT procedures, project file documentation, and interview information. This report also identifies several notable observations and successful practices that we recommend be expanded.
Non-compliance observations are instances where the team found the TxDOT was out of compliance or deficient in proper implementation of a Federal regulation, statute, guidance, policy, the terms of the MOU, or TxDOT's own procedures for compliance with the NEPA process. Such observations may also include instances where TxDOT has failed to maintain technical competency, adequate personnel, and/or financial resources to carry out the assumed responsibilities. Other non-compliance observations could suggest a persistent failure to adequately consult, coordinate, or consider the concerns of other Federal, State, tribal, or local agencies with oversight, consultation, or coordination responsibilities. The FHWA expects TxDOT to develop and implement corrective actions to address all non-compliance observations. As part of information gathered for this audit, TxDOT informed the team they are still implementing some recommendations made by FHWA on Audit #3 to address non-compliance. The FHWA will conduct followup reviews of non-compliance observations in Audit #5 from this review.
The MOU (Part 3.1.1) states that “[p]ursuant to 23 U.S.C. 327(a)(2)(A), on the Effective Date, FHWA assigns, and TxDOT assumes, subject to the terms and conditions set forth in 23 U.S.C. 327 and this MOU, all of the USDOT Secretary's responsibilities for compliance with the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq. with respect to the highway projects specified under subpart 3.3. This includes statutory provisions, regulations, policies, and guidance related to the implementation of NEPA for Federal highway projects such as 23 U.S.C. 139, 40 CFR 1500-1508, DOT Order 5610.1C, and 23 CFR 771 as applicable.” Also, the performance measure in MOU Part 10.2.1(A) for compliance with NEPA and other Federal environmental statutes and regulations commits TxDOT to maintaining documented compliance with requirements of all applicable statutes and regulations, as well as provisions in the MOU. The following non-compliance observations are presented as two categories of non-compliance observations: (1) with procedures specified in Federal laws, regulations, policy, or guidance, or (2) with the State's environmental review procedures.
(a)
(b)
(c)
(d)
(a)
(b)
(c)
(d)
(e)
This section summarizes the team's observations about issues or practices that TxDOT may consider as areas to improve. It also summarizes practices that the team believes are successful, so that TxDOT can consider continuing or expanding those programs in the future. Further information on these successful practices and observations is contained in the following subsections that address these six topic areas: program management; documentation and records management; quality assurance/quality control; legal sufficiency; performance management; and training.
Throughout the following subsections, the team lists 8 observations for TxDOT to consider in order to make improvements. The FHWA's suggested implementation methods of action include: corrective action, targeted training, revising procedures, continued self-assessment, improved QA/QC, or some other means. The team acknowledges that, by sharing the preliminary draft audit report with TxDOT, TxDOT has begun the process of implementing actions to address these observations and improve its program prior to the publication of this report.
The team appreciates TxDOT ENV willingness to partner with FHWA before, during, and after audit reviews. This has resulted in improved communication and assisted the team in verifying many of the conclusions in this report. The quarterly partnering sessions, started in 2016, will be an ongoing effort. These exchanges of information between FHWA and TxDOT have clarified and refined FHWA's reviews and assisted TxDOT's efforts to make improvements to their environmental review processes and procedures.
The team noted in District and ENV staff interviews that they welcomed the opportunity to be responsible and accountable for NEPA decisions. Additionally, TxDOT District staff members and management have said in interviews that they are more diligent with their documentation because they know that these approvals will be internally assessed and the District held accountable by the TxDOT ENV Program Review Team (formerly TxDOT's Self-Assessment Branch, [SAB]). District staff indicated in interviews that the former SAB detailed reviews were highly valued because they learned from their mistakes and make improvements. Accountability, in part, is driving an enhanced desire for TxDOT staff to consistently and carefully complete environmental reviews.
The team recognizes enhanced communication among individuals in the project development process through the Core Team (a partnership of District and ENV environmental staff assigned to an individual EIS project) as a valuable concept. Information gained from interviews and materials provided by TxDOT in most cases demonstrate improved communication amongst Districts and between Districts and ENV. The team noted that “NEPA Chats” (regular conference calls led by ENV, providing a platform for Districts to discuss complex NEPA implementation issues) are still, for the most part, well received. Districts also provide internal self-initiated training across disciplines so everyone in the District Office is aware of TxDOT procedures to try to ensure that staff follows NEPA-related, discipline specific processes. This keeps projects on-schedule or ensures that there are no surprises if projected schedules slip.
TxDOT ENV is currently in the process of proposing an update to their Noise Guidelines. The team reviewed a project file where the decisions based on an original noise study were re-examined to reach a different conclusion. The current TxDOT Noise Guidelines do not address how, or under what conditions a re-examination of an original Noise Study report that reaches different conclusions could occur. The team urges TxDOT to clarify their noise guidelines to ensure consistent and fair and equitable treatment of stakeholders affected by highway noise impacts.
During the interviews, the review team learned that there is a disincentive for “may affect” determinations because TxDOT cannot predict the amount of time required to complete informal consultation. If a particular project's schedule could accommodate the time required for informal consultation, a “may affect” determination might be made to minimize a risk of a legal challenge.
The review team would like to draw TxDOT's attention to the possibility that risk management decisionmaking can introduce a bias or “disincentive” to coordinate with USFWS when it is expected according to Federal policy and guidance. In fulfilling ESA Section 7(a)(2) responsibilities, Congress intended the “benefit of the doubt” to be given to the species (H.R. Conf. Rep. 96-697, 96 Cong., 1st sess. 1979).
The team acknowledges that TxDOT plans to train staff on its revised ESA handbook and standard operating procedures, and this may inform staff of this bias. Through interviews, the team learned that in certain Districts with sensitive habitats (i.e., karst) or the possibility of a species present (i.e., a salamander), ENV managers would review a project's information in addition to the District's and/or ENV biologists. This enhanced review process is currently limited only to two Districts and could be expanded to
The team reviewed one project where the scope described in the NEPA document differed from what was proposed to be implemented. A proposed added capacity project's description indicated a longer terminus compared to a schematic. The team could not determine whether the description or the schematic accurately reflected the project proposal.
A second reviewed project contained a description of the proposed project as the project's purpose instead of identifying a purpose that would accommodate more than one reasonable alternative. The team urges TxDOT to make reviewers aware of these challenges.
The team relied on information in ECOS, TxDOT's official file of record, to evaluate project documentation and records management practices. Many TxDOT toolkit and handbook procedures mention the requirement to store official documentation in ECOS. The ECOS is also a tool for storage and management of information records, as well as for disclosure within TxDOT District Offices. ECOS is how TxDOT identifies and procures information required to be disclosed to, and requested by, the public. ECOS is being upgraded, and there are four more phased upgrades planned over time. The most recent work includes incorporation of a revised scope development tool, Biological Evaluation (BE) form, and new way to electronically approve a CE determination form in lieu of paper. The TxDOT staff noted that ECOS is both adaptable and flexible.
A number of successful practices demonstrated by TxDOT were evident as a result of the documentation and records management review. The team learned that ECOS continues to improve in download speed and compatibility. The team learned through interviews with TxDOT staff members that ENV is changing the scope development tool within ECOS and that functionality will improve. Some staff indicated that they also utilized the scope development tool to develop their own checklists to ensure that all environmental requirements have been met prior to making a NEPA approval.
The team's review included project files that were incomplete because of missing or incorrect CSJ references that would link the files to environmental review documentation. TxDOT has indicated that they are working to address this problem. In addition to the issue of database links, the team identified a project file that lacked a record of required public involvement required per TxDOT procedures. The team learned from interviews that ENV and District staff do not consistently include such documentation in ECOS. Also, one reviewed project file had outdated data for threatened and endangered species. The team urges TxDOT staff to rely upon up to date and complete data in making project decisions.
The team identified one project file where total project costs were not presented in the project documentation and EA documents were added after the FONSI was signed. The added EA documentation was editorial in nature. The team urges TxDOT to ensure the project file contains supportive documentation. Material that was not considered as part of the NEPA decision, and that was dated after the NEPA approval should not be included in a project's file.
The team found a project file that had conflicting information about a detour. The review form indicated that no detour was proposed, but letters to a county agency said that a road would be closed, which would require addressing the need for a detour. Our review was unable to confirm the detour or whether the impact road closure was considered.
The team observed some continued successful practices from previous audits in (QA/QC). These successful practices include the use of established checklists, certifications, NEPA Chats, and the CORE Team concept (items described in previous audit reports). The TxDOT District Office environmental staff continue to do peer reviews of environmental decisions to double check the quality and accuracy of documentation. The Environmental Affairs Division has established a post-NEPA review team (performance review team) that was briefly mentioned in the Self-Assessment report to FHWA. Through our interviews, we learned that the team reaches out to ENVs own Section Directors and subject matter experts, in addition to District environmental staff, regarding their observations to improve the quality of documentation in future NEPA decisions. The FHWA team observed increased evidence in ECOS of documentation of collaboration illustrating the efforts to improve document quality and accuracy.
Based on project file reviews, the team found errors and omissions that should have been identified and addressed through TxDOT quality control. Also, TxDOT's certified monthly list of project decisions contained errors, some of which were recurring.
During this review period, the team was informed that TxDOT's approach to QA/QC had changed since the previous audit review. In audit #3, the team identified the Self-Assessment Branch (SAB) as a successful practice. TxDOT's response in the PAIR #4 indicated SAB was disbanded and ENV did not explain how its function would be replaced. Through interviews, the team learned that TxDOT had reorganized its SAB staff and modified its approach to QA/QC. This report identifies a higher number of observations that were either non-compliant or the result of missing or erroneous information compared to previous audits. The team could not assess the validity and relevance of TxDOT's self-assessment of QA/QC because TxDOT's methodology (sampling and timeframe) was not explained. Lastly, through interviews with District environmental staff, the team learned that they are unclear on how errors and omissions now identified by the new “performance review team” and ENV SMEs are to be resolved. The team urges TxDOT to evaluate its new approach to QA/QC with relevant and valid performance measures and to explain its approach to QA/QC to its staff.
Based on the interviews with two of the General Counsel Division (GCD) staff and documentation review, the requirements for legal sufficiency under the MOU continue to be adequately fulfilled.
There are five attorneys in TxDOT's GCD, with one serving as lead attorney. Additional assistance is provided by a consultant attorney who has delivered environmental legal assistance to ENV for several years and by an outside law firm. The contract for the outside law firm is currently going through a scheduled re-procurement. The GCD assistance continues to be guided by
GCD continues to serve as a resource to ENV and the Districts and is involved early in the development of large and complex projects. One example is the very large Houston District IH 45 project around downtown Houston with an estimated cost of $4.5 billion. The GCD lead attorney has been involved in the project and participated in the project's public hearing. GCD participates in the monthly NEPA chats and recently provided informal training during the chat on project scoping, logical termini, and independent utility.
According to TxDOT's response to FHWA's PAIR #4, GCD staff has reviewed or been involved in legal review for eight projects. The ENV project delivery managers make requests for review of a document or assistance to the lead attorney, who then assigns that project to an attorney for legal review. Attorney comments are provided in the standard comment response matrix back to ENV and are reviewed by the lead attorney. All comments must be satisfactorily addressed for GCD to complete its legal sufficiency determination. The GCD does not issue conditional legal sufficiency determinations. Legal sufficiency is documented by email to ENV.
A notable effort by GCD, in the last year, were the two lawsuits on TxDOT issued Federal environmental FONSI decision on the MOPAC intersections, the ongoing environmental process on the widening of south MOPAC, and State environmental decision on SH 45 SW. The lawsuit advanced only the Federal environmental decision on the MOPAC intersections. GCD worked first to develop the administrative record, having the numerous consultant and TxDOT staff provide documentation of their involvement on the MOPAC intersections project. Staff from GCD, Attorney General, and outside counsel then developed the voluminous record, which is their first since assuming NEPA responsibilities. The initial request by the plaintiffs for a preliminary injunction on the project was denied in Federal court, and, since a hearing on the merits was held later, they are awaiting the judge's decision. The FHWA and DOJ were notified, as appropriate, of the notices of pleadings through the court's PACE database.
ENV involves GCD early on projects and issues in need of their attention and expertise. Based on our discussions, GCD continues to be involved with the Districts and ENV throughout the NEPA project development process, when needed, and addresses legal issues, as appropriate. Based on interview responses, observation, and the comments above, TxDOT's approach to legal sufficiency is adequate.
TxDOT states in their self-assessment summary report that they achieved acceptable performance goals for all five performance-based performance metrics with the remaining seven performance goals remaining, consistent with the March 2016 self-assessment. The TxDOT continues to devote a high level of effort to develop the metrics to measure performance. During this audit, the team learned through interviews that the methodology employed to assess QA/QC performance had been revamped to the point that the results do not appear to be comparable with measures from previous years.
As part of TxDOT's response to the PAIR #4, TxDOT provided an alternate performance metric for EA timeframes that analyzed the distribution of EA durations for projects initiated and completed prior to assignment, initiated prior to assignment but completed after assignment, and ones initiated and completed after assignment. This creative approach identified both improved and diminished performance in EA timeframes for projects initiated before assignment but completed after assignment. TxDOT reports in their response to the PAIR #4 that, at a 95 percent confidence interval, comparing completion times for EA projects before and after assignment, the post-assignment median timeframe for completion is faster after assignment.
The team noted through interviews of TxDOT District Office staff that many were unaware of TxDOT performance measures and their results. We encourage TxDOT environmental leadership to make these results available to their staff, if only as a means of feedback on performance. Overall, these measures are a positive reflection of actions taken by TxDOT staff, and sharing changes in performance measures may lead to improved performance.
As mentioned above, the team learned that TxDOT's QA/QC methodology changed from that utilized since the previous audit. Previously, the measure reported the percent of project files determined to be complete and accurate, but included information on substantive errors made across different documents. Now the measure is limited only to the percent of project files determined to be complete that relies upon new yes/no/NA response questions whose result lacks an evaluation of the substantial-ness of errors of accuracy or completion. The team urges TxDOT to continue to analyze the information they are already collecting on the completeness and accuracy of project files as means of implementing information that usually leads to continuous improvement.
Since the period of the previous audit, TxDOT has revamped its on-line training program, as training courses content were out of date. Training continues to be offered to TxDOT staff informally through NEPA chats as well as through in-person instructor training. All of the training information for any individual TxDOT District staff environmental professional can be found on a TxDOT sharepoint site and is monitored by the training coordinator (especially the qualifications in the Texas Administrative Code). This makes it much more straightforward for third parties (including FHWA) to assess the District staff competency and exposure to training. Since Audit #3 TxDOT has increased the number of hours of training that staff are required to have to maintain environmental certification from 16 to 32 hours. Based on interviews, we learned that some individuals had far exceeded the minimal number of training hours required. We learned that training hours could be earned by participating in the environmental conference, but with a stipulation that other sources of training would be required.
The team recognizes the following successful training practices. We learned from interviews that two TxDOT District Offices conduct annual training events for staff of local governments as a means to help them develop their own projects. This training identifies the TxDOT expectations for successful project development, including environmental review.
Another successful practice we learned from interviews, and reported
Finally, the team would like to acknowledge that TxDOT has recognized and taken advantage of cross training that is a successful practice. The TxDOT ENV strategic planning coordinator informed us in an interview that he co-taught a class on planning consistency by adding an environmental component. The team taught how the planning issues relate to environmental review and compliance 5 or 6 times throughout the State. The ENV strategic planning coordinator is now working with the local government division to add an environment module to the Local Project Assistance (LPA) class with specific discussion of environmental reviews (adding information on how to work with ENV at TxDOT, or how to find consultants who are approved to do work for TxDOT).
The team learned through interviews the value and importance of NEPA chats for informing ENV staff when there are changes in procedures, guidance, or policy. For example, when the handbook for compliance with ESA was first completed, it was the subject of a NEPA chat. The team is aware of recent changes TxDOT made to the handbook related to a non-compliance related to ESA compliance. Based on information gained from interviews, the team learned that the changes to the ESA SOP/handbook were not followed by a NEPA chat. As a result, we confirmed that most of the TxDOT Biology SMEs were unaware of the handbook changes. The team appreciates that TxDOT has revised its ESA handbook and urges staff to implement training or other outreach to inform TxDOT staff of these revisions.
The Fixing America's Transportation (FAST) Act included several new statutory requirements for the environmental review process, as well as other changes that change NEPA procedures and requirements. The FHWA's Office of Project Development and Environmental Review has released some guidance on how to implement these requirements and anticipates releasing additional information. Even though additional information on these changes is forthcoming, States under NEPA assignment are required to implement these changes. The team learned through TxDOT's PAIR #4, and through interviews, that TxDOT has neither developed nor delivered training to its staff concerning new requirements for the FAST Act for environmental review. In response to this observation, TxDOT is currently collaborating with FHWA to develop a presentation on this topic for its annual environmental conference.
Department of Veterans Affairs.
Notice.
This Department of Veterans Affairs (VA) notice updates the data for calculating the “Reasonable Charges” collected or recovered by VA for medical care or services. This notice also updates the “National Average Administrative Prescription Costs” for purposes of calculating VA's charges for prescription drugs that were not administered during treatment, but provided or furnished by VA to a veteran.
Romona Greene, Office of Community Care, Revenue Operations, Payer Relations and Services, Rates and Charges (10D1C1), Veterans Health Administration (VHA), Department of Veterans Affairs, 810 Vermont Avenue NW, Washington, DC 20420, (202) 382-2521. (This is not a toll free number).
Section 17.101 of Title 38 of the Code of Federal Regulations sets forth the “Reasonable Charges” for medical care or services provided or furnished by VA to a veteran: “For a nonservice-connected disability for which the veteran is entitled to care (or the payment of expenses for care) under a health plan contract; For a nonservice-connected disability incurred incident to the veteran's employment and covered under a worker's compensation law or plan that provides reimbursement or indemnification for such care and services; or For a nonservice-connected disability incurred as a result of a motor vehicle accident in a State that requires automobile accident reparations insurance.” Section 17.101 provides the methodologies for establishing billed amounts for several types of charges; however, this notice will only address partial hospitalization facility charges; outpatient facility charges; physician and other professional charges, including professional charges for anesthesia services and dental services; pathology and laboratory charges; observation care facility charges; ambulance and other emergency transportation charges; and charges for durable medical equipment, drugs, injectables, and other medical services, items, and supplies identified by Healthcare Common Procedure Coding System (HCPCS) Level II codes.
Section 17.101 provides that the actual charge amounts at individual VA medical facilities based on these methodologies and the data sources used for calculating those actual charge amounts will either be published as a notice in the
Certain charges are hereby updated as stated in this notice and will be effective on January 1, 2018.
In cases where VA has not established charges for medical care or services provided or furnished at VA expense (by either VA or non-VA providers) under other provisions or regulations, the method for determining VA's charges is set forth at 38 CFR 17.101(a)(8).
Based on the methodologies set forth in § 17.101, this notice provides an update to charges for 2018 HCPCS Level II and Current Procedural Terminology (CPT) codes. Charges are also being updated based on more recent versions of data sources for the following charge types: partial hospitalization facility charges; outpatient facility charges; physician and other professional charges, including professional charges for anesthesia services and dental services; pathology and laboratory charges; observation care facility charges; ambulance and other emergency transportation charges; and charges for durable medical equipment, drugs, injectables, and other medical services, items, and supplies identified by HCPCS Level II codes. As of the date of this notice, the actual charge amounts at individual VA medical facilities based on the methodologies in § 17.101 will be posted on the VHA Office of Community Care's website at
The list of data sources used for calculating the actual charge amounts listed above also will be posted on the VHA Office of Community Care's website under the heading “Reasonable Charges Data Sources” and identified as “Reasonable Charges v3.23 Data Sources (Outpatient and Professional) (PDF).”
Acute inpatient facility charges and skilled nursing facility/sub-acute inpatient facility charges remain the same as set forth in the notice published in the
We are also updating the list of VA medical facility locations. The list of VA medical facility locations, including the first three digits of their zip codes as well as provider-based/non-provider-based designations, will be posted on the VHA Office of Community Care's website under the heading “VA Medical Facility Locations” and identified as “v3.23 (Jan18).”
As indicated in 38 CFR 17.101(m), when VA provides or furnishes prescription drugs not administered during treatment, “charges billed separately for such prescription drugs will consist of the amount that equals the total of the actual cost to VA for the drugs and the national average of VA administrative costs associated with dispensing the drugs for each prescription.” Section 17.101(m) includes the methodology for calculating the national average administrative cost for prescription drug charges not administered during treatment.
VA determines the amount of the national average administrative cost annually for the prior fiscal year (October through September) and then applies the charge at the start of the next calendar year. The national average administrative drug cost for calendar year 2018 is $16.64. This change will be posted on the VHA Office of Community Care's website at
Consistent with § 17.101, the national average administrative cost, the updated data, and supplementary tables containing the changes described in this notice will be posted online, as indicated in this notice. This notice will be posted on the VHA Office of Community Care's website under the heading “
The Secretary of Veterans Affairs, or designee, approved this document and authorized the undersigned to sign and submit the document to the Office of the Federal Register for publication electronically as an official document of the Department of Veterans Affairs. Gina S. Farrisee, Deputy Chief of Staff, Department of Veterans Affairs,
Rule document 2017-23932 was originally published on pages 52356 through 52637 in the issue of Monday, November 13, 2017. In that publication, a section of the document was omitted due to a printing error. The corrected document is published here in its entirety.
Centers for Medicare & Medicaid Services (CMS), HHS.
Final rule with comment period.
This final rule with comment period revises the Medicare hospital outpatient prospective payment system (OPPS) and the Medicare ambulatory surgical center (ASC) payment system for CY 2018 to implement changes arising from our continuing experience with these systems. In this final rule with comment period, we describe the changes to the amounts and factors used to determine the payment rates for Medicare services paid under the OPPS and those paid under the ASC payment system. In addition, this final rule with comment period updates and refines the requirements for the Hospital Outpatient Quality Reporting (OQR) Program and the ASC Quality Reporting (ASCQR) Program.
In commenting, please refer to file code CMS-1678-FC when commenting on the issues in this proposed rule. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.
You may submit comments in one of four ways (no duplicates, please):
1.
2.
Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1678-FC, P.O. Box 8013, Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received before the close of the comment period.
3.
Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1678-FC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4.
a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.
(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)
b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address, please call the telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.
Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.
For information on viewing public comments, we refer readers to the beginning of the
(We note that public comments must be submitted through one of the four channels outlined in the
Advisory Panel on Hospital Outpatient Payment (HOP Panel), contact the HOP Panel mailbox at
Ambulatory Surgical Center (ASC) Payment System, contact Elisabeth Daniel via email
Ambulatory Surgical Center Quality Reporting (ASCQR) Program Administration, Validation, and Reconsideration Issues, contact Anita Bhatia via email
Ambulatory Surgical Center Quality Reporting (ASCQR) Program Measures, contact Vinitha Meyyur via email
Blood and Blood Products, contact Josh McFeeters via email
Cancer Hospital Payments, contact Scott Talaga via email
Care Management Services, contact Scott Talaga via email
CPT Codes, contact Marjorie Baldo via email
CMS Web Posting of the OPPS and ASC Payment Files, contact Chuck Braver via email
Composite APCs (Low Dose Brachytherapy and Multiple Imaging), contact Twi Jackson via email
Comprehensive APCs (C-APCs), contact Lela Strong via email
Hospital Outpatient Quality Reporting (OQR) Program Administration, Validation, and Reconsideration Issues, contact Anita Bhatia via email
Hospital Outpatient Quality Reporting (OQR) Program Measures, contact Vinitha Meyyur via email
Hospital Outpatient Visits (Emergency Department Visits and Critical Care Visits), contact Twi Jackson via email
Inpatient Only (IPO) Procedures List, contact Lela Strong via email
New Technology Intraocular Lenses (NTIOLs), contact Scott Talaga via email
No Cost/Full Credit and Partial Credit Devices, contact Twi Jackson via email
OPPS Brachytherapy, contact Scott Talaga via email
OPPS Data (APC Weights, Conversion Factor, Copayments, Cost-to-Charge Ratios
OPPS Drugs, Radiopharmaceuticals, Biologicals, and Biosimilar Products, contact Elisabeth Daniel via email
OPPS New Technology Procedures/Services, contact the New Technology APC email at
OPPS Exceptions to the 2 Times Rule, contact Marjorie Baldo via email
OPPS Packaged Items/Services, contact Elisabeth Daniel via email
OPPS Pass-Through Devices, contact the Device Pass-Through email at
OPPS Status Indicators (SI) and Comment Indicators (CI), contact Marina Kushnirova via email
Partial Hospitalization Program (PHP) and Community Mental Health Center (CMHC) Issues, contact the PHP Payment Policy Mailbox at
Revisions to the Laboratory Date of Service Policy, contact Craig Dobyski via email
Rural Hospital Payments, contact Josh McFeeters via email
Skin Substitutes, contact Josh McFeeters via email
All Other Issues Related to Hospital Outpatient and Ambulatory Surgical Center Payments Not Previously Identified, contact Lela Strong via email
Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of the rule, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244, on Monday through Friday of each week from 8:30 a.m. to 4 p.m. EST. To schedule an appointment to view public comments, phone 1-800-743-3951.
This
In the past, a majority of the Addenda referred to in our OPPS/ASC proposed and final rules were published in the
In this final rule with comment period, we are updating the payment
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We are continuing to implement the statutory 2.0 percentage point reduction in payments for hospitals failing to meet the hospital outpatient quality reporting requirements, by applying a reporting factor of 0.980 to the OPPS payments and copayments for all applicable services.
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In sections XVIII. and XIX. of this final rule with comment period, we set forth a detailed analysis of the regulatory and Federalism impacts that the changes will have on affected entities and beneficiaries. Key estimated impacts are described below.
Table 88 in section XVIII. of this final rule with comment period displays the distributional impact of all the OPPS changes on various groups of hospitals and CMHCs for CY 2018 compared to all estimated OPPS payments in CY 2017. We estimate that policies in this final rule with comment period will result in a 1.4 percent overall increase in OPPS payments to providers. We estimate that total OPPS payments for CY 2018, including beneficiary cost-sharing, to the approximate 3,900 facilities paid under the OPPS (including general acute care hospitals, children's hospitals, cancer hospitals, and CMHCs) will increase by approximately $690 million compared to CY 2017 payments, excluding our estimated changes in enrollment, utilization, and case-mix.
We estimated the isolated impact of our OPPS policies on CMHCs because CMHCs are only paid for partial hospitalization services under the OPPS. Continuing the provider-specific structure that we adopted beginning in CY 2011 and basing payment fully on the type of provider furnishing the service, we estimate a 17.2 percent increase in CY 2018 payments to CMHCs relative to their CY 2017 payments.
We estimate that our update of the wage indexes based on the FY 2018 IPPS final rule wage indexes results in no change for urban and rural hospitals under the OPPS. These wage indexes include the continued implementation of the OMB labor market area delineations based on 2010 Decennial Census data.
There are no significant impacts of our CY 2018 payment policies for hospitals that are eligible for the rural adjustment or for the cancer hospital payment adjustment. We are not making any change in policies for determining the rural hospital payment adjustments. While we are implementing the required reduction to the cancer hospital payment adjustment in Section 16002 of the 21st Century Cures Act for CY 2018, the adjustment amounts do not significantly impact the budget neutrality adjustments for these policies.
We estimate that, for most hospitals, the application of the OPD fee schedule increase factor of 1.35 percent to the conversion factor for CY 2018 will mitigate the impacts of the budget neutrality adjustments. As a result of the OPD fee schedule increase factor and other budget neutrality adjustments, we estimate that rural and urban hospitals will experience increases of approximately 1.3 percent for urban hospitals and 2.7 percent for rural hospitals. Classifying hospitals by teaching status, we estimate non-teaching hospitals will experience increases of 2.9 percent, minor teaching hospitals will experience increases of 1.7 percent, and major teaching hospitals will experience decreases of −0.9 percent. We also classified hospitals by type of ownership. We estimate that hospitals with voluntary ownership will experience increases of 1.3 percent, hospitals with proprietary ownership will experience increases of 4.5 percent and hospitals with government ownership will experience no change in payments.
For impact purposes, the surgical procedures on the ASC list of covered procedures are aggregated into surgical specialty groups using CPT and HCPCS code range definitions. The percentage change in estimated total payments by specialty groups under the CY 2018 payment rates, compared to estimated CY 2017 payment rates, generally ranges between an increase of 1 to 5 percent, depending on the service, with some exceptions.
When Title XVIII of the Social Security Act was enacted, Medicare payment for hospital outpatient services was based on hospital-specific costs. In an effort to ensure that Medicare and its beneficiaries pay appropriately for services and to encourage more efficient delivery of care, the Congress mandated replacement of the reasonable cost-
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) made major changes in the hospital OPPS. The following Acts made additional changes to the OPPS: The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554); the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173); the Deficit Reduction Act of 2005 (DRA) (Pub. L. 109-171), enacted on February 8, 2006; the Medicare Improvements and Extension Act under Division B of Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA) (Pub. L. 109-432), enacted on December 20, 2006; the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) (Pub. L. 110-173), enacted on December 29, 2007; the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) (Pub. L. 110-275), enacted on July 15, 2008; the Patient Protection and Affordable Care Act (Pub. L. 111-148), enacted on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 2010 (these two public laws are collectively known as the Affordable Care Act); the Medicare and Medicaid Extenders Act of 2010 (MMEA, Pub. L. 111-309); the Temporary Payroll Tax Cut Continuation Act of 2011 (TPTCCA, Pub. L. 112-78), enacted on December 23, 2011; the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA, Pub. L. 112-96), enacted on February 22, 2012; the American Taxpayer Relief Act of 2012 (Pub. L. 112-240), enacted January 2, 2013; the Pathway for SGR Reform Act of 2013 (Pub. L. 113-67) enacted on December 26, 2013; the Protecting Access to Medicare Act of 2014 (PAMA, Pub. L. 113-93), enacted on March 27, 2014; the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 (Pub. L. 114-10), enacted April 16, 2015; the Bipartisan Budget Act of 2015 (Pub. L. 114-74), enacted November 2, 2015; the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), enacted on December 18, 2015, and the 21st Century Cures Act (Pub. L. 114-255), enacted on December 13, 2016.
Under the OPPS, we generally pay for hospital Part B services on a rate-per-service basis that varies according to the APC group to which the service is assigned. We use the Healthcare Common Procedure Coding System (HCPCS) (which includes certain Current Procedural Terminology (CPT) codes) to identify and group the services within each APC. The OPPS includes payment for most hospital outpatient services, except those identified in section I.C. of this final rule with comment period. Section 1833(t)(1)(B) of the Act provides for payment under the OPPS for hospital outpatient services designated by the Secretary (which includes partial hospitalization services furnished by CMHCs), and certain inpatient hospital services that are paid under Medicare Part B.
The OPPS rate is an unadjusted national payment amount that includes the Medicare payment and the beneficiary copayment. This rate is divided into a labor-related amount and a nonlabor-related amount. The labor-related amount is adjusted for area wage differences using the hospital inpatient wage index value for the locality in which the hospital or CMHC is located.
All services and items within an APC group are comparable clinically and with respect to resource use (section 1833(t)(2)(B) of the Act). In accordance with section 1833(t)(2) of the Act, subject to certain exceptions, items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median cost (or mean cost, if elected by the Secretary) for an item or service in the APC group is more than 2 times greater than the lowest median cost (or mean cost, if elected by the Secretary) for an item or service within the same APC group (referred to as the “2 times rule”). In implementing this provision, we generally use the cost of the item or service assigned to an APC group.
For new technology items and services, special payments under the OPPS may be made in one of two ways. Section 1833(t)(6) of the Act provides for temporary additional payments, which we refer to as “transitional pass-through payments,” for at least 2 but not more than 3 years for certain drugs, biological agents, brachytherapy devices used for the treatment of cancer, and categories of other medical devices. For new technology services that are not eligible for transitional pass-through payments, and for which we lack sufficient clinical information and cost data to appropriately assign them to a clinical APC group, we have established special APC groups based on costs, which we refer to as New Technology APCs. These New Technology APCs are designated by cost bands which allow us to provide appropriate and consistent payment for designated new procedures that are not yet reflected in our claims data. Similar to pass-through payments, an assignment to a New Technology APC is temporary; that is, we retain a service within a New Technology APC until we acquire sufficient data to assign it to a clinically appropriate APC group.
Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to designate the hospital outpatient services that are paid under the OPPS. While most hospital outpatient services are payable under the OPPS, section 1833(t)(1)(B)(iv) of the Act excludes payment for ambulance, physical and occupational therapy, and speech-language pathology services, for which payment is made under a fee schedule. It also excludes screening mammography, diagnostic mammography, and effective January 1, 2011, an annual wellness visit providing personalized prevention plan services. The Secretary exercises the authority granted under the statute to also exclude from the OPPS certain services that are paid under fee schedules or other payment systems. Such excluded services include, for example, the professional services of physicians and nonphysician practitioners paid under the Medicare Physician Fee Schedule (MPFS); certain laboratory services paid under the Clinical Laboratory Fee Schedule (CLFS); services for beneficiaries with end-stage renal disease (ESRD) that are paid under the ESRD prospective payment system; and services and procedures that require an inpatient stay that are paid under the hospital IPPS. In addition, section 1833(t)(1)(B)(v) of the Act does not include applicable items and services (as defined in subparagraph (A) of paragraph (21)) that are furnished on or after January 1, 2017 by an off-campus outpatient department of a provider (as defined in subparagraph (B) of paragraph (21). We set forth the services that are excluded from payment under the OPPS in regulations at 42 CFR 419.22.
Under § 419.20(b) of the regulations, we specify the types of hospitals that are excluded from payment under the OPPS. These excluded hospitals include:
• Critical access hospitals (CAHs);
• Hospitals located in Maryland and paid under the Maryland All-Payer Model;
• Hospitals located outside of the 50 States, the District of Columbia, and Puerto Rico; and
• Indian Health Service (IHS) hospitals.
On April 7, 2000, we published in the
Since initially implementing the OPPS, we have published final rules in the
Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of Public Law 106-113, and redesignated by section 202(a)(2) of Public Law 106-113, requires that we consult with an external advisory panel of experts to annually review the clinical integrity of the payment groups and their weights under the OPPS. In CY 2000, based on section 1833(t)(9)(A) of the Act, the Secretary established the Advisory Panel on Ambulatory Payment Classification Groups (APC Panel) to fulfill this requirement. In CY 2011, based on section 222 of the PHS Act which gives discretionary authority to the Secretary to convene advisory councils and committees, the Secretary expanded the panel's scope to include the supervision of hospital outpatient therapeutic services in addition to the APC groups and weights. To reflect this new role of the panel, the Secretary changed the panel's name to the Advisory Panel on Hospital Outpatient Payment (the HOP Panel or the Panel). The HOP Panel is not restricted to using data compiled by CMS, and in conducting its review, it may use data collected or developed by organizations outside the Department.
On November 21, 2000, the Secretary signed the initial charter establishing the Panel, and at that time named the APC Panel. This expert panel is composed of appropriate representatives of providers (currently employed full-time, not as consultants, in their respective areas of expertise), reviews clinical data, and advises CMS about the clinical integrity of the APC groups and their payment weights. Since CY 2012, the Panel also is charged with advising the Secretary on the appropriate level of supervision for individual hospital outpatient therapeutic services. The Panel is technical in nature, and it is governed by the provisions of the Federal Advisory Committee Act (FACA). The current charter specifies, among other requirements, that the Panel—
• May advise on the clinical integrity of Ambulatory Payment Classification (APC) groups and their associated weights;
• May advise on the appropriate supervision level for hospital outpatient services;
• Continues to be technical in nature;
• Is governed by the provisions of the FACA;
• Has a Designated Federal Official (DFO); and
• Is chaired by a Federal Official designated by the Secretary.
The Panel's charter was amended on November 15, 2011, renaming the Panel and expanding the Panel's authority to include supervision of hospital outpatient therapeutic services and to add critical access hospital (CAH) representation to its membership. The Panel's charter was also amended on November 6, 2014 (80 FR 23009), and the number of members was revised from up to 19 to up to 15 members. The Panel's current charter was approved on November 21, 2016, for a 2-year period (81 FR 94378).
The current Panel membership and other information pertaining to the Panel, including its charter,
The Panel has held multiple meetings, with the last meeting taking place on August 21, 2017. Prior to each meeting, we publish a notice in the
In addition, the Panel has established an operational structure that, in part, currently includes the use of three subcommittees to facilitate its required review process. The three current subcommittees include the following:
• APC Groups and Status Indicator Assignments Subcommittee, which advises the Panel on the appropriate status indicators to be assigned to HCPCS codes, including but not limited to whether a HCPCS code or a category of codes should be packaged or separately paid, as well as the appropriate APC assignment of HCPCS codes regarding services for which separate payment is made;
• Data Subcommittee, which is responsible for studying the data issues confronting the Panel and for recommending options for resolving them; and
• Visits and Observation Subcommittee, which reviews and makes recommendations to the Panel on all technical issues pertaining to observation services and hospital outpatient visits paid under the OPPS.
Each of these subcommittees was established by a majority vote from the full Panel during a scheduled Panel meeting, and the Panel recommended at the August 21, 2017 meeting that the subcommittees continue. We accepted this recommendation.
In addition, discussions of the other recommendations made by the Panel at the August 21, 2017 Panel meeting are included in the sections of this final rule with comment period that are specific to each recommendation. For discussions of earlier Panel meetings and recommendations, we refer readers to previously published OPPS/ASC proposed and final rules, the CMS Web site mentioned earlier in this section, and the FACA database at
We note that we received some public comments on the CY 2018 OPPS/ASC proposed rule related to the HOP Panel meeting presentations, which we address below.
We received 39 timely pieces of correspondence on the CY 2017 OPPS/ASC final rule with comment period that appeared in the
Section 1833(t)(9)(A) of the Act requires that the Secretary review not less often than annually and revise the relative payment weights for APCs. In the April 7, 2000 OPPS final rule with comment period (65 FR 18482), we explained in detail how we calculated the relative payment weights that were implemented on August 1, 2000 for each APC group.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33568), for CY 2018, we proposed to recalibrate the APC relative payment weights for services furnished on or after January 1, 2018, and before January 1, 2019 (CY 2018), using the same basic methodology that we described in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79574 through 79595). For this final rule with comment period, for CY 2018, we recalibrated the APC relative payment weights for services furnished on or after January 1, 2018, and before January 1, 2019 (CY 2018), using the same basic methodology that we described in the CY 2017 OPPS/ASC final rule with comment period, using updated CY 2016 claims data. That is, we recalibrate the relative payment weights for each APC based on claims and cost report data for hospital outpatient department (HOPD) services, using the most recent available data to construct a database for calculating APC group weights.
For the purpose of recalibrating the APC relative payment weights for CY 2018, we began with approximately 163 million final action claims (claims for which all disputes and adjustments have been resolved and payment has been made) for HOPD services furnished on or after January 1, 2016, and before January 1, 2017, before applying our exclusionary criteria and other methodological adjustments. After the application of those data processing changes, we used approximately 86 million final action claims to develop the CY 2018 OPPS payment weights. For exact numbers of claims used and additional details on the claims accounting process, we refer readers to the claims accounting narrative under supporting documentation for this CY 2018 OPPS/ASC final rule with comment period on the CMS Web site at:
Addendum N to this final rule with comment period (which is available via the Internet on the CMS Web site) includes the list of bypass codes for CY 2018. The list of bypass codes contains codes that were reported on claims for services in CY 2016 and, therefore, includes codes that were in effect in CY 2016 and used for billing, but were deleted for CY 2017. We retained these deleted bypass codes on the CY 2018 bypass list because these codes existed in CY 2016 and were covered OPD services in that period, and CY 2016 claims data are used to calculate CY 2018 payment rates. Keeping these deleted bypass codes on the bypass list potentially allows us to create more “pseudo” single procedure claims for ratesetting purposes. “Overlap bypass codes” that are members of the multiple imaging composite APCs are identified by asterisks (*) in the third column of Addendum N to this final rule with comment period. HCPCS codes that we are adding for CY 2018 are identified by asterisks (*) in the fourth column of Addendum N.
Table 1 below contains the list of codes that we are removing from the CY 2018 bypass list.
For CY 2018, in this CY 2018 OPPS/ASC final rule with comment period, as we proposed, we are continuing to use the hospital-specific overall ancillary and departmental cost-to-charge ratios (CCRs) to convert charges to estimated costs through application of a revenue code-to-cost center crosswalk. To calculate the APC costs on which the CY 2018 APC payment rates are based, we calculated hospital-specific overall ancillary CCRs and hospital-specific departmental CCRs for each hospital for which we had CY 2016 claims data by comparing these claims data to the most recently available hospital cost reports, which, in most cases, are from CY 2015. For the final CY 2018 OPPS payment rates, we used the set of claims processed during CY 2016. We applied the hospital-specific CCR to the hospital's charges at the most detailed level possible, based on a revenue code-to-cost center crosswalk that contains a hierarchy of CCRs used to estimate costs from charges for each revenue code. That crosswalk is available for review and continuous comment on the CMS Web site at:
To ensure the completeness of the revenue code-to-cost center crosswalk, we reviewed changes to the list of revenue codes for CY 2016 (the year of claims data we used to calculate the CY 2018 OPPS payment rates) and found that the National Uniform Billing Committee (NUBC) did not add any new revenue codes to the NUBC 2016 Data Specifications Manual.
In accordance with our longstanding policy, we calculate CCRs for the standard and nonstandard cost centers accepted by the electronic cost report database. In general, the most detailed level at which we calculate CCRs is the hospital-specific departmental level. For a discussion of the hospital-specific overall ancillary CCR calculation, we refer readers to the CY 2007 OPPS/ASC final rule with comment period (71 FR 67983 through 67985). The calculation of blood costs is a longstanding exception (since the CY 2005 OPPS) to this general methodology for calculation of CCRs used for converting charges to costs on each claim. This exception is discussed in detail in the CY 2007 OPPS/ASC final rule with comment period and discussed further in section II.A.2.a.(1) of this final rule with comment period.
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 74840 through 74847), we finalized our policy of creating new cost centers and distinct CCRs for implantable devices, MRIs, CT scans, and cardiac catheterization. However, in response to the CY 2014 OPPS/ASC proposed rule, commenters reported that some hospitals currently use an imprecise “square feet” allocation methodology for the costs of large moveable equipment like CT scan and MRI machines. They indicated that while CMS recommended using two alternative allocation methods, “direct assignment” or “dollar value,” as a more accurate methodology for directly assigning equipment costs, industry analysis suggested that approximately only half of the reported cost centers for CT scans and MRIs rely on these preferred methodologies. In response to concerns from commenters, we finalized a policy for the CY 2014 OPPS to remove claims from providers that use a cost allocation method of “square feet” to calculate CCRs used to estimate costs associated with the CT and MRI APCs (78 FR 74847). Further, we finalized a transitional policy to estimate imaging APC relative payment weights using only CT and MRI cost data from providers that do not use “square feet” as the cost allocation statistic. We provided that this finalized policy would sunset in 4 years to provide a sufficient time for hospitals to transition to a more accurate cost allocation method and for the related data to be available for ratesetting purposes (78 FR 74847). Therefore, beginning CY 2018, with the sunset of the transition policy, we will estimate the imaging APC relative payment weight using cost data from all providers, regardless of the cost allocation statistic employed.
As we discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33570), some stakeholders have raised concerns regarding using claims from all providers to calculate CT and MRI CCRs, regardless of the cost allocations statistic employed (78 FR 74840 through 74847). Stakeholders noted that providers continue to use the “square feet” cost allocation method and that including claims from such providers would cause significant reductions in imaging APC payment rates.
Table 2 below demonstrates the relative effect on imaging APC payments after removing cost data for providers that report CT and MRI standard cost centers using “square feet” as the cost allocation method by extracting HCRIS data on Worksheet B-1. Table 3 below provides statistical values based on the CT and MRI standard cost center CCRs using the different cost allocation methods.
Our analysis showed that since the CY 2014 OPPS in which we established the transition policy, the number of valid MRI CCRs has increased by 17.5 percent to 2,177 providers and the number of valid CT CCRs has increased by 15.1 percent to 2,251 providers. However, in the proposed rule, we noted that, as shown in Table 2 above, nearly all imaging APCs would see an increase in payment rates for CY 2018 if claims from providers that report “square feet” cost allocation method were removed. This can be attributed to the generally lower CCR values from providers that use a cost allocation method of “square feet” as shown in Table 3 above. We stated in the proposed rule that we believe that the imaging CCRs that we have are appropriate for ratesetting. However, in response to provider concerns and to provide added flexibility for hospitals to improve their cost allocation methods, we proposed to extend the transition policy an additional year, for the CY 2018 OPPS.
For the CY 2018 OPPS, we proposed to continue to remove claims from providers that use a cost allocation method of “square feet” to calculate CCRs used to estimate costs with the CT and MRI APCs identified in Table 2 above. Beginning in CY 2019, we would estimate the imaging APC relative payment weights using cost data from all providers, regardless of the cost allocation statistic employed.
After consideration of the public comments we received, we are finalizing our proposal to extend our transition policy for 1 additional year and continue to remove claims from providers that use a cost allocation method of “square feet” to calculate CT and MRI CCRs for the CY 2018 OPPS.
In this section of this final rule with comment period, we discuss the use of claims to calculate the OPPS payment rates for CY 2018. The Hospital OPPS page on the CMS Web site on which this final rule with comment period is posted (
In the history of the OPPS, we have traditionally established the scaled relative weights on which payments are based using APC median costs, which is a process described in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74188). However, as discussed in more detail in section II.A.2.f. of the CY 2013 OPPS/ASC final
We used the methodology described in sections II.A.2.a. through II.A.2.c. of this final rule with comment period to calculate the costs we used to establish the relative payment weights used in calculating the OPPS payment rates for CY 2018 shown in Addenda A and B to this final rule with comment period (which are available via the Internet on the CMS Web site). We refer readers to section II.A.4. of this final rule with comment period for a discussion of the conversion of APC costs to scaled payment weights.
For details of the claims process used in this final rule with comment period, we refer readers to the claims accounting narrative under supporting documentation for this CY 2018 OPPS/ASC final rule with comment period on the CMS Web site at:
Since the implementation of the OPPS in August 2000, we have made separate payments for blood and blood products through APCs rather than packaging payment for them into payments for the procedures with which they are administered. Hospital payments for the costs of blood and blood products, as well as for the costs of collecting, processing, and storing blood and blood products, are made through the OPPS payments for specific blood product APCs.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33571), we proposed to continue to establish payment rates for blood and blood products using our blood-specific CCR methodology, which utilizes actual or simulated CCRs from the most recently available hospital cost reports to convert hospital charges for blood and blood products to costs. This methodology has been our standard ratesetting methodology for blood and blood products since CY 2005. It was developed in response to data analysis indicating that there was a significant difference in CCRs for those hospitals with and without blood-specific cost centers, and past public comments indicating that the former OPPS policy of defaulting to the overall hospital CCR for hospitals not reporting a blood-specific cost center often resulted in an underestimation of the true hospital costs for blood and blood products. Specifically, in order to address the differences in CCRs and to better reflect hospitals' costs, we proposed to continue to simulate blood CCRs for each hospital that does not report a blood cost center by calculating the ratio of the blood-specific CCRs to hospitals' overall CCRs for those hospitals that do report costs and charges for blood cost centers. We also proposed to apply this mean ratio to the overall CCRs of hospitals not reporting costs and charges for blood cost centers on their cost reports in order to simulate blood-specific CCRs for those hospitals. We proposed to calculate the costs upon which the proposed CY 2018 payment rates for blood and blood products are based using the actual blood-specific CCR for hospitals that reported costs and charges for a blood cost center and a hospital-specific, simulated blood-specific CCR for hospitals that did not report costs and charges for a blood cost center.
We continue to believe that the hospital-specific, simulated blood-specific CCR methodology better responds to the absence of a blood-specific CCR for a hospital than alternative methodologies, such as defaulting to the overall hospital CCR or applying an average blood-specific CCR across hospitals. Because this methodology takes into account the unique charging and cost accounting structure of each hospital, we believe that it yields more accurate estimated costs for these products. We continue to believe that this methodology in CY 2018 would result in costs for blood and blood products that appropriately reflect the relative estimated costs of these products for hospitals without blood cost centers and, therefore, for these blood products in general.
We note that, as discussed in section II.A.2.e. of the CYs 2014 through 2017 OPPS/ASC final rules with comment period (78 FR 74861 through 74910, 79 FR 66798 through 66810, 80 FR 70325 through 70339, and 81 FR 79580 through 79585, respectively), we defined a comprehensive APC (C-APC) as a classification for the provision of a primary service and all adjunctive services provided to support the delivery of the primary service. Under this policy, we include the costs of blood and blood products when calculating the overall costs of these C-APCs. In the CY 2018 OPPS/ASC proposed rule (82 FR 33571), we proposed to continue to apply the blood-specific CCR methodology described in this section when calculating the costs of the blood and blood products that appear on claims with services assigned to the C-APCs. Because the costs of blood and blood products would be reflected in the overall costs of the C-APCs (and, as a result, in the proposed payment rates of the C-APCs), we proposed to not make separate payments for blood and blood products when they appear on the same claims as services assigned to the C-APCs (we refer readers to the CY 2015 OPPS/ASC final rule with comment period (79 FR 66796)).
We also referred readers to Addendum B to the proposed rule (which is available via the Internet on the CMS Web site) for the proposed CY 2018 payment rates for blood and blood products (which are identified with status indicator “R”). For a more detailed discussion of the blood-specific CCR methodology, we refer readers to the CY 2005 OPPS proposed rule (69 FR 50524 through 50525). For a full history of OPPS payment for blood and blood products, we refer readers to the CY 2008 OPPS/ASC final rule with comment period (72 FR 66807 through 66810).
We invited public comments on our proposals.
The commenters supported a thorough examination of the current set of HCPCS P-codes for blood products as a necessary undertaking because the HCPCS P-codes were created several years ago. Several commenters recommended that CMS convene a stakeholder group that includes representatives of hospitals, blood banks, the American Red Cross, and others to discuss a framework to systematically review and revise the HCPCS P-codes for blood products. Commenters also suggested that CMS establish a “not otherwise classified (NOC)” code for blood products, which would allow hospitals to begin immediately billing for a new blood product that is not described by a specific HCPCS P-code. One commenter supported the use of broader descriptions for HCPCS P-codes when more granular language is no longer meaningful for differentiating between different types of blood and blood products, and where the costs and volume of the HCPCS P-codes are similar. Other commenters suggested specific modifications to the order, classification, and code descriptors of the blood and blood product HCPCS P-codes.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to establish payment rates for blood and blood products using our blood-specific CCR methodology. Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site) contains the final CY 2018 payment rates for blood and blood products (which are identified with status indicator “R”).
In March 2016, the Food and Drug Administration (FDA) issued draft guidance for blood collection establishments and transfusion services entitled “Bacterial Risk Control Strategies for Blood Collection Establishments and Transfusion Services to Enhance the Safety and Availability of Platelets for Transfusion” (available at:
In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70322), we established HCPCS code P9072 (Platelets, pheresis, pathogen reduced, each unit). The CMS HCPCS Workgroup later revised HCPCS code P9072 to include the use of pathogen-reduction technology or rapid bacterial testing. Specifically, the descriptor for this code was revised, effective January 1, 2017, to read as follows: HCPCS code P9072 (Platelets, pheresis, pathogen reduced or rapid bacterial tested, each unit). The payment rate for HCPCS code P9072 is based on a crosswalk to HCPCS code P9037 (Platelets, pheresis, leukocyte reduced, irradiated, each unit). We refer readers to the CY 2016 OPPS/ASC final rule with comment period for a further discussion of crosswalks for pathogen-reduced blood products (80 FR 70323).
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33571 and 33572), after the release of the CY 2017 OPPS/ASC final rule with comment period, several blood and blood product stakeholders expressed concerns about the revised code descriptor for HCPCS code P9072. The stakeholders believed that the revision to HCPCS code P9072 to describe both pathogen reduction and rapid bacterial testing was an inappropriate code descriptor. They stated that separate coding is needed to describe each service because each service is distinct. The stakeholders also noted that the code descriptor for
After review of the concerns expressed by the blood and blood product stakeholders, the CMS HCPCS Workgroup deactivated HCPCS code P9072 for Medicare reporting and replaced the code with two new HCPCS codes effective July 1, 2017. Specifically, effective July 1, 2017, HCPCS code Q9988 (Platelets, pheresis, pathogen reduced, each unit) is used to report the use of pathogen-reduction technology and HCPCS code Q9987 (Pathogen(s) test for platelets) is used to report rapid bacterial testing or other pathogen tests for platelets, instead of HCPCS code P9072. We note that HCPCS code Q9987 should be reported to describe the test used for the detection of bacterial contamination in platelets as well as any other test that may be used to detect pathogen contamination. HCPCS code Q9987 should not be used for reporting donation testing for infectious agents such as viruses. The coding changes associated with these codes were published on the CMS HCPCS Quarterly Update Web site, effective July 2017, at:
In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70322 through 70323), we reiterated that we calculate payment rates for blood and blood products using our blood-specific CCR methodology, which utilizes actual or simulated CCRs from the most recently available hospital cost reports to convert hospital charges for blood and blood products to costs. Because HCPCS code P9072 was new for CY 2016, there were no claims data available on the charges and costs for this blood product upon which to apply our blood-specific CCR methodology. Therefore, we established an interim payment rates for this HCPCS code based on a crosswalk to existing blood product HCPCS code P9037, which we believed provided the best proxy for the costs of the new blood product. In addition, we stated that once we had claims data for HCPCS code P9072, we would calculate its payment rate using the claims data that should be available for the code beginning in CY 2018, which is our practice for other blood product HCPCS codes for which claims data have been available for 2 years.
We stated in the proposed rule that, although our standard practice for new codes involves using claims data to set payment rates once claims data become available, we are concerned that there may have been confusion among the provider community about the services that HCPCS code P9072 described. That is, as early as 2016, there were discussions about changing the descriptor for HCPCS code P9072 to include the phrase “or rapid bacterial tested”, which is a much less costly technology than pathogen reduction. In addition, as noted above, effective January 2017, the code descriptor for HCPCS code P9072 was, in fact, changed to also describe rapid bacterial testing of platelets and, effective July 1, 2017, the descriptor for the temporary successor code for HCPCS code P9072 (that is, HCPCS code Q9988) was changed again back to the original descriptor for HCPCS code P9072 that was in place for 2016.
Based on the ongoing discussions involving changes to the original HCPCS code P9072 established in CY 2016, we believe that claims for pathogen reduced platelets may potentially reflect certain claims for rapid bacterial testing of platelets. The geometric mean costs based on submitted claims for HCPCS code P9072 based on available claims data from CY 2016 is $491.53, which is a 24-percent reduction from the CY 2017 payment rate of $647.12. Because we believe that there may have been confusion related to ongoing discussions about changes to the original code descriptor for HCPCS code P9072, we believe it is appropriate to continue to crosswalk the payment amount for at least 1 additional year. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33571 and 33572), we proposed for CY 2018 to determine the payment rate for HCPCS code Q9988 (the successor code to HCPCS code P9072) by continuing to use the payment rate that has been crosswalked from HCPCS code P9037 of $647.12.
In the CY 2018 OPPS/ASC proposed rule, we solicited public comments on the proposed APC and status indicator assignments for HCPCS codes Q9987 and Q9988 for the CY 2018 OPPS update. The proposed payment rates for HCPCS codes Q9987 and Q9988 were included in Addendum B to the proposed rule (which is available via the Internet on the CMS Web site).
After consideration of the public comments we received, we are finalizing our CY 2018 proposal for reporting pathogen-reduced platelets and rapid bacterial testing for platelets. The only changes are to replace HCPCS code Q9987 (Pathogen(s) test for platelets) with HCPCS code P9100 (Pathogen(s) test for platelets) and to replace HCPCS code Q9988 (Platelets, pheresis, pathogen-reduced, each unit) with HCPCS code P9073 (Platelets, pheresis, pathogen-reduced, each unit). Details of the replacement of HCPCS codes Q9987 and Q9988 with HCPCS codes P9100 and P9073, respectively, are found in Table 4 below. The final payment rates for HCPCS codes P9100 and P9073 can be found in Addendum B to this final rule with comment period
Section 1833(t)(2)(H) of the Act mandates the creation of additional groups of covered OPD services that classify devices of brachytherapy consisting of a seed or seeds (or radioactive source) (“brachytherapy sources”) separately from other services or groups of services. The statute provides certain criteria for the additional groups. For the history of OPPS payment for brachytherapy sources, we refer readers to prior OPPS final rules, such as the CY 2012 OPPS/ASC final rule with comment period (77 FR 68240 through 68241). As we have stated in prior OPPS updates, we believe that adopting the general OPPS prospective payment methodology for brachytherapy sources is appropriate for a number of reasons (77 FR 68240). The general OPPS methodology uses costs based on claims data to set the relative payment weights for hospital outpatient services. This payment methodology results in more consistent, predictable, and equitable payment amounts per source across hospitals by averaging the extremely high and low values, in contrast to payment based on hospitals' charges adjusted to costs. We believe that the OPPS methodology, as opposed to payment based on hospitals' charges adjusted to cost, also would provide hospitals with incentives for efficiency in the provision of brachytherapy services to Medicare beneficiaries. Moreover, this approach is consistent with our payment methodology for the vast majority of items and services paid under the OPPS. We refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70323 through 70325) for further discussion of the history of OPPS payment for brachytherapy sources.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33572), for CY 2018, we proposed to use the costs derived from CY 2016 claims data to set the proposed CY 2018 payment rates for brachytherapy sources because CY 2016 is the same year of data we proposed to use to set the proposed payment rates for most other items and services that would be paid under the CY 2018 OPPS. We proposed to base the payment rates for brachytherapy sources on the geometric mean unit costs for each source, consistent with the methodology that we proposed for other items and services paid under the OPPS, as discussed in section II.A.2. of the proposed rule. We also proposed to continue the other payment policies for brachytherapy sources that we finalized and first implemented in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60537). We proposed to pay for the stranded and nonstranded not otherwise specified (NOS) codes, HCPCS codes C2698 and C2699, at a rate equal to the lowest stranded or nonstranded prospective payment rate for such sources, respectively, on a per source basis (as opposed to, for example, a per mCi), which is based on the policy we established in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66785). We also proposed to continue the policy we first implemented in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60537) regarding payment for new brachytherapy sources for which we have no claims data, based on the same reasons we discussed in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66786; which was delayed until January 1, 2010 by section 142 of Pub. L. 110-275). Specifically, this policy is intended to enable us to assign new HCPCS codes for new brachytherapy sources to their own APCs, with prospective payment rates set based on our consideration of external data and other relevant information regarding the expected costs of the sources to hospitals.
The proposed CY 2018 payment rates for brachytherapy sources were included in Addendum B to the proposed rule (which is available via the Internet on the CMS Web site) and were identified with status indicator “U”. For CY 2018, we proposed to assign status indicator “E2” (Items and Services for Which Pricing Information and Claims Data Are Not Available) to HCPCS code C2645 (Brachytherapy planar, palladium-103, per square millimeter) because this code was not reported on CY 2016 claims. Therefore, we are unable to calculate a proposed payment rate based on the general OPPS ratesetting methodology described earlier. Although HCPCS code C2645 became effective January 1, 2016, and although we would expect that if a hospital furnished a brachytherapy source described by this code in CY 2016, HCPCS code C2645 should appear on the CY 2016 claims, there were no CY 2016 claims reporting this code available for the proposed rule. In addition, unlike our policy for new brachytherapy sources HCPCS codes, we did not consider external data to determine a proposed payment rate for HCPCS code C2645 for CY 2018. Therefore, we proposed to assign status indicator “E2” to HCPCS code C2645.
In addition, we assigned status indicator “E2” to HCPCS code C2644 (Brachytherapy, cesium-131 chloride, per square millimeter) because this code was not reported on any CY 2015 claims (that is, there were no Medicare claims submitted by any hospitals in 2015 that reported this HCPCS code). In our review of CY 2016 claims (which are used to set rates for CY 2018), we found that one hospital submitted one claim reporting HCPCS code C2644. Therefore, we proposed to assign status indicator “U” to HCPCS code C2644.
We invited public comments on our proposals.
In addition, commenters noted that, for CY 2016 and CY 2017, HCPCS code C2645 was assigned an OPPS status indicator of “U” (Brachytherapy Sources, Paid under OPPS; separate APC payment) and a payment rate of $4.69 per mm
After consideration of the public comments we received, we are finalizing our proposal to assign status indicator “U” to HCPCS code C2636 (Brachytherapy linear, non-stranded, palladium-103, per 1mm) and assigning an APC payment rate for HCPCS code C2636 at $27.08 based on the 8 claims we received for the CY 2018 OPPS standard ratesetting process. We also are finalizing our proposal to assign status indicator “U” to HCPCS code C2644 (Brachytherapy, cesium-131 chloride, per millicurie) and are modifying our proposal to assign status indicator “E2” to HCPCS code C2645 (Brachytherapy planar, palladium-103, per square millimeter) and instead adopting a status indicator of “U” for CY 2018. The final CY 2018 payment rates for brachytherapy sources can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site) and are identified with status indicator “U”.
We continue to invite hospitals and other parties to submit recommendations to us for new codes to describe new brachytherapy sources. Such recommendations should be directed to the Division of Outpatient Care, Mail Stop C4-01-26, Centers for Medicare and Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244. We will continue to add new brachytherapy source codes and descriptors to our systems for payment on a quarterly basis.
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 74861 through 74910), we finalized a comprehensive payment policy that packages payment for adjunctive and secondary items, services, and procedures into the most costly primary procedure under the OPPS at the claim level. The policy was finalized in CY 2014, but the effective date was delayed until January 1, 2015, to allow additional time for further analysis, opportunity for public comment, and systems preparation. The comprehensive APC (C-APC) policy was implemented effective January 1, 2015, with modifications and clarifications in response to public comments received regarding specific provisions of the C-APC policy (79 FR 66798 through 66810).
A C-APC is defined as a classification for the provision of a primary service and all adjunctive services provided to support the delivery of the primary service. We established C-APCs as a category broadly for OPPS payment and implemented 25 C-APCs beginning in CY 2015 (79 FR 66809 through 66810). In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70332), we finalized 10 additional C-APCs to be paid under the existing C-APC payment policy and added one additional level to both the Orthopedic Surgery and Vascular Procedures clinical families. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79584 through 79585), we finalized another 25 C-APCs.
Under this policy, we designate a service described by a HCPCS code assigned to a C-APC as the primary service when the service is identified by OPPS status indicator “J1”. When such a primary service is reported on a hospital outpatient claim, taking into consideration the few exceptions that are discussed below, we make payment for all other items and services reported on the hospital outpatient claim as being integral, ancillary, supportive, dependent, and adjunctive to the primary service (hereinafter collectively referred to as “adjunctive services”) and representing components of a complete comprehensive service (78 FR 74865 and 79 FR 66799). Payments for adjunctive services are packaged into
Services excluded from the C-APC policy under the OPPS include services that are not covered OPD services, services that cannot by statute be paid for under the OPPS, and services that are required by statute to be separately paid. This includes certain mammography and ambulance services that are not covered OPD services in accordance with section 1833(t)(1)(B)(iv) of the Act; brachytherapy seeds, which also are required by statute to receive separate payment under section 1833(t)(2)(H) of the Act; pass-through payment drugs and devices, which also require separate payment under section 1833(t)(6) of the Act; self-administered drugs (SADs) that are not otherwise packaged as supplies because they are not covered under Medicare Part B under section 1861(s)(2)(B) of the Act; and certain preventive services (78 FR 74865 and 79 FR 66800 through 66801). A list of services excluded from the C-APC policy is included in Addendum J to this final rule with comment period (which is available via the Internet on the CMS Web site).
The C-APC policy payment methodology set forth in the CY 2014 OPPS/ASC final rule with comment period for the C-APCs and modified and implemented beginning in CY 2015 is summarized as follows (78 FR 74887 and 79 FR 66800):
In the CY 2016 OPPS/ASC final rule with comment period, we expanded the C-APC payment methodology to qualifying extended assessment and management encounters through the “Comprehensive Observation Services” C-APC (C-APC 8011). Services within this APC are assigned status indicator “J2”. Specifically, we make a payment through C-APC 8011 for a claim that:
• Does not contain a procedure described by a HCPCS code to which we have assigned status indicator “T” that is reported with a date of service on the same day or 1 day earlier than the date of service associated with services described by HCPCS code G0378;
• Contains 8 or more units of services described by HCPCS code G0378 (Observation services, per hour);
• Contains services provided on the same date of service or 1 day before the date of service for HCPCS code G0378 that are described by one of the following codes: HCPCS code G0379 (Direct referral of patient for hospital observation care) on the same date of service as HCPCS code G0378; CPT code 99281 (Emergency department visit for the evaluation and management of a patient (Level 1)); CPT code 99282 (Emergency department visit for the evaluation and management of a patient (Level 2)); CPT code 99283 (Emergency department visit for the evaluation and management of a patient (Level 3)); CPT code 99284 (Emergency department visit for the evaluation and management of a patient (Level 4)); CPT code 99285 (Emergency department visit for the evaluation and management of a patient (Level 5)) or HCPCS code G0380 (Type B emergency department visit (Level 1)); HCPCS code G0381 (Type B emergency department visit (Level 2)); HCPCS code G0382 (Type B emergency department visit (Level 3)); HCPCS code G0383 (Type B emergency department visit (Level 4)); HCPCS code G0384 (Type B emergency department visit (Level 5)); CPT code 99291 (Critical care, evaluation and management of the critically ill or critically injured patient; first 30-74 minutes); or HCPCS code G0463 (Hospital outpatient clinic visit for assessment and management of a patient); and
• Does not contain services described by a HCPCS code to which we have assigned status indicator “J1”.
The assignment of status indicator “J2” to a specific combination of services performed in combination with each other allows for all other OPPS payable services and items reported on the claim (excluding services that are not covered OPD services or that cannot by statute be paid for under the OPPS) to be deemed adjunctive services representing components of a comprehensive service and resulting in a single prospective payment for the comprehensive service based on the costs of all reported services on the claim (80 FR 70333 through 70336).
Services included under the C-APC payment packaging policy, that is, services that are typically adjunctive to the primary service and provided during the delivery of the comprehensive service, include diagnostic procedures, laboratory tests, and other diagnostic tests and treatments that assist in the delivery of the primary procedure; visits and evaluations performed in association with the procedure; uncoded services and supplies used during the service; durable medical equipment as well as prosthetic and orthotic items and supplies when provided as part of the outpatient service; and any other components reported by HCPCS codes that represent services that are provided during the complete comprehensive service (78 FR 74865 and 79 FR 66800).
In addition, payment for hospital outpatient department services that are similar to therapy services and delivered either by therapists or nontherapists is included as part of the payment for the packaged complete comprehensive service. These services that are provided during the perioperative period are adjunctive services and are deemed not to be therapy services as described in section 1834(k) of the Act, regardless of whether the services are delivered by therapists or other nontherapist health care workers. We have previously noted that therapy services are those provided by therapists under a plan of care in accordance with section 1835(a)(2)(C) and section 1835(a)(2)(D) of the Act and are paid for under section 1834(k) of the Act, subject to annual therapy caps as applicable (78 FR 74867 and 79 FR 66800). However, certain other services similar to therapy services are considered and paid for as hospital outpatient department services. Payment for these nontherapy outpatient department services that are reported with therapy codes and provided with a comprehensive service is included in the payment for the packaged complete comprehensive service. We note that these services, even though they are reported with therapy codes, are hospital outpatient department services and not therapy services. Therefore, the requirement for functional reporting under the regulations at 42 CFR 410.59(a)(4) and 42 CFR 410.60(a)(4) does not apply. We refer readers to the July 2016 OPPS Change Request 9658 (Transmittal 3523) for further instructions on reporting these services in the context of a C-APC service.
Items included in the packaged payment provided in conjunction with the primary service also include all
We define each hospital outpatient claim reporting a single unit of a single primary service assigned to status indicator “J1” as a single “J1” unit procedure claim (78 FR 74871 and 79 FR 66801). Line item charges for services included on the C-APC claim are converted to line item costs, which are then summed to develop the estimated APC costs. These claims are then assigned one unit of the service with status indicator “J1” and later used to develop the geometric mean costs for the C-APC relative payment weights. (We note that we use the term “comprehensive” to describe the geometric mean cost of a claim reporting “J1” service(s) or the geometric mean cost of a C-APC, inclusive of all of the items and services included in the C-APC service payment bundle.) Charges for services that would otherwise be separately payable are added to the charges for the primary service. This process differs from our traditional cost accounting methodology only in that all such services on the claim are packaged (except certain services as described above). We apply our standard data trims, which exclude claims with extremely high primary units or extreme costs.
The comprehensive geometric mean costs are used to establish resource similarity and, along with clinical similarity, dictate the assignment of the primary services to the C-APCs. We establish a ranking of each primary service (single unit only) to be assigned to status indicator “J1” according to its comprehensive geometric mean costs. For the minority of claims reporting more than one primary service assigned to status indicator “J1” or units thereof, we identify one “J1” service as the primary service for the claim based on our cost-based ranking of primary services. We then assign these multiple “J1” procedure claims to the C-APC to which the service designated as the primary service is assigned. If the reported “J1” services on a claim map to different C-APCs, we designate the “J1” service assigned to the C-APC with the highest comprehensive geometric mean cost as the primary service for that claim. If the reported multiple “J1” services on a claim map to the same C-APC, we designate the most costly service (at the HCPCS code level) as the primary service for that claim. This process results in initial assignments of claims for the primary services assigned to status indicator “J1” to the most appropriate C-APCs based on both single and multiple procedure claims reporting these services and clinical and resource homogeneity.
• Frequency of 25 or more claims reporting the code combination (frequency threshold); and
• Violation of the 2 times rule in the originating C-APC (cost threshold).
These criteria identify paired code combinations that occur commonly and exhibit materially greater resource requirements than the primary service. The CY 2017 OPPS/ASC final rule with comment period (81 FR 79582) included a revision to the complexity adjustment eligibility criteria. Specifically, we finalized a policy to discontinue the requirement that a code combination (that qualifies for a complexity adjustment by satisfying the frequency and cost criteria thresholds described above) also not create a 2 times rule violation in the higher level or receiving APC.
After designating a single primary service for a claim, we evaluate that service in combination with each of the other procedure codes reported on the claim assigned to status indicator “J1” (or certain add-on codes) to determine if there are paired code combinations that meet the complexity adjustment criteria. For a new HCPCS code, we determine initial C-APC assignment and qualification for a complexity adjustment using the best available information, crosswalking the new HCPCS code to a predecessor code(s) when appropriate.
Once we have determined that a particular code combination of “J1” services (or combinations of “J1” services reported in conjunction with certain add-on codes) represents a complex version of the primary service because it is sufficiently costly, frequent, and a subset of the primary comprehensive service overall according to the criteria described above, we promote the claim including the complex version of the primary service as described by the code combination to the next higher cost C-APC within the clinical family, unless the primary service is already assigned to the highest cost APC within the C-APC clinical family or assigned to the only C-APC in a clinical family. We do not create new APCs with a comprehensive geometric mean cost that is higher than the highest geometric mean cost (or only) C-APC in a clinical family just to accommodate potential complexity adjustments. Therefore, the highest payment for any claim including a code combination for services assigned to a C-APC would be the highest paying C-APC in the clinical family (79 FR 66802).
We package payment for all add-on codes into the payment for the C-APC. However, certain primary service add-on combinations may qualify for a complexity adjustment. As noted in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70331), all add-on codes that can be appropriately reported in combination with a base code that describes a primary “J1” service are evaluated for a complexity adjustment.
To determine which combinations of primary service codes reported in conjunction with an add-on code may qualify for a complexity adjustment for CY 2018, in the CY 2018 OPPS/ASC proposed rule (82 FR 33575), we proposed to apply the frequency and cost criteria thresholds discussed above, testing claims reporting one unit of a single primary service assigned to status indicator “J1” and any number of units of a single add-on code for the primary “J1” service. If the frequency and cost criteria thresholds for a complexity adjustment are met and reassignment to the next higher cost APC in the clinical family is appropriate (based on meeting the criteria outlined above), we make a complexity adjustment for the code combination; that is, we reassign the primary service code reported in conjunction with the add-on code to the next higher cost C-APC within the same clinical family of C-APCs. As previously stated, we package payment for add-on codes into the C-APC
Addendum J to the proposed rule included the cost statistics for each code combination that would qualify for a complexity adjustment (including primary code and add-on code combinations). Addendum J to the proposed rule also contained summary cost statistics for each of the paired code combinations that describe a complex code combination that would qualify for a complexity adjustment and were proposed to be reassigned to the next higher cost C-APC within the clinical family. The combined statistics for all proposed reassigned complex code combinations were represented by an alphanumeric code with the first 4 digits of the designated primary service followed by a letter. For example, the proposed geometric mean cost listed in Addendum J for the code combination described by complexity adjustment assignment 3320R, which is assigned to C-APC 5224 (Level 4 Pacemaker and Similar Procedures), included all paired code combinations that were proposed to be reassigned to C-APC 5224 when CPT code 33208 is the primary code. Providing the information contained in Addendum J to the proposed rule allowed stakeholders the opportunity to better assess the impact associated with the proposed reassignment of claims with each of the paired code combinations eligible for a complexity adjustment.
Other commenters requested various changes to the complexity adjustment criteria. One commenter requested that CMS amend the current cost criterion for a complexity adjustment to allow for code combinations that have qualified for a complexity adjustment in the previous year to qualify for a complexity adjustment for the subsequent year if the code combination is within 5 percent of the cost criterion for the subsequent year. Another commenter requested that CMS eliminate the criterion that the code combination must create a violation of the 2 times rule in the originating C-APC in order to qualify for a complexity adjustment.
Some commenters recommended that CMS create a complexity adjustment for endoscopic sinus surgery claims that include a drug or device code (C-code or a J-code), or more than two “J1” procedures. Other commenters requested that CMS revise its complexity adjustment methodology to account for the higher costs that essential hospitals incur when performing complex procedures and treating sicker patients.
A minimum of 25 claims is already very low for a national payment system. Lowering the minimum of 25 claims further could lead to unnecessary complexity adjustments for service combinations that are rarely performed. The complexity adjustment cost threshold compares the code combinations to the lowest cost significant procedure assigned to the APC. If the cost of the code combination does not exceed twice the cost of the lowest cost significant procedure within the APC, no complexity adjustment is made. Lowering or eliminating this threshold could remove so many claims from the accounting for the primary “J1” service that the geometric mean costs attributed to the primary procedure could be skewed.
Regarding the request for a code combination that qualified previously for a complexity adjustment to qualify for the subsequent year if the code combination is within 5 percent of the cost criterion for the subsequent year, we evaluate code combinations each year against our complexity adjustment criteria using the latest available data. We do not believe it is necessary to expand the ability for code combinations to meet the cost criterion in this manner.
We also do not believe that it is necessary to adjust the complexity adjustment criteria to allow claims that include a drug or device code, more than two “J1” procedures, or procedures performed at certain hospitals to qualify for a complexity adjustment. As mentioned earlier, we believe the current criteria are adequate to determine if a combination of procedures represents a complex, costly subset of the primary service.
• CPT code 22510 (Percutaneous vertebroplasty (bone biopsy included when performed), 1 vertebral body, unilateral or bilateral injection, inclusive of all imaging guidance; cervicothoracic) and CPT code 22512 (Percutaneous vertebroplasty (bone biopsy included when performed), 1 vertebral body, unilateral or bilateral injection, inclusive of all imaging guidance; each additional cervicothoracic or lumbosacral vertebral body) for multi-level vertebroplasty in the cervicothoracic region);
• CPT code 22511 (Percutaneous vertebroplasty (bone biopsy included when performed), 1 vertebral body, unilateral or bilateral injection, inclusive of all imaging guidance; lumbosacral) and CPT code 22512 (Percutaneous vertebroplasty (bone biopsy included when performed), 1 vertebral body, unilateral or bilateral injection, inclusive of all imaging guidance; each additional cervicothoracic or lumbosacral vertebral body); and
• CPT code 22511 (Percutaneous vertebroplasty (bone biopsy included when performed), 1 vertebral body, unilateral or bilateral injection, inclusive of all imaging guidance; lumbosacral) and CPT code 20982 (Ablation therapy for reduction or eradication of 1 or more bone tumors (
• CPT code 92978 (Endoluminal imaging of coronary vessel or graft using intravascular ultrasound (IVUS) or optical coherence tomography (OCT) during diagnostic evaluation and/or therapeutic intervention including imaging supervision, interpretation and report; initial vessel (List separately in addition to code for primary procedure);
• CPT code 92979 (Endoluminal imaging of coronary vessel or graft using intravascular ultrasound (IVUS) or optical coherence tomography (OCT) during diagnostic evaluation and/or therapeutic intervention including imaging supervision, interpretation and report; each additional vessel (List separately in addition to code for primary procedure));
• CPT code 93571 (Intravascular Doppler velocity and/or pressure derived coronary flow reserve measurement (coronary vessel or graft) during coronary angiography including pharmacologically induced stress; initial vessel (List separately in addition to code for primary procedure)); and
• CPT code 93572 ((Intravascular Doppler velocity and/or pressure derived coronary flow reserve measurement (coronary vessel or graft) during coronary angiography including pharmacologically induced stress; each additional vessel (List separately in addition to code for primary procedure)) in the complexity adjustment evaluation.
After consideration of the public comments we received, we are applying the complexity adjustment criteria as proposed. The finalized complexity adjustments for CY 2018 can be found in Addendum J to this final rule with comment period (which is available via the Internet on the CMS Web site).
For CY 2018 and subsequent years, in the CY 2018 OPPS/ASC proposed rule (82 FR 33576), we proposed to continue to apply the C-APC payment policy methodology made effective in CY 2015 and updated with the implementation of status indicator “J2” in CY 2016. A discussion of the C-APC payment policy methodology can be found at 81 FR 79583.
As a result of our annual review of the services and APC assignments under the OPPS, we did not propose any additional C-APCs to be paid under the existing C-APC payment policy beginning in CY 2018. Table 4 of the proposed rule listed the proposed C-APCs for CY 2018, all of which were established in past rules. All C-APCs were displayed in Addendum J to the proposed rule (which is available via the Internet on the CMS Web site). Addendum J to the proposed rule also contained all of the data related to the C-APC payment policy methodology, including the list of proposed complexity adjustments and other information.
It is the cost of the primary item or service that drives assignment to an APC group. In this case, the primary service is described by CPT code 67027, which is the only CPT code assigned to C-APC 5494 (Level 4 Intraocular Procedures). The costs of drugs or other packaged ancillary items or services that may be used with a primary service are packaged into the costs of the primary service and are not separately paid. In this case, because CPT code 67027 is assigned to a C-APC, the costs of drugs, such as Retisert, and any other items or services that are billed with the “J1” service are packaged into the geometric mean cost for HCPCS code 67027 and are bundled into the C-APC payment. The geometric mean cost is based on reported costs for all hospitals paid under the OPPS; to the extent that Retisert or other items are billed with the primary service, those costs are also reflected in the cost of the primary service. Therefore, because the cost of the Retisert drug is packaged into the cost of CPT code 67027, assignment of HCPCS code 67027 to C-APC 5494 does not create a 2 times rule violation.
In addition, with regard to the packaging of the drug Retisert based on the C-APC policy, as stated in previous rules (78 FR 74868 through 74869 and 74909 and 79 FR 66800), items included in the packaged payment provided with the primary “J1” service include all drugs, biologicals, and radiopharmaceuticals, regardless of cost, except those drugs with pass-through payment status and SADs, unless they function as packaged supplies. Therefore, we believe that HCPCS code J3711 is appropriately packaged, and we are not providing separate payment for the drug.
After consideration of the public comments we received, we are finalizing the proposed C-APCs for CY 2018. Table 6 below lists the final C-APCs for CY 2018, all of which were established in past rules. All C-APCs are displayed in Addendum J to this final rule with comment period (which is available via the Internet on the CMS Web site). Addendum J to this final rule with comment period also contains all of the data related to the C-APC payment policy methodology, including the list of complexity adjustments and other information for CY 2018.
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79584), we finalized 25 new C-APCs. Some of the HCPCS codes assigned to the C-APCs established for CY 2017 described surgical procedures for inserting brachytherapy catheters/needles and other related brachytherapy procedures such as the insertion of tandem and/or ovoids and the insertion of Heyman capsules. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79583), we stated that we received public comments which noted that claims that included several insertion codes for brachytherapy devices often did not also contain a brachytherapy treatment delivery code (CPT codes 77750 through 77799). The brachytherapy insertion codes that commenters asserted were not often billed with a brachytherapy treatment code included the following:
• CPT code 57155 (Insertion of uterine tandem and/or vaginal ovoids for clinical brachytherapy);
• CPT code 20555 (Placement of needles or catheters into muscle and/or soft tissue for subsequent interstitial radioelement application (at the time of or subsequent to the procedure));
• CPT code 31643 (Bronchoscopy, rigid or flexible, including fluoroscopic guidance, when performed; with placement of catheter(s) for intracavitary radioelement application);
• CPT code 41019 (Placement of needles, catheters, or other device(s) into the head and/or neck region (percutaneous, transoral, or transnasal) for subsequent interstitial radioelement application);
• CPT code 43241 (Esophagogastroduodenoscopy, flexible, transoral; with insertion of intraluminal tube catheter);
• CPT code 55920 (Placement of needles or catheters into pelvic organs and/or genitalia (except prostate) for subsequent interstitial radioelement application); and
• CPT code 58346 (Insertion of Heyman capsules for clinical brachytherapy).
The commenters concluded that brachytherapy delivery charges are being underrepresented in ratesetting under the C-APC methodology because a correctly coded claim should typically include an insertion and treatment delivery code combination. The commenters stated that the insertion procedure and brachytherapy treatment delivery generally occur on the same day or within the same week and therefore the services should appear on a claim together. In the CY 2017 OPPS/ASC final rule with comment period, we indicated that we would not exclude claims from the CY 2017 ratesetting calculation because we generally do not remove claims from the claims accounting when stakeholders believe that hospitals included incorrect information on some claims (81 FR 79583). However, we stated that we would examine the claims for the brachytherapy insertion codes in question and determine if any future adjustment to the methodology (or possibly code edits) would be appropriate.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33577 through 33578), we analyzed the claims that include brachytherapy insertion codes assigned to status indicator “J1” and that received payment through a C-APC, and we determined that several of these codes are frequently billed without an associated brachytherapy treatment code. As mentioned above, stakeholders have expressed concerns that using claims for ratesetting for brachytherapy insertion procedures that do not also include a brachytherapy treatment code may not capture all of the costs associated with the insertion procedure. To address this issue and base payment on claims for the most common clinical scenario, for CY 2018 and subsequent years, we indicated in the CY 2018 OPPS/ASC proposed rule (82 FR 33578) that we were establishing a code edit that requires a brachytherapy treatment code when a brachytherapy insertion code is billed.
As noted in section II.A.2.c. of the proposed rule and this final rule with comment period, we also proposed to delete composite APC 8001 (LDR Prostate Brachytherapy Composite) and assign HCPCS code 55875 (Transperineal placement of needles or catheters into prostate for interstitial radioelement application, with or without cystoscopy) to status indicator “J1” and to provide payment for this procedure through the C-APC payment methodology, similar to the payment methodology for other surgical insertion procedures related to brachytherapy. Specifically, when HCPCS code 55875 is the primary service reported on a hospital outpatient claim, we proposed to package payments for all adjunctive services reported on the claim into the payment for HCPCS code 55875. We proposed to assign HCPCS code 55875 to C-APC 5375 (Level 5 Urology and Related Services). The code edit for claims with brachytherapy services described above that will be effective January 1, 2018, will require the brachytherapy application HCPCS code 77778 (Interstitial radiation source application; complex) to be included on the claim with the brachytherapy insertion procedure (HCPCS code 55875).
After consideration of the public comments we received, we are not establishing a code edit that requires a brachytherapy treatment code when a brachytherapy insertion code is billed. We are finalizing our proposal to delete composite APC 8001 (LDR Prostate Brachytherapy Composite) and assign HCPCS code 55875 (Transperineal placement of needles or catheters into prostate for interstitial radioelement application, with or without cystoscopy) to status indicator “J1” and to provide payment for this procedure through the C-APC payment methodology, similar to the payment methodology for other surgical insertion procedures related to brachytherapy.
Stereotactic radiosurgery (SRS) is a type of radiation therapy that targets multiple beams of radiation to precisely deliver radiation to a brain tumor while sparing the surrounding normal tissue. SRS treatment can be delivered by Cobalt-60-based (also referred to as gamma knife) technology or robotic linear accelerator-based (LINAC)-based technology. As stated in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70336), section 634 of the American Taxpayer Relief Act (ATRA) of 2012 (Pub. L. 112-240) amended section 1833(t)(16) of the Act by adding a new subparagraph (D) to require that OPPS payments for Cobalt-60-based SRS be reduced to equal that of payments for LINAC-based SRS for covered OPD services furnished on or after April 1, 2013. Because section 1833(t)(16)(D) of the Act requires equal payment for SRS treatment delivered by Cobalt-60-based or LINAC-based technology, the two types of services involving SRS delivery instruments (which are described by HCPCS code 77371 (Radiation treatment delivery, stereotactic radiosurgery [SRS], complete course of treatment cranial lesion(s) consisting of 1 session; multi-source Cobalt 60-based) and
In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70336), we stated that we had identified differences in the billing patterns for SRS procedures delivered using Cobalt-60-based and LINAC-based technologies. In particular, our claims data analysis revealed that services involving SRS delivered by Cobalt-60-based technologies (as described by HCPCS code 77371) typically included SRS treatment planning services (for example, imaging studies, radiation treatment aids, and treatment planning) and the actual deliveries of SRS treatment on the same date of service and reported on the same claim. In contrast, claims data analysis results revealed that services involving SRS delivered by LINAC-based technologies (as described by HCPCS code 77372) frequently included services related to SRS treatment (for example, imaging studies, radiation treatment aids, and treatment planning) that were provided on different dates of service and reported on claims separate from the actual delivery of SRS treatment.
We stated in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70336) that the intent of the C-APC policy is to package payment for all services adjunctive to the primary “J1” procedure and that we believed that all essential planning and preparation services related to the SRS treatment are adjunctive to the SRS treatment delivery procedure. Therefore, payment for these adjunctive services should be packaged into the C-APC payment for the SRS treatment instead of reported on a different claim and paid separately. To identify services that are adjunctive to the primary SRS treatment described by HCPCS codes 77371 and 77372, but reported on a different claim, we established modifier “CP” which became effective in CY 2016 and required the use of the modifier for CY 2016 and CY 2017.
To ensure appropriate ratesetting for the SRS C-APC, we believed it was necessary to unbundle payment for the adjunctive services for CY 2016 and CY 2017. Therefore, we finalized a policy to change the payment for SRS treatment for the 10 SRS planning and preparation services identified in our claims data (HCPCS codes 70551, 70552, 70553, 77011, 77014, 77280, 77285, 77290, 77295, and 77336) that were reported differentially using HCPCS codes 77371 and 77372 both on the same claim as the SRS services and on claims 1 month prior to the delivery of SRS services. These codes were removed from the geometric mean cost calculations for C-APC 5627. In addition, for CY 2016 and CY 2017, we provided separate payment for the 10 planning and preparation services adjunctive to the delivery of the SRS treatment using either the Cobalt-60-based or LINAC-based technology, even when the planning service was included on the same claim as the primary “J1” SRS treatment service. The use of the modifier “CP” was not required to identify these 10 planning and preparation codes.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33564 and 33465), the data collection period for SRS claims with modifier “CP” began on January 1, 2016 and concludes on December 31, 2017. Based on our analysis of preliminary data collected with modifier “CP”, we have identified some additional services that are adjunctive to the primary SRS treatment and reported on a different claim outside of the 10 SRS planning and preparation codes that were removed from the SRS C-APC costs calculations and paid separately.
However, the “CP” modifier has been used by a small number of providers since its establishment. In addition, our analysis showed that several of the HCPCS codes that were billed with modifier “CP” belonged to the group of 10 SRS planning and preparation codes that we pay separately and do not require the use of modifier “CP”. Also, some providers erroneously included the modifier when reporting the HCPCS code for the delivery of the LINAC-based SRS treatment. As stated above, the data collection period for SRS claims with modifier “CP” was set to conclude on December 31, 2017. Accordingly, for CY 2018, we are deleting this modifier and discontinuing its required use.
For CY 2018, we also proposed to continue to make separate payments for the 10 planning and preparation services adjunctive to the delivery of the SRS treatment using either the Cobalt-60-based or LINAC-based technology when furnished to a beneficiary within 1 month of the SRS treatment. The continued separate payment of these services will allow us to complete our analysis of the claims data including modifier “CP” from both CY 2016 and CY 2017 claims. As stated in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79583), we will consider in the future whether repackaging all adjunctive services (planning, preparation, and imaging, among others) back into cranial single session SRS is appropriate.
We invited public comments on these proposals.
After consideration of the public comments we received, we are finalizing our proposal to make separate payments for the 10 planning and preparation services adjunctive to the delivery of the SRS treatment using either the Cobalt-60-based or LINAC-based technology when furnished to a beneficiary within 1 month of the SRS treatment.
As discussed in prior OPPS/ASC final rules with comment period, and most recently in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79668), we continue to believe that Cysview® (hexaminolevulinate HCl) (described by HCPCS code C9275) is a drug that functions as a supply in a diagnostic test or procedure and is therefore packaged with payment for the primary procedure. In addition, as discussed in section II.A.2.b.(1) of the CY 2018 OPPS/ASC proposed rule and this final rule with comment period, drugs that are not eligible for pass-through payment are always packaged when billed with a comprehensive service. To maintain the integrity of the OPPS, we believe it is generally not appropriate to allow exceptions to our drug packaging policy or comprehensive APC policy that would result in separate payment for the drug based on the product's ASP+6 percent payment rate. While we did not propose in the CY 2018 proposed rule to pay separately for Cysview®, we have heard concerns from stakeholders that the payment for blue light cystoscopy procedures involving Cysview® may be creating a barrier to beneficiaries receiving access to reasonable and necessary care for which there may not be a clinically comparable alternative. Therefore, as we stated in the proposed rule, we revisited our payment policy for blue light cystoscopy procedures. As described in more detail below, we believe certain code combinations for blue light cystoscopy procedures should be eligible to qualify for a complexity
Traditionally, white light (or standard) cystoscopy, typically performed by urologists, has been the gold standard for diagnosing bladder cancer. Enhanced bladder cancer diagnostics, such as narrow band imaging or blue light cystoscopy, increase tumor detection in nonmuscle invasive bladder cancer over white light cystoscopy alone, thus enabling more precise tumor removal by the urologist. Blue light cystoscopy can only be performed after performance of white light cystoscopy. Because blue light cystoscopy requires specialized imaging equipment to view cellular uptake of the dye that is not otherwise used in white light cystoscopy procedures, some practitioners consider blue light cystoscopy to be a distinct and adjunctive procedure to white light cystoscopy. However, the current CPT coding structure for cystoscopy procedures does not identify blue light cystoscopy in the coding descriptions separate from white light cystoscopy. Therefore, the existing cystoscopy CPT codes do not distinguish cystoscopy procedures involving only white light cystoscopy from those involving both white and blue light cystoscopy, which require additional resources compared to white light cystoscopy alone.
As discussed in the CY 2018 OPPS/ASC proposed rule, after discussion with our clinical advisors (including a urologist), we believe that blue light cystoscopy represents an additional elective but distinguishable service as compared to white light cystoscopy that, in some cases, may allow greater detection of bladder tumors in beneficiaries relative to white light cystoscopy alone. Given the additional equipment, supplies, operating room time, and other resources required to perform blue light cystoscopy in addition to white light cystoscopy, for CY 2018, in the proposed rule, we proposed to create a new HCPCS C-code to describe blue light cystoscopy and to allow for a complexity adjustment to APC 5374 (Level 4 Urology and Related Services) for certain code combinations in APC 5373 (Level 3 Urology and Related Services). (In the proposed rule, we cited HCPCS code “C97XX” as a placeholder for the new code. However, for ease of reading, hereafter in this section, we refer to the replacement code HCPCS code C9738 (Adjunctive blue light cystoscopy with fluorescent imaging agent (List separately in addition to code for primary procedure)) instead of the placeholder code.) Specifically, to determine which code pair combinations of a procedure described by proposed new HCPCS code C9738 and a cystoscopy procedure would qualify for a complexity adjustment, we first crosswalked the costs of the procedure described by HCPCS code C9275 (Hexaminolevulinate hcl) to the procedure described by proposed new HCPCS code C9738 assigned status indicator “N”. Next, we identified the procedure codes used to describe white light cystoscopy of the bladder which include the following CPT codes and APC assignments:
Because APC 5372 is not a C-APC, cystoscopy procedures assigned to Level 2 Urology are not eligible for a complexity adjustment, and therefore, we did not analyze these codes to determine whether they met the criteria for this adjustment. We modeled the data to determine which code pair combinations exceed the claim frequency and cost threshold in APC 5373, APC 5374, and APC 5375, which are all C-APCs. In the proposed rule, we stated that the results of our analysis indicate that the code pair combination of procedures described by proposed new HCPCS code C9738 and cystoscopy procedures assigned to APC 5373 would be eligible for a complexity adjustment based on current criteria and cost data because they meet the frequency and cost criteria thresholds. Likewise, our results indicated that the combination of procedures described by proposed new HCPCS code C9738 and cystoscopy procedures assigned to APC 5374 and APC 5375 would not qualify for a complexity adjustment because they do not meet the frequency and cost criteria thresholds.
We indicated in the proposed rule that, under the C-APC policy, blue light cystoscopy would be packaged, but when performed with a cystoscopy procedure in APC 5373 and reported with proposed new HCPCS code C9738 in addition to the cystoscopy CPT code, there would be a complexity adjustment to the next higher level APC in the series, resulting in a higher payment than for the white light cystoscopy procedure alone. That is, if the code pair combination of proposed new HCPCS code C9738 with CPT code 52204, 52214, or 52224 is reported on a claim, the claim will qualify for payment reassignment from APC 5373 to APC 5374. We stated that we plan to track the utilization and the costs associated with white light/blue light cystoscopy procedure combinations that will receive a complexity adjustment.
We invited public comments on our CY 2018 proposal to allow for a complexity adjustment when a white light cystoscopy procedure followed by a blue light cystoscopy procedure is performed. In addition, we sought public comments on whether alternative procedures, such as narrow band imaging, may be disadvantaged by this proposed policy.
We did not propose and the commenters did not provide evidence to support waiving application of the complexity adjustment criteria and allowing for a complexity adjustment whenever a blue light cystoscopy procedure is performed with any white light cystoscopy procedure. To allow for a complexity adjustment under any circumstance would require a change to the complexity adjustment criteria, which we did not propose. Therefore, we are finalizing the blue light cystoscopy complexity adjustment proposal, without modification. In addition we are establishing HCPCS code C9738 (Adjunctive blue light cystoscopy with fluorescent imaging agent (List separately in addition to code for primary procedure)), which replaces proposed HCPCS code C97XX. For CY 2018, the code pair combination of HCPCS code C9738 with CPT code 52204, 52214, or 52224 will qualify for a complexity adjusted payment from APC 5373 to APC 5374.
With respect to the public comments on unpackaging Cysview to allow for separate payment in both the HOPD and ASC settings, as we stated in the background section for the proposal, we continue to believe that Cysview is a drug that functions as a supply in a diagnostic test or procedure and therefore is packaged with payment for the primary procedure. In the CY 2018 OPPS/ASC proposed rule, we did not propose to make any changes to the “drugs that function as a supply” packaging policy or make any corresponding proposals to pay separately for Cysview in the HOPD and ASC settings. Therefore, Cysview will remain packaged.
With respect to the recommendation that we establish a payment methodology for blue light cystoscopy with Cysview procedures conceptually similar to the ASC device intensive payment policy, we did not propose revisions to the ASC device-intensive procedure policy. In addition, it is unclear to us exactly how such a policy would work and to what precise procedures in addition to blue light cystoscopy it might apply. Further, we believe that the C-APC payment adequately reflects the average resources expended by hospitals as reflected in hospital claims data. In addition, for especially costly cases, we believe our proposed policy appropriately recognizes the additional costs of blue light cystoscopy with white light cystoscopy through the complexity adjustment. We will continue to analyze the data and evaluate whether refinements to the C-APC policy, including the complexity adjustment criteria, should be considered in future rulemaking.
After consideration of the public comments we received, we are
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79584), we accepted a recommendation made at the August 22, 2016 HOP Panel meeting to analyze the effects of C-APCs. The HOP panel recommendation did not elucidate specific concerns with the C-APC policy or provide detailed recommendations on particular aspects of the policy to analyze. Therefore, we took a broad approach in studying HCPCS codes and APCs subject to the C-APC policy to determine whether aberrant trends in the data existed. Overall, we observed no such aberrancies and believe that the C-APC policy is working as intended.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33580), specifically, using OPPS claims data for the CY 2016 final rule with comment period, the CY 2017 final rule with comment period, and the CY 2018 proposed rule, which reflect an observation period of CY 2014 to CY 2016, we examined the effects of C-APCs and their impact on OPPS payments. We started with all hospital outpatient claims billed on the 13X claim-type and, from that, separately identified HCPCS codes and APCs that were subject to the comprehensive methodology in CYs 2015 and 2016 (that is, HCPCS codes or APCs assigned status indicator “J1” or “J2”). Next, we analyzed the claims to create a subset of claims that contain the HCPCS codes and APCs that were subject to the comprehensive methodology. Using the claims noted above, we analyzed claim frequency, line frequency, number of billing units, and the total OPPS payment between CYs 2014 and 2016 for each HCPCS code and APC that had been previously identified. In reviewing the cost statistics for HCPCS codes for procedures with status indicator “S”, “T”, or “V” in CY 2014 that were assigned to a C-APC in either CY 2015 or CY 2016, overall, we observed an increase in claim line frequency, units billed, and Medicare payment, which suggest that the C-APC payment policy did not adversely affect access to care or reduce payments to hospitals. Decreases in these cost statistics would suggest our comprehensive packaging logic is not working as intended and/or the C-APC payment rates were inadequate, resulting in lower volume due to migration of services to other settings or the cessation of providing these services. Likewise, because the cost statistics of major separately payable codes (that is, HCPCS codes with status indicator “S”, “T”, or “V”) that were packaged into a C-APC prospectively were consistent with the cost statistics of the codes packaged on the claim, in actuality, indicate that costs were appropriately redistributed, we believe the C-APC payment methodology is working as intended.
As discussed in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66613), we believe it is important that the OPPS enhance incentives for hospitals to provide necessary, high quality care as efficiently as possible. For CY 2008, we developed composite APCs to provide a single payment for groups of services that are typically performed together during a single clinical encounter and that result in the provision of a complete service. Combining payment for multiple, independent services into a single OPPS payment in this way enables hospitals to manage their resources with maximum flexibility by monitoring and adjusting the volume and efficiency of services themselves. An additional advantage to the composite APC model is that we can use data from correctly coded multiple procedure claims to calculate payment rates for the specified combinations of services, rather than relying upon single procedure claims which may be low in volume and/or incorrectly coded. Under the OPPS, we currently have composite policies for low dose rate (LDR) prostate brachytherapy, mental health services, and multiple imaging services. We refer readers to the CY 2008 OPPS/ASC final rule with comment period for a full discussion of the development of the composite APC methodology (72 FR 66611 through 66614 and 66650 through 66652) and the CY 2012 OPPS/ASC final rule with comment period (76 FR 74163) for more recent background.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33580), for CY 2018 and subsequent years, we proposed to continue our composite APC payment policies for mental health services and multiple imaging services, as discussed below. As discussed in section II.A.2.b. of the proposed rule and this final rule with comment period, we proposed to assign CPT code 55875 (Transperineal placement of needs or catheters into prostate for interstitial radioelement application, with or without cystoscopy) a status indicator of “J1” and assign it to a C-APC. In conjunction with this proposal, we also proposed to delete the low dose rate (LDR) prostate brachytherapy composite APC for CY 2018 and subsequent years. We refer readers to section II.A.2.b. of the CY 2018 OPPS/ASC proposed rule and this final rule with comment period for our discussion on our low dose rate (LDR) prostate brachytherapy APC proposal for CY 2018 and subsequent years.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33580), we proposed to continue our longstanding policy of limiting the aggregate payment for specified less resource-intensive mental health services furnished on the same date to the payment for a day of partial hospitalization services provided by a hospital, which we consider to be the most resource intensive of all outpatient mental health services. We refer readers to the April 7, 2000 OPPS final rule with comment period (65 FR 18452 through 18455) for the initial discussion of this longstanding policy and the CY 2012 OPPS/ASC final rule with comment period (76 FR 74168) for more recent background.
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79588 through 79589), we finalized a policy to combine the existing Level 1 and Level 2 hospital-based PHP APCs into a single hospital-based PHP APC and, thereby, discontinue APCs 5861 (Level 1 Partial Hospitalization (3 services) for Hospital-Based PHPs) and 5862 (Level 2 Partial Hospitalization (4 or more services) for Hospital-Based PHPs) and replace them with APC 5863 (Partial Hospitalization (3 or more services per day)). For CY 2018, and subsequent years, we proposed that when the aggregate payment for specified mental health services provided by one hospital to a single beneficiary on a single date of service, based on the payment rates associated with the APCs for the individual services, exceeds the maximum per diem payment rate for partial hospitalization services provided
We did not receive any public comments on these proposals. Therefore, we are finalizing our CY 2018 proposal, without modification, that when aggregate payment for specified mental health services provided by one hospital to a single beneficiary on a date of service, based on the payment rates with the APCs for the individual services, exceeds the maximum per diem payment rate for partial hospitalization services provided by a hospital, those specified mental health services will be paid through composite APC 8010 for CY 2018. In addition, we are finalizing our CY 2018 proposal, without modification, to set the payment rate for composite APC 8010 for CY 2018 at the same payment rate that we established for APC 5863, which is the maximum partial hospitalization per diem payment rate for a hospital, and that the hospital continue to be paid the payment rate for composite APC 8010.
Effective January 1, 2009, we provide a single payment each time a hospital submits a claim for more than one imaging procedure within an imaging family on the same date of service, in order to reflect and promote the efficiencies hospitals can achieve when performing multiple imaging procedures during a single session (73 FR 41448 through 41450). We utilize three imaging families based on imaging modality for purposes of this methodology: (1) Ultrasound; (2) computed tomography (CT) and computed tomographic angiography (CTA); and (3) magnetic resonance imaging (MRI) and magnetic resonance angiography (MRA). The HCPCS codes subject to the multiple imaging composite policy and their respective families are listed in Table 12 of the CY 2014 OPPS/ASC final rule with comment period (78 FR 74920 through 74924).
While there are three imaging families, there are five multiple imaging composite APCs due to the statutory requirement under section 1833(t)(2)(G) of the Act that we differentiate payment for OPPS imaging services provided with and without contrast. While the ultrasound procedures included under the policy do not involve contrast, both CT/CTA and MRI/MRA scans can be provided either with or without contrast. The five multiple imaging composite APCs established in CY 2009 are:
• APC 8004 (Ultrasound Composite);
• APC 8005 (CT and CTA without Contrast Composite);
• APC 8006 (CT and CTA with Contrast Composite);
• APC 8007 (MRI and MRA without Contrast Composite); and
• APC 8008 (MRI and MRA with Contrast Composite).
We define the single imaging session for the “with contrast” composite APCs as having at least one or more imaging procedures from the same family performed with contrast on the same date of service. For example, if the hospital performs an MRI without contrast during the same session as at least one other MRI with contrast, the hospital will receive payment based on the payment rate for APC 8008, the “with contrast” composite APC.
We make a single payment for those imaging procedures that qualify for payment based on the composite APC payment rate, which includes any packaged services furnished on the same date of service. The standard (noncomposite) APC assignments continue to apply for single imaging procedures and multiple imaging procedures performed across families. For a full discussion of the development of the multiple imaging composite APC methodology, we refer readers to the CY 2009 OPPS/ASC final rule with comment period (73 FR 68559 through 68569).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33581), we proposed, for CY 2018 and subsequent years, to continue to pay for all multiple imaging procedures within an imaging family performed on the same date of service using the multiple imaging composite APC payment methodology. We stated that we continue to believe that this policy would reflect and promote the efficiencies hospitals can achieve when performing multiple imaging procedures during a single session.
The proposed CY 2018 payment rates for the five multiple imaging composite APCs (APCs 8004, 8005, 8006, 8007, and 8008) were based on proposed geometric mean costs calculated from a partial year of CY 2016 claims available for the CY 2018 OPPS/ASC proposed rule that qualified for composite payment under the current policy (that is, those claims reporting more than one procedure within the same family on a single date of service). To calculate the proposed geometric mean costs, we used the same methodology that we used to calculate the final geometric mean costs for these composite APCs since CY 2014, as described in the CY 2014 OPPS/ASC final rule with comment period (78 FR 74918). The imaging HCPCS codes referred to as “overlap bypass codes” that we removed from the bypass list for purposes of calculating the proposed multiple imaging composite APC geometric mean costs, in accordance with our established methodology as stated in the CY 2014 OPPS/ASC final rule with comment period (78 FR 74918), were identified by asterisks in Addendum N to the CY 2018 OPPS/ASC proposed rule (which is available via the Internet on the CMS Web site) and were discussed in more detail in section II.A.1.b. of the CY 2018 OPPS/ASC proposed rule.
For the CY 2018 OPPS/ASC proposed rule, we were able to identify approximately 634,918 “single session” claims out of an estimated 1.7 million potential claims for payment through composite APCs from our ratesetting claims data, which represents approximately 36 percent of all eligible claims, to calculate the proposed CY 2018 geometric mean costs for the multiple imaging composite APCs. Table 6 of the CY 2018 OPPS/ASC proposed rule listed the proposed HCPCS codes that would be subject to the multiple imaging composite APC policy and their respective families and approximate composite APC proposed geometric mean costs for CY 2018.
After consideration of the public comments we received, we are finalizing our proposal to continue the use of multiple imaging composite APCs to pay for services providing more than one imaging procedure from the same family on the same date, without modification. Table 7 below lists the HCPCS codes that will be subject to the multiple imaging composite APC policy and their respective families and approximate composite APC proposed geometric mean costs for CY 2018.
Like other prospective payment systems, the OPPS relies on the concept of averaging to establish a payment rate for services. The payment may be more or less than the estimated cost of providing a specific service or a bundle of specific services for a particular patient. The OPPS packages payments for multiple interrelated items and services into a single payment to create incentives for hospitals to furnish services most efficiently and to manage their resources with maximum flexibility. Our packaging policies support our strategic goal of using larger payment bundles in the OPPS to maximize hospitals' incentives to provide care in the most efficient manner. For example, where there are a variety of devices, drugs, items, and supplies that could be used to furnish a service, some of which are more costly than others, packaging encourages hospitals to use the most cost-efficient item that meets the patient's needs, rather than to routinely use a more expensive item, which often occurs if separate payment is provided for the item.
Packaging also encourages hospitals to effectively negotiate with manufacturers and suppliers to reduce the purchase price of items and services or to explore alternative group purchasing arrangements, thereby encouraging the most economical health care delivery. Similarly, packaging encourages hospitals to establish protocols that ensure that necessary services are furnished, while scrutinizing the services ordered by practitioners to maximize the efficient use of hospital resources. Packaging payments into larger payment bundles promotes the predictability and accuracy of payment for services over time. Finally, packaging may reduce the importance of refining service-specific payment because packaged payments include costs associated with higher cost cases requiring many ancillary items and services and lower cost cases requiring fewer ancillary items and services. Because packaging encourages efficiency and is an essential component of a prospective payment system, packaging payments for items and services that are typically integral, ancillary, supportive, dependent, or adjunctive to a primary service has been a fundamental part of the OPPS since its implementation in August 2000. For an extensive discussion of the history and background of the OPPS packaging policy, we refer readers to the CY 2000 OPPS final rule (65 FR 18434), the CY 2008 OPPS/ASC final rule with comment period (72 FR 66580), the CY 2014 OPPS/ASC final rule with comment period (78 FR 74925), the CY 2015 OPPS/ASC final rule with comment period (79 FR 66817), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70343), and the CY 2017 OPPS/ASC final rule with comment period (81 FR 79592). As we continue to develop larger payment groups that more broadly reflect services provided in an encounter or episode of care, we have expanded the OPPS packaging policies. Most, but not necessarily all, items and services currently packaged in the OPPS are listed in 42 CFR 419.2(b). Our overarching goal is to make OPPS payments for all services paid under the OPPS more consistent with those of a prospective payment system and less like those of a per-service fee schedule, which pays separately for each coded item. As a part of this effort, we have continued to examine the payment for items and services provided under the OPPS to determine which OPPS services can be packaged to further achieve the objective of advancing the OPPS toward a more prospective payment system.
For CY 2018, we examined the items and services currently provided under the OPPS, reviewing categories of integral, ancillary, supportive, dependent, or adjunctive items and services for which we believe payment would be appropriately packaged into payment of the primary service that they support. Specifically, we examined the HCPCS code definitions (including CPT code descriptors) and outpatient hospital billing patterns to determine whether there were categories of codes for which packaging would be appropriate according to existing OPPS packaging policies or a logical expansion of those existing OPPS packaging policies. In the CY 2018 OPPS/ASC proposed rule (82 FR 33584 through 33585), for CY 2018, we proposed to conditionally package the costs of selected newly identified ancillary services into payment with a primary service where we believe that the packaged item or service is integral, ancillary, supportive, dependent, or adjunctive to the provision of care that was reported by the primary service HCPCS code. Below we discuss the items and services that we proposed to package beginning in CY 2018.
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 74942 through 74945), we finalized a policy to unconditionally package procedures described by add-on codes. Procedures described by add-on codes represent an extension or continuation of a primary procedure, which means that they are typically supportive, dependent, or adjunctive to a primary service. The primary code defines the purpose and typical scope of the patient encounter and the add-on code describes incremental work, when the extent of the procedure encompasses a range rather than a single defined endpoint applicable to all patients. Given the dependent nature and adjunctive characteristics of procedures described by add-on codes and in light of longstanding OPPS packaging principles, we finalized a policy to unconditionally package add-on codes with the primary procedure. However, in response to stakeholder comments on the appropriateness of packaging drug administration add-on codes, we did not finalize our proposal to package drug administration add-on codes (78 FR 74945).
In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66819 through 66822), we conditionally packaged payment for ancillary services assigned to APCs with a geometric mean cost of less than or equal to $100 (prior to application of the conditional packaging status indicator). The ancillary services that we identified are primarily minor diagnostic tests and procedures that are often performed with a primary service, although there are instances where hospitals provide such services alone and without another primary service during the same encounter. Under this policy, we assigned the conditionally packaged services to status indicator “Q1”, which indicates that the service is separately payable when not billed on the same claim as a HCPCS code assigned status indicator “S”, “T”, or “V”. Exclusions to this ancillary service packaging policy include preventive services, certain psychiatric and counseling-related services, and certain low-cost drug administration services. In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66819), we indicated that we did not propose to package certain low-cost drug administration services because we were examining various alternative payment policies for drug administration, including the associated drug administration add-on codes.
As stated earlier, our overarching goal is to make OPPS payments for all services paid under the OPPS more consistent with those of a prospective payment system and less like those of a per-service fee schedule. To achieve this goal, it is important that we are consistent in our approach to packaging items and services under the established packaging categories. Although we excluded packaging of low-cost drug administration services from the ancillary services packaging policy in the CY 2015 rulemaking, separate payment for drug administration services is an example of inconsistent application of our packaging policy where we are continuing to pay separately for a service, regardless of cost and performance with another service. Given the frequency of drug administration in hospital outpatient care, in the CY 2018 OPPS/ASC proposed rule, we stated that we believe it is appropriate for us to reconsider whether payment for drug administration services with a geometric mean cost of less than or equal to $100 (prior to application of the conditional packaging status indicator) should continue to be excluded from the ancillary services packaging policy.
As part of our review of CY 2016 claims data used for ratesetting in the CY 2018 OPPS/ASC proposed rule, we examined drug administration billing patterns and payment for drug administration services under the OPPS. Based on our analysis of CY 2016 claims data used for the CY 2018 proposed rule ratesetting, we found that the geometric mean cost for APC 5691 (Level 1 Drug Administration) is approximately $37 and the geometric mean cost for APC 5692 (Level 2 Drug Administration) is approximately $59. In addition, we observed that drug administration services in APC 5692 are frequently reported on the same claim with other separately payable services, such as an emergency department or clinic visit, while drug administration services in APC 5691 are sometimes reported with other separately payable services. Accordingly, Medicare data show that these drug administration services are currently being provided as part of another separately payable service for which two separate payments are made, and support that packaging these services, when they are reported with another separately payable service, is appropriate. Further, packaging for Levels 1 and 2 Drug Administration services is consistent with the ancillary packaging policy that was adopted in CY 2015, as noted earlier in this section. Therefore, given the low geometric mean costs of drug administration services in APC 5691 and APC 5692 as well as their associated billing patterns, we stated in the CY 2018 OPPS/ASC proposed rule that we believe that when these services are performed with another separately payable service, they should be packaged, but that they should be separately paid when performed alone. That is, we stated that we believe it is no longer necessary to exclude low-cost drug administration services from packaging under the ancillary services packaging policy adopted in CY 2015.
In addition, as we examine payment differences between the hospital outpatient department and the physician office for similar services, under the OPPS, hospitals may receive separate payments for a clinic (office) visit and a drug administration service. In contrast, physicians are not eligible to receive payment for an office visit when a drug administration service is also provided. As a result, for furnishing the same drug administration service, hospitals receive an additional payment for which physician offices are not eligible. We stated in the proposed rule that we believe that conditional packaging of drug administration services would promote equitable payment between the physician office and the hospital outpatient hospital department. Accordingly, for CY 2018, we proposed to conditionally package payment for HCPCS codes describing drug administration services in APC 5691 and APC 5692, except for add-on codes and preventive services, when these services are performed with another service.
Because preventive services are excluded from our packaging policies, we proposed to continue to pay separately for Medicare Part B vaccine administration services. In addition, at that time, we did not propose to package any drug administration services in APC 5693 (Level 3 Drug Administration) or APC 5694 (Level 4 Drug Administration), but indicated our interest in public comments pertaining to whether payment for the services in these APCs may be appropriate for packaging. The proposed status indicators for drug administration services in APC 5691 and APC 5692 were listed in Table 7 of the proposed rule.
• Low-cost drug administration services are dissimilar from other low cost ancillary services in that drug administration services are separate and distinct stand-alone services and not adjunctive, supportive, or dependent to a primary procedure.
• The proposal would not promote equitable payment between the physician's office and the hospital outpatient department because, in accordance with CMS guidelines, there are clinical circumstances where a physician may receive payment for both a drug administration service and an office visit.
• Because all drugs are separately payable in the physician's office, unlike under the OPPS, the proposal, if implemented, would exacerbate differences in payment between the hospital outpatient department and the physician office setting. Commenters expressed doubt that the full cost of a packaged drug administration service or drug would be appropriately and accurately reflected in the payment for another separately payable procedure.
• Packaging drug administration services with other services could result in hospitals scheduling patients for multiple visits, thereby reducing access to care and quality of care.
• Further analysis of the impact packaging drug administration services would have on APCs should be conducted prior to making a policy change.
• In general, packaging discourages full reporting of hospital costs, which impacts the accuracy of cost data that are used to calculate OPPS payment rates.
In addition, at the summer 2017 meeting of the HOP Panel, the HOP Panel recommended that CMS not implement its proposal to package drug administration services described under APC 5691 (Level 1 Drug Administration) and APC 5692 (Level 2 Drug Administration).
Furthermore, regarding the comments that low-cost drug administration services are separate and distinct standalone services and not adjunctive, supportive, or dependent to a primary procedure, we disagree based on typical billing patterns for these services. As stated earlier in the introduction to this section, ancillary services are often performed with a primary service. Because these low-cost drug administration services are typically furnished with another primary service and are assigned to APCs with a geometric mean cost of less than or equal to $100 (prior to the application of the conditional packaging status indicator), we believe these services fall under the ancillary services packaging policy.
In addition, as stated in the proposed rule, we believe that conditional packaging of drug administration services will promote equitable payment between the physician office and the hospital outpatient department. However, we clarify that while typically physicians are not eligible to receive payment for an office visit when a drug administration service is also provided, we acknowledge that Medicare will pay for both services when the office visit CPT code is reported with Modifier 25 (Significant, separately identifiable evaluation and management services by the same physician on the day of the procedure).
With respect to data availability and general requests for further CMS analysis, we believe that the data made available to the public as part of the proposed rule were appropriate, clear, and sufficient for interested parties to conduct analyses to evaluate facility-specific impacts of the proposed policy. It is unclear what the commenters meant by requesting that CMS further analyze the effects of the proposal on APCs, as the commenters did not specify any particular analysis that CMS should conduct or data that CMS should provide that is not already available to the public. Because the OPPS is a budget neutral payment system, packaging a procedure does not remove its costs from ratesetting.
With respect to commenters' concerns on reporting of hospital costs for packaged services, we remind commenters that hospitals are expected to report all HCPCS codes that describe the services provided, regardless of whether or not those services are separately paid or their payment is packaged. The calculation of OPPS relative payment weights that reflect the relative resources required for HOPD services is the foundation of the OPPS. We rely on hospitals to bill all HCPCS codes accurately in accordance with their code descriptors and CPT and CMS instructions, as applicable, and to report charges on claims and charges and costs on their Medicare hospital cost report appropriately (77 FR 68324).
Therefore, for the reasons stated above, we believe that it is appropriate, and a logical expansion of our ancillary services policy, to finalize our proposal to unconditionally package low-cost drug administration services assigned to APCs 5691 and 5692. Accordingly, we are not accepting the HOP Panel's recommendation to not finalize our proposal.
In summary, after consideration of the public comments we received, we are finalizing, without modification, the proposed policy to conditionally package low-cost drug administration services assigned to APC 5691 and APC 5692.
Because preventive services are excluded from our packaging policies, we are continuing to pay separately for Medicare Part B vaccine administration services. In addition, at this time, we are not packaging any drug administration services assigned to APC 5693 (Level 3 Drug Administration) or APC 5694 (Level 4 Drug Administration). The status indicators for drug administration services in APC 5691 and APC 5692 for CY 2018 are listed in Table 8 below.
With respect to drug administration add-on codes, as discussed in the CY 2014 OPPS/ASC proposed rule (78 FR 43573), we proposed to unconditionally package all drug administration services described by add-on codes. In response to the proposal, commenters objected to packaging drug administration add-on codes, which typically describe each additional hour of infusion or each additional intravenous push, among others, in addition to the initial drug administration service. The commenters believed that such a policy could disadvantage providers of longer drug administration services, which are often protocol-driven and are not necessarily dictated by the hospital, but by the characteristics of the specific drug or biological being administered to the patient. In response to these comments, we stated in the CY 2014 OPPS/ASC final rule with comment period (78 FR 74945) that, given the frequency of drug administration services in the hospital outpatient department and their use in such a wide variety of different drug treatment protocols for various diseases in all types of hospitals, further study of the payment methodology for these services was warranted at that time. Therefore, we did not finalize our proposal to package the drug administration add-on codes in CY 2014. However, we stated we would continue to explore other payment options, including packaging and variations on packaging, in future years.
In the CY 2018 OPPS/ASC proposed rule, we did not propose to package drug administration add-on codes for CY 2018 because we wanted stakeholder input on a payment methodology that supports the principles of a prospective payment system while ensuring patient access to prolonged infusion services. Instead, we solicited public comment on whether conditionally or unconditionally packaging such codes would create access to care issues or have other unintended consequences. Specifically, we requested public comments on the following: (1) Whether we should conditionally or unconditionally package drug administration services add-on codes; (2) how we should consider or incorporate the varied clinical drug protocols that result in different infusion times into a drug administration service add-on code payment proposal; and (3) other recommendations on an encounter-based payment approach for drug administration services that are described by add-on codes when furnished in the hospital outpatient department setting.
At the August 22, 2016 HOP Panel meeting, a stakeholder expressed concern regarding conditional packaging of multiple pathology services. When multiple conditionally packaged services are billed on the same claim, the costs of the lowest paying services are bundled into the cost of the highest paying service and payment is made based on the highest single payable service. The stakeholder requested that CMS create a pathology composite APC to more appropriately pay for claims with only multiple pathology services and no other separately payable service such as a surgical procedure or a clinic visit. The HOP panel recommended that CMS develop a composite APC for pathology services when multiple pathology services are provided on a claim with no other payable services. The HOP Panel also requested that CMS take into consideration the stakeholder presentation comments made at the August 22, 2016 HOP Panel meeting regarding hospital pathology laboratories as CMS evaluates conditional packaging to determine whether an accommodation can be made. Specifically, the stakeholder expressed concern with conditional packaging of pathology services, particularly when payment is limited to the single highest paying code, regardless of the number of services provided or specimens tested.
In response to these HOP Panel requests and recommendation, we stated that we may consider the stakeholders' request for a pathology composite APC as well as additional composite APCs for future rulemaking (81 FR 79588). In light of these requests and recommendation, in development of the CY 2018 OPPS/ASC proposed rule, we evaluated and considered a pathology composite APC when multiple pathology services are performed and billed without a separately payable service on the same claim. To understand the frequency of billing multiple pathology services and no other separately payable codes on the same claim by hospital outpatient departments, we examined currently available claims data to identify the frequency distribution of pathology codes within the CPT code range 88300 to 88361. The claim frequency breakdown was displayed in Table 8 of the proposed rule (82 FR 33587).
Based on our analysis of claims data for the proposed rule, the majority of pathology only OPPS claims are reported with one pathology code. Therefore, as we stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33588), we believe that it is neither a frequent occurrence nor a common occurrence for a provider to submit a claim for payment under the OPPS with multiple pathology services and no other separately payable service.
With regard to the HOP Panel's recommendation to develop a composite APC for pathology services when multiple pathology services are provided on a claim with no other payable services, we used CY 2016 claims data available for the CY 2018 OPPS/ASC proposed rule to model four hypothetical pathology composite APCs. That is, following our standard packaging methodology, we modeled four hypothetical pathology composite APCs based on the following clinical scenarios that were specifically requested by a stakeholder at the August 2016 HOP Panel meeting:
• Hypothetical Composite APC A: Claims that contain 2-4 pathology units (CPT codes 88302 through 88309) with or without special stains (CPT codes 88312 through 88314);
• Hypothetical Composite APC B: Claims that contain 5 or more pathology units (CPT codes 88302 through 88309) with or without special stains (CPT codes 88312 through 88314);
• Hypothetical Composite APC C: Claims that contain 2-4 pathology units (CPT codes 88302 through 88309) with immunostains (CPT codes 88341, 88342, 88346, 88350, 88360, 88361); and
• Hypothetical Composite APC D: Claims that contain 5 or more pathology units (CPT codes 88302 through 88309)
In addition, for the proposed rule, we evaluated the volume of services and costs for each hypothetical composite. Results from modeling the four composite scenarios showed low claim volume, which indicates that the suggested pathology code combinations are infrequently billed by hospital outpatient departments and which may mean that these are not likely clinical scenarios in hospital outpatient departments. A summary of the results from our composite analysis was presented in Table 9 of the proposed rule (82 FR 33587). We refer readers to Addendum B to the CY 2018 OPPS/ASC proposed rule (which is available via the Internet on the CMS Web site) for the CPT code descriptors.
As we move toward larger payment bundles under the OPPS, the necessity of composite APCs diminishes. For example, in the CY 2018 OPPS/ASC proposed rule, we proposed to delete composite APC 8001 (LDR Prostate Brachytherapy Composite) and to provide payment for the component procedures through the C-APC payment methodology. Composite APCs were a precursor to C-APCs. In CY 2008, we implemented composite APCs to provide a single payment for groups of services that are typically performed together during a single clinical encounter and that result in the provision of a complete service (72 FR 66650 through 66652). Because a C-APC would treat all individually reported codes as representing components of the comprehensive service, all of the elements of the composite service are included in the C-APC payment. In addition, given the infrequent occurrence of multiple pathology services on the same claim without a separately payable service, we do not believe a composite APC is necessary or warranted.
Therefore, for CY 2018, we did not propose to create a pathology composite APC or additional composite APCs for stakeholder-requested services, such as X-ray services, respiratory services, cardiology services, or allergy testing services. However, we solicited public comments on our packaging policies, as discussed under section II.A.3.d. of this final rule with comment period.
We did not receive any public comments on our analysis of packaging of pathology services.
As previously noted, packaging is an inherent principle of a prospective payment system. The OPPS, like other prospective payment systems, relies on the concept of averaging, where the payment may be more or less than the estimated costs of providing a service or package of services for a particular patient, but with the exception of outlier cases, is adequate to ensure access to appropriate care. Packaging and bundling payments for multiple interrelated services into a single payment create incentives for providers to furnish services in the most efficient way by enabling hospitals to manage their resources with maximum flexibility, thereby encouraging long-term cost containment. Decisions about packaging and bundling payment involve a balance between ensuring some separate payment for individual services or items while establishing incentives for efficiency through larger units of payment.
As the OPPS continues to move toward prospectively determined encounter-based payments and away from separate fee schedule-like payments, we continue to hear concerns from stakeholders that our packaging policies may be hampering patient access or resulting in other undesirable consequences. However, we have not observed significant fluctuations in our data that show a sharp decline of the volume of packaged items and services, nor have we heard from Medicare beneficiaries specifically about access issues or other concerns with packaged items and services. However, given that aggregate spending and utilization continue to increase for covered hospital outpatient services, it is unclear what, if any, adverse effect packaging has on beneficiary access to care. Specifically, in the CY 2018 OPPS/ASC proposed rule (82 FR 33588), within the framework of existing packaging categories, such as drugs that function as supplies in a surgical procedure or diagnostic test or procedure, we expressed interest in stakeholder feedback on common clinical scenarios involving currently packaged HCPCS codes for which stakeholders believe packaged payment is not appropriate under the OPPS. Likewise, outside the framework of existing packaging categories, we expressed interest in stakeholder feedback on common clinical scenarios involving separately payable HCPCS codes for which payment would be most appropriately packaged under the OPPS. In the proposed rule, we solicited public comments from a broad cross-section of stakeholders, including beneficiaries, patient advocates, hospital providers, clinicians, manufacturers, and other interested parties.
We established a policy in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68283) of using geometric mean-based APC costs to calculate relative payment weights under the OPPS. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79594 through 79595), we applied this policy and calculated the relative payment weights for each APC for CY 2017 that were shown in Addenda A and B to that final rule with comment period (which were made available via the Internet on the CMS Web site) using the APC costs discussed in sections II.A.1. and II.A.2. of that final rule with comment period. For CY 2018, as we did for CY 2017, we proposed to continue to apply the policy established in CY 2013 and calculate relative payment weights for each APC for CY 2018 using geometric mean-based APC costs (82 FR 33588).
For CY 2012 and CY 2013, outpatient clinic visits were assigned to one of five levels of clinic visit APCs, with APC 0606 representing a mid-level clinic visit. In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75036 through 75043), we finalized a policy that created alphanumeric HCPCS code G0463 (Hospital outpatient clinic visit for assessment and management of a patient), representing any and all clinic visits under the OPPS. HCPCS code G0463 was assigned to APC 0634 (Hospital Clinic Visits). We also finalized a policy to use CY 2012 claims data to develop the CY 2014 OPPS payment rates for HCPCS code G0463 based on the total geometric mean cost of the levels one through five CPT E/M codes for clinic visits previously recognized under the OPPS (CPT codes 99201 through 99205 and 99211 through 99215). In addition, we finalized a policy to no longer recognize a distinction between new and established patient clinic visits.
For CY 2016, we deleted APC 0634 and reassigned the outpatient clinic visit HCPCS code G0463 to APC 5012 (Level 2 Examinations and Related Services) (80 FR 70351). In the CY 2018 OPPS/ASC proposed rule (82 FR 33588), for CY 2018, as we did for CY 2017, we proposed to continue to standardize all of the relative payment weights to APC 5012. We stated that we believe that standardizing relative payment weights to the geometric mean of the APC to which HCPCS code G0463 is assigned maintains consistency in calculating unscaled weights that represent the cost of some of the most frequently provided OPPS services. For CY 2018, as we did for CY 2017, we proposed to assign APC 5012 a relative payment weight of 1.00 and to divide the geometric mean cost of each APC by the geometric mean cost for APC 5012 to derive the unscaled relative payment weight for each APC. The choice of the APC on which to standardize the relative payment weights does not affect payments made under the OPPS because we scale the weights for budget neutrality.
We did not receive any public comments on our proposal to use the geometric mean cost of APC 5012 to standardize relative payment weights for CY 2018. Therefore, we are finalizing our proposal and assigning APC 5012 the relative payment weight of 1.00, and using the relative payment weight for APC 5012 to derive the unscaled relative payment weight for each APC for CY 2018.
Section 1833(t)(9)(B) of the Act requires that APC reclassification and recalibration changes, wage index changes, and other adjustments be made in a budget neutral manner. Budget neutrality ensures that the estimated aggregate weight under the OPPS for CY 2018 is neither greater than nor less than the estimated aggregate weight that would have been made without the changes. To comply with this requirement concerning the APC changes, in the CY 2018 OPPS/ASC proposed rule (82 FR 33588), we proposed to compare the estimated aggregate weight using the CY 2017 scaled relative payment weights to the estimated aggregate weight using the proposed CY 2018 unscaled relative payment weights.
For CY 2017, we multiplied the CY 2017 scaled APC relative payment weight applicable to a service paid under the OPPS by the volume of that service from CY 2016 claims to calculate the total relative payment weight for each service. We then added together the total relative payment weight for each of these services in order to calculate an estimated aggregate weight for the year. For CY 2018, we proposed to apply the same process using the estimated CY 2018 unscaled relative payment weights rather than scaled relative payment weights. We proposed to calculate the weight scalar by dividing the CY 2017 estimated aggregate weight by the unscaled CY 2018 estimated aggregate weight.
For a detailed discussion of the weight scalar calculation, we refer readers to the OPPS claims accounting document available on the CMS Web site at:
We proposed to compare the estimated unscaled relative payment weights in CY 2018 to the estimated total relative payment weights in CY 2017 using CY 2016 claims data, holding all other components of the payment system constant to isolate changes in total weight. Based on this comparison, we proposed to adjust the calculated CY 2018 unscaled relative payment weights for purposes of budget neutrality. We proposed to adjust the estimated CY 2018 unscaled relative payment weights by multiplying them by a proposed weight scalar of 1.328 to ensure that the proposed CY 2018 relative payment weights are scaled to be budget neutral. The proposed CY 2018 relative payment weights listed in Addenda A and B to the proposed rule (which are available via the Internet on the CMS Web site) were scaled and incorporated the recalibration adjustments discussed in sections II.A.1. and II.A.2. of the proposed rule.
The final CY 2018 relative payment weights listed in Addenda A and B to the final rule with comment period (which are available via the Internet on the CMS Web site) were scaled and incorporate the recalibration adjustments discussed in sections II.A.1. and II.A.2. of this final rule with comment period.
Section 1833(t)(14) of the Act provides the payment rates for certain SCODs. Section 1833(t)(14)(H) of the Act provides that additional expenditures resulting from this paragraph shall not be taken into account in establishing the conversion factor, weighting, and other adjustment factors for 2004 and 2005 under paragraph (9), but shall be taken into account for subsequent years. Therefore, the cost of those SCODs (as discussed in section V.B.2. of this final rule with comment period) is included in the budget neutrality calculations for the CY 2018 OPPS.
We did not receive any public comments on the proposed weight scalar calculation. Therefore, we are finalizing our proposal to use the calculation process described in the proposed rule, without modification, for CY 2018. Using updated final rule claims data, we are updating the estimated CY 2018 unscaled relative payment weights by multiplying them by a weight scalar of 1.4457 to ensure that the final CY 2018 relative payment weights are scaled to be budget neutral.
Section 1833(t)(3)(C)(ii) of the Act requires the Secretary to update the conversion factor used to determine the payment rates under the OPPS on an annual basis by applying the OPD fee schedule increase factor. For purposes of section 1833(t)(3)(C)(iv) of the Act, subject to sections 1833(t)(17) and 1833(t)(3)(F) of the Act, the OPD fee schedule increase factor is equal to the hospital inpatient market basket percentage increase applicable to hospital discharges under section 1886(b)(3)(B)(iii) of the Act. As stated in the CY 2018 OPPS/ASC proposed rule, in the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 19931), consistent with current law, based on IHS Global, Inc.'s fourth quarter 2016 forecast of the FY 2018 market basket increase, the proposed FY 2018 IPPS market basket update was 2.9 percent. However, sections 1833(t)(3)(F) and 1833(t)(3)(G)(v) of the Act, as added by section 3401(i) of the Patient Protection and Affordable Care Act of 2010 (Pub. L. 111-148) and as amended by section 10319(g) of that law and further amended by section 1105(e) of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152), provide adjustments to the OPD fee schedule increase factor for CY 2018.
Specifically, section 1833(t)(3)(F)(i) of the Act requires that, for 2012 and subsequent years, the OPD fee schedule increase factor under subparagraph (C)(iv) be reduced by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the Act defines the productivity adjustment as equal to the 10-year moving average of changes in annual economy-wide, private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable fiscal year, year, cost reporting period, or other annual period) (the “MFP adjustment”). In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51689 through 51692), we finalized our methodology for calculating and applying the MFP adjustment, and then
In the CY 2018 OPPS/ASC proposed rule, we proposed that if more recent data became subsequently available after the publication of the proposed rule (for example, a more recent estimate of the market basket increase and the MFP adjustment), we would use such updated data, if appropriate, to determine the CY 2018 market basket update and the MFP adjustment, which are components in calculating the OPD fee schedule increase factor under sections 1833(t)(3)(C)(iv) and 1833(t)(3)(F) of the Act, in this CY 2018 OPPS/ASC final rule with comment period. Consistent with that proposal, and the FY 2018 IPPS/LTCH PPS final rule (82 FR 38177), we applied the final FY 2018 market basket percentage increase (2.7 percent) and the final FY 2018 MFP adjustment (0.6 percent) to the OPD fee schedule increase factor for the CY 2018 OPPS.
In addition, section 1833(t)(3)(F)(ii) of the Act requires that, for each of years 2010 through 2019, the OPD fee schedule increase factor under section 1833(t)(3)(C)(iv) of the Act be reduced by the adjustment described in section 1833(t)(3)(G) of the Act. For CY 2018, section 1833(t)(3)(G)(v) of the Act provides a 0.75 percentage point reduction to the OPD fee schedule increase factor under section 1833(t)(3)(C)(iv) of the Act. Therefore, in accordance with sections 1833(t)(3)(F)(ii) and 1833(t)(3)(G)(v) of the Act, in the CY 2018 OPPS/ASC proposed rule, we proposed to apply a 0.75 percentage point reduction to the OPD fee schedule increase factor for CY 2018.
We note that section 1833(t)(3)(F) of the Act provides that application of this subparagraph may result in the OPD fee schedule increase factor under section 1833(t)(3)(C)(iv) of the Act being less than 0.0 percent for a year, and may result in OPPS payment rates being less than rates for the preceding year. As described in further detail below, we are applying an OPD fee schedule increase factor of 1.35 percent for the CY 2018 OPPS (which is 2.7 percent, the final estimate of the hospital inpatient market basket percentage increase, less the final 0.6 percentage point MFP adjustment, and less the 0.75 percentage point additional adjustment).
Hospitals that fail to meet the Hospital OQR Program reporting requirements are subject to an additional reduction of 2.0 percentage points from the OPD fee schedule increase factor adjustment to the conversion factor that would be used to calculate the OPPS payment rates for their services, as required by section 1833(t)(17) of the Act. For further discussion of the Hospital OQR Program, we refer readers to section XIII. of this final rule with comment period.
In the CY 2018 OPPS/ASC proposed rule, we proposed to amend 42 CFR 419.32(b)(1)(iv)(B) by adding a new paragraph (
We did not receive any public comments on our proposal. Therefore, we are implementing our proposal without modification.
To set the OPPS conversion factor for the CY 2018 OPPS/ASC proposed rule, we proposed to increase the CY 2017 conversion factor of $75.001 by 1.75 percent (82 FR 33589). In accordance with section 1833(t)(9)(B) of the Act, we proposed further to adjust the conversion factor for CY 2018 to ensure that any revisions made to the wage index and rural adjustment were made on a budget neutral basis. We proposed to calculate an overall budget neutrality factor of 0.9999 for wage index changes by comparing proposed total estimated payments from our simulation model using the proposed FY 2018 IPPS wage indexes to those payments using the FY 2017 IPPS wage indexes, as adopted on a calendar year basis for the OPPS.
For the CY 2018 OPPS/ASC proposed rule, we proposed to maintain the current rural adjustment policy, as discussed in section II.E. of this final rule with comment period. Therefore, the proposed budget neutrality factor for the rural adjustment was 1.0000.
For the CY 2018 OPPS/ASC proposed rule, we proposed to continue previously established policies for implementing the cancer hospital payment adjustment described in section 1833(t)(18) of the Act, as discussed in section II.F. of this final rule with comment period. We proposed to calculate a CY 2018 budget neutrality adjustment factor for the cancer hospital payment adjustment by comparing estimated total CY 2018 payments under section 1833(t) of the Act, including the proposed CY 2018 cancer hospital payment adjustment, to estimated CY 2018 total payments using the CY 2017 final cancer hospital payment adjustment as required under section 1833(t)(18)(B) of the Act. The CY 2018 proposed estimated payments applying the proposed CY 2018 cancer hospital payment adjustment were less than estimated payments applying the CY 2017 final cancer hospital payment adjustment. Therefore, we proposed to apply a budget neutrality adjustment factor of 1.0003 to the conversion factor for the cancer hospital payment adjustment. In accordance with section 16002(b) of the 21st Century Cures Act, we stated in the proposed rule that we are applying a budget neutrality factor calculated as if the proposed cancer hospital adjustment target payment-to-cost ratio was 0.90, not the 0.89 target payment-to-cost ratio we are applying as stated in section II.F. of the proposed rule.
For the CY 2018 OPPS/ASC proposed rule, we estimated that proposed pass-through spending for drugs, biologicals, and devices for CY 2018 would equal approximately $26.2 million, which represented 0.04 percent of total projected CY 2018 OPPS spending. Therefore, the proposed conversion factor would be adjusted by the difference between the 0.26 percent estimate of pass-through spending for CY 2017 and the 0.04 percent estimate of proposed pass-through spending for CY 2018, resulting in a proposed adjustment for CY 2018 of 0.22 percent. Proposed estimated payments for outliers would remain at 1.0 percent of total OPPS payments for CY 2018. We estimated for the proposed rule that outlier payments would be 1.04 percent of total OPPS payments in CY 2017; the 1.0 percent for proposed outlier payments in CY 2018 would constitute a 0.04 percent decrease in payment in CY 2018 relative to CY 2017.
For the CY 2018 OPPS/ASC proposed rule, we also proposed that hospitals that fail to meet the reporting requirements of the Hospital OQR Program would continue to be subject to a further reduction of 2.0 percentage points to the OPD fee schedule increase factor. For hospitals that fail to meet the requirements of the Hospital OQR Program, we proposed to make all other adjustments discussed above, but use a reduced OPD fee schedule update factor of −0.25 percent (that is, the proposed OPD fee schedule increase factor of 1.75 percent further reduced by 2.0 percentage points). This would result in a proposed reduced conversion factor for CY 2018 of $74.953 for hospitals that fail to meet the Hospital OQR Program requirements (a difference of −1.530 in
In summary, for CY 2018, we proposed to amend § 419.32(b)(1)(iv)(B) by adding a new paragraph (
For CY 2018, we proposed to use a conversion factor of $76.483 in the calculation of the national unadjusted payment rates for those items and services for which payment rates are calculated using geometric mean costs; that is, the proposed OPD fee schedule increase factor of 1.75 percent for CY 2018, the required proposed wage index budget neutrality adjustment of approximately 0.9999, the proposed cancer hospital payment adjustment of 1.0003, and the proposed adjustment of 0.22 percentage point of projected OPPS spending for the difference in the pass-through spending and outlier payments that resulted in a proposed conversion factor for CY 2018 of $76.483.
We invited public comments on these proposals. However, we did not receive any public comments. Therefore, we are finalizing these proposals without modification, as discussed below.
For CY 2018, we proposed to continue previously established policies for implementing the cancer hospital payment adjustment described in section 1833(t)(18) of the Act, as discussed in section II.F. of this final rule with comment period. Based on the updated claims data for this final rule with comment period used in calculating the cancer hospital payment adjustment in section II.F. of this final rule with comment period, the target PCR for the cancer hospital payment adjustment, which was 0.91 for CY 2017, is 0.88 for CY 2018. Because we budget neutralize using the target PCR ratio prior to implementation of section 16002 (b) of the 21st Century Cures Act, we are applying a budget neutrality adjustment factor of 1.0008 to the conversion factor for the cancer hospital payment adjustment for CY 2018.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33712), we estimated a 1.4 percent adjustment to nondrug OPPS payment rates as a result of the proposed payment adjustment to separately payable nonpass-through drugs purchased under the 340B Program. As part of that proposed policy, we noted that our adjustment in the final rule could potentially change as a result of changes such as updated data, modifications to the estimate methodology, and other factors. Applying the final payment policy for drugs purchased under the 340B Program, as described in section V.B.7. of this final rule with comment period, results in an estimated reduction of approximately $1.6 billion in separately paid OPPS drug payments. To ensure budget neutrality under the OPPS after applying this alternative payment methodology for drugs purchased under the 340B Program, we applied an offset of approximately $1.6 billion into the OPPS conversion factor, which results in a final adjustment of 1.0319 to the OPPS conversion factor.
As a result of these finalized policies, the OPD fee schedule increase factor for the CY 2018 OPPS is 1.35 percent (which is 2.7 percent, the estimate of the hospital inpatient market basket percentage increase, less the 0.6 percentage point MFP adjustment, and less the 0.75 percentage point additional adjustment). For CY 2018, we are using a conversion factor of $78.636 in the calculation of the national unadjusted payment rates for those items and services for which payment rates are calculated using geometric mean costs; that is, the OPD fee schedule increase factor of 1.35 percent for CY 2018, the required wage index budget neutrality adjustment of approximately 0.9997, the cancer hospital payment adjustment of 1.0008, the adjustment for drugs purchased under the 340B Program of 1.0319, and the adjustment of 0.2 percentage point of projected OPPS spending for the difference in the pass-through spending and outlier payments that result in a conversion factor for CY 2018 of $78.636.
Section 1833(t)(2)(D) of the Act requires the Secretary to determine a wage adjustment factor to adjust the portion of payment and coinsurance attributable to labor-related costs for relative differences in labor and labor-related costs across geographic regions in a budget neutral manner (codified at 42 CFR 419.43(a)). This portion of the OPPS payment rate is called the OPPS labor-related share. Budget neutrality is discussed in section II.B. of this final rule with comment period.
The OPPS labor-related share is 60 percent of the national OPPS payment. This labor-related share is based on a regression analysis that determined that, for all hospitals, approximately 60 percent of the costs of services paid under the OPPS were attributable to wage costs. We confirmed that this labor-related share for outpatient services is appropriate during our regression analysis for the payment adjustment for rural hospitals in the CY 2006 OPPS final rule with comment period (70 FR 68553). In the CY 2018 OPPS/ASC proposed rule (82 FR 33590), we proposed to continue this policy for the CY 2018 OPPS. We refer readers to section II.H. of this final rule with comment period for a description and an example of how the wage index for a particular hospital is used to determine payment for the hospital. We did not receive any public comments on this proposal. Therefore, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33590), we are finalizing our proposal to continue this policy as discussed above for the CY 2018 OPPS without modification.
As discussed in the claims accounting narrative included with the supporting documentation for this final rule with comment period (which is available via the Internet on the CMS Web site), for estimating APC costs, we standardize 60 percent of estimated claims costs for geographic area wage variation using the same FY 2018 pre-reclassified wage index that the IPPS uses to standardize costs. This standardization process removes the effects of differences in area wage levels from the determination of a national unadjusted OPPS payment rate and copayment amount.
Under 42 CFR 419.41(c)(1) and 419.43(c) (published in the OPPS April 7, 2000 final rule with comment period (65 FR 18495 and 18545)), the OPPS adopted the final fiscal year IPPS post-reclassified wage index as the calendar year wage index for adjusting the OPPS standard payment amounts for labor market differences. Therefore, the wage index that applies to a particular acute care, short-stay hospital under the IPPS also applies to that hospital under the OPPS. As initially explained in the September 8, 1998 OPPS proposed rule (63 FR 47576), we believe that using the IPPS wage index as the source of an adjustment factor for the OPPS is reasonable and logical, given the inseparable, subordinate status of the HOPD within the hospital overall. In accordance with section 1886(d)(3)(E) of the Act, the IPPS wage index is updated annually.
The Affordable Care Act contained several provisions affecting the wage index. These provisions were discussed in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74191). Section 10324 of the Affordable Care Act added section 1886(d)(3)(E)(iii)(II)
We did not receive any public comments on this proposal. Therefore, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33591), we are finalizing our proposal to implement the frontier State floor under the OPPS in the same manner as we have since CY 2011. We note that, after we made our proposal in the FY 2018 IPPS/LTCH PPS proposed rule not to extend the imputed floor under the IPPS for FY 2018 and subsequent fiscal years (82 FR 19904 through 19905), and our proposal in the CY 2018 OPPS/ASC proposed rule not to extend the imputed floor under the OPPS for CY 2018 and subsequent years (82 FR 33592), we decided in the FY 2018 IPPS/LTCH PPS final rule not to finalize our proposal to discontinue the imputed floor under the IPPS (82 FR 38138 through 38142). As discussed below, consistent with the FY 2018 IPPS/LTCH PPS final rule, we are not finalizing our proposal to discontinue application of the imputed floor under the OPPS. This means that the applicable wage index, which can be superseded by the frontier State wage index if the applicable criteria are met, could also be affected by the imputed floor. We discuss our policy on the extension of the imputed floor under the IPPS as finalized in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38142), and under the OPPS as finalized in this rule, in more detail later in this section.
In addition to the changes required by the Affordable Care Act, we note that the FY 2018 IPPS wage indexes continue to reflect a number of adjustments implemented over the past few years, including, but not limited to, reclassification of hospitals to different geographic areas, the rural floor provisions, an adjustment for occupational mix, and an adjustment to the wage index based on commuting patterns of employees (the out-migration adjustment). In the CY 2018 OPPS/ASC proposed rule, we referred readers to the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 19898 through 19915) for a detailed discussion of all proposed changes to the FY 2018 IPPS wage indexes. We note that, in the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 19905), we proposed not to apply the imputed floor to the IPPS wage index computations for FY 2018 and subsequent fiscal years. Consistent with this, we proposed in the CY 2018 OPPS/ASC proposed rule (82 FR 33592) not to extend the imputed floor policy under the OPPS beyond December 31, 2017 (the date the imputed floor policy is set to expire under the OPPS). However, in the FY 2018 IPPS/LTCH PPS final rule, we did not finalize our proposal to discontinue the imputed floor under the IPPS, and instead decided to temporarily extend the imputed floor for an additional year through FY 2018, while we continue to assess the effects of this policy and whether to continue or discontinue the imputed floor for the long term. As discussed below, consistent with the FY 2018 IPPS/LTCH PPS final rule, we are not finalizing our proposal to discontinue application of the imputed floor under the OPPS, but are instead continuing the imputed floor policy under the OPPS for an additional year, through December 31, 2018. We refer readers to the FY 2018 IPPS/LTCH PPS proposed and final rules (82 FR 19898 through 19915 and 82 FR 38129 through 38157, respectively) for a detailed discussion of all proposed and final changes to the FY 2018 IPPS wage indexes (including our proposed and final policy regarding the imputed floor for FY 2018 and subsequent fiscal years). In addition, we refer readers to the CY 2005 OPPS final rule with comment period (69 FR 65842 through 65844) and subsequent OPPS rules for a detailed discussion of the history of these wage index adjustments as applied under the OPPS.
Summarized below are comments we received regarding the application of the rural and imputed floor policies under the OPPS, along with our responses.
After consideration of the public comments we received and for the reasons discussed above, consistent with the FY 2018 IPPS/LTCH PPS final rule, we have decided to extend the imputed floor policy under the OPPS for an additional year, through December 31, 2018, while we continue to assess the effects of this policy and whether to continue or discontinue the imputed floor for the long term. Therefore, we are not finalizing our proposal to discontinue the imputed floor policy under the OPPS. We continue to believe that using the final fiscal year IPPS post-reclassified wage index, inclusive of any adjustments (including the imputed floor), as the wage index for the OPPS to determine the wage adjustments for both the OPPS payment rate and the copayment standardized amount is reasonable and logical, given the inseparable, subordinate status of the HOPD within the hospital overall.
As discussed in the FY 2015 IPPS/LTCH PPS final rule (79 FR 49951 through 49963), the FY 2016 IPPS/LTCH PPS final rule (80 FR 49488 through 49489 and 49494 through 49496), and the FY 2017 IPPS/LTCH PPS final rule (81 FR 56913), the Office of Management and Budget (OMB) issued revisions to the labor market area delineations on February 28, 2013 (based on 2010 Decennial Census data), that included a number of significant changes such as new Core Based Statistical Areas (CBSAs), urban counties that became rural, rural counties that became urban, and existing CBSAs that were split apart (OMB Bulletin 13-01). This bulletin can be found at:
CBSAs are made up of one or more constituent counties. Each CBSA and constituent county has its own unique identifying codes. The FY 2018 IPPS/LTCH PPS proposed rule (82 FR 19898 through 19899) and final rule (82 FR 38130) discuss the two different lists of codes to identify counties: Social Security Administration (SSA) codes and Federal Information Processing Standard (FIPS) codes. Historically, CMS has listed and used SSA and FIPS county codes to identify and crosswalk counties to CBSA codes for purposes of the IPPS and OPPS wage indexes. However, the SSA county codes are no longer being maintained and updated, although the FIPS codes continue to be maintained by the U.S. Census Bureau. The Census Bureau's most current statistical area information is derived from ongoing census data received since 2010; the most recent data are from 2015. In the FY 2018 IPPS/LTCH PPS proposed rule (81 FR 19898), for purposes of crosswalking counties to CBSAs for the IPPS wage index, we proposed to discontinue the use of the SSA county codes and begin using only the FIPS county codes. (We note that we finalized the proposal to discontinue use of SSA county codes and begin using only the FIPS county codes for purposes of crosswalking counties to CBSAs in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38130)). Similarly, for the purposes of crosswalking counties to CBSAs for the OPPS wage index, in the CY 2018 OPPS/ASC proposed rule (82 FR 33591), we proposed to discontinue the use of SSA county codes and begin using only the FIPS county codes. We invited public comments on this proposal. We did not receive any public comments on this proposal. Thus, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33591), we are finalizing, without modification, our proposal to discontinue the use of SSA county codes and begin using only the FIPS county codes for the purposes of crosswalking counties to CBSAs for the OPPS wage index.
The Census Bureau maintains a complete list of changes to counties or county equivalent entities on the Web site at:
• Petersburg Borough, AK (FIPS State County Code 02-195), CBSA 02, was created from part of former Petersburg Census Area (02-195) and part of Hoonah-Angoon Census Area (02-105). The CBSA code remains 02.
• The name of La Salle Parish, LA (FIPS State County Code 22-059), CBSA 14, is now LaSalle Parish, LA (FIPS State County Code 22-059). The CBSA code remains as 14.
• The name of Shannon County, SD (FIPS State County Code 46-113), CBSA 43, is now Oglala Lakota County, SD (FIPS State County Code 46-102). The CBSA code remains as 43.
In the FY 2018 IPPS/LTCH PPS final rule (82 FR 38130), for the IPPS, we finalized our proposal to implement these FIPS code updates, effective October 1, 2017, beginning with the FY 2018 wage indexes. We note that while the county update changes listed earlier changed the county names, the CBSAs to which these counties map did not change from the prior counties. Therefore, there is no impact or change to hospitals in these counties; they continue to be considered rural for the IPPS wage index under these changes. Consistent with the FY 2018 IPPS/LTCH PPS proposed rule, in the CY 2018 OPPS/ASC proposed rule (82 FR 33592), we proposed to implement these revisions for purposes of the OPPS, effective January 1, 2018, beginning with the CY 2018 OPPS wage indexes. We stated that we believe it is important to use the latest counties or county equivalent entities in order to properly crosswalk hospitals from a county to a CBSA for purposes of the OPPS wage index. In addition, we stated we believe that using the latest FIPS codes will allow us to maintain a more accurate and up-to-date payment system that reflects the reality of population shifts and labor market conditions. We invited public comments on this proposal.
We did not receive any public comments on this proposal. Therefore, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33591 through 33592), we are finalizing our proposal, without modification, to implement the FIPS code updates described above, effective January 1, 2018, beginning with the CY 2018 OPPS wage indexes. Tables 2 and 3 associated with the FY 2018 IPPS/LTCH PPS final rule and the County to CBSA Crosswalk File and Urban CBSAs and Constituent Counties for Acute Care Hospitals File posted on the CMS Web site reflect these county changes.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33592), we proposed to use the FY 2018 hospital IPPS post-reclassified wage index for urban and rural areas as the wage index for the OPPS to determine the wage adjustments for both the OPPS payment rate and the copayment standardized amount for CY 2018. Therefore, we stated in the proposed rule that any adjustments for the FY 2018 IPPS post-reclassified wage index would be reflected in the final CY 2018 OPPS wage index. (We refer readers to the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 19898 through 19915) and final rule (82 FR 38129 through 38157), and the proposed and final FY 2018 hospital wage index files posted on the CMS Web site.) We invited public comments on this proposal. As discussed above, we received public comments regarding the application of the rural and imputed floors under the OPPS. We refer readers to our earlier discussion of these comments and our responses. After consideration of these comments, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33592), we are finalizing this proposal without modification. As stated earlier, we continue to believe that using the final fiscal year IPPS post-reclassified wage index, inclusive of any adjustments, as the wage index for the OPPS to determine the wage adjustments for both the OPPS payment rate and the copayment standardized amount is reasonable and logical, given the inseparable, subordinate status of the HOPD within the hospital overall.
Hospitals that are paid under the OPPS, but not under the IPPS, do not have an assigned hospital wage index under the IPPS. Therefore, for non-IPPS hospitals paid under the OPPS, it is our longstanding policy to assign the wage index that would be applicable if the hospital were paid under the IPPS, based on its geographic location and any applicable wage index adjustments. In the CY 2018 OPPS/ASC proposed rule, we proposed to continue this policy for CY 2018, and included a brief summary of the major proposed FY 2018 IPPS wage index policies and adjustments that we proposed to apply to these hospitals under the OPPS for CY 2018. These proposals are summarized below. We invited public comments on these proposals.
It has been our longstanding policy to allow non-IPPS hospitals paid under the OPPS to qualify for the out-migration adjustment if they are located in a section 505 out-migration county (section 505 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)). Applying this adjustment is consistent with our policy of adopting IPPS wage index policies for hospitals paid under the OPPS. We note that, because non-IPPS hospitals cannot reclassify, they are eligible for the out-migration wage adjustment if they are located in a section 505 out-migration county. This is the same out-migration adjustment policy that applies if the hospital were paid under the IPPS. For CY 2018, we proposed to continue our policy of allowing non-IPPS hospitals paid under the OPPS to qualify for the out-migration adjustment if they are located in a section 505 out-migration county (section 505 of the MMA). We did not receive any public comments on this proposal. Therefore, for the reasons discussed above and in the CY 2018 OPPS/ASC proposed rule (82 FR 33592), we are finalizing this proposal without modification.
As stated earlier, in the FY 2015 IPPS/LTCH PPS final rule, we adopted the OMB labor market area delineations issued by OMB in OMB Bulletin No. 13-01 on February 28, 2013, based on standards published on June 28, 2010 (75 FR 37246 through 37252) and the 2010 Census data to delineate labor market areas for purposes of the IPPS wage index. For IPPS wage index purposes, for hospitals that were located in urban CBSAs in FY 2014 but were designated as rural under these revised OMB labor market area delineations, we generally assigned them the urban wage index value of the CBSA in which they were physically located for FY 2014 for a period of 3 fiscal years (79 FR 49957 through 49960). To be consistent, we applied the same policy to hospitals paid under the OPPS but not under the IPPS so that such hospitals will maintain the wage index of the CBSA in which they were physically located for FY 2014 for 3 calendar years (until December 31, 2017). Because this 3-year transition will end at the end of CY
In addition, under the IPPS, the imputed floor policy was set to expire effective October 1, 2017. However, as discussed above and in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38138 through 38142), we did not finalize our proposal not to extend the imputed floor policy under the IPPS for FY 2018 and subsequent fiscal years (82 FR 38132), and instead decided to extend the imputed floor policy for one additional year, through FY 2018. For purposes of the CY 2018 OPPS, we proposed not to extend the imputed floor policy beyond December 31, 2017. However, consistent with the FY 2018 IPPS/LTCH PPS final rule, as discussed above, we are extending the imputed floor policy under the OPPS for one additional year, through December 31, 2018. Therefore, for CY 2018, for hospitals paid under the OPPS but not under the IPPS, the imputed floor policy will continue to apply through December 31, 2018.
For CMHCs, for CY 2018, we proposed to continue to calculate the wage index by using the post-reclassification IPPS wage index based on the CBSA where the CMHC is located. As with OPPS hospitals and for the same reasons, for CMHCs previously located in urban CBSAs that were designated as rural under the revised OMB labor market area delineations in OMB Bulletin No. 13-01, we finalized a policy to maintain the urban wage index value of the CBSA in which they were physically located for CY 2014 for 3 calendar years (until December 31, 2017). Because this 3-year transition will end at the end of CY 2017, it will not be applied in CY 2018. Furthermore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33592), we proposed that the wage index that applies to CMHCs would include the rural floor adjustment, but not the imputed floor adjustment, given that we had proposed not to extend the imputed floor policy under the OPPS beyond December 31, 2017 (the expiration date for the imputed floor under the OPPS). We also proposed that the wage index that applies to CMHCs would not include the out-migration adjustment because that adjustment only applies to hospitals. We did not receive any public comments regarding these proposals, and are finalizing these proposals with the following modification. Because, as discussed above, we are extending the application of the imputed floor under the OPPS for an additional year, through December 31, 2018, the wage index that applies to CMHCs will continue to include the imputed floor adjustment through December 31, 2018.
Table 2 associated with the FY 2018 IPPS/LTCH PPS final rule (available via the Internet on the CMS Web site at:
In addition to using CCRs to estimate costs from charges on claims for ratesetting, CMS uses overall hospital-specific CCRs calculated from the hospital's most recent cost report to determine outlier payments, payments for pass-through devices, and monthly interim transitional corridor payments under the OPPS during the PPS year. MACs cannot calculate a CCR for some hospitals because there is no cost report available. For these hospitals, CMS uses the statewide average default CCRs to determine the payments mentioned earlier until a hospital's MAC is able to calculate the hospital's actual CCR from its most recently submitted Medicare cost report. These hospitals include, but are not limited to, hospitals that are new, hospitals that have not accepted assignment of an existing hospital's provider agreement, and hospitals that have not yet submitted a cost report. CMS also uses the statewide average default CCRs to determine payments for hospitals that appear to have a biased CCR (that is, the CCR falls outside the predetermined ceiling threshold for a valid CCR) or for hospitals in which the most recent cost report reflects an all-inclusive rate status (Medicare Claims Processing Manual (Pub. 100-04), Chapter 4, Section 10.11).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33593), we proposed to update the default ratios for CY 2018 using the most recent cost report data. We discussed our policy for using default CCRs, including setting the ceiling threshold for a valid CCR, in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68594 through 68599) in the context of our adoption of an outlier reconciliation policy for cost reports beginning on or after January 1, 2009. For detail on our process for calculating the statewide average CCRs, we referred readers to the CY 2018 OPPS proposed rule Claims Accounting Narrative that is posted on the CMS Web site. Table 10 published in the proposed rule (82 FR 33593 through 33594) listed the proposed statewide average default CCRs for OPPS services furnished on or after January 1, 2018, based on proposed rule data.
We did not receive any public comments on our proposal to use statewide average default CCRs if a MAC cannot calculate a CCR for a hospital and to use these CCRs to adjust charges to costs on claims data for setting the final CY 2018 OPPS relative payment weights. Therefore, we are finalizing our proposal without modification.
Table 9 below lists the statewide average default CCRs for OPPS services furnished on or after January 1, 2018, based on final rule data.
In the CY 2006 OPPS final rule with comment period (70 FR 68556), we finalized a payment increase for rural sole community hospitals (SCHs) of 7.1 percent for all services and procedures paid under the OPPS, excluding drugs, biologicals, brachytherapy sources, and devices paid under the pass-through payment policy in accordance with section 1833(t)(13)(B) of the Act, as added by section 411 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173). Section 1833(t)(13) of the Act provided the Secretary the authority to make an adjustment to OPPS payments for rural hospitals, effective January 1, 2006, if justified by a study of the difference in costs by APC between hospitals in rural areas and hospitals in urban areas. Our analysis showed a difference in costs for rural SCHs. Therefore, for the CY 2006 OPPS, we finalized a payment adjustment for rural SCHs of 7.1 percent for all services and procedures paid under the OPPS, excluding separately payable drugs and biologicals, brachytherapy sources, and devices paid under the pass-through payment policy, in accordance with section 1833(t)(13)(B) of the Act.
In the CY 2007 OPPS/ASC final rule with comment period (71 FR 68010 and 68227), for purposes of receiving this rural adjustment, we revised § 419.43(g) of the regulations to clarify that essential access community hospitals (EACHs) also are eligible to receive the rural SCH adjustment, assuming these entities otherwise meet the rural adjustment criteria. Currently, two hospitals are classified as EACHs, and as of CY 1998, under section 4201(c) of Public Law 105-33, a hospital can no longer become newly classified as an EACH.
This adjustment for rural SCHs is budget neutral and applied before calculating outlier payments and copayments. We stated in the CY 2006 OPPS final rule with comment period (70 FR 68560) that we would not reestablish the adjustment amount on an annual basis, but we may review the adjustment in the future and, if appropriate, would revise the adjustment. We provided the same 7.1 percent adjustment to rural SCHs, including EACHs, again in CYs 2008 through 2017. Further, in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68590), we updated the regulations at § 419.43(g)(4) to specify, in general terms, that items paid at charges adjusted to costs by application of a hospital-specific CCR are excluded from the 7.1 percent payment adjustment.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33594 through 33595), for the CY 2018 OPPS, we proposed to continue our policy of a 7.1 percent payment adjustment that is done in a budget neutral manner for rural SCHs, including EACHs, for all services and procedures paid under the OPPS, excluding separately payable drugs and biologicals, devices paid under the pass-through payment policy, and items paid at charges reduced to costs.
After consideration of the public comments we received, we are finalizing the proposal for CY 2017 to continue our policy of a 7.1 percent payment adjustment that is done in a budget neutral manner for rural SCHs, including EACHs, for all services and procedures paid under the OPPS, excluding separately payable drugs and biologicals, devices paid under the pass-through payment policy, and items paid at charges reduced to costs.
Since the inception of the OPPS, which was authorized by the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), Medicare has paid the 11 hospitals that meet the criteria for cancer hospitals identified in section 1886(d)(1)(B)(v) of the Act under the OPPS for covered outpatient hospital services. These cancer hospitals are exempted from payment under the IPPS. With the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), Congress established section 1833(t)(7) of the Act, “Transitional Adjustment to Limit Decline in Payment,” to determine OPPS payments to cancer and children's hospitals based on their pre-BBA payment amount (often referred to as “held harmless”).
As required under section 1833(t)(7)(D)(ii) of the Act, a cancer hospital receives the full amount of the difference between payments for covered outpatient services under the OPPS and a “pre-BBA amount.” That is, cancer hospitals are permanently held harmless to their “pre-BBA amount,” and they receive transitional outpatient payments (TOPs) or hold harmless payments to ensure that they do not receive a payment that is lower in amount under the OPPS than the payment amount they would have received before implementation of the OPPS, as set forth in section 1833(t)(7)(F) of the Act. The “pre-BBA amount” is the product of the hospital's reasonable costs for covered outpatient services occurring in the current year and the base payment-to-cost ratio (PCR) for the hospital defined in section 1833(t)(7)(F)(ii) of the Act. The “pre-BBA amount” and the determination of the base PCR are defined at 42 CFR 419.70(f). TOPs are calculated on Worksheet E, Part B, of the Hospital Cost Report or the Hospital Health Care Complex Cost Report (Form CMS-2552-96 or Form CMS-2552-10, respectively) as applicable each year. Section 1833(t)(7)(I) of the Act exempts TOPs from budget neutrality calculations.
Section 3138 of the Affordable Care Act amended section 1833(t) of the Act by adding a new paragraph (18), which instructs the Secretary to conduct a study to determine if, under the OPPS, outpatient costs incurred by cancer hospitals described in section 1886(d)(1)(B)(v) of the Act with respect to APC groups exceed outpatient costs incurred by other hospitals furnishing services under section 1833(t) of the Act, as determined appropriate by the Secretary. Section 1833(t)(18)(A) of the Act requires the Secretary to take into consideration the cost of drugs and biologicals incurred by cancer hospitals and other hospitals. Section 1833(t)(18)(B) of the Act provides that, if the Secretary determines that cancer hospitals' costs are higher than those of other hospitals, the Secretary shall provide an appropriate adjustment under section 1833(t)(2)(E) of the Act to reflect these higher costs. In 2011, after conducting the study required by section 1833(t)(18)(A) of the Act, we determined that outpatient costs incurred by the 11 specified cancer hospitals were greater than the costs incurred by other OPPS hospitals. For a complete discussion regarding the cancer hospital cost study, we refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74200 through 74201).
Based on these findings, we finalized a policy to provide a payment adjustment to the 11 specified cancer hospitals that reflects their higher outpatient costs as discussed in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74202 through 74206). Specifically, we adopted a policy to provide additional payments to the cancer hospitals so that each cancer hospital's final PCR for services provided in a given calendar year is equal to the weighted average PCR (which we refer to as the “target PCR”) for other hospitals paid under the OPPS. The target PCR is set in advance of the calendar year and is calculated using the most recently submitted or settled cost report data that are available at the time of final rulemaking for the calendar year. The amount of the payment adjustment is made on an aggregate basis at cost report settlement. We note that the changes made by section 1833(t)(18) of the Act do not affect the existing statutory provisions that provide for TOPs for cancer hospitals. The TOPs are assessed as usual after all payments, including the cancer hospital payment adjustment, have been made for a cost reporting period. For CYs 2012 and 2013, the target PCR for purposes of the cancer hospital payment adjustment was 0.91. For CY 2014, the target PCR for purposes of the cancer hospital payment adjustment was 0.89. For CY 2015, the target PCR was 0.90. For CY 2016, the target PCR was 0.92, as discussed in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70362 through 70363). For CY 2017, the target PCR was 0.91, as discussed in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79603 through 7960).
Section 16002(b) of the 21st Century Cures Act (Pub. L. 114-255) amended section 1833(t)(18) of the Act by adding subparagraph (C), which requires that in applying 42 CFR 419.43(i), that is, the payment adjustment for certain cancer hospitals, for services furnished on or after January 1, 2018, the target PCR adjustment be reduced by 1.0 percentage point less than what would otherwise apply. Section 16002(b) also provides that, in addition to the percentage reduction, the Secretary may consider making an additional percentage point reduction to the target PCR that takes into account payment rates for applicable items and services described under section 1833(t)(21)(C) of the Act for hospitals that are not cancer hospitals described under section 1886(d)(1)(B)(v) of the Act. Further, in making any budget neutrality adjustment under section 1833(t) of the Act, the Secretary shall not take into account the reduced expenditures that result from application of section 1833(t)(18)(C) of the Act. In the CY 2018 OPPS/ASC proposed rule (82 FR 33595), for CY 2018, we proposed to provide additional payments to the 11 specified cancer hospitals so that each cancer hospital's final PCR is equal to the weighted average PCR (or “target PCR”) for the other OPPS hospitals using the most recent submitted or settled cost report data that were available at the time of the development of the proposed rule, reduced by 1.0 percentage point to comply with section 16002(b) of the 21st Century Cures Act. We did not propose an additional reduction beyond the 1.0 percentage point reduction required by section 16002(b) for CY 2018. To calculate the proposed CY 2018 target PCR, we used the same extract of cost report data from HCRIS, as discussed in section II.A. of the proposed rule, used to estimate costs for the CY 2018 OPPS. Using these cost report data, we included data from Worksheet E, Part B, for each hospital, using data from each hospital's most recent cost report, whether as submitted or settled.
We then limited the dataset to the hospitals with CY 2016 claims data that we used to model the impact of the proposed CY 2018 APC relative payment weights (3,701 hospitals) because it is appropriate to use the same set of hospitals that we are using to calibrate the modeled CY 2018 OPPS. The cost report data for the hospitals in this dataset were from cost report periods with fiscal year ends ranging
Using this smaller dataset of cost report data, we estimated that, on average, the OPPS payments to other hospitals furnishing services under the OPPS were approximately 90 percent of reasonable cost (weighted average PCR of 0.90). Therefore, after applying the 1.0 percentage point reduction as required by section 16002(b) of the 21st Century Cures Act, we proposed that the payment amount associated with the cancer hospital payment adjustment to be determined at cost report settlement would be the additional payment needed to result in a proposed target PCR equal to 0.89 for each cancer hospital.
Table 11 of the proposed rule indicated the proposed estimated percentage increase in OPPS payments to each cancer hospital for CY 2018 due to the cancer hospital payment adjustment policy. We stated in the proposed rule that the actual amount of the CY 2018 cancer hospital payment adjustment for each cancer hospital will be determined at cost report settlement and will depend on each hospital's CY 2018 payments and costs. We noted that the requirements contained in section 1833(t)(18) of the Act do not affect the existing statutory provisions that provide for TOPs for cancer hospitals. The TOPs will be assessed as usual after all payments, including the cancer hospital payment adjustment, have been made for a cost reporting period.
After consideration of the public comments we received, we are finalizing our cancer hospital payment adjustment methodology as proposed. For this final rule with comment period, we are using the most recent cost report data through June 30, 2017 to update the adjustment. This update yields a target PCR of 0.88. We limited the dataset to the hospitals with CY 2016 claims data that we used to model the impact of the CY 2018 APC relative payment weights (3,724 hospitals) because it is appropriate to use the same set of hospitals that we are using to calibrate the modeled CY 2018 OPPS. The cost report data for the hospitals in this dataset were from cost report periods with fiscal year ends ranging from 2012 to 2017. We then removed the cost report data of the 49 hospitals located in Puerto Rico from our dataset because we do not believe that their cost structure reflects the costs of most hospitals paid under the OPPS and, therefore, their inclusion may bias the calculation of hospital-weighted statistics. We also removed the cost report data of 14 hospitals because these hospitals had cost report data that were not complete (missing aggregate OPPS payments, missing aggregate cost data, or missing both), so that all cost reports in the study would have both the payment and cost data necessary to calculate a PCR for each hospital, leading to an analytic file of 3,661 hospitals with cost report data.
Using this smaller dataset of cost report data, we estimated a target PCR of 0.89. Therefore, after applying the 1.0 percentage point reduction as required by section 16002(b) of the 21st Century Cures Act, we are finalizing that the payment amount associated with the cancer hospital payment adjustment to be determined at cost report settlement will be the additional payment needed to result in a PCR equal to 0.88 for each cancer hospital. Table 10 below indicates the estimated percentage increase in OPPS payments to each cancer hospital for CY 2018 due to the cancer hospital payment adjustment policy. We note that the requirements contained in section 1833(t)(18) of the Act do not affect the existing statutory provisions that provide for TOPs for cancer hospitals. The TOPs will be assessed as usual after all payments, including the cancer hospital payment adjustment, have been made for a cost reporting period.
The OPPS provides outlier payments to hospitals to help mitigate the financial risk associated with high-cost and complex procedures, where a very costly service could present a hospital with significant financial loss. As explained in the CY 2015 OPPS/ASC final rule with comment period (79 FR 66832 through 66834), we set our projected target for aggregate outlier payments at 1.0 percent of the estimated aggregate total payments under the OPPS for the prospective year. Outlier payments are provided on a service-by-service basis when the cost of a service exceeds the APC payment amount multiplier threshold (the APC payment amount multiplied by a certain amount) as well as the APC payment amount plus a fixed-dollar amount threshold (the APC payment plus a certain amount of dollars). In CY 2017, the outlier threshold was met when the hospital's cost of furnishing a service exceeded 1.75 times (the multiplier threshold) the APC payment amount and exceeded the APC payment amount plus $3,825 (the fixed-dollar amount threshold) (81 FR 79604 through 79606). If the cost of a service exceeds both the multiplier threshold and the fixed-dollar threshold, the outlier payment is calculated as 50 percent of the amount by which the cost of furnishing the service exceeds 1.75 times the APC payment amount. Beginning with CY 2009 payments, outlier payments are subject to a reconciliation process similar to the IPPS outlier reconciliation process for cost reports, as discussed in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68594 through 68599).
It has been our policy to report the actual amount of outlier payments as a percent of total spending in the claims being used to model the OPPS. Our estimate of total outlier payments as a percent of total CY 2016 OPPS payments, using CY 2016 claims available for this proposed rule, is approximately 1.0 percent of the total aggregated OPPS payments. Therefore, for CY 2016, we estimate that we paid the outlier target of 1.0 percent of total aggregated OPPS payments.
As stated in the proposed rule, using CY 2016 claims data and CY 2017 payment rates, we estimated that the aggregate outlier payments for CY 2017 would be approximately 1.0 percent of the total CY 2017 OPPS payments. Using an updated claims dataset and OPPS ancillary CCRs, we estimate that we paid approximately 1.11 percent of the total CY 2017 OPPS payments, in OPPS outliers. We provided estimated CY 2018 outlier payments for hospitals and CMHCs with claims included in the claims data that we used to model impacts in the Hospital-Specific Impacts—Provider-Specific Data file on the CMS Web site at:
In the CY 2018 OPPS/ASC proposed rule (82 FR 33596), for CY 2018, we proposed to continue our policy of estimating outlier payments to be 1.0 percent of the estimated aggregate total payments under the OPPS. We proposed that a portion of that 1.0 percent, an amount equal to less than 0.01 percent of outlier payments (or 0.0001 percent of total OPPS payments) would be allocated to CMHCs for PHP outlier payments. This is the amount of estimated outlier payments that would result from the proposed CMHC outlier threshold as a proportion of total estimated OPPS outlier payments. As discussed in section VIII.C. of the proposed rule, we proposed to continue our longstanding policy that if a CMHC's cost for partial hospitalization services, paid under APC 5853 (Partial Hospitalization for CMHCs), exceeds 3.40 times the payment rate for proposed APC 5853, the outlier payment would be calculated as 50 percent of the amount by which the cost exceeds 3.40 times the proposed APC 5853 payment rate. For further discussion of CMHC outlier payments, we refer readers to section VIII.D. of the proposed rule.
To ensure that the estimated CY 2018 aggregate outlier payments would equal 1.0 percent of estimated aggregate total payments under the OPPS, we proposed that the hospital outlier threshold be set so that outlier payments would be triggered when a hospital's cost of furnishing a service exceeds 1.75 times the APC payment amount and exceeds the APC payment amount plus $4,325.
We calculated the proposed fixed-dollar threshold of $4,325 using the standard methodology most recently used for CY 2017 (81 FR 79604 through 79605). For purposes of estimating outlier payments for the proposed rule, we used the hospital-specific overall ancillary CCRs available in the April 2017 update to the Outpatient Provider-Specific File (OPSF). The OPSF contains provider-specific data, such as the most current CCRs, which are maintained by the MACs and used by the OPPS Pricer to pay claims. The claims that we use to model each OPPS update lag by 2 years.
In order to estimate the CY 2018 hospital outlier payments for the proposed rule, we inflated the charges on the CY 2016 claims using the same inflation factor of 1.104055 that we used to estimate the IPPS fixed-dollar outlier threshold for the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 20173). We used an inflation factor of 1.05074 to estimate CY 2017 charges from the CY 2016 charges reported on CY 2016 claims. The methodology for determining this charge inflation factor is discussed in the FY 2017 IPPS/LTCH PPS final rule (81 FR 57286). As we stated in the CY 2005 OPPS final rule with comment period (69 FR 65845), we believe that the use of these charge inflation factors are appropriate for the OPPS because, with the exception of the inpatient routine service cost centers, hospitals use the same ancillary and outpatient cost centers to capture costs and charges for inpatient and outpatient services.
As noted in the CY 2007 OPPS/ASC final rule with comment period (71 FR 68011), we are concerned that we could systematically overestimate the OPPS hospital outlier threshold if we did not apply a CCR inflation adjustment factor. Therefore, we proposed to apply the same CCR inflation adjustment factor that we proposed to apply for the FY 2018 IPPS outlier calculation to the CCRs used to simulate the proposed CY 2018 OPPS outlier payments to determine the fixed-dollar threshold. Specifically, for CY 2018, we proposed to apply an adjustment factor of 0.979187 to the CCRs that were in the April 2017 OPSF to trend them forward from CY 2017 to CY 2018. The methodology for calculating this proposed adjustment was discussed in the FY 2018 IPPS/LTCH PPS proposed rule (82 FR 20173).
To model hospital outlier payments for the proposed rule, we applied the overall CCRs from the April 2017 OPSF after adjustment (using the proposed CCR inflation adjustment factor of 0.979187 to approximate CY 2018 CCRs) to charges on CY 2016 claims that were adjusted (using the proposed charge inflation factor of 1.104055 to approximate CY 2018 charges). We simulated aggregated CY 2018 hospital outlier payments using these costs for several different fixed-dollar thresholds, holding the 1.75 multiplier threshold constant and assuming that outlier payments would continue to be made at 50 percent of the amount by which the cost of furnishing the service would exceed 1.75 times the APC payment amount, until the total outlier payments
Section 1833(t)(17)(A) of the Act, which applies to hospitals as defined under section 1886(d)(1)(B) of the Act, requires that hospitals that fail to report data required for the quality measures selected by the Secretary, in the form and manner required by the Secretary under section 1833(t)(17)(B) of the Act, incur a 2.0 percentage point reduction to their OPD fee schedule increase factor; that is, the annual payment update factor. The application of a reduced OPD fee schedule increase factor results in reduced national unadjusted payment rates that will apply to certain outpatient items and services furnished by hospitals that are required to report outpatient quality data and that fail to meet the Hospital OQR Program requirements. For hospitals that fail to meet the Hospital OQR Program requirements, we proposed to continue the policy that we implemented in CY 2010 that the hospitals' costs will be compared to the reduced payments for purposes of outlier eligibility and payment calculation. For more information on the Hospital OQR Program, we referred readers to section XIII. of the proposed rule.
We did not receive any public comments on our hospital outpatient outlier payment methodology. Therefore, we are finalizing our proposal to continue our policy of estimating outlier payments to be 1.0 percent of the estimated aggregate total payments under the OPPS and to use our established methodology to set the OPPS outlier fixed-dollar loss threshold for CY 2018.
Consistent with historical practice, we used updated data for this final rule with comment period for outlier calculations. For CY 2018, we are applying the overall CCRs from the July 2017 OPSF file after adjustment (using the CCR inflation adjustment factor of 0.9856 to approximate CY 2018 CCRs) to charges on CY 2016 claims that were adjusted using a charge inflation factor of 1.0936 to approximate CY 2018 charges. These are the same CCR adjustment and charge inflation factors that were used to set the IPPS fixed-dollar thresholds for the FY 2018 IPPS/LTCH PPS final rule (82 FR 38527). We simulated aggregated CY 2018 hospital outlier payments using these costs for several different fixed-dollar thresholds, holding the 1.75 multiple threshold constant and assuming that outlier payments will continue to be made at 50 percent of the amount by which the cost of furnishing the service would exceed 1.75 times the APC payment amount, until the total outlier payment equaled 1.0 percent of aggregated estimated total CY 2018 OPPS payments. We estimate that a fixed-dollar threshold of $4,150, combined with the multiple threshold of 1.75 times the APC payment rate, will allocate 1.0 percent of aggregated total OPPS payments to outlier payments. We note that the difference in our calculation of the final fixed-dollar threshold of $4,150 and the proposed fixed-dollar threshold of $4,350 is largely attributed to finalized proposals related to reducing payments for drugs purchased under the 340B drug program for CY 2018, as discussed in section V.B.7. of this final rule with comment period.
For CMHCs, if a CMHC's cost for partial hospitalization services, paid under APC 5853, exceeds 3.40 times the payment rate, the outlier payment will be calculated as 50 percent of the amount by which the cost exceeds 3.40 times APC 5853.
The basic methodology for determining prospective payment rates for HOPD services under the OPPS is set forth in existing regulations at 42 CFR part 419, subparts C and D. For this CY 2018 OPPS/ASC final rule with comment period, the payment rate for most services and procedures for which payment is made under the OPPS is the product of the conversion factor calculated in accordance with section II.B. of this final rule with comment period and the relative payment weight determined under section II.A. of this final rule with comment period. Therefore, the national unadjusted payment rate for most APCs contained in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site) and for most HCPCS codes to which separate payment under the OPPS has been assigned in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site) was calculated by multiplying the CY 2018 scaled weight for the APC by the CY 2018 conversion factor. We note that this is the same methodology proposed in the CY 2018 OPPS/ASC proposed rule (82 FR 33598), on which we did not receive any public comments.
We note that section 1833(t)(17) of the Act, which applies to hospitals as defined under section 1886(d)(1)(B) of the Act, requires that hospitals that fail to submit data required to be submitted on quality measures selected by the Secretary, in the form and manner and at a time specified by the Secretary, incur a reduction of 2.0 percentage points to their OPD fee schedule increase factor, that is, the annual payment update factor. The application of a reduced OPD fee schedule increase factor results in reduced national unadjusted payment rates that apply to certain outpatient items and services provided by hospitals that are required to report outpatient quality data and that fail to meet the Hospital OQR Program (formerly referred to as the Hospital Outpatient Quality Data Reporting Program (HOP QDRP)) requirements. For further discussion of the payment reduction for hospitals that fail to meet the requirements of the Hospital OQR Program, we refer readers to section XIII. of this final rule with comment period.
We demonstrate below the steps on how to determine the APC payments that will be made in a calendar year under the OPPS to a hospital that fulfills the Hospital OQR Program requirements and to a hospital that fails to meet the Hospital OQR Program requirements for a service that has any of the following status indicator assignments: “J1”, “J2”, “P”, “Q1”, “Q2”, “Q3”, “Q4”, “R”, “S”, “T”, “U”, or “V” (as defined in Addendum D1 to this final rule with comment period, which is available via the Internet on the CMS Web site), in a circumstance in which the multiple procedure discount does not apply, the procedure is not bilateral, and conditionally packaged services (status indicator of “Q1” and “Q2”) qualify for separate payment. We note that, although blood and blood products with status indicator “R” and brachytherapy sources with status indicator “U” are not subject to wage adjustment, they are subject to reduced payments when a hospital fails to meet the Hospital OQR Program requirements.
Individual providers interested in calculating the payment amount that they will receive for a specific service from the national unadjusted payment
The formula below is a mathematical representation of Step 1 and identifies the labor-related portion of a specific payment rate for a specific service.
The formula below is a mathematical representation of Step 4 and adjusts the labor-related portion of the national unadjusted payment rate for the specific service by the wage index.
The formula below is a mathematical representation of Step 5 and calculates the remaining portion of the national payment rate, the amount not attributable to labor, and the adjusted payment for the specific service.
The formula below is a mathematical representation of Step 6 and applies the rural adjustment for rural SCHs.
We are providing examples below of the calculation of both the full and reduced national unadjusted payment rates that will apply to certain outpatient items and services performed by hospitals that meet and that fail to meet the Hospital OQR Program requirements, using the steps outlined above. For purposes of this example, we used a provider that is located in Brooklyn, New York that is assigned to CBSA 35614. This provider bills one service that is assigned to APC 5071 (Level 1 Excision/Biopsy/Incision and Drainage). The CY 2018 full national unadjusted payment rate for APC 5071 is approximately $572.81. The reduced national unadjusted payment rate for APC 5071 for a hospital that fails to meet the Hospital OQR Program requirements is approximately $561.35. This reduced rate is calculated by multiplying the reporting ratio of 0.980 by the full unadjusted payment rate for APC 5071.
The FY 2018 wage index for a provider located in CBSA 35614 in New York is 1.2876. The labor-related portion of the full national unadjusted payment is approximately $442.53 (.60 * $572.81 * 1.2876). The labor-related portion of the reduced national unadjusted payment is approximately $433.68 (.60 * $561.35 * 1.2876). The nonlabor-related portion of the full national unadjusted payment is approximately $229.12 (.40 * $572.81). The nonlabor-related portion of the
Section 1833(t)(3)(B) of the Act requires the Secretary to set rules for determining the unadjusted copayment amounts to be paid by beneficiaries for covered OPD services. Section 1833(t)(8)(C)(ii) of the Act specifies that the Secretary must reduce the national unadjusted copayment amount for a covered OPD service (or group of such services) furnished in a year in a manner so that the effective copayment rate (determined on a national unadjusted basis) for that service in the year does not exceed a specified percentage. As specified in section 1833(t)(8)(C)(ii)(V) of the Act, the effective copayment rate for a covered OPD service paid under the OPPS in CY 2006, and in calendar years thereafter, shall not exceed 40 percent of the APC payment rate.
Section 1833(t)(3)(B)(ii) of the Act provides that, for a covered OPD service (or group of such services) furnished in a year, the national unadjusted copayment amount cannot be less than 20 percent of the OPD fee schedule amount. However, section 1833(t)(8)(C)(i) of the Act limits the amount of beneficiary copayment that may be collected for a procedure performed in a year to the amount of the inpatient hospital deductible for that year.
Section 4104 of the Affordable Care Act eliminated the Medicare Part B coinsurance for preventive services furnished on and after January 1, 2011, that meet certain requirements, including flexible sigmoidoscopies and screening colonoscopies, and waived the Part B deductible for screening colonoscopies that become diagnostic during the procedure. Our discussion of the changes made by the Affordable Care Act with regard to copayments for preventive services furnished on and after January 1, 2011, may be found in section XII.B. of the CY 2011 OPPS/ASC final rule with comment period (75 FR 72013).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33599), for CY 2018, we proposed to determine copayment amounts for new and revised APCs using the same methodology that we implemented beginning in CY 2004. (We refer readers to the November 7, 2003 OPPS final rule with comment period (68 FR 63458).) In addition, we proposed to use the same standard rounding principles that we have historically used in instances where the application of our standard copayment methodology would result in a copayment amount that is less than 20 percent and cannot be rounded, under standard rounding principles, to 20 percent. (We refer readers to the CY 2008 OPPS/ASC final rule with comment period (72 FR 66687) in which we discuss our rationale for applying these rounding principles.) The proposed national unadjusted copayment amounts for services payable under the OPPS that would be effective January 1, 2018 were included in Addenda A and B to the proposed rule (which are available via the Internet on the CMS Web site).
We did not receive any public comments on the proposed copayment amounts for new and revised APCs using the same methodology we implemented beginning in CY 2004 or the standard rounding principles we apply to our copayment amounts. Therefore, we are finalizing our proposed copayment policies, without modification.
As discussed in section XIII.E. of this final rule with comment period, for CY 2018, the Medicare beneficiary's minimum unadjusted copayment and national unadjusted copayment for a service to which a reduced national unadjusted payment rate applies will equal the product of the reporting ratio and the national unadjusted copayment, or the product of the reporting ratio and the minimum unadjusted copayment, respectively, for the service.
We note that OPPS copayments may increase or decrease each year based on changes in the calculated APC payment rates due to updated cost report and claims data, and any changes to the OPPS cost modeling process. However, as described in the CY 2004 OPPS final rule with comment period, the development of the copayment methodology generally moves beneficiary copayments closer to 20 percent of OPPS APC payments (68 FR 63458 through 63459).
In the CY 2004 OPPS final rule with comment period (68 FR 63459), we adopted a new methodology to calculate unadjusted copayment amounts in situations including reorganizing APCs, and we finalized the following rules to determine copayment amounts in CY 2004 and subsequent years.
• When an APC group consists solely of HCPCS codes that were not paid under the OPPS the prior year because they were packaged or excluded or are new codes, the unadjusted copayment amount would be 20 percent of the APC payment rate.
• If a new APC that did not exist during the prior year is created and consists of HCPCS codes previously assigned to other APCs, the copayment amount is calculated as the product of the APC payment rate and the lowest coinsurance percentage of the codes comprising the new APC.
• If no codes are added to or removed from an APC and, after recalibration of its relative payment weight, the new payment rate is equal to or
• If no codes are added to or removed from an APC and, after recalibration of its relative payment weight, the new payment rate is
• If HCPCS codes are added to or deleted from an APC and, after recalibrating its relative payment weight, holding its unadjusted copayment amount constant results in a decrease in the coinsurance percentage for the reconfigured APC, the copayment amount would not change (unless retaining the copayment amount would result in a coinsurance rate less than 20 percent).
• If HCPCS codes are added to an APC and, after recalibrating its relative payment weight, holding its unadjusted copayment amount constant results in an increase in the coinsurance percentage for the reconfigured APC, the copayment amount would be calculated as the product of the payment rate of the reconfigured APC and the lowest coinsurance percentage of the codes being added to the reconfigured APC.
We noted in the CY 2004 OPPS final rule with comment period that we would seek to lower the copayment percentage for a service in an APC from the prior year if the copayment percentage was greater than 20 percent. We noted that this principle was consistent with section 1833(t)(8)(C)(ii) of the Act, which accelerates the reduction in the national unadjusted coinsurance rate so that beneficiary liability will eventually equal 20 percent of the OPPS payment rate for all OPPS services to which a copayment
As we stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33600), individuals interested in calculating the national copayment liability for a Medicare beneficiary for a given service provided by a hospital that met or failed to meet its Hospital OQR Program requirements should follow the formulas presented in the following steps.
The formula below is a mathematical representation of Step 1 and calculates the national copayment as a percentage of national payment for a given service.
The formula below is a mathematical representation of Step 3 and applies the beneficiary payment percentage to the adjusted payment rate for a service calculated under section II.H. of this final rule with comment period, with and without the rural adjustment, to calculate the adjusted beneficiary copayment for a given service.
The unadjusted copayments for services payable under the OPPS that will be effective January 1, 2018, are shown in Addenda A and B to this final rule with comment period (which are available via the Internet on the CMS Web site). We note that the national unadjusted payment rates and copayment rates shown in Addenda A and B to this final rule with comment period reflect the CY 2018 OPD fee schedule increase factor discussed in section II.B. of this final rule with comment period.
In addition, as noted earlier, section 1833(t)(8)(C)(i) of the Act limits the amount of beneficiary copayment that may be collected for a procedure performed in a year to the amount of the inpatient hospital deductible for that year.
CPT and Level II HCPCS codes are used to report procedures, services, items, and supplies under the hospital OPPS. Specifically, CMS recognizes the following codes on OPPS claims:
• Category I CPT codes, which describe surgical procedures and medical services;
• Category III CPT codes, which describe new and emerging technologies, services, and procedures; and
• Level II HCPCS codes, which are used primarily to identify products, supplies, temporary procedures, and services not described by CPT codes.
CPT codes are established by the American Medical Association (AMA) and the Level II HCPCS codes are established by the CMS HCPCS Workgroup. These codes are updated and changed throughout the year. CPT and HCPCS code changes that affect the OPPS are published both through the annual rulemaking cycle and through the OPPS quarterly update Change Requests (CRs). CMS releases new Level II HCPCS codes to the public or recognizes the release of new CPT codes by the AMA and makes these codes effective (that is, the codes can be reported on Medicare claims) outside of the formal rulemaking process via OPPS quarterly update CRs. Based on our review, we assign the new CPT and Level II HCPCS codes to interim status indicators (SIs) and APCs. These interim assignments are finalized in the OPPS/ASC final rules. This quarterly process offers hospitals access to codes that may more accurately describe items or services furnished and provides payment or more accurate payment for these items or services in a timelier manner than if we waited for the annual rulemaking process. We solicit public comments on these new codes and finalize our proposals related to these codes through our annual rulemaking process.
We note that, under the OPPS, the APC assignment determines the payment rate for an item, procedure, or service. Those items, procedures, or services not paid separately under the hospital OPPS are assigned to appropriate status indicators. Certain payment status indicators provide separate payment, while other payment status indicators do not. Section XI. of this final rule with comment period discusses the various status indicators used under the OPPS.
As we did in the CY 2018 OPPS/ASC proposed rule, in Table 11 below, we summarize our current process for updating codes through our OPPS quarterly update CRs, seeking public comments, and finalizing the treatment of these new codes under the OPPS.
Through the April 2017 OPPS quarterly update CR (Transmittal 3728, Change Request 10005, dated March 3, 2017), we made effective five new Level II HCPCS codes for separate payment under the OPPS. In the CY 2018 OPPS/ASC proposed rule (82 FR 33601), we solicited public comments on the proposed APC and status indicator assignments for these Level II HCPCS codes, which were displayed in Table 13 of the proposed rule and are now listed in Table 12 of this final rule with comment period. Specifically, we solicited public comments on HCPCS codes C9484, C9485, C9486, C9487, and C9488. We note that HCPCS code C9487 was deleted on June 30, 2017, and replaced with HCPCS code Q9989, effective July 1, 2017. We indicated that the proposed payment rates for these codes were included in Addendum B to the proposed rule (which is available via the Internet on the CMS Web site).
We did not receive any public comments on the proposed APC and status indicator assignments for the new Level II HCPCS codes implemented in April 2017. Therefore, we are finalizing the proposed APC and status indicator assignments for these codes, as indicated in Table 12 above. We note that several of the HCPCS C-codes have been replaced with HCPCS J-codes effective January 1, 2018. Their replacement codes are listed in Table 12 above. The final payment rates for these codes can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site). In addition, the status indicator meanings can be found in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site).
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33602), through the July 2017 OPPS quarterly update CR (Transmittal 3783, Change Request 10122, dated May 26, 2017), we made 10 new Category III CPT codes and 13 Level II HCPCS codes effective July 1, 2017, and assigned them to appropriate interim OPPS status indicators and APCs. In the CY 2018 OPPS/ASC proposed rule, we solicited public comments on the proposed APC and status indicator assignments for CY 2018 for the CPT and Level II HCPCS codes implemented on July 1, 2017, all of which were displayed in Table 14 of the proposed rule, and are now listed in Table 13 of this final rule with comment period. We note that three of the new HCPCS codes effective July 1, 2017 replaced four existing HCPCS codes. Specifically, HCPCS code Q9986 replaced HCPCS code J1725 (Injection, hydroxyprogesterone caproate, 1 mg), HCPCS codes Q9987 and Q9988 replaced HCPCS code P9072 (Platelets, pheresis, pathogen reduced or rapid bacterial tested, each unit), and HCPCS code Q9989 replaced HCPCS code C9487 (Ustekinumab, for intravenous injection, 1 mg). With the establishment of HCPCS codes Q9986, Q9987, and Q9988, we made their predecessor HCPCS codes J1725 and P9072 inactive for reporting and revised the status indicators for both codes to “E1” (Not Payable by Medicare) effective July 1, 2017. In addition, because HCPCS code Q9989 describes the same drug as HCPCS code C9487, in the CY 2018 OPPS/ASC proposed rule, we proposed to continue the drug's pass-through payment status and to assign HCPCS code Q9989 to the same APC and status indicator as its predecessor HCPCS code
We did not receive any public comments on the proposed APC and status indicator assignments for the new Category III CPT codes and Level II HCPCS codes implemented in July 2017. Therefore, we are finalizing the proposed APC and status indicator assignments for these codes, as indicated in Table 13 below. We note that several of the HCPCS C and Q-codes have been replaced with HCPCS J-codes effective January 1, 2018. Their replacement codes are listed in Table 13 below. The final payment rates for these codes can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site). In addition, the status indicator meanings can be found in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site).
As has been our practice in the past, we incorporate those new Level II HCPCS codes that are effective October 1 and January 1 in the final rule with comment period, thereby updating the OPPS for the following calendar year, as displayed in Table 11 of this final rule with comment period. These codes are released to the public through the October and January OPPS quarterly update CRs and via the CMS HCPCS Web site (for Level II HCPCS codes). For CY 2018, these codes are flagged with comment indicator “NI” in Addendum B to this OPPS/ASC final rule with comment period to indicate that we are assigning them an interim payment status which is subject to public comment. Specifically, the status indicators and the APC assignments for codes flagged with comment indicator “NI” are open to public comment in this final rule with comment period, and we will respond to these public comments in the OPPS/ASC final rule with comment period for the next year's OPPS/ASC update. In the CY 2018 OPPS/ASC proposed rule (82 FR 33603), we proposed to continue this process for CY 2018. Specifically, for CY 2018, we proposed to include in Addendum B to the CY 2018 OPPS/ASC final rule with comment period the following new HCPCS codes:
• New Level II HCPCS codes effective October 1, 2017, that would be incorporated in the October 2017 OPPS quarterly update CR; and
• New Level II HCPCS codes effective January 1, 2018, that would be incorporated in the January 2018 OPPS quarterly update CR.
As stated above, the October 1, 2017 and January 1, 2018 codes are flagged with comment indicator “NI” in Addendum B to this CY 2018 OPPS/ASC final rule with comment period to indicate that we have assigned these codes an interim OPPS payment status for CY 2018. We are inviting public comments on the interim status indicator and APC assignments for these codes, if applicable, that will be finalized in the CY 2019 OPPS/ASC final rule with comment period.
In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66841 through 66844), we finalized a revised process of assigning APC and status indicators for new and revised Category I and III CPT codes that would be effective January 1. Specifically, for the new/revised CPT codes that we receive in a timely manner from the AMA's CPT Editorial Panel, we finalized our proposal to include the codes that would be effective January 1 in the OPPS/ASC proposed rules, along with proposed APC and status indicator assignments for them, and to finalize the APC and status indicator assignments in the OPPS/ASC final rules beginning with the CY 2016 OPPS update. For those new/revised CPT codes that were received too late for inclusion in the OPPS/ASC proposed rule, we finalized our proposal to establish and use HCPCS G-codes that mirror the predecessor CPT codes and retain the current APC and status indicator assignments for a year until we can propose APC and status indicator assignments in the following year's rulemaking cycle. We note that even if we find that we need to create HCPCS G-codes in place of certain CPT codes for the MPFS proposed rule, we do not anticipate that these HCPCS G-codes will always be necessary for OPPS purposes. We will make every effort to include proposed APC and status indicator assignments for all new and revised CPT codes that the AMA makes publicly available in time for us to include them in the proposed rule, and to avoid the resort to HCPCS G-codes and the resulting delay in utilization of the most current CPT codes. Also, we finalized our proposal to make interim APC and status indicator assignments for CPT codes that are not available in time for the proposed rule and that describe wholly new services (such as new technologies or new surgical procedures), solicit public comments, and finalize the specific APC and status indicator assignments for those codes in the following year's final rule.
For the CY 2018 OPPS update, we received the CY 2018 CPT codes from AMA in time for inclusion in the CY 2018 OPPS/ASC proposed rule. The new, revised, and deleted CY 2018 Category I and III CPT codes were included in Addendum B to the CY 2018 OPPS/ASC proposed rule (which is available via the Internet on the CMS Web site). We noted in the proposed rule that the new and revised codes are assigned to new comment indicator “NP” to indicate that the code is new for the next calendar year or the code is an existing code with substantial revision to its code descriptor in the next calendar year as compared to the current calendar year with a proposed APC assignment, and that comments will be accepted on the proposed APC assignment and status indicator.
Further, in the CY 2018 OPPS/ASC proposed rule, we reminded readers that the CPT code descriptors that appear in Addendum B are short descriptors and do not fully describe the complete procedure, service, or item described by the CPT code. Therefore, we included the 5-digit placeholder codes and their long descriptors for the new and revised CY 2018 CPT codes in Addendum O to the proposed rule (which is available via the Internet on the CMS Web site) so that the public could adequately comment on our proposed APCs and status indicator assignments. We indicated that the 5-digit placeholder codes were included in Addendum O, specifically under the column labeled “CY 2018 OPPS/ASC Proposed Rule 5-Digit AMA Placeholder Code,” to the proposed rule. We stated that the final CPT code numbers will be included in the CY 2018 OPPS/ASC final rule with comment period. We noted that not every code listed in Addendum O is subject to comment. For the new and revised Category I and III CPT codes, we requested comments on only those codes that are assigned to comment indicator “NP”. We indicated that public comments would not be accepted for new Category I CPT laboratory codes that were not assigned to the “NP” comment indicator in Addendum O to the proposed rule. We stated that comments to these codes must be submitted at the Clinical Laboratory Fee Schedule (CLFS) Public Meeting, which was scheduled on July 31-August 1, 2017.
In summary, we solicited public comments on the proposed APC and status indicator assignments for the new and revised Category I and III CPT codes that will be effective January 1, 2018. The CPT codes were listed in Addendum B to the proposed rule with short descriptors only. We listed them again in Addendum O to the proposed rule with long descriptors. We also proposed to finalize the status indicator and APC assignments for these codes (with their final CPT code numbers) in the CY 2018 OPPS/ASC final rule with comment period.
Commenters addressed several of the new CPT codes that were assigned to comment indicator “NP” in Addendum
The final status indicators, APC assignments, and payment rates for the new CPT codes that are effective January 1, 2018 can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site). In addition, the status indicator meanings can be found in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site).
Section 1833(t)(2)(A) of the Act requires the Secretary to develop a classification system for covered hospital outpatient department services. Section 1833(t)(2)(B) of the Act provides that the Secretary may establish groups of covered OPD services within this classification system, so that services classified within each group are comparable clinically and with respect to the use of resources. In accordance with these provisions, we developed a grouping classification system, referred to as Ambulatory Payment Classifications (APCs), as set forth in § 419.31 of the regulations. We use Level I and Level II HCPCS codes to identify and group the services within each APC. The APCs are organized such that each group is homogeneous both clinically and in terms of resource use. Using this classification system, we have established distinct groups of similar services. We also have developed separate APC groups for certain medical devices, drugs, biologicals, therapeutic radiopharmaceuticals, and brachytherapy devices that are not packaged into the payment for the procedure.
We have packaged into the payment for each procedure or service within an APC group the costs associated with those items and services that are typically ancillary and supportive to a primary diagnostic or therapeutic modality and, in those cases, are an integral part of the primary service they support. Therefore, we do not make separate payment for these packaged items or services. In general, packaged items and services include, but are not limited to, the items and services listed in § 419.2(b) of the regulations. A further discussion of packaged services is included in section II.A.3. of this final rule with comment period.
Under the OPPS, we generally pay for covered hospital outpatient services on a rate-per-service basis, where the service may be reported with one or more HCPCS codes. Payment varies according to the APC group to which the independent service or combination of services is assigned. In the CY 2018 OPPS/ASC proposed rule (82 FR 33604), for CY 2018, we proposed that each APC relative payment weight represents the hospital cost of the services included in that APC, relative to the hospital cost of the services included in APC 5012 (Clinic Visits and Related Services). The APC relative payment weights are scaled to APC 5012 because it is the hospital clinic visit APC and clinic visits are among the most frequently furnished services in the hospital outpatient setting.
Section 1833(t)(9)(A) of the Act requires the Secretary to review, not less often than annually, and revise the APC groups, the relative payment weights, and the wage and other adjustments described in paragraph (2) to take into account changes in medical practice, changes in technology, the addition of new services, new cost data, and other relevant information and factors. Section 1833(t)(9)(A) of the Act also requires the Secretary to consult with an expert outside advisory panel composed of an appropriate selection of representatives of providers to review (and advise the Secretary concerning) the clinical integrity of the APC groups and the relative payment weights. We note that the HOP Panel recommendations for specific services for the CY 2018 OPPS and our responses to them are discussed in the relevant specific sections throughout this final rule with comment period.
In addition, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest cost for an item or service in the group is more than 2 times greater than the lowest cost for an item or service within the same group (referred to as the “2 times rule”). The statute authorizes the Secretary to make exceptions to the 2 times rule in unusual cases, such as low-volume items and services (but the Secretary may not make such an exception in the case of a drug or biological that has been designated as an orphan drug under section 526 of the Federal Food, Drug, and Cosmetic Act).
Therefore, in accordance with section 1833(t)(2) of the Act and § 419.31 of the regulations, we annually review the items and services within an APC group to determine if there are any APC violations of the 2 times rule and whether there are any appropriate revisions to APC assignments that may be necessary or exceptions to be made. In determining the APCs with a 2 times rule violation, we consider only those HCPCS codes that are significant based on the number of claims. We note that, for purposes of identifying significant procedure codes for examination under the 2 times rule, we consider procedure codes that have more than 1,000 single major claims or procedure codes that have both greater than 99 single major claims and contribute at least 2 percent of the single major claims used to establish the APC cost to be significant (75 FR 71832). This longstanding definition of when a procedure code is significant for purposes of the 2 times rule was selected because we believe that a subset of 1,000 claims (or less than 1,000 claims) is negligible within the set of approximately 100 million single procedure or single session claims we use for establishing costs. Similarly, a procedure code for which there are fewer than 99 single claims and which comprises less than 2 percent of the single major claims within an APC will have a negligible impact on the APC cost. In the CY 2018 OPPS/ASC proposed rule (81 FR 33604 through 33605), we proposed to make exceptions to this limit on the variation of costs within each APC group in unusual cases, such as low-volume items and services.
For the CY 2018 OPPS update, we identified the APCs with violations of the 2 times rule, and we proposed changes to the procedure codes assigned to these APCs in Addendum B to the CY 2018 OPPS/ASC proposed rule. We noted that Addendum B did not appear in the printed version of the
Taking into account the APC changes that we proposed for CY 2018, we reviewed all of the APCs to determine which APCs would not meet the requirements of the 2 times rule. We used the following criteria to evaluate whether to propose exceptions to the 2 times rule for affected APCs:
• Resource homogeneity;
• Clinical homogeneity;
• Hospital outpatient setting utilization;
• Frequency of service (volume); and
• Opportunity for upcoding and code fragments.
Based on the CY 2016 claims data available for the CY 2018 proposed rule, we found 12 APCs with violations of the 2 times rule. We applied the criteria as described above to identify the APCs for which we proposed to make exceptions under the 2 times rule for CY 2018, and found that all of the 12 APCs we identified met the criteria for an exception to the 2 times rule based on the CY 2016 claims data available for the proposed rule. We did not include in that determination those APCs where a 2 times rule violation was not a relevant concept, such as APC 5401 (Dialysis), which only has two HCPCS codes assigned to it that have similar geometric mean costs and do not create a 2 times rule violation. Therefore, we have only identified those APCs, including those with criteria-based costs, such as device-dependent CPT/HCPCS codes, with 2 times rule violations.
We note that, for cases in which a recommendation by the HOP Panel appears to result in or allow a violation of the 2 times rule, we may accept the HOP Panel's recommendation because those recommendations are based on explicit consideration (that is, a review of the latest OPPS claims data and group discussion of the issue) of resource use, clinical homogeneity, site of service, and the quality of the claims data used to determine the APC payment rates.
Table 16 of the proposed rule listed the 12 APCs for which we proposed to make exceptions under the 2 times rule for CY 2018 based on the criteria cited above and claims data submitted between January 1, 2016, and December 31, 2016, that were processed on or before December 31, 2016. We indicated that, for the final rule with comment period, we intended to use claims data for dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017, and updated CCRs, if available.
Based on the updated final rule CY 2016 claims data used for this CY 2018 final rule with comment period, we were able to remedy 6 APC violations out of the 12 APCs that appeared in Table 16 of the CY 2018 OPPS/ASC proposed rule. Specifically, we found that the following 6 APCs no longer met the criteria for exception to the 2 times rule in this final rule with comment period:
• APC 5161 (Level 1 ENT Procedures);
• APC 5311 (Level 1 Lower GI Procedures);
• APC 5461 (Level 1 Neurostimulator and Related Procedures);
• APC 5573 (Level 3 Imaging with Contrast);
• APC 5611 (Level 1 Therapeutic Radiation Treatment Preparation); and
• APC 5735 (Level 5 Minor Procedures).
Secondly, based on our analysis of the final rule claims data, we found a total of 11 APCs with violations of the 2 times rule. Of these 11 total APCs, 6 were identified in the proposed rule and 5 are newly identified APCs. Specifically, we found the following 6 APCs from the proposed rule continued to have violations of the 2 times rule for this final rule with comment period:
• APC 5112 (Level 2 Musculoskeletal Procedures);
• APC 5521 (Level 1 Imaging without Contrast);
• APC 5691 (Level 1 Drug Administration);
• APC 5731 (Level 1 Minor Procedures);
• APC 5771 (Cardiac Rehabilitation); and
• APC 5823 (Level 3 Health and Behavior Services).
In addition, we found that the following 5 additional APCs violated the 2 times rule using the final rule with comment period claims data:
• APC 5522 (Level 2 Imaging without Contrast);
• APC 5524 (Level 4 Imaging without Contrast);
• APC 5571 (Level 1 Imaging with Contrast);
• APC 5721 (Level 1 Diagnostic Tests and Related Services); and
• APC 5732 (Level 2 Minor Procedures).
After considering the public comments we received on APC assignments and our analysis of the CY 2016 costs from hospital claims and cost report data available for this CY 2018 final rule with comment period, we are finalizing our proposals with some modifications. Specifically, we are finalizing our proposal to except 6 of the 12 proposed APCs from the 2 times rule for CY 2018 (APCs 5112, 5521, 5691, 5731, 5771, and 5823), and also excepting 5 additional APCs (APCs 5522, 5524, 5571, 5721, and 5732). As noted above, we were able to remedy the other 6 of the proposed rule 2 time violations in this final rule with comment period.
Table 14 below lists the 11 APCs that we are excepting from the 2 times rule for CY 2018 based on the criteria described earlier and a review of updated claims data for dates of service between January 1, 2016 and December 31, 2016, that were processed on or before June 30, 2017, and updated CCRs, if available. We note that, for cases in which a recommendation by the HOP Panel appears to result in or allow a violation of the 2 times rule, we generally accept the HOP Panel's recommendation because those recommendations are based on explicit consideration of resource use, clinical homogeneity, site of service, and the quality of the claims data used to determine the APC payment rates. The geometric mean costs for hospital outpatient services for these and all other APCs that were used in the development of this final rule with comment period can be found on the CMS Web site at:
In the November 30, 2001 final rule (66 FR 59903), we finalized changes to the time period in which a service can be eligible for payment under a New Technology APC. Beginning in CY 2002, we retain services within New Technology APC groups until we gather sufficient claims data to enable us to assign the service to an appropriate clinical APC. This policy allows us to move a service from a New Technology APC in less than 2 years if sufficient data are available. It also allows us to retain a service in a New Technology APC for more than 2 years if sufficient data upon which to base a decision for reassignment have not been collected.
For CY 2017, there are 51 New Technology APC levels, ranging from the lowest cost band assigned to APC 1491 (New Technology—Level 1A ($0-$10)) through the highest cost band assigned to APC 1906 (New Technology—Level 51 ($140,001-$160,000)). In the CY 2004 OPPS final rule with comment period (68 FR 63416), we restructured the New Technology APCs to make the cost intervals more consistent across payment levels and refined the cost bands for these APCs to retain two parallel sets of New Technology APCs, one set with a status indicator of “S” (Significant Procedures, Not Discounted when Multiple. Paid under OPPS; separate APC payment) and the other set with a status indicator of “T” (Significant Procedure, Multiple Reduction Applies. Paid under OPPS; separate APC payment). These current New Technology APC configurations allow us to price new technology services more appropriately and consistently.
We note that the cost bands for the New Technology APCs, specifically, APCs 1491 through 1599 and 1901 through 1906, vary with increments ranging from $10 to $19,999. These cost bands identify the APCs to which new technology procedures and services with estimated service costs that fall within those cost bands are assigned under the OPPS. Payment for each APC is made at the mid-point of the APC's assigned cost band. For example, payment for New Technology APC 1507 (New Technology—Level 7 ($501-$600)) is made at $550.50.
Every year, we receive several requests for higher payment amounts under the New Technology APCs for specific procedures paid under the OPPS because they require the use of expensive equipment. As we did in the CY 2018 OPPS/ASC proposed rule, we are taking this opportunity to reiterate our response, in general, to the issue of hospitals' capital expenditures as they relate to the OPPS and Medicare, as specified in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70374).
Under the OPPS, one of our goals is to make payments that are appropriate for the services that are necessary for the treatment of Medicare beneficiaries. The OPPS, like other Medicare payment systems, is budget neutral and increases are limited to the annual hospital inpatient market basket increase. We believe that our payment rates generally reflect the costs that are associated with providing care to Medicare beneficiaries. Furthermore, we believe that our payment rates are adequate to ensure access to services (80 FR 70374).
For many emerging technologies, there is a transitional period during which utilization may be low, often because providers are first learning about the techniques and their clinical utility. Quite often, parties request that Medicare make higher payment amounts under the New Technology APCs for new procedures in that transitional phase. These requests, and their accompanying estimates for expected total patient utilization, often reflect very low rates of patient use of expensive equipment, resulting in high per use costs for which requesters believe Medicare should make full payment. Medicare does not, and we believe should not, assume responsibility for more than its share of the costs of procedures based on projected utilization for Medicare beneficiaries and does not set its payment rates based on initial projections of low utilization for services that require expensive capital equipment. For the OPPS, we rely on hospitals to make informed business decisions regarding the acquisition of high-cost capital equipment, taking into consideration their knowledge about their entire patient base (Medicare beneficiaries included) and an understanding of Medicare's and other payers' payment policies. (We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68314) for further discussion regarding this payment policy.)
We note that, in a budget neutral environment, payments may not fully cover hospitals' costs in a particular circumstance, including those for the purchase and maintenance of capital equipment. We rely on hospitals to make their decisions regarding the acquisition of high-cost equipment with the understanding that the Medicare program must be careful to establish its
As stated earlier, for CY 2017, there are currently 51 levels of New Technology APCs. To improve our ability to have payments for services over $100,000 more closely match the cost of the service, in the CY 2018 OPPS/ASC proposed rule (82 FR 33606), for CY 2018, we proposed to narrow the increments for New Technology APCs 1901-1906 from $19,999 cost bands to $14,999 cost bands. We also proposed to add New Technology APCs 1907 and 1908 (New Technology Level 52 ($145,001-$160,000), which would allow for an appropriate payment of retinal prosthesis implantation procedures, which is discussed later in this section. Table 17 of the proposed rule included the complete list of the proposed modified and additional New Technology APC groups for CY 2018.
We did not receive any public comments on our proposal. Therefore, we are finalizing the proposal, without modification. Table 15 below includes the complete list of the final modified and additional New Technology APC groups for CY 2018.
The final payment rates for New Technology APCs 1901 through 1908 are included in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site).
As we explained in the CY 2002 OPPS final rule with comment period (66 FR 59902), we generally retain a procedure in the New Technology APC to which it is initially assigned until we have obtained sufficient claims data to justify reassignment of the procedure to a clinically appropriate APC.
In addition, in cases where we find that our initial New Technology APC assignment was based on inaccurate or inadequate information (although it was the best information available at the time), where we obtain new information that was not available at the time of our initial New Technology APC assignment, or where the New Technology APCs are restructured, we may, based on more recent resource utilization information (including claims data) or the availability of refined New Technology APC cost bands, reassign the procedure or service to a different New Technology APC that more appropriately reflects its cost (66 FR 59903).
Consistent with our current policy, for CY 2018, in the CY 2018 OPPS/ASC proposed rule (82 FR 33606), we proposed to retain services within New Technology APC groups until we obtain sufficient claims data to justify reassignment of the service to a clinically appropriate APC. The flexibility associated with this policy allows us to reassign a service from a New Technology APC in less than 2 years if sufficient claims data are available. It also allows us to retain a service in a New Technology APC for more than 2 years if sufficient claims data upon which to base a decision for reassignment have not been obtained (66 FR 59902).
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33607), currently, there are four CPT/HCPCS codes that describe magnetic resonance image guided high intensity focused ultrasound (MRgFUS) procedures, three of which we proposed to continue to assign to standard APCs and one of which we proposed to continue to assign to a New Technology APC for CY 2018. These codes include CPT codes 0071T, 0072T, and 0398T, and HCPCS code C9734. CPT codes 0071T and 0072T are used for the treatment of uterine fibroids, CPT code 0398T is used for the treatment of essential tremor, and HCPCS code C9734 is used for pain palliation for metastatic bone cancer.
As shown in Table 18 of the proposed rule, and as listed in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT codes 0071T and 0072T to APC 5414 (Level 4 Gynecologic Procedures), with a proposed payment rate of approximately $2,189 for CY 2018. We also proposed to continue to assign the APC to status indicator “J1” (Hospital Part B services paid through a comprehensive APC) to indicate that all covered Part B services on the claim are packaged with the payment for the primary “J1” service for the claim, except for services assigned to OPPS status indicator “F”, “G”, “H”, “L”, and “U”; ambulance services; diagnostic and screening mammography; all preventive services; and certain Part B inpatient services. In addition, we proposed to continue to assign HCPCS code C9734 (Focused ultrasound ablation/therapeutic intervention, other than uterine leiomyomata, with magnetic resonance (mr) guidance) to APC 5114 (Level 4 Musculoskeletal Procedures), with a proposed payment rate of approximately $5,385 for CY 2018. We also proposed to continue to assign HCPCS code C9734 to status indicator “J1”.
Further, we proposed to continue to assign CPT code 0398T to APC 1537 (New Technology—Level 37 ($9,501-
In summary, after consideration of the public comments we received, we are modifying our proposal for the APC assignment of CPT code 0398T. Instead of continuing to assign this code to New Technology APC 1537 (New Technology—Level 37 ($9,501-$10,000)), with a payment rate of $9,750.50, for CY 2018, we are reassigning CPT code 0398T to New Technology APC 1576 (New Technology—Level 39 ($15,001-$20,000)), with a payment rate of $17,500.50. In addition, we are finalizing our proposal, without modification, to reassign HCPCS code C9734 to APC 5114. We did not receive any public comments related to our proposal for CPT codes 0071T and 0072T. Therefore, we are finalizing our proposal to continue to assign these CPT codes to APC 5414 without modification. Table 16 below lists the final CY 2018 status indicator and APC assignments for the magnetic resonance image guided high intensity focused ultrasound (MRgFUS) procedures. We refer readers to Addendum B of this final rule with comment period for the final payment rates for all codes reportable under the OPPS. Addendum B is available via the Internet on the CMS Web site.
CPT code 0100T (Placement of a subconjunctival retinal prosthesis receiver and pulse generator, and implantation of intra-ocular retinal electrode array, with vitrectomy) describes the implantation of a retinal prosthesis, specifically, a procedure involving the use of the Argus® II Retinal Prosthesis System. This first retinal prosthesis was approved by the FDA in 2013 for adult patients diagnosed with advanced retinitis pigmentosa. Pass-through payment status was granted for the Argus® II device under HCPCS code C1841 (Retinal prosthesis, includes all internal and external components) beginning October 1, 2013, and this status expired on December 31, 2015. We note that after pass-through payment status expires for a medical device, the payment for the device is packaged into the payment for the associated surgical procedure. Consequently, for CY 2016, the device described by HCPCS code C1841 was assigned to OPPS status indicator “N” to indicate that payment for the device is packaged and included in the payment rate for the surgical procedure described by CPT code 0100T. For CY 2016, CPT code 0100T was assigned to New Technology APC 1599 with a payment rate of $95,000, which was the highest paying New Technology APC for that year. This payment includes both the surgical procedure (CPT code 0100T) and the use of the Argus® II device (HCPCS code C1841). However, stakeholders (including the device manufacturer and hospitals) believed that the CY 2016 payment rate for the procedure involving the Argus® II System was insufficient to cover the hospital cost of performing the procedure, which includes the cost of the retinal prosthesis with a retail price of approximately $145,000.
For CY 2017, analysis of the CY 2015 OPPS claims data used for the CY 2017 final rule with comment period showed 9 single claims (out of 13 total claims) for CPT code 0100T, with a geometric mean cost of approximately $142,003 based on claims submitted between January 1, 2015, through December 31, 2015, and processed through June 30, 2016. Based on the CY 2015 OPPS claims data available for the final rule with comment period and our understanding of the Argus® II procedure, we reassigned CPT code 0100T from New Technology APC 1599 to New Technology APC 1906, with a final payment rate of $150,000.50 for CY 2017. We noted that this payment rate included the cost of both the surgical procedure (CPT code 0100T) and the retinal prosthesis device (HCPCS code C1841).
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33607 through 33608), for the CY 2018 update, analysis of the CY 2016 OPPS claims data used for the CY 2018 proposed rule showed 3 single claims (out of 3 total claims) for CPT code 0100T, with a geometric mean cost of approximately $116,239 based on the claims submitted between January 1, 2016 through December 31, 2016, and processed through December 31, 2016. We stated in the proposed rule that, for the CY 2018 OPPS/ASC final rule with comment period, the final payment rate would be based on claims submitted between January 1, 2016 and December 31, 2016, and processed through June 30, 2017.
In the proposed rule, based on the CY 2016 OPPS claims data available, which showed a geometric mean cost of approximately $116,239, we proposed to reassign the Argus® II procedure to a New Technology APC with a payment band that covers the geometric mean cost of the procedure. Therefore, we proposed to reassign CPT code 0100T to APC 1904 (New Technology—Level 50 ($115,001-$130,000)), with a proposed payment of $122,500.50 for CY 2018. We invited public comments on this proposal.
In accordance with section 1833(t)(2)(B) of the Act, we must establish that services classified within each APC are comparable clinically and with respect to the use of resources. Accordingly, we are using our equitable adjustment authority under section 1833(t)(2)(E) of the Act, which states that the Secretary shall establish, in a budget neutral manner, other adjustments as determined to be necessary to ensure equitable payments, to maintain the proposed rate for this procedure, despite the lower geometric mean costs available in the claims data used for this final rule with comment period. As stated earlier, we believe that this situation is unique, given the high cost and very limited number of claims for the procedure. Therefore, for CY 2018, we are reassigning the Argus® II procedure to APC 1904 (New Technology—Level 50 ($115,001-$130,000)). This APC assignment will establish a payment rate for the Argus® II procedure of $122,500.50, which is the arithmetic mean of the payment rates for the service for CY 2016 and CY 2017. As we do each year, we acquire claims data regarding hospital costs associated with new procedures. We regularly examine the claims data and any available new information regarding the clinical aspects of new procedures to confirm that our OPPS payments remain appropriate for procedures like the Argus® II procedure as they transition into mainstream medical practice (77 FR 68314).
After consideration of the public comments we received, we are finalizing our proposal to reassign CPT code 0100T to APC 1904 through use of our equitable adjustment authority. We are reassigning CPT code 0100T from APC 1906 (New Technology—Level 51 ($140,001-$160,000)), which has a final payment rate of $150,000.50 for CY 2017, to APC 1904 (New Technology—Level 50 $115,001-$130,000)), which has a final payment rate of $122,500.50 for CY 2018. We note this payment includes both the surgical procedure (CPT code 0100T) and the use of the Argus® II device (HCPCS code C1841).
As stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33608), the CMS HCPCS Workgroup established HCPCS code Q9987 (Pathogen(s) test for platelets), effective July 1, 2017. HCPCS code Q9987 will be used to report any test used to identify bacterial or other pathogen contamination in blood platelets. Currently, there is one test approved by the FDA that is described by HCPCS code Q9987. The test is a rapid bacterial test, and the manufacturer estimates the cost of the test to be between $26 and $35. HCPCS code Q9987 was established after concerns from blood and blood product stakeholders that the previous CPT code used to describe pathogen tests for platelets, CPT code P9072 (Platelets, pheresis, pathogen reduced or rapid bacterial tested, each unit), inappropriately described rapid bacterial testing by combining the test with the pathogen reduction of platelets. CPT code P9072 is inactive effective on July 1, 2017.
In the CY 2018 OPPS/ASC proposed rule, we sought more information on the actual costs of pathogen tests for platelets before assigning HCPCS code Q9987 to a clinical APC. Effective July 1, 2017, HCPCS code Q9987 is assigned to New Technology APC 1493 (New Technology—Level 1C ($21-$30)), with a payment rate of $25.50. We proposed to continue to assign HCPCS code Q9987 to New Technology APC 1493, with a proposed payment rate of $25.50, until such time as claims data are available to support the assignment to a clinical APC. We invited public comments on this proposal.
After consideration of the public comments we received, we are finalizing our proposal to continue separate payment for HCPCS code Q9987 for CY 2018, with a modification that HCPCS code Q9987 will be replaced by HCPCS code P9100 (Pathogen(s) test for platelets). Table 17 below contains more information on the coding change.
For CY 2018, the AMA CPT Editorial Panel established four new CPT codes for fractional flow reserve derived from computed tomography (FFR
We note that the CPT code descriptors that appeared in Addendum B were short descriptors and did not fully describe the complete procedure,
As displayed in Table 18 and in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to assign CPT codes 0501T and 0504T to status indicator “M” (Not paid under OPPS; Items and Services Not Billable to the MAC) to indicate that these services are not paid under the OPPS, and to assign CPT codes 0502T and 0503T to status indicator “N” (packaged) to indicate that the payment for these services is packaged into the primary service or procedure that is reported with the codes.
According to the FDA, FFR
The developer of FFR
In a New Technology APC application for HeartFlow for CY 2018, the developer of the FFR
Commenters asserted that a FFR
Commenters stated that, many times, a coronary computed tomography angiography indicates that a beneficiary may potentially have CAD and that without FFR
The developer also stated that hospitals incur a cost charged by HeartFlow of $1,500 to perform the FFR
Some commenters, including the developer, stated that CMS did not properly interpret the regulation at 42 CFR 419.2(b)(13) in its previous decisions to deny the FFR
After reviewing the public comments, we agree with the commenters that the FFR
With respect to image processing, in the CY 2008 OPPS/ASC interim and final rule with comment period, we stated that an “image processing service processes and integrates diagnostic test data that were captured during another independent procedure, usually one that is separately payable under the OPPS. The image processing service is not necessarily provided on the same date of service as the independent procedure. In fact, several of the image processing services that we proposed to package for CY 2008 do not need to be provided face-to-face with the patient in the same encounter as the independent service” (72 FR 66625). In addition, we stated that we believed it was important
FFR
With respect to imaging interpretation, as stated in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66630), we define “imaging supervision and interpretation codes” as HCPCS codes for services that are defined as “radiological supervision and interpretation” in the radiology series, codes 70000 through 79999 of the book of AMA CPT codes, with the addition of some services in other code ranges of CPT, Category III CPT tracking codes, or Level II HCPCS codes that are clinically similar or directly crosswalk to codes defined as radiological supervision and interpretation services in the CPT radiology range. The current CPT FFR
Nonetheless, we were persuaded by the commenters that the FFR
Therefore, we conclude, based on the information available to us at this time, that the costs of the FFR
In summary, after consideration of the public comments we received, we are finalizing our proposal for CPT codes 0501T, 0502T, and 0504T without modification. However, for CPT code 0503T, we are finalizing our proposal with modification. Specifically, we are reassigning CPT code 0503T from packaged status (status indicator “N”) to New Technology APC 1516 (New Technology—Level 16 ($1401-$1500)), with a payment rate of $1,450.50 for CY 2018. We note our belief that CPT code 0503T covers payment for the majority of hospital resources involved in the HeartFlow service, and that CPT 0502T, which reflects data preparation and transmission, will be packaged under the OPPS.
Table 19 lists the final status indicator assignments for CPT codes 0501T, 0502T, 0503T, and 0504T. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and B are available via the Internet on the CMS Web site.
HCPCS code 38205 describes blood-derived hematopoietic progenitor cell harvesting for transplantation, per collection; allogeneic. This code represents a donor acquisition cost for an allogeneic hematopoietic stem cell transplant (HSCT). In the CY 2010 OPPS/ASC final rule with comment period (74 FR 60575), we assigned HCPCS code 38205 to status indicator “B”, which indicates that this code is not recognized by the OPPS when submitted on an outpatient hospital Part B bill (type 12x and 13x).
In CY 2017, we finalized a C-APC for HSCT (81 FR 79586 through 79587). Payment for donor acquisition services for HSCT is included in the C-APC payment for the allogeneic stem cell transplant when the transplant occurs in the hospital outpatient setting. All donor acquisition costs, including the costs for HCPCS code 38205, should be reported on the same date of service as the transplant procedure (HCPCS code 38240 (Hematopoietic progenitor (HPC); allogeneic transplantation per donor)) in order to be appropriately packaged for payment purposes. Hospitals are instructed to identify services required to acquire stem cells from a donor for allogeneic HSCT separately in Field 42 on Form CMS-1450 (or UB-04), with revenue code 0815 when an allogeneic stem cell transplant occurs. (We refer readers to the Medicare Claims Processing Manual (Pub. 100-04), Chapter 4, Section 231.11, and Chapter 3, Section 90.3.1.)
There are other donor acquisition costs, namely those costs for the procedure described by HCPCS code 38230 (Bone marrow harvesting for transplantation; allogeneic), that are assigned to status indicator “S”. For consistency and to ensure that the donor acquisition costs are captured accurately, in the CY 2018 OPPS/ASC proposed rule (82 FR 33608), for CY 2018, we proposed to change the status indicator assignment for the procedure described by HCPCS code 38205 from “B” to “S”, which indicates that the procedure is paid under the OPPS and receives separate payment.
The CY 2016 claims data used for the proposed rule, which included claims submitted between January 1, 2016, and December 31, 2016, and processed on or before December 31, 2016, showed a geometric mean cost of approximately $580 for HCPCS code 38205 based on 2 single claims (out of 8 total claims). The procedure described by HCPCS code 38205 has resource and clinical similarities to procedures assigned to APC 5242 (Level 2 Blood Product Exchange and Related Services). Therefore, we proposed to assign HCPCS code 38205 to APC 5242. We invited public comments on these proposals.
After consideration of the public comments we received, we are not finalizing our proposal to change the status indicator assignment for the procedure described by HCPCS code 38205 from “B” to “S” and to assign HCPCS code 38205 to APC 5242.
For CY 2018, as displayed in Table 20 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 55920 to C-APC 5341 (Abdominal/Peritoneal/Biliary and Related Procedures), with a proposed payment rate of $2,788.26.
After consideration of the public comments we received, we are finalizing our CY 2018 proposal with modification. Specifically, we are reassigning CPT code 55920 from C-APC 5341 to C-APC 5415 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the final CY 2018 payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS for CY 2018. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 21 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 19298 to C-APC 5092 (Level 2 Breast/Lymphatic Surgery and Related Procedures), with a proposed payment rate of $4,616.48.
After consideration of the public comments we received and based on updated claims data, we are finalizing our proposal to continue to assign CPT code 19298 to C-APC 5092 for CY 2018.
As noted in the CY 2018 MPFS proposed rule (82 FR 34079), we continue to be interested in the ongoing work of the medical community to refine the set of codes used to describe care management services, including chronic care management. In the CY 2018 OPPS/ASC proposed rule (82 FR 33603 and 33604), we proposed to adopt CPT replacement codes for CY 2018 for several of the care management services finalized last year and sought public comment on ways we might further reduce the burden on reporting providers, including through stronger alignment between CMS requirements and CPT guidance for existing and potential new codes. Table 15 of the CY 2018 OPP/ASC proposed rule detailed the proposed care management coding changes. We referred readers to Addendum B to the proposed rule (which is available via the Internet on the CMS Web site) for the proposed CY 2018 payment rates for the replacement codes.
After consideration of the public comments we received, we are finalizing our proposal to adopt CPT replacement codes for CY 2018 for several of the care management services finalized last year. Table 22 below details the final care management coding changes. We refer readers to Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site) for the final CY 2018 payment rates for the replacement codes.
For CY 2018, as noted in Table 23 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to reassign CPT code 93229 from APC 5733 (Level 3 Minor Procedures) to APC 5734 (Level 4 Minor Procedures), with a proposed payment rate of $94.27.
We proposed to revise the APC assignment for CPT code 93229 based on claims data used for the CY 2018 OPPS/ASC proposed rule. We note that the proposed rule data were based on claims data submitted between January 1, 2016, and December 31, 2016, that were processed on or before December 31, 2016. Our analysis of the claims data revealed a geometric mean cost of approximately $156 for CPT code 93229 based on 1,518 single claims (out of 3,370 total claims). Our analysis further revealed a geometric mean cost of approximately $98 for APC 5734. Based on the geometric mean cost, we believed that it was necessary to revise the APC assignment for CPT code 93229 from APC 5733 to APC 5734 to pay appropriately for the service.
In addition, as we have stated since the implementation of the OPPS in August 2000, section 1833(t)(9) of the Act requires that we annually review all the items and services within an APC group and revise the APC structures accordingly. Included in this review is the identification of any 2 times rule violations as provided under section 1833(t)(2) of the Act and, to the extent possible, rectification of these violations. We review the most recently available OPPS claims data every year and determine whether changes to the current APC assignment are necessary. Although CPT code 93229 was assigned to APC 5722 in CY 2016, we revised the APC assignment to APC 5733 for CY 2017 based on the latest claims data available at that time. The discussion related to this APC revision can be found in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79616 through 79617).
For this CY 2018 OPPS/ASC final rule with comment period, we again reviewed the claims data associated with CPT code 93229. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016 that were processed on or before June 30, 2017. Our analysis revealed a geometric mean cost of approximately $160 for CPT code 93229 based on 1,750 single claims (out of 3,869 total claims). Based on our review of the four levels of Diagnostic Tests and Related Services APCs, we believe that CPT code 93229 appropriately fits in APC 5721 (Level 1 Diagnostic Tests and Related Services), which has a geometric mean cost of approximately $136, rather than in APC 5722, which has a geometric mean cost of approximately $249. In addition, our review shows that the geometric mean cost of approximately $160 for CPT code 93229 is within the range of the significant procedures in APC 5721, which is between $60 (for CPT code 93702) and $181 (for CPT code 94727). Consequently, we believe that a reassignment of CPT code 93229 to APC 5721 is more appropriate.
In summary, after consideration of the public comments we received, we are finalizing our CY 2018 proposal with modification. Specifically, we are revising the assignment for CPT code 93229 to APC 5721 for CY 2018 rather than the proposed APC 5734. Consistent with our policy of reviewing APC assignments annually, we will reevaluate the cost of CPT code 93229 and its APC assignment for the CY 2019 rulemaking. Table 24 below lists the final status indicator and APC assignment for CPT code 93229 for CY 2018. We refer readers to Addendum B of this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addenda A and B are available via the Internet on the CMS Web site.
For CY 2018, as noted in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 0402T (Collagen cross-linking of cornea (including removal of the corneal epithelium and intraoperative pachymetry when performed)) to APC 5502 (Level 2 Extraocular, Repair, and Plastic Eye Procedures) for CY 2018.
For CY 2018, the AMA CPT Editorial Panel deleted CPT code 0340T and replaced the code with CPT code 32994, effective January 1, 2018. We note that CPT code 0340T was effective January 1, 2014, and deleted on December 31, 2017. Table 25 below lists the complete descriptors for the deleted and replacement code. We note that the deleted and replacement code were both listed in Addendum B and Addendum O to the CY 2018 OPPS/ASC proposed rule (which are available via the Internet on the CMS Web site). Addendum B listed the proposed status indicator assignment for the replacement code and assigned it to comment indicator “NP” (New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code), while Addendum O listed the proposed/placeholder CY 2018 CPT codes and the long descriptors.
As noted in Table 26 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to delete CPT code 0340T (status indicator “D”) and assign its replacement code, CPT code 32994 (placeholder code 32X99), to C-APC 5361 (Level 1 Laparoscopy and Related Services), with a proposed payment rate of $4,340.65. As noted in Table 26, for CY 2017, CPT code 0340T was assigned to C-APC 5361, which is the same APC assignment for CPT code 32994.
In summary, after consideration of the public comments we received and our analysis of the updated claims data for this final rule with comment period, we are finalizing our CY 2018 proposal without modification, and assigning CPT code 32994 to C-APC 5361. The final CY 2018 geometric mean cost for C-APC 5361 is approximately $4,486. Table 27 below lists the final status indicator and APC assignment for CPT code 32994 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addenda A and B are available via the Internet on the CMS Web site.
For CY 2018, the AMA CPT Editorial Panel revised the bone marrow and aspiration CPT codes. Specifically, the descriptors for CPT codes 38220 and 38221 were revised and new CPT codes 20939 (placeholder code 2093X) and 38222 (placeholder code 382X3) were established, effective January 1, 2018. In addition, add-on HCPCS code G0364, which was effective January 1, 2005, will be deleted on December 31, 2017 and replaced with CPT codes 38220, 38221, and 38222, effective January 1, 2018. The deleted and replacement codes were listed in Addendum B and Addendum O to the CY 2018 OPPS/ASC proposed rule. Addendum B listed the proposed status indicator assignment for revised CPT codes 38220 and 38221 and new CPT code 38222, which was assigned to comment indicator “NP” (New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code), while Addendum O listed the proposed/placeholder CY 2018 CPT codes and the long descriptors.
Table 28 below lists the complete descriptors for the bone marrow aspiration and biopsy codes.
As noted in Table 29 below and in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to delete HCPCS code G0364 (status indicator “D”) and assign revised CPT codes 38220 and 38221, as well as new CPT code 38222 (placeholder code 382X3) to C-APC 5072 (Level 2 Excision/Biopsy/Incision and Drainage), with a proposed payment rate of $1,268.53. We note that, under the OPPS, we packaged the payment for HCPCS code G0364 (status
For this final rule with comment period, we again analyzed updated claims data associated with the four codes. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Our review of the final rule claims data revealed a similar pattern for both codes. For CPT code 38220, we found a geometric mean cost of approximately $1,787 based on 5,908 single claims (out of 5,993 total claims), and for CPT code 38221, our claims data revealed a geometric mean cost of approximately $1,799 based on 59,892 single claims (out of 60,467 total claims). Because the geometric mean costs of approximately $1,787 for CPT code 38220 and $1,799 for CPT code 38221 are similar to the geometric mean cost of approximately $1,347 for C-APC 5072, we continue to believe that C-APC 5072 is the most appropriate APC assignment for both codes for CY 2018.
In addition, based on input from our medical advisors, we believe that C-APC 5072 is the most appropriate APC assignment for new CPT code 38222, consistent with the APC assignment for similar diagnostic bone marrow aspiration and biopsy procedures. As noted in Table 29, CPT codes 38220 and 38221 are assigned to C-APC 5072, and we believe that the service described by new CPT code 38222 is similar to the existing bone marrow aspiration and biopsy codes. Consistent with the statutory requirement under section 1833(t)(9)(A) of the Act, we will reevaluate the APC groupings during the next rulemaking cycle.
After consideration of the public comment we received, we are finalizing our CY 2018 proposals, without modification, for the bone marrow aspiration and biopsy codes, specifically, CPT codes 20939, 38220, 38221, and 38222. Table 30 below lists the final APC and status indicator assignments for CPT codes 20939, 38220, 38221, and 38222 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33609 through 33610), as part of our CY 2018 comprehensive review of the structure of the APCs and procedure code assignments, we evaluated the intraocular procedure APCs with a particular focus on C-APC 5491 (Level 1 Intraocular Procedures) that contains cataract surgery procedures. We strive to maintain APCs that contain procedures that are relatively homogenous in resource costs and clinical characteristics. While it is impracticable and contrary to the principles of a prospective payment system to assign each procedure to its own APC, thus resulting in a cost-based, fee schedule payment system, we seek to ensure our clinical groupings appropriately group like items and services while maintaining the integrity of a prospective payment system under which bundled, encounter-based payments are essential.
For CY 2018, we considered proposing a new intraocular procedure APC that would further distinguish the resource costs and clinical characteristics between cataract surgery and complex cataract surgery. As listed in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 66984 (Cataract surgery with IOL 1 stage procedure) and CPT code 66982 (Cataract surgery complex) to C-APC 5491. However, because the 2017 AMA CPT Code manual describes a complex cataract surgery case as “requiring devices or techniques not generally used in routine cataract surgery (
After consideration of the public comments we received, we are continuing the assignment of simple and complex cataract surgery procedures (described by CPT codes 66984 and 66982, respectively) to the same APC for CY 2018. We appreciate the commenters' support of CMS' continuing efforts to monitor both the cost and utilization of simple and complex cataract surgery to determine if an APC reassignment or other change may be needed in the future.
For CY 2018, we proposed to continue the existing four levels of Endovascular C-APCs (C-APCs 5191 through 5194) as displayed in Table 31 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule.
At the annual meeting for the HOP Panel held on August 21, 2017, the HOP Panel recommended that, for CY 2018, CMS examine the number of APCs for endovascular procedures. The HOP Panel also recommended that the appropriate Panel subcommittee review the APCs for endovascular procedures to determine whether more granularity (that is, more APCs) is warranted.
Other commenters opposed a reorganization of the endovascular C-APCs for CY 2018 and expressed concerns regarding changing the number of C-APCs in this family without a chance for the public to comment. These commenters encouraged CMS to consider the impact that adding APCs for the endovascular procedures may have on other procedures in existing APCs and recommended that, if CMS plans to make a change to the endovascular APCs, it include a proposal in the CY 2019 OPPS/ASC proposed rule to allow the opportunity for the public to comment.
For CY 2018, as displayed in Table 33 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 43210 to APC 5331 (Complex GI Procedures), with a proposed payment rate of $4,119.27.
• 43210 (Esophagogastroduodenoscopy, flexible, transoral; with esophagogastric fundoplasty, partial or complete, includes duodenoscopy when performed);
• 43257 (Esophagogastroduodenoscopy, flexible, transoral; with delivery of thermal energy to the muscle of lower esophageal sphincter and/or gastric cardia, for treatment of gastroesophageal reflux disease);
• 43280 (Laparoscopy, surgical, esophagogastric fundoplasty (
• 43281 (Laparoscopy, surgical, repair of paraesophageal hernia, includes fundoplasty, when performed; without implantation of mesh);
• 43284 (Laparoscopy, surgical, esophageal sphincter augmentation procedure, placement of sphincter augmentation device (
• 43770 (Laparoscopy, surgical, gastric restrictive procedure; placement of adjustable gastric restrictive device (
• 46762 (Sphincteroplasty, anal, for incontinence, adult; implantation artificial sphincter).
In summary, after consideration of the public comment we received, we are finalizing our CY 2018 proposal with modification. Specifically, we are reassigning CPT code 43210 from C-APC 5331 to C-APC 5362 for CY 2018. As we do every year under the OPPS, we will reevaluate the cost of the procedure and its APC assignment for next year's OPPS rulemaking. Table 34 below lists the final status indicator and APC assignments for CPT code 43210. We refer readers to Addendum B of this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A of this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 35 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 46930 to APC 5311 (Level 1 Lower GI Procedures), with a proposed payment rate of $690.37.
Therefore, after consideration of the public comment we received, we are finalizing our CY 2018 proposal with modification to the APC assignment for CPT code 46930. Specifically, we are reassigning CPT code 46930 from C-APC 5311 to C-APC 5312 for CY 2018. Table 36 below lists the final status indicator and APC assignments for CPT code 49630. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 37 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT code 44384 to C-APC 5303 (Level 3 Upper GI Procedures).
For this final rule with comment period, we again examined updated claims data associated with CPT code 44384. We note that for this final rule with comment period we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Our examination of the final rule claims data revealed a similar pattern for CPT code 44384. Specifically, we found a geometric mean cost of approximately $2,492 for CPT code 44384 based on 32 single claims (out of 33 total claims), which is similar to the geometric mean cost of approximately $2,742 for C-APC 5303 rather than the geometric mean cost of approximately $4,291 for C-APC 5331. Assigning CPT code 43384 to C-APC 5331 would result in an overpayment for the procedure. C-APC 5303 contains several GI-related procedures, which are similar to those procedures described by CPT code 44384, based on clinical homogeneity and resource costs.
In response to the comment related to device-dependent APCs, we note that device-dependent APCs are no longer recognized under the OPPS as of CY 2015 and that, effective January 1, 2017, device-intensive status is assigned at the HCPCS code level, not at the APC level. We note that when we implemented the C-APC policy in CY 2015, we eliminated the device-dependent APC policy and replaced it with the device-intensive policy, effective January 1, 2015. For more information on this change, we refer readers to the CY 2015 OPPS/ASC final rule with comment period (79 FR 66793 through 66795), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70421 through 70422), and the CY 2017 OPPS/ASC final rule with comment period (81 FR 79657 through 79659). In addition, we refer readers to section IV.B. of this final rule with comment period for the discussion related to the device-intensive policy under the OPPS. For a discussion of ASC procedures designated as device-intensive, we refer readers to section XII.C.1.c. of this final rule with comment period.
Finally, we remind readers that, as we have stated since the implementation of the OPPS in August 2000, section 1833(t)(9) of the Act requires that we annually review all the items and services within an APC group and revise the APC structures accordingly. Included in this review is the identification of any 2 times rule violations as provided under section 1833(t)(2) of the Act and, to the extent possible, rectification of these violations. We review our claims data every year and determine whether we need to make changes to the current APC assignment for the following year. Although CPT code 44384 was assigned to C-APC 5331 in CY 2016, we revised the assignment to C-APC 5303 for CY 2017 based on the latest claims data.
In summary, after consideration of the public comments we received, we are finalizing our CY 2018 proposal without modification to continue the assignment of CPT code 44384 to C-APC 5303. Table 38 below lists the final status indicator and APC assignments for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 39 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to reassign CPT code 50543 from C-APC 5377 (Level 7 Urology and Related Services), which had a proposed payment rate of $15,220.83 to C-APC 5362 (Level 2 Laparoscopy and Related Services), which had a proposed payment rate of $7,213.53.
Therefore, after consideration of the public comment we received, we are finalizing our proposal, without modification, to reassign CPT code 50543 to C-APC 5362 for CY 2018. As we do every year, we will review our claims data for the procedure for the CY 2019 OPPS rulemaking. Table 40 below lists the final CY 2018 status indicator and APC assignments for CPT code 50543. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 41 below and as listed in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to continue to assign CPT codes 81490, 81503, 81535, 81536, 81538, and 81539, to status indicator “Q4” to indicate that the codes are conditionally packaged. Specifically, as defined in Addendum D1 to the CY 2018 OPPS/ASC proposed rule, an
Therefore, after consideration of the public comments, we are finalizing our proposal, without modification, for CPT codes 81490, 81503, 81535, 81536, 81538, and 81539. As stated earlier, we will update the OPPS payment file (Addendum B) to appropriately reflect the status indicator assignment once a CPT code has been designated under the CLFS as an ADLT that meets the criteria of section 1834A(d)(5)(A) of the Act. Table 42 below lists the final status indicator for the CPT codes. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, we proposed to continue the existing C-APCs for the six levels of musculoskeletal procedures (C-APCs 5111 through 5116), as displayed in Table 43 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule.
For CY 2018, the AMA CPT Editorial Panel established several new bundled nasal/sinus endoscopy CPT codes. Table 44 below lists the complete descriptors for the new CPT codes. These codes were listed in Addendum B and Addendum O to the CY 2018 OPPS/ASC proposed rule (which is available via the Internet on the CMS Web site). Addendum B listed the proposed status indicator assignments for the new codes and assigned them to comment indicator “NP” (New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code), while Addendum O listed the proposed/placeholder CY 2018 CPT codes and the long descriptors. We note that the CPT code descriptors that appeared in the OPPS Addendum B were short descriptors and did not accurately describe the complete procedure, service, or item described by the CPT code. Therefore, we included the 5-digit placeholder codes and their long descriptors in Addendum O to the proposed rule, specifically under the column labeled “CY 2018 OPPS/ASC Proposed Rule 5-Digit AMA Placeholder Code” so that the public could adequately comment on our proposed APC and status indicator assignments. We also indicated that the final CPT code numbers would be included in this CY 2018 OPPS/ASC final rule with comment period. The final CPT code numbers, along with their corresponding 5-digit placeholder codes, can be found in Table 45 below.
As displayed in Table 44 below and in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to assign CPT code 31241 to status indicator “C” to indicate that this is an inpatient only procedure, and to assign CPT codes 31253, 31257, 31259, and 31298 to C-APC 5155 (Level 5 Airway Endoscopy), with a proposed payment rate of $4,628.89.
With regards to the comment recommending separate payment for the single endoscopic sinus procedures performed in 2017, because the codes describing single endoscopic sinus surgery are assigned to status indicator “J1”, HOPDs receive one payment for the multiple surgeries, regardless of the number of endoscopic sinus procedures performed in a day. The status indicator assignment of “J1” to C-APC 5155 indicates that the APC is designated as a comprehensive APC (C-APC) under the OPPS. C-APCs provide a single payment for a primary service, and payment for all adjunctive services reported on the same claim is packaged into payment for the primary service. With few exceptions, all other services reported on a hospital outpatient claim in combination with the primary service are considered to be related to the delivery of the primary service and packaged into the single payment for the primary service and, therefore, separate payment is not available. We note that C-APCs do not apply to ASCs; consequently, the procedures would not be packaged. Instead, the procedures would be separately payable in the ASC setting. As we stated in the CY 2017 OPPS/ASC final rule with comment period, we did not implement C-APCs in the ASC payment system, and consequently, procedures paid separately through the ASC payment system are paid based on the standard ASC methodology (81 FR 79738). We refer readers to section II.A.2.b. (Comprehensive APCs) of this final rule with comment period for the discussion on the payment methodology for C-APCs and to section XII. (ASC Payment System) of this final rule with comment period for the discussion on the ASC Payment System. For the history on the establishment of C-APCs under the OPPS, we refer readers to the CY 2014 OPPS/ASC final rule (78 FR 74861-4910).
In summary, after consideration of the public comments we received, we are finalizing our proposal for CPT codes 31241, 31253, 31257, 31259, and 31298 without modification. Consistent with the statutory requirement under section 1833(t)(9)(A) of the Act, we will reevaluate the APC assignment for these codes in the next rulemaking cycle. Table 45 below lists the final status indicator and APC assignments for CPT codes 31241, 31253, 31257, 31259, and 31298 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as illustrated in Table 46 below, we proposed to continue to assign CPT codes 78018 and 78121 to APC 5592 (Level 2 Nuclear Medicine and Related Services) and to also continue to assign CPT codes 78110 and 78111 to APC 5593 (Level 3 Nuclear Medicine and Related Services).
For this final rule with comment period, we again analyzed updated claims data associated with the four codes. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Our review of the final rule claims data revealed a similar pattern for all four codes. For CPT code 78018, we found a geometric mean cost of approximately $418 based on 6,113 single claims (out of 6,923 total claims), which is similar to the geometric mean cost of approximately $453 for APC 5592. Consequently, we believe that it continues to be appropriate to assign CPT code 78018 to APC 5592. For CPT code 78110, our claims data revealed a geometric mean cost of approximately $1,037 based on 12 single claims (out of 14 total claims), which is similar to the geometric mean cost of approximately $1,202 for APC 5593.
Consequently, we are maintaining CPT code 78110 in APC 5593. For CPT code 78111, we again had no claims data. However, because of its clinical similarity to CPT code 78110, we will maintain the assignment to APC 5593. For CPT code 78121, we found a geometric mean cost of approximately $808 based on 3 single claims (out of 3 total claims). Based on the comment received that the APC assignment is appropriate, we will retain CPT code 78121 in APC 5592, whose geometric mean cost is approximately $453, for CY 2018. In addition, given the low volume for the CPT code, we do not believe that we should reassign CPT code 78121 to APC 5593, whose geometric mean cost is approximately $1,202 for CY 2018. To reassign CPT code 78121 to APC 5593 would result in an overpayment for CPT code 78121.
Further, we remind the commenter, that as we do every year, we review the latest OPPS claims data to set the payment rates for the following year. Section 1833(t)(9) of the Act requires that we annually review all the items and services within an APC group and revise the APC structures accordingly. Included in this review is the identification of any 2 times rule violations as provided under section 1833(t)(2) of the Act and, to the extent possible, rectification of these violations.
With regard to the comment of deferring to specialty societies for appropriate APC placement for designated codes, while we rely on our latest claims data to appropriately set payment rates under the OPPS, we welcome and appreciate comments from all stakeholders on our proposals. We note that every year we publish the OPPS/ASC proposed rules with requests for public comments on the OPPS and ASC payment assignments from interested parties, including hospitals, specialty societies, physicians, nurses, health care technicians, other health care professionals, interested individuals, patients, and any other stakeholders interested on commenting on our proposed payment assignments.
In summary, after consideration of the public comment we received, we are finalizing our CY 2018 proposals, without modification, for CPT codes 78018, 78110, 78111, and 78121. Table 47 below lists the final status indicator and APC assignments for the CPT codes. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as noted in Table 48 below and in Addendum B to the CY 2018 OPPS/ASC proposed rule, we proposed to revise the APC assignment for the percutaneous transluminal mechanical thrombectomy procedures, specifically, CPT codes 37184 and 37187. Specifically, we proposed to reassign CPT codes 37184 and 37187 from APC 5183 (Level 3 Vascular Procedures) to APC 5184 (Level 4 Vascular Procedures), with a proposed payment rate of $4,084.25.
After consideration of the public comment we received, we are finalizing our CY 2018 proposal, with modification, for CPT codes 37184 and 37187. Specifically, we are reassigning CPT codes 37184 and 37187 from APC 5183 to C-APC 5192 for CY 2018. As we do every year under the OPPS, we will reevaluate the cost of CPT codes 37184, and 37187 and their APC assignment for next year's OPPS update. Table 49 below lists the final status indicator and APC assignments for both CPT codes. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as noted in Table 50 below, we proposed to reassign CPT code 36569 from APC 5181 (Level 1 Vascular Procedures) to APC 5182 (Level 2 Vascular Procedures), with a proposed payment rate of $945.33.
We proposed to revise the APC assignment for CPT code 36569 based on claims data used for the CY 2018 OPPS/ASC proposed rule. We note that the proposed rule data was based on claims data submitted between January 1, 2016, and December 31, 2016, that were processed on or before December 31, 2016. Our analysis of the proposed rule claims data revealed a geometric mean cost of approximately $934 for CPT code 36569 based on 29,514 single claims (out of 52,035 total claims). Our analysis further revealed a geometric mean cost of approximately $983 for APC 5182 and $610 for APC 5181. Based on the geometric mean costs of APCs 5181 and 5182, we believed it was necessary to revise the APC assignment for CPT code 36569 from APC 5181 to APC 5182 to pay appropriately for the procedure. Consequently, we proposed to revise the APC assignment for CPT code 36569, whose geometric mean cost of approximately $934 is comparable to the geometric mean cost of approximately $983 for APC 5182.
For this final rule with comment period, we again reviewed the updated claims data associated with CPT code 36569. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Our analysis of the final rule claims data revealed a similar pattern for CPT code 36569. Specifically, we found a geometric mean cost of approximately $929 for CPT code 36569 based on 31,559 single claims (out of 56,891 total claims). We also found the geometric mean cost of approximately $982 for APC 5182 to be similar to the geometric mean cost of CPT code 36569 compared to the geometric mean cost of approximately $612 for APC 5181.
In summary, after consideration of the public comment we received, we are finalizing our CY 2018 proposal, without modification, to reassign CPT code 36569 to APC 5182. Table 51 below lists the final status indicator and APC assignments for CPT code 36569 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as displayed in Table 52 below, and as listed in Addendum B of the CY 2018 OPPS/ASC proposed rule, we did not propose to make any change to the APC assignments for the pulmonary rehabilitation services and cardiac rehabilitation services codes. Currently, there are four HCPCS codes that describe pulmonary rehabilitation services, specifically, HCPCS codes G0237, G0238, G0239, and G0424. For CY 2018, we proposed to continue to assign HCPCS codes G0237, G0238, and G0239 to APC 5732 (Level 2 Minor Procedures) and to continue to assign HCPCS code G0424 to APC 5733 (Level 3 Minor Procedures) for CY 2018. In addition, there are currently four HCPCS codes that describe the cardiac rehabilitation services, specifically, HCPCS codes 93797, 93798, G0422, and G0423. For CY 2018, we proposed to continue to assign the cardiac rehabilitation services codes to APC 5771 (Cardiac Rehabilitation) for CY 2018.
For the proposed rule, we based the proposed payment rates on claims data submitted between January 1, 2016, and December 31, 2016, that were processed on or before December 31, 2016. Based on our analysis, we found the costs for both types of services to be significantly different.
For the pulmonary rehabilitation services, our analysis revealed a geometric mean cost of approximately $26 for HCPCS code G0237 (based on 19,925 single claims), $22 for HCPCS code G0238 (based on 17,361 single claims), and $33 for HCPCS code G0239 (based on 168,295 single claims). We note that the range of costs (between $26 and $33) for HCPCS codes G0237, G0238, and G0239 are similar to the geometric mean cost of approximately $31 for APC 5732. Consequently, we proposed to continue to assign all three pulmonary rehabilitation services HCPCS codes to APC 5732 for CY 2018. In addition, we found a geometric mean cost of approximately $45 for HCPCS code G0424 (based on 468,571 single claims) that is comparable to the geometric mean cost of approximately $55 for APC 5733. Therefore, we proposed to continue to assign HCPCS code G0424 to APC 5733.
For the cardiac rehabilitation services, our analysis revealed a geometric mean cost of approximately $101 for HCPCS code 93797 (based on 129,124 single claims), $118 for HCPCS code 93798 (based on 2,698,534 single claims), $212 for HCPCS code G0422 (based on 38,094 single claims), and $174 for HCPCS code G0423 (based on 18,001 single claims). Because the range of costs (between $101 and $212) for the cardiac rehabilitation services are comparable to the geometric mean cost of approximately $118 for APC 5771, we proposed to continue to assign the cardiac rehabilitation HCPCS codes to APC 5771 for CY 2018.
For this final rule with comment period, we again analyzed the updated claims data associated with the pulmonary and cardiac rehabilitation services. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Similar to our proposed rule findings, we found the costs to be different for both services.
For the pulmonary rehabilitation services, our final rule claims data revealed a geometric mean cost of approximately $25 for HCPCS code G0237 (based on 22,097 single claims), $22 for HCPCS code G0238 (based on 18,900 single claims), and $33 for HCPCS code G0239 (based on 187,134 single claims). Based on the range of costs (between $22 and $33), we believe that HCPCS codes G0237, G0238, and G0239 are appropriately assigned to APC 5732, whose geometric mean cost is approximately $32. Similarly, we believe that the geometric mean cost of approximately $44 (based on 514,478 single claims) for HCPCS code G0424 is comparable to the geometric mean costs of those services assigned to APC 5733, whose geometric mean cost is approximately $56 for CY 2018.
For the cardiac rehabilitation services, our final rule claims data revealed a geometric mean cost of approximately $224 for HCPCS code G0422 (based on 44,754 single claims), $186 for HCPCS code G0423 (based on 22,188 single claims), $101 for HCPCS code 93797 (based on 143,507 single claims), and $116 for HCPCS code 93798 (based on 2,991,759 single claims). Based on the costs for the cardiac rehabilitation HCPCS codes (between $101 to $224), we believe that the geometric mean cost of approximately $117 for APC 5771 appropriately reflects the resources in providing cardiac rehabilitation services.
In addition, while the commenters believed that pulmonary and cardiac rehabilitation services are similar, our analysis of the available OPPS data reveals that their costs are significantly different. Consequently, we do not agree that we should assign both services to one APC, or even assign the pulmonary rehabilitation HCPCS code G0424 to the cardiac rehabilitation services group (APC 5771). We note that the commenters did not provide data to suggest that the hospital reported costs in our data are incorrect or that the resources (costs) incurred to furnish these two types of services are equal. Accordingly, we have no reason to believe that the data reported to us by hospitals are incorrect.
Moreover, we do not agree that we should create a composite APC for the pulmonary and cardiac rehabilitation services. Composite APCs provide a single payment for groups of services that are typically performed together during a single clinical encounter that result in the provision of a complete service. Combining payment for multiple, independent services into a single OPPS payment in this way enables hospitals to manage their resources with maximum flexibility by monitoring and adjusting the volume and efficiency of services themselves. Establishing a composite APC for these services would not be appropriate because pulmonary and cardiac rehabilitation services are generally not performed on the same day. We refer readers to the CY 2008 OPPS/ASC final rule with comment period for a full discussion of the development of the composite APC methodology (72 FR 66611 through 66614 and 66650 through 66652) and the CY 2012 OPPS/ASC final rule with comment period (76 FR 74163) for more recent background.
In addition, as illustrated in Table 52-1 below, the number of services paid by Medicare for both cardiac rehabilitation and pulmonary rehabilitation has grown in the last several years. For the CY 2018 OPPS update, our claims data reveal over 514,000 single claims for pulmonary rehabilitation services as described by HCPCS code G0424 alone. Accordingly, we do not believe that beneficiary access to pulmonary rehabilitation services is inadequate. Details pertaining to the volume of these services furnished in the physician office setting can be derived from the CY 2018 MPFS final rule and associated public use files.
In summary, after consideration of the public comments we received and after our analysis of the updated claims data for this final rule with comment period, we believe that the current APC assignments for the pulmonary and cardiac rehabilitation services appropriately reflects their clinical coherence and resource costs. Consequently, we are finalizing our proposal to continue the current APC assignment of the pulmonary and cardiac rehabilitation HCPCS codes, without modification, for CY 2018. As we do every year, we will review our claims data for these services for the CY 2019 OPPS rulemaking. Table 53 below lists the final status indicator and APC assignments for the codes for pulmonary and cardiac rehabilitation services. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
Section 1833(t)(9)(A) of the Act requires the Secretary to review not less often than annually, and revise the APC group assignments, relative payment weights, and the wage and other adjustments to take into account changes in medical practice, changes in technology, the addition of new services, new cost data, and other relevant information and factors. In addition, section 1833(t)(2)(G) of the Act requires the Secretary to create additional groups of covered OPD services that classify separately those procedures that utilize contrast agents from those procedures that do not utilize contrast agents.
In CY 2016, as a part of our comprehensive review of the structure of the APCs and procedure code assignments, we restructured the APCs that contain imaging services (80 FR 70392). The purpose of this restructuring was to more appropriately reflect the resource costs and clinical characteristics of the services classified within the imaging APCs. The restructuring of the imaging APCs resulted in broader groupings that removed the excessive granularity of grouping imaging services according to organ or physiologic system, which did not necessarily reflect either significant differences in resources or how these services are delivered in the hospital outpatient setting. In CY 2017, in response to public comments on the CY 2017 OPPS/ASC proposed rule, we further consolidated the imaging APCs from 17 APCs in CY 2016 to 7 APCs in CY 2017 (81 FR 79633). These included four imaging APCs without contrast and three imaging APCs with contrast.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33608), for CY 2018, we reviewed the services assigned to the imaging without contrast APCs and imaging with contrast APCs. Specifically, we evaluated the resource costs and clinical coherence of the procedures associated with the four levels of imaging without contrast APCs and the three levels of imaging with contrast APCs, as well as identified and corrected any 2 times rule violations as discussed in section III.B.2. of the CY 2018 OPPS/ASC proposed rule. In addition, we reviewed and considered stakeholder recommendations to make additional refinements to the structure of the APC groupings of the imaging procedures classified within the imaging APCs that would maintain clinical homogeneity while more appropriately addressing resource cost fluctuation and volatility. As a result of our analysis and review of the claims data used for CY 2018 ratesetting, we stated in the proposed rule that we believed a Level 5 Imaging without Contrast APC was needed to more appropriately group certain imaging services with higher resource costs. Specifically, we stated our belief that
We invited public comments on our proposal to add a Level 5 Imaging without Contrast APC in CY 2018.
• CPT code 70543 (Magnetic resonance imaging, orbit, face, and/or neck; without contrast material(s) and further sequences);
• CPT code 70553 (Magnetic resonance imaging, brain (including brain stem); without contrast material, followed by contrast material(s) and further sequences);
• CPT code 71552 (Magnetic resonance imaging, chest; without contrast material(s), followed by contrast material(s) and further sequences);
• CPT code 72156 (Magnetic resonance imaging, spinal canal and contents, without contrast material, followed by contrast material(s) and further sequences; cervical);
• CPT code 72157 (Magnetic resonance imaging spinal canal and contents, without contrast material, followed by contrast material(s) and further sequences; thoracic);
• CPT code 72158 (Magnetic resonance imaging spinal canal and contents, without contrast material, followed by contrast material(s) and further sequences; lumbar);
• CPT code 72197 (Magnetic resonance imaging pelvis; without contrast material(s), followed by contrast material(s) and further sequences);
• CPT code 73223 (Magnetic resonance imaging, any joint of upper extremity; without contrast material(s), followed by contrast material(s) and further sequences); and
• CPT code 74183 (Magnetic resonance imaging abdomen; without contrast material(s), followed by with contrast material(s) and further sequences).
In summary, after consideration of the public comments we received and for the reasons discussed above, we are not finalizing the proposal to create a Level 5 (Imaging without Contrast) APC or the proposal to assign nine high-volume contrast MRI procedures to Level 3 (Imaging with Contrast) for CY 2018. Table 54 below compares the CY 2017 and 2018 APC geometric mean costs for the imaging APCs.
The specific APC assignments for each imaging procedure grouping are listed in Addendum B to this final rule with comment period, which is available via the Internet on the CMS Web site.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33609), for the CY 2018 OPPS update, we proposed to reassign HCPCS code C9733 (Non-ophthalmic fluorescent vascular angiography) from APC 5523 (Level 3 Imaging without Contrast) to APC 5524 (Level 4 Imaging without Contrast) based on the latest claims data available for the proposed rule. We proposed to maintain the status indicator assignment of “Q2” (T-packaged) to indicate that the service is conditionally packaged when performed in conjunction with other procedures on the same day but paid separately when performed as a stand-alone service.
Our claims data used for the proposed rule, which included claims submitted between January 1, 2016, and December 31, 2016, and processed on or before December 31, 2016, showed a geometric mean cost of approximately $236 for HCPCS code C9733 based on 216 single claims (out of 953 total claims), which is closely aligned with the geometric mean cost of approximately $275 for APC 5524. Because HCPCS code C9733 is an imaging service which is similar to the codes assigned to APC 5524, we proposed to reassign HCPCS code C9733 from APC 5523 to APC 5524. We stated that we believe this proposed reassignment would improve the clinical homogeneity of APC 5524 and appropriately align the resource costs of HCPCS code C9733 to the resource costs of those procedures assigned to APC 5524.
As we have stated in previous OPPS/ASC final rules, specifically, in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68345 through 68346), the CY 2014 OPPS/ASC final rule with comment period (78 FR 74976 through 74977), and the CY 2017 OPPS/ASC final rule with comment period (81 FR 79632), the service described by HCPCS code C9733 is primarily an intraoperative imaging service that is performed in combination with a number of primary procedures, including facial reconstruction and reanimation, muscle flaps, trauma reconstruction, digital and limb reattachment, and breast reconstruction. Therefore, payment for the service described by HCPCS code C9733 is conditionally packaged under 42 CFR 419.2(b)(14), which contains the policies governing packaging of intraoperative items and services. Consequently, we proposed to maintain the status indicator assignment of “Q2” to indicate that the payment for the service will be packaged in the APC payment if billed on the same date of service as a HCPCS code assigned to status indicator “T”, but in all other circumstances, a separate APC payment for the service will be made. We believe that the OPPS payments, separate or packaged, for surgical procedures with which this service is performed are more than adequate to cover the cost of the service described by HCPCS code C9733 for Medicare beneficiaries in need of this service.
After consideration of the public comments we received, we are not finalizing our proposal to reassign HCPCS code C9733 from APC 5523 to APC 5524 for CY 2018. Instead, for CY 2018, we are continuing to assign HCPCS code C9733 to APC 5523 and continuing to assign the code to status indicator “Q2” to indicate that the service is conditionally packaged. The final CY 2018 OPPS payment rate for HCPCS code C9733 can be found in OPPS Addendum B to this final rule with comment period, which is available via the Internet on the CMS Web site.
For CY 2018, the AMA CPT Editorial Panel established two new codes to describe the injection of a noncompounded foam sclerosant for treatment of incompetent veins. Table 55 below lists the complete descriptors for the new CPT codes. These codes were listed in Addendum B and Addendum O to the CY 2018 OPPS/ASC proposed rule (which are available via the Internet on the CMS Web site). Addendum B listed the proposed status indicator assignments for the new codes and assigned them to comment indicator “NP” (New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code), while Addendum O listed the proposed/placeholder CY 2018 CPT codes and the long descriptors. We note that the CPT code descriptors that appeared in Addendum B to the CY 2018 proposed rule were short descriptors and did not accurately describe the complete procedure, service, or item described of the CPT code. Therefore, we included the 5-digit placeholder codes and their long descriptors in Addendum O to the proposed rule, specifically under the column labeled “CY 2018 OPPS/ASC Proposed Rule 5-Digit AMA Placeholder Code” so that the public could adequately comment on our proposed APC and status indicator assignments. We also indicated that the final CPT code numbers would be included in this CY 2018 OPPS/ASC final rule with comment period. The final CPT code numbers, along with their corresponding 5-digit placeholder codes, can be found in Table 55 below.
As displayed in Table 55 below and in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to assign CPT codes 36465 and 36466 to APC 5053 (Level 3 Skin Procedures), with a proposed payment rate of $468.82.
• CPT code 36473 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, mechanochemical; first vein treated);
• CPT code 36474 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, mechanochemical; subsequent vein(s) treated in a single extremity, each through separate access sites (list separately in addition to code for primary procedure));
• CPT code 36475 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, radiofrequency; first vein treated);
• CPT code 36476 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, radiofrequency; subsequent vein(s) treated in a single extremity, each through separate access sites (list separately in addition to code for primary procedure))
• CPT code 36478 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, laser; first vein treated); and
• CPT code 36479 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, laser; subsequent vein(s) treated in a single extremity, each through separate access sites (list separately in addition to code for primary procedure)).
One commenter stated that the procedures described by CPT codes 36465 and 36466 share similar characteristics and comparable anticipated costs as the procedures assigned to APC 5183, and consequently, requested an assignment to APC 5183 for the two new CPT codes. Another commenter noted that CPT codes 36473, 36475, and 36478 are currently assigned to APC 5183, and requested that CMS also assign new CPT codes 36465 and 36466 to APC 5183. One commenter reported that, in the CY 2018 MPFS proposed rule, CMS proposed a nonfacility payment of $1,605.17 for new CPT code 36465 and $1,678.23 for new CPT code 36466 for CY 2018. This commenter also listed a practice expense input price of $1,054 for the Varithena (foam) used in the procedures.
In summary, after consideration of the public comments we received, we are finalizing our proposal for the APC assignment of the procedures described by new CPT codes 36465 and 36466, with modification. Specifically, we are assigning both codes to APC 5054, instead of proposed APC 5053, for CY 2018. Table 56 below lists the final status indicator and APC assignments for CPT codes 36465 and 36466 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, we proposed to assign skin substitute procedures to APCs 5053 through 5055 (Level 3 through 5 Skin Procedures). The cost of the procedures is affected by whether the skin substitute product is low cost or high cost, the surface area of the wound, and the location of the wound.
After consideration of the public comments we received, we are finalizing our proposal for CY 2018 for assignment of skin substitute procedures to APCs 5053 through 5055, including the assignment of HCPCS code C5277 to APC 5053 and CPT code 15277 to APC 5054.
In the CY 2018 MPFS proposed rule (82 FR 34011 through 34012), CMS proposed to establish three G-codes to appropriately report the insertion and removal of buprenorphine hydrochloride, formulated as a 4-rod, 80 mg, long-acting subdermal drug implant for the treatment of opioid addiction (82 FR 34011 through 34012). Specifically, we proposed to establish the following HCPCS G-codes:
• Placeholder HCPCS Code GDDD1 (Insertion, non-biodegradable drug delivery implants, 4 or more);
• Placeholder HCPCS Code GDDD2 (Removal, non-biodegradable drug delivery implants, 4 or more); and
• Placeholder HCPCS code GDDD3 (Removal with reinsertion, non-biodegradable drug delivery implants, 4 or more).
We did not make any proposal related to HCPCS codes GDDD1 through GDDD3 in the CY 2018 OPPS/ASC proposed rule because there are existing codes that can be used to report the insertion and removal of buprenorphine hydrochloride, as well as a HCPCS J-code to report use of the buprenorphine hydrochloride drug. Listed below in Table 57 are the specific CPT and HCPCS codes for the buprenorphine hydrochloride subdermal drug and its administration, and the proposed OPPS payment rates for CY 2018.
In summary, after consideration of the public comments we received, we are establishing HCPCS G-codes G0516, G0517, and G0518 under the OPPS, effective January 1, 2018. Table 58 below lists the final status indicator and APC assignments for HCPCS G-codes G0516, G0517, G0518, and HCPCS code J0570 for CY 2018. We remind hospitals that the HCPCS drug code for buprenorphine hydrochloride (HCPCS code J0570) should also be reported when billing for the subdermal administration of the drug. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as noted in Table 59 below, we proposed to continue to assign CPT codes 67028 and 0465T to APC 5694 (Level 4 Drug Administration), with a proposed payment rate of $286.62. We also proposed to continue to assign CPT code 67028 to status indicator “S” (Procedure or Service, Not Discounted When Multiple) and to continue to assign CPT code 0465T to status indicator “T” (Procedure or Service, Multiple Procedure Reduction Applies).
• CPT code 0465T (Suprachoroidal injection of a pharmacologic agent (does not include supply of medication));
• CPT code 36593 (Declotting by thrombolytic agent of implanted vascular access device or catheter);
• CPT code 37195 (Thrombolysis, cerebral, by intravenous infusion); and
• CPT code 92977 (Thrombolysis, coronary; by intravenous infusion).
As stated earlier, status indicator “T” indicates that the service will be reduced by 50 percent if it is the lower priced service on the same claim with another procedure that is also assigned to a status indicator “T”. For CPT code 0465T, we expect this reduction to occur when there is a separate procedure performed on the same day as the suprachoroidal injection due to significant efficiencies in administering the pharmacologic agent. If the suprachoroidal injection is performed by itself or with a visit, or with a service or procedure assigned to status indicator “S”, the multiple procedure reduction will not apply. We remind hospitals that, when reporting CPT code 0465T, the appropriate HCPCS drug code should also be reported on the claim.
Therefore, after consideration of the public comments we received, we are finalizing our CY 2018 proposal, without modification, to continue to assign CPT codes 67028 and 0465T to status indicator “S” and “T” respectively, and to continue to assign the CPT codes to APC 5694. Table 60 below lists the final status indicator and APC assignments for both codes for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, the AMA CPT Editorial Panel deleted CPT code 0438T and replaced the code with CPT code 55874, effective January 1, 2018. CPT code 0438T was effective July 1, 2016 and will be deleted on December 31, 2017. Prior to July 2016, the transperineal placement of biodegradable material procedure was described by HCPCS code C9743 (Injection/implantation of bulking or spacer material (any type) with or without image guidance (not to be used if a more specific code applies)), which was effective October 1, 2015 and was deleted on June 30, 2016, when it was replaced with CPT code 0438T, effective July 1, 2016.
Table 61 below lists the complete descriptors for the deleted and replacement CPT codes. We note that the deleted and replacement CPT codes were both listed in Addendum B and Addendum O to the CY 2018 OPPS/ASC proposed rule (which are available via the Internet on the CMs Web site). Addendum B listed the proposed status indicator assignment for the replacement code and assigned it to comment indicator “NP” (New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code), while Addendum O listed the proposed/placeholder CY 2018 CPT codes and the long descriptors.
As listed in Table 63 below and in Addendum B of the CY 2018 OPPS/ASC proposed rule, we proposed to delete CPT code 0438T (status indicator “D”) and assign its replacement code, CPT code 55874 (placeholder code 55X87), to C-APC 5375 (Level 5 Urology and Related Services) with a proposed payment rate of $3,597.65. As noted in Table 62, the predecessor code 0438T was assigned to C-APC 5374 (Level 4 Urology and Related Services), while this replacement code is proposed to be reassigned to C-APC 5375. We proposed to revise the APC assignment for CPT code 55874 based on claims data used for the CY 2018 OPPS/ASC proposed rule. We note that the proposed rule claims data was based on claims data submitted between January 1, 2016, and December 31, 2016, that were processed on or before December 31, 2016. For the predecessor codes HCPCS codes C9743 and 0438T that were in effect during CY 2016, our analysis of the proposed rule claims data revealed a geometric mean cost of approximately $4,504 based on 157 single claims (out of 159 total claims), which is similar to the geometric mean cost of approximately $3,742 for C-APC 5375 rather than the geometric mean cost of approximately $2,714 for C-APC 5374 or the geometric mean cost of approximately $7,747 for C-APC 5376 (Level 6 Urology and Related Services). Based on its clinical homogeneity and resource similarity to the other procedures assigned to C-APC 5375, we proposed to reassign replacement CPT code 55874 from C-APC 5374 to C-APC 5375 for CY 2018.
With regards to the device-intensive designation for CPT code 55874, based on our analysis of the predecessor HCPCS code C9743, this code is not eligible for device-intensive status because it does not meet the criteria of a device offset that is greater than 40 percent. For more information on how codes are designated as device-intensive status, we refer readers to section IV.B. of this final rule with comment period.
In summary, after consideration of the public comments we received and our analysis of the updated claims data for this final rule with comment period, we are finalizing our CY 2018 proposal, without modification, and assigning CPT code 55874 to C-APC 5375. Table 63 below lists the final status indicator and APC assignments for CPT code 55874 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, as listed in Table 64 below, we proposed to continue to assign CPT code 90867 to APC 5722 (Level 2 Diagnostic Tests and Related Services) and to also continue to assign CPT code 90869 to APC 5721 (Level 1 Diagnostic Tests and Related Services). However, we proposed to reassign CPT code 90868 from APC 5722 to APC 5721.
For this final rule with comment period, we again reviewed the updated claims data associated with CPT codes 90868 and 90869. We note that, for this final rule with comment period, we used claims data with dates of service between January 1, 2016, and December 31, 2016, that were processed on or before June 30, 2017. Our analysis of the final rule claims data revealed a similar pattern for both codes. Specifically, we found a geometric mean cost of approximately $148 for CPT code 90868 based on 7,258 single claims (out of 7,312 total claims), which is similar to the geometric mean cost of approximately $136 for APC 5721, rather than the geometric mean cost of approximately $249 for APC 5722. Our analysis also revealed a geometric mean cost of approximately $125 for CPT code 90869 based on 105 single claims (out of 106 total claims), which is comparable to the geometric mean cost of $136 for APC 5721. Based on our analysis of the final rule claims data, we believe that APC 5721 is the appropriate APC assignment for both CPT codes 90868 and 90869 based on their clinical homogeneity and resource costs to the other procedures in APC 5721.
With regards to the comment that TMS therapy requires significant time with physicians, we remind readers that payments under the OPPS are for services provided by hospital outpatient facilities, not physician services. We note that physician services are paid under the MPFS. Medicare payment rates for physician services can be found on the CMS Physician Fee Schedule Web site, specifically at:
In summary, after consideration of the public comments we received, we are finalizing our CY 2018 proposal, without modification, for CPT codes 90867, 90868, and 90869. Table 65 below lists the final status indicator and APC assignments for all three CPT codes. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
On June 5, 2017, the Category B Investigational Device Exemption (IDE) study associated with the “Waterjet Ablation Therapy for Endoscopic Resection of Prostate Tissue II (WATER)” met CMS' standards for coverage. According to the National Institutes of Health (NIH)
In the CY 2018 OPPS/ASC proposed rule, we solicited public comments on the proposed APC and status indicator assignments for the code. Specifically, as listed in Table 66 below, we proposed to continue to assign CPT code 0421T to C-APC 5374 for CY 2018.
In summary, after consideration of the public comments, we are finalizing our CY 2018 proposal with modification. Specifically, we are revising the APC assignment for CPT code 0421T from proposed C-APC 5374 to C-APC 5375 for CY 2018. Table 67 below lists the final status indicator and APC assignments for CPT code 0421T for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
For CY 2018, CMS received a New Technology APC application requesting a new HCPCS code for the Rezūm therapy. The Rezūm procedure is a new treatment, and the Rezūm System associated with this procedure received a 510(k) FDA clearance on August 27, 2015. The procedure utilizes water vapor for the treatment of benign prostatic hypertrophy (BPH). The applicant maintained that there was coding confusion about whether the procedure could be described by existing CPT code 53852 (Transurethral destruction of prostate tissue; by radiofrequency thermotherapy). We note that CPT code 53852 is assigned to C-APC 5375 (Level 5 Urology and Related Services), which has a geometric mean cost of approximately $3,704 for CY 2018.
Based on our review of the application, the procedure, and input from our clinical advisors, we agree that CPT code 53852 does not appropriately describe the Rezūm procedure. Consequently, we are establishing HCPCS code C9748 to appropriately describe the procedure. Effective January 1, 2018, HOPDs should report HCPCS code C9748 to report the use of the Rezūm procedure for the treatment of BPH. In addition, based on cost information submitted to CMS in the application, we believe that the procedure should appropriately be assigned to C-APC 5373 (Level 3 Urology and Related Services), which has a geometric mean cost of approximately $1,695. We believe the Rezūm procedure shares similar resource and clinical homogeneity to the other procedures currently assigned to C-APC 5373.
Table 68 below lists the final status indicator and APC assignments for HCPCS code C9748 for CY 2018. We refer readers to Addendum B to this final rule with comment period for the payment rates for all codes reported under the OPPS. In addition, we refer readers to Addendum A to this final rule with comment period for the status indicator meanings for all codes reported under the OPPS. Both Addendum A and Addendum B are available via the Internet on the CMS Web site.
We note that HCPCS code C9748 is assigned to comment indicator “NI” in Addendum B to this CY 2018 OPPS/ASC final rule with comment period to indicate that we have assigned the code an interim OPPS payment status for CY 2018. We are inviting public comments on the interim status indicator and APC assignments that will be finalized in the CY 2019 OPPS/ASC final rule with comment period.
Under section 1833(t)(6)(B)(iii) of the Act, the period for which a device category eligible for transitional pass-through payments under the OPPS can be in effect is at least 2 years but not more than 3 years. Prior to CY 2017, our regulation at 42 CFR 419.66(g) provided that this pass-through payment eligibility period began on the date CMS established a particular transitional pass-through category of devices, and we based the pass-through status expiration date for a device category on the date on which pass-through payment was effective for the category. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79654), in accordance with section 1833(t)(6)(B)(iii)(II) of the Act, we amended § 419.66(g) to provide that the pass-through eligibility period for a device category begins on the first date on which pass-through payment is made under the OPPS for any medical device described by such category.
In addition, prior to CY 2017, our policy was to propose and finalize the dates for expiration of pass-through status for device categories as part of the OPPS annual update. This means that device pass-through status would expire
As stated earlier, section 1833(t)(6)(B)(iii) of the Act requires that, under the OPPS, a category of devices be eligible for transitional pass-through payments for at least 2 years, but not more than 3 years. There currently are three device categories eligible for pass-through payment: (1) HCPCS code C2623 (Catheter, transluminal angioplasty, drug-coated, non-laser), which was established effective April 1, 2015; (2) HCPCS code C2613 (Lung biopsy plug with delivery system), which was established effective July 1, 2015; and (3) HCPCS code C1822 (Generator, neurostimulator (implantable), high frequency, with rechargeable battery and charging system), which was established effective January 1, 2016. The pass-through payment status of the device categories for HCPCS codes C2623, C2613, and C1822 will end on December 31, 2017. We note that our new policy adopted in the CY 2017 OPPS/ASC final rule with comment period to allow for quarterly expiration of pass-through payment status for devices applies to devices approved in CY 2017 and subsequent years. As all the devices in these three device categories were approved prior to CY 2017, we are applying our policy to expire them at the end of the calendar year when at least 2 years of pass-through payments have been made. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33610), we proposed, beginning in CY 2018, to package the costs of each of the devices described by HCPCS codes C2623, C2613, and C1822 into the costs related to the procedure with which each device is reported in the hospital claims data.
One commenter also referenced the proposal in the CY 2018 OPPS/ASC proposed rule (82 FR 33579 and 33580) to establish a HCPCS C-code to describe blue light cystoscopy (HCPCS code C9738 (Adjunctive blue light cystoscopy with fluorescent imaging agent (List separately in addition to code for primary procedure)) and to apply the C-APC complexity adjustment policy when this C-code is billed with specific white light cystoscopy codes. The commenter pointed out that, in the proposed rule, CMS stated that establishment of this C-code was appropriate because CMS believed that blue light cystoscopy is a distinguishable service in comparison to white light cystoscopy alone. CMS further stated that, with the C-APC complexity adjustment, qualifying combinations of the blue light cystoscopy C-code and white light cystoscopy codes are paid at the next higher paying C-APC when billed together on the same claim. The commenter requested that CMS take comparable steps to separately identify and pay for angioplasty procedures involving drug-coated balloons.
Finally, several commenters referenced the HOP Panel's recommendation that CMS examine the number of APCs for endovascular procedures for CY 2018 and requested CMS create two new levels within the Endovascular C-APCs to provide higher payment for angioplasty procedures using a drug-coated balloon.
We note that stakeholders who are interested in the establishment of a CPT procedure code to describe angioplasty procedures involving the use of drug-coated balloons may request a new procedure code from the AMA CPT Editorial Panel.
With regard to the request to create additional levels within the Vascular C-APC clinical family, this issue is discussed in greater detail in section III.D. of this final rule with comment period. As we do every year, we will review and evaluate the APC groupings based on the latest available data in the next rulemaking cycle.
With respect to comments expressing concerns that the reported costs for HCPCS code C1822 for CY 2016 were lower due to hospital cost reporting
Commenters writing in support of extending the pass-through payment period for HCPCS code C1822 also stated that access to the service covered by HCPCS code C1822 could be reduced if pass-through payment status for HCPCS code C1822 is removed. Because reported costs for CPT code 63685 appear to be consistent with or without being reported in combination with HCPCS code C1822, we do not anticipate a significant impact to the payment amount for CPT code 63685 once HCPCS code C1822 is removed from pass-through payment status. We anticipate that hospitals will be able to adjust to any possible changes to the payment for the service.
We did not receive any public comments regarding the proposal to package the payment for the costs of the device described by HCPCS code C2623 into the payment for the costs related to the procedure with which the device is reported.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to package the payment for the costs of each of the devices described by HCPCS codes C2623, C2613, and C1822 into the payment for the costs related to the procedure with which each device is reported in the hospital claims data.
Section 1833(t)(6) of the Act provides for pass-through payments for devices, and section 1833(t)(6)(B) of the Act requires CMS to use categories in determining the eligibility of devices for pass-through payments. As part of implementing the statute through regulations, we have continued to believe that it is important for hospitals to receive pass-through payments for devices that offer substantial clinical improvement in the treatment of Medicare beneficiaries to facilitate access by beneficiaries to the advantages of the new technology. Conversely, we have noted that the need for additional payments for devices that offer little or no clinical improvement over previously existing devices is less apparent. In such cases, these devices can still be used by hospitals, and hospitals will be paid for them through appropriate APC payment. Moreover, a goal is to target pass-through payments for those devices where cost considerations might be most likely to interfere with patient access (66 FR 55852; 67 FR 66782; and 70 FR 68629).
As specified in regulations at 42 CFR 419.66(b)(1) through (b)(3), to be eligible for transitional pass-through payment under the OPPS, a device must meet the following criteria: (1) If required by FDA, the device must have received FDA approval or clearance (except for a device that has received an FDA investigational device exemption (IDE) and has been classified as a Category B device by the FDA), or another appropriate FDA exemption; and the pass-through payment application must be submitted within 3 years from the date of the initial FDA approval or clearance, if required, unless there is a documented, verifiable delay in U.S. market availability after FDA approval or clearance is granted, in which case CMS will consider the pass-through payment application if it is submitted within 3 years from the date of market availability; (2) the device is determined to be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part, as required by section 1862(a)(1)(A) of the Act; and (3) the device is an integral part of the service furnished, is used for one patient only, comes in contact with human tissue, and is surgically implanted or inserted (either permanently or temporarily), or applied in or on a wound or other skin lesion. In addition, according to § 419.66(b)(4), a device is not eligible to be considered for device pass-through payment if it is any of the following: (1) Equipment, an instrument, apparatus, implement, or item of this type for which depreciation and financing expenses are recovered as depreciation assets as defined in Chapter 1 of the Medicare Provider Reimbursement Manual (CMS Pub. 15-1); or (2) a material or supply furnished incident to a service (for example, a suture, customized surgical kit, or clip, other than a radiological site marker).
Separately, we use the following criteria, as set forth under § 419.66(c), to determine whether a new category of pass-through payment devices should be established. The device to be included in the new category must—
• Not be appropriately described by an existing category or by any category previously in effect established for transitional pass-through payments, and was not being paid for as an outpatient service as of December 31, 1996;
• Have an average cost that is not “insignificant” relative to the payment amount for the procedure or service with which the device is associated as determined under § 419.66(d) by demonstrating: (1) The estimated average reasonable costs of devices in the category exceeds 25 percent of the applicable APC payment amount for the service related to the category of devices; (2) the estimated average reasonable cost of the devices in the category exceeds the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent; and (3) the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device exceeds 10 percent of the APC payment amount for the related service (with the exception of brachytherapy and temperature-monitored cryoblation, which are exempt from the cost
• Demonstrate a substantial clinical improvement, that is, substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment.
Beginning in CY 2016, we changed our device pass-through evaluation and determination process. Device pass-through applications are still submitted to CMS through the quarterly subregulatory process, but the applications will be subject to notice-and-comment rulemaking in the next applicable OPPS annual rulemaking cycle. Under this process, all applications that are preliminarily approved upon quarterly review will automatically be included in the next applicable OPPS annual rulemaking cycle, while submitters of applications that are not approved upon quarterly review will have the option of being included in the next applicable OPPS annual rulemaking cycle or withdrawing their application from consideration. Under this notice-and-comment process, applicants may submit new evidence, such as clinical trial results published in a peer-reviewed journal or other materials for consideration during the public comment process for the proposed rule. This process allows those applications that we are able to determine meet all the criteria for device pass-through payment under the quarterly review process to receive timely pass-through payment status, while still allowing for a transparent, public review process for all applications (80 FR 70417 through 70418).
More details on the requirements for device pass-through payment applications are included on the CMS Web site in the application form itself at:
We received five applications by the March 1, 2017 quarterly deadline, which was the last quarterly deadline for applications to be received in time to be included for the CY 2018 OPPS/ASC proposed rule. All applications were received in the second quarter of 2016. None of the five applications were approved for device pass-through payment during the quarterly review process.
Applications received for the later deadlines for the remaining 2017 quarters (June 1, September 1, and December 1), if any, will be presented in the CY 2019 OPPS/ASC proposed rule. We note that the quarterly application process and requirements have not changed in light of the addition of rulemaking review. Detailed instructions on submission of a quarterly device pass-through payment application are included on the CMS Web site at:
Harbor MedTech, Inc. submitted an application for a new device category for transitional pass-through payment status for Architect® Px. Architect® Px is a collagen biomatrix comprised of a stabilized extracellular matrix derived from equine pericardium. The equine pericardium is stabilized to become a catalyst and scaffold for use by autologous tissue regeneration factors. Architect® Px is packaged as an individual unit in sizes ranging from 2 cm x 2 cm up to 10 cm x 15 cm and is approximately 0.75 mm thick. Architect® Px typically requires only one application. The applicant asserted that it is clinically superior to other skin substitutes that work by flooding the wound with nonautologous collagen and growth factors because Architect® Px attracts and concentrates the patient's own autologous collagen and growth factors to support healing.
With respect to the newness criterion at § 419.66(b)(1), the applicant received FDA clearance for Architect® Px on September 12, 2014, and its June 1, 2016 application was submitted within 3 years of FDA clearance. However, Unite BioMatrix, cleared by the FDA on June 20, 2007, is claimed as a predicate of Architect® Px. The Architect® Px application states that “. . . while packaged differently, Architect® Px and Unite BioMatrix are identical . . . they are both stabilized equine pericardium manufactured using the same processes . . . .” If the date for FDA clearance for Unite BioMatrix is used to evaluate the newness criterion, Architect® Px may not meet the newness criterion. We invited public comments on this issue.
With respect to the eligibility criterion at § 419.66(b)(3), according to the applicant, Architect® Px is a skin substitute product that is integral to the service provided, is used for one patient only, comes in contact with human skin, and is surgically inserted into the patient. The applicant also claims Architect® Px meets the device eligibility requirements of § 419.66(b)(4) because Architect® Px is not an instrument, apparatus, implement, or item for which depreciation and financing expenses are recovered, and it is not a supply or material.
The criteria for establishing new device categories are specified at § 419.66(c). The first criterion, at § 419.66(c)(1), provides that CMS
We did not receive any public comments on this issue. We are confirming that there is no existing pass-through category that describes Architect® Px and have determined that Architect® Px meets this eligibility criterion.
The second criterion for establishing a device category, at § 419.66(c)(2), provides that CMS determines that a device to be included in the category has demonstrated that it will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. With regard to the substantial clinical improvement criterion, the applicant only identified two references, neither of which we believe provide evidence of substantial clinical improvement. One reference is a 2012 summary report
The third criterion for establishing a device category, at § 419.66(c)(3), requires us to determine that the cost of the device is not insignificant, as described in § 419.66(d). Section 419.66(d) includes three cost significance criteria that must each be met. The applicant provided the following information in support of the cost significance requirements: Architect® Px would be reported with CPT codes 15271 through 15278, which cover the application of skin substitute grafts to different areas of the body for high-cost skin substitutes. To meet the cost criterion for device pass-through payment, a device must pass all three tests of the cost criteria for at least one APC. CPT codes 15271 through 15278 are assigned to either APC 5054 (Level 4 Skin Procedures), with a CY 2016 payment rate of $1,411.21 and a device offset of $4.52, or APC 5055 (Level 5 Skin Procedures), with a CY 2016 payment rate of $2,137.49 and a device offset of $25.44. According to the applicant, the cost of the substitute graft procedures when performed with Architect® Px is $5,495.
Section 419.66(d)(1), the first cost significance requirement, provides that the estimated average reasonable cost of devices in the category must exceed 25 percent of the applicable APC payment amount for the service related to the category of devices. The estimated average reasonable cost of $5,495 for Architect® Px exceeds the applicable APC amount for the service related to the category of devices of $1,411.21 by 389 percent ($5,495/$1,411.21 × 100 percent = 389 percent). Therefore, it appears that Architect® Px meets the first cost significance test.
The second cost significance test, at § 419.66(d)(2), provides that the estimated average reasonable cost of the devices in the category must exceed the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent, which means the device cost needs to be at least 125 percent of the offset amount (the device-related portion of the APC found on the offset list). The estimated average reasonable cost of $5,495 for Architect® Px exceeds the device-related portion of the APC payment amount for the related service of $4.52 by 121,571 percent ($5,495/$4.52 × 100 percent = 121,571 percent). Therefore, we stated in the proposed rule that it appears that Architect® Px meets the second cost significance test.
Section 419.66(d)(3), the third cost significance test, requires that the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device must exceed 10 percent of the APC payment amount for the related service. The difference between the estimated average reasonable cost of $5,495 for Architect® Px and the portion of the APC payment amount for the device of
We invited public comments on whether Architect® Px meets the device pass-through payment criteria discussed in this section.
We did not receive any public comments relating to whether Architect® Px meets the device pass-through payment cost criterion. As stated earlier, we believe that Architect® Px meets the cost criterion at § 419.66(c)(3) for new device categories. However after consideration of the public comments we received, we are not approving device pass-through payment status for Architect® Px for CY 2018.
Aedicell, Inc. submitted an application for a new device category for transitional pass-through payment status for Dermavest and Plurivest human placental connective tissue matrix (HPCTM). Dermavest and Plurivest HPCTM use tissue sourced from the placental disk, amnion/chorion, and umbilical cord to replace or supplement damaged tissue. The applicant stated that Dermavest and Plurivest replace or supplement damaged or inadequate integumental tissue by providing a scaffold to entrap migrating cells for repopulation. The applicant stated that the products may be clinically indicated for the following conditions: Partial and full thickness wounds; pressure ulcers; venous ulcers; chronic vascular ulcers; diabetic ulcers; trauma wounds (abrasions, lacerations, second degree burns, and skin tears); drainage wounds; and surgical wounds (donor sites/grafts post mohs surgery, post laser surgery, and podiatric). Dermavest and Plurivest HPCTM are applied to the area of inadequate or damaged tissue, moistened if necessary and covered with a nonadherent secondary dressing. While the application does not distinguish between the Dermavest and Plurivest products, the AediCell Inc. Web site states that the two products differ by dosage. According to information on the Web site at
With respect to the newness criterion at § 419.66(b)(1), the applicant indicated that the product conforms to the requirements for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) regulated solely under section 361 of the Public Health Service (PHS) Act and 21 CFR part 1271. For these products, FDA requires, among other things, that the manufacturer register and list its HCT/Ps with the Center for Biologics Evaluation and Research (CBER) within 5 days after beginning operations and update their registrations annually. AediCell, Inc. has an FDA field establishment identifier (FEI) under the HHS-FDA-Establishment Registration and Listing for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) and submitted with its application the annual registration/listing for Dermavest and Plurivest dated November 9, 2015. The applicant noted that the initial registration for the manufacture of Dermavest was submitted to the CBER on October 28, 2013, and the registration of Plurivest was submitted the following year on November 14, 2014. The registration forms including these dates were not included in the application. Therefore, it is unclear if the newness criterion is met.
With respect to the eligibility criterion at § 419.66(b)(3), according to the applicant, Dermavest and Plurivest are skin substitute products that are integral to the service provided, are used for one patient only, come in contact with human skin, and are applied in or on a wound or other skin lesion. The applicant also claimed Dermavest and Plurivest meet the device eligibility requirements of § 419.66(b)(4) because they are not instruments, apparatuses, implements, or items for which depreciation and financing expenses are recovered, and they are not supplies or materials furnished incident to a service.
The criteria for establishing new device categories are specified at § 419.66(c). The first criterion, at § 419.66(c)(1), provides that CMS determines that a device to be included in the category is not appropriately described by any of the existing categories or by any category previously in effect, and was not being paid for as an outpatient service as of December 31, 1996. We have not identified an existing pass-through payment category that describes Dermavest and Plurivest HPCTM. The applicant proposed a category descriptor for Dermavest and Plurivest of “Human placental connective tissue matrix (HPCTM), comprised of tissue sourced from the placental disk, amnion/chorion, and umbilical cord for the intention of replacing or supplementing damaged or inadequate integumental issue.” We invited public comments on this issue.
The second criterion for establishing a device category, at § 419.66(c)(2), provides that CMS determines that a device to be included in the category has demonstrated that it will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. With respect to this criterion, the applicant provided several background studies showing general evidence that placental tissue, umbilical cord, and amnion membrane products are effective in the treatment of various wounds and ulcers. However, these studies were not specific to Dermavest and Plurivest HPCTM. The applicant submitted two poster presentations describing case studies that evaluated the wound healing time and wound characteristics of patients with diabetic and venous ulcers treated with Dermavest and Plurivest HPCTM. Both studies were described as case series and, as such, lacked blinding, randomization, and control groups. The first poster,
The second poster,
In the CY 2018 OPPS/ASC proposed rule, we stated that we were concerned that the research provided did not clinically demonstrate the active ingredients of the product(s) that might distinguish the product from others, the correct dosing of the product(s), the amount of durable wound closure with the product(s) compared to standard of care in studies with rigorous trial design/implementation, and the amount of durable wound closure with the product(s) compared to other products in studies with rigorous trial design/implementation. We stated in the proposed rule that, based on the evidence submitted with the application, we were not yet convinced that the Dermavest and Plurivest HPCTM provide a substantial clinical improvement over other treatments for wound care. We invited public comments on whether the Dermavest and Plurivest HPCTM meet this criterion.
The third criterion for establishing a device category, at § 419.66(c)(3), requires us to determine that the cost of the device is not insignificant, as described in § 419.66(d). Section 419.66(d) includes three cost significance criteria that must each be met. The applicant provided the following information in support of the cost significance requirements. The applicant stated that Dermavest and Plurivest HPCTM would be reported with CPT codes 15271, 15272, 15273, 15274, 15275, 15276, 15277, and 15278. CPT codes 15272, 15274, 15276, and 15278 are add-on codes assigned status indicator “N”, which means payment is packaged under the OPPS. CPT codes 15271 and 15275 are assigned to APC 5054 (Level 4 Skin Procedures), and CPT codes 15273 and 15277 are assigned to APC 5055 (Level 5 Skin Procedures). To meet the cost criterion for device pass-through payment, a device must pass all three tests of the cost criterion for at least one APC. For our calculations, we used APC 5054 (Level 4 Skin Procedures), which had a CY 2016 payment rate of $1,411 and a device offset amount of $4.52 at the time the application was received. According to the applicant, the cost of a sheet of 2x3 cm Dermavest is $550, and the cost of a sheet of 2x3 cm Plurivest is $500.
Section 419.66(d)(1), the first cost significance requirement, provides that the estimated average reasonable cost of devices in the category must exceed 25 percent of the applicable APC payment amount for the service related to the category of devices. The estimated average reasonable cost of $550 for Dermavest and Plurivest exceeds 39 percent of the applicable APC payment amount for the service related to the category of devices of $1,411 ($550/$1,411 × 100 = 39 percent). Therefore, we stated in the proposed rule that we believe Dermavest and Plurivest meet the first cost significance test.
The second cost significance test, at § 419.66(d)(2), provides that the estimated average reasonable cost of the devices in the category must exceed the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent, which means that the device cost needs to be at least 125 percent of the offset amount (the device-related portion of the APC found on the offset list). The estimated average reasonable cost of $550 for Dermavest and Plurivest exceeds the cost of the device-related portion of the APC payment amount for the related service of $4.52 by 12,168 percent
The third cost significance test, at § 419.66(d)(3), requires that the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device must exceed 10 percent of the APC payment amount for the related service. The difference between the estimated average reasonable cost of $550 for Dermavest and Plurivest and the portion of the APC payment amount for the device of $4.52 exceeds the APC payment amount for the related service of $1,411 by 38.6 percent (($550−$4.52)/$1,411 × 100 = 38.6 percent). Therefore, we stated in the proposed rule that we believe that Dermavest and Plurivest meet the third cost significance test.
We invited public comments on whether Dermavest and Plurivest meet the device pass-through payment cost criteria discussed in this section.
We did not receive any public comments on this issue. We continue to believe that Dermavest and Plurivest meet the device pass-through payment cost criteria.
After consideration of the public comments we received, we are not approving device pass-through payment status for the Dermavest and Plurivest HPCTM for CY 2018.
Applied Biologics, LLC submitted an application for a new device category for transitional pass-through payment status for FlōGraft®/Flōgraft Neogenesis®. FlōGraft®/Flōgraft Neogenesis® is an injectable, human placental amniotic fluid. It is an allograft derived from human birth tissue recovered from a live, healthy C-section birth. The allograft is used to augment tissue to bone and tissue to tissue repairs. The allograft is implanted at the surgical site at the end of the procedure using a needle and syringe under direct visualization. The applicant claimed that the product helps drive healing towards native tissue regeneration and away from scar formation. FlōGraft® has a standardized potency of 2 million cells. FlōGraft Neogenesis® has a standardized potency of 1.5 million cells. The applicant indicated that the product may be used with several surgical procedures, including joint replacement procedures, traumatic bone and soft tissue injury, meniscal repairs, meniscal transplantation, articular cartilage restoration, foot and ankle repairs, and chronic wounds.
With respect to the newness criterion at § 419.66(b)(1), the applicant indicated that FlōGraft® and Flōgraft Neogenesis® conform to the requirements for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) regulated solely under section 361 of the PHS Act and 21 CFR part 1271. For these products, FDA requires, among other things, that the manufacturer register and list their HCT/Ps with the Center for Biologics Evaluation and Research (CBER) within 5 days after beginning operations and update their registrations annually. Applied Biologics, LLC has two FDA field establishment identifiers (FEI) under the HHS-FDA-Establishment Registration and Listing for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps). Both registration forms list the product as “FlōGraft®”. The applicant submitted an initial registration/listing for one FEI dated June 8, 2015, as well as an annual registration/listing for a different FEI dated December 1, 2014. The first date of U.S. sale for FlōGraft® was May 23, 2013. It is not clear when the initial CBER filing occurred for the FlōGraft® product. Therefore, it is unclear if the newness criterion for the FlōGraft® product is met.
With respect to the eligibility criterion at § 419.66(b)(3), according to the applicant, FlōGraft® and Flōgraft Neogenesis® are integral to the service provided, are used for one patient only, come in contact with human skin, and are applied in or on a wound or other skin lesion. The applicant also claimed FlōGraft® and Flōgraft Neogenesis meet the device eligibility requirements of § 419.66(b)(4) because they are not instruments, apparatuses, implements, or items for which depreciation and financing expenses are recovered, and they are not supplies or materials furnished incident to a service.
The criteria for establishing new device categories are specified at § 419.66(c). The first criterion, at § 419.66(c)(1), provides that CMS determines that a device to be included in the category is not appropriately described by any of the existing categories or by any category previously in effect, and was not being paid for as an outpatient service as of December 31, 1996. We have not identified an existing pass-through payment device category that describes FlōGraft®/Flōgraft Neogenesis®. The application suggested a payment device category for FlōGraft®/Flōgraft Neogenesis® with a category descriptor of “Injectable Amniotic Fluid Allograft”. We invited public comments on this issue.
We did not receive any public comments on this issue, and at this time, we have not identified an existing pass-through category that describes FlōGraft®/Flōgraft Neogenesis®.
The second criterion for establishing a device category, at § 419.66(c)(2), provides that CMS determines that a device to be included in the category has demonstrated that it will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. With respect to the substantial clinical improvement criterion, the applicant submitted several peer-reviewed publications that provided general evidence that amniotic fluid and amniotic membrane-based products significantly reduce recovery time. However, these studies did not include the use of the FlōGraft®/Flōgraft Neogenesis® product. The applicant did list several studies in the application that involved the use of the FlōGraft®/Flōgraft Neogenesis® product. Of these studies, five unpublished studies were available for review. The five studies submitted with the application were described as case studies, case series, or retrospective cohort studies. The studies lacked random allocation, blinding, and a comparison group. The first study
The next study
Based on the evidence submitted, we stated in the proposed rule that we believe there is insufficient data to determine whether FlōGraft®/Flōgraft Neogenesis® offers a substantial clinical improvement over other treatments for wound care. We invited public comments on whether the FlōGraft®/Flōgraft Neogenesis® meets the substantial clinical improvement criterion.
The third criterion for establishing a device category, at § 419.66(c)(3), requires us to determine that the cost of the device is not insignificant, as described in § 419.66(d). Section 419.66(d) includes three cost significance criteria that must each be met. The applicant provided the following information in support of the cost significance requirements. The applicant stated several CPT codes would be used to report FlōGraft®/Flōgraft Neogenesis®, including CPT codes 29826, 29827, 29828, 23473, 23420, 23412, 27605, 27650, 29891, 29888, 29889, 28008, 22551, 22856, 27179, 29861, and 29862. To meet the cost criterion for device pass-through payment, a device must pass all three tests of the cost criterion for at least one APC. These CPT codes are assigned to APCs 5121 through 5125 (Level 1 through Level 5 Musculoskeletal Procedures). For our calculations, we used APC 5121 (Level 1 Musculoskeletal Procedures), which had a CY 2016 payment rate of $1,455 and a device offset of $15.86 at the time the application was received. According to the applicant, the FlōGraft®/Flōgraft Neogenesis® product is available in a variety of vial sizes, the largest size being 18 cc with a cost of $19,925.
Section 419.66(d)(1), the first cost significance requirement, provides that the estimated average reasonable cost of devices in the category must exceed 25 percent of the applicable APC payment amount for the service related to the category of devices. We used the highest priced product for this determination. The estimated average reasonable cost of $19,925 for FlōGraft®/Flōgraft Neogenesis® exceeds the applicable APC payment amount for the service related to the category of devices of $1,455 by 1,369 percent ($19,925/$1,455 × 100 = 1,369 percent). Therefore, we stated in the proposed rule that we believe FlōGraft®/Flōgraft Neogenesis® meets the first cost significance test.
The second cost significance test, at § 419.66(d)(2), provides that the estimated average reasonable cost of the devices in the category must exceed the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent, which means that the device cost needs to be at least 125 percent of the offset amount (the device-related portion of the APC found on the offset list). The average reasonable cost of $19,925 for FlōGraft®/Flōgraft Neogenesis® exceeds the device-related portion of the APC payment amount of $15,86 by 125,360 percent ($19,925/$15.86) × 100 = 125,630 percent). Therefore, in the proposed rule, we stated that we believe that FlōGraft®/Flōgraft Neogenesis® meets the second cost significance test.
The third cost significance test, at § 419.66(d)(3), requires that the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device must exceed 10 percent of the APC payment amount for the related service. The difference between the average reasonable cost of $19,925 for FlōGraft®/Flōgraft Neogenesis® and the portion of the APC payment amount for the device of $15.86 exceeds the APC payment amount for the related service of $1,455 by 1,368 percent (($19,925−$15.86)/$1,455 × 100 = 1,368 percent). Therefore, in the proposed rule, we stated that we believe FlōGraft®/Flōgraft Neogenesis® meets the third cost significance test.
We invited public comments on whether FlōGraft®/Flōgraft Neogenesis® meets the device pass-through payment cost criteria discussed in this section.
We did not receive any public comments on this issue. We continue to believe that FlōGraft®/Flōgraft Neogenesis® meets the device pass-through payment cost criteria.
After consideration of the public comments we received, we are not approving device pass-through payment status for the FlōGraft®/Flōgraft Neogenesis® product for CY 2018.
Kerecis, LLC submitted an application for a new device category for transitional pass-through payment status for Kerecis
With respect to the newness criterion at § 419.66(b)(1), the applicant received FDA clearance for Kerecis
With respect to the eligibility criterion at § 419.66(b)(3), according to the applicant, Kerecis
The criteria for establishing new device categories are specified at § 419.66(c). The first criterion, at § 419.66(c)(1), provides that CMS determines that a device to be included in the category is not appropriately described by any of the existing categories or by any category previously in effect, and was not being paid for as an outpatient service as of December 31, 1996. We have not identified an existing pass-through payment category that describes Kerecis
We did not receive any public comments on this issue. As we stated earlier, we have not identified an existing pass-through category that describes Kerecis
The second criterion for establishing a device category, at § 419.66(c)(2), provides that CMS determines that a device to be included in the category has demonstrated that it will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. With regard to the substantial clinical improvement criterion, the applicant stated that individuals who would normally refuse to use skin substitute products from animal sources, including pigs, cows, horses, and sheep, would use Kerecis
The applicant cited three studies in support of the application. The first study
The results showed that, at 21 days, 58 (72.5 percent) of the fish skin ADM group were healed, compared with 46 (56 percent) of the porcine SIS ECM group. At 25 days, 62 (77.5 percent) of the fish skin ADM and 53 (65 percent) of the porcine SIS ECM group had healed. At the completion of the trial (28 days), 76 of the 80 wounds treated with fish skin ADM (95 percent) and 79 of the 82 wounds treated with porcine SIS ECM (96.3 percent) were healed. The odds ratio of a fish skin ADM-treated wound being healed as compared with that treated with porcine SIS ECM at any given time point was estimated to be 4.75. The difference between the treatments was statistically significant (P = 0.041). The immunological part of the study was designed to detect autoimmune reactions in those individuals treated with Kerecis
There were issues with this study that may limit its usefulness to determine substantial clinical improvement including the use of nonpatient volunteers; studying the healing of biopsy sites rather than actual wounds requiring treatment; and the use of a 1-month endpoint of care instead of a longer period, such as a 6-month endpoint of care.
The second study
The study results showed a 40-percent decrease in wound surface area (P <0.05) and a 48-percent decrease in wound depth was seen with 5 weekly applications of the fish-skin graft and secondary dressing (P <0.05). Complete closure was seen in 3 of 18 patients by
The third study
There are no clinical data provided by the applicant to suggest that Kerecis
Lastly, the commenter believed that a skin substitute product that eliminates religious objections to its use, because Kerecis
The commenter stated that other skin substitute products that had presented less evidence of substantial clinical improvement had previously been approved for pass-through payment status. However, we believe that the commenter may have been referring to skin substitutes approved for transitional pass-through payments before these products were subject to the transitional pass-through payment approval for medical devices. Since CY 2015, skin substitutes have been evaluated using the medical device pass-through payment process (79 FR 66885 through 66888), which includes the criterion for substantial clinical improvement. Applicants must demonstrate that the device under consideration for pass-through status will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. The commenter did not provided additional information showing substantial clinical improvement.
Finally, the commenter stated that Kerecis
The third criterion for establishing a device category, at § 419.66(c)(3), requires us to determine that the cost of the device is not insignificant, as described in § 419.66(d). Section 419.66(d) includes three cost significance criteria that must each be met. The applicant provided the following information in support of the cost significance requirements. With respect to the cost criterion, the applicant stated that Kerecis
Section 419.66(d)(1), the first cost significance requirement, provides that the estimated average reasonable cost of devices in the category must exceed 25 percent of the applicable APC payment amount for the service related to the category of devices. The estimated average reasonable cost of $2,030 for Kerecis
The second cost significance test, at § 419.66(d)(2), provides that the estimated average reasonable cost of the devices in the category must exceed the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent, which means that the device cost needs to be at least 125 percent of the offset amount (the device-related portion of the APC found on the offset list). The average reasonable cost of $2,030 for Kerecis
The third cost significance test, at § 419.66(d)(3), requires that the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device must exceed 10 percent of the APC payment amount for the related service. The difference between the average reasonable cost of $2,030 for Kerecis
We invited public comments on whether Kerecis
We did not receive any public comments for this section. We confirm that Kerecis
After consideration of the public comments we received, we are not approving device pass-through payment status for Kerecis
Applied Biologics, LLC submitted an application for a new device category for transitional pass-through payment status for X-WRAP®. X-WRAP® is a chorion-free, amnion membrane allograft that can be used as a biological wrap or patch at any surgical site. It is used as a treatment for surgical or traumatic injury to bone or soft tissue. It is used to minimize adhesions, reduce inflammation, and promote soft tissue healing. The X-WRAP® is made from the intermediate amniotic epithelial layer of the placenta, recovered from a Cesarean delivery of pre-screened donors. It is available in a variety of sizes and is used as a biologic augmentation to a variety of orthopedic repairs.
With respect to the newness criterion at § 419.66(b)(1), the applicant indicated that X-WRAP® conforms to the requirements for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) regulated solely under section 361 of the PHS Act and 21 CFR part 1271. For these products, FDA requires, among other things, that the manufacturers register and list their HCT/Ps with the Center for Biologics Evaluation and Research (CBER) within 5 days after beginning operations and update their registrations annually. Applied Biologics, LLC has a FDA field establishment identifier (FEI) under the HHS-FDA-Establishment Registration and Listing for Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps). The applicant submitted an annual registration/listing dated December 30, 2015. It is not clear when the initial CBER filing occurred for the X-WRAP® product, and therefore, it is unclear if the newness criterion for X-WRAP® is met.
With respect to the eligibility criterion at § 419.66(b)(3), according to the applicant, X-WRAP® is integral to the service provided, is used for one patient only, comes in contact with human skin, and is applied in or on a wound or other skin lesion. The applicant also claimed X-WRAP® meets the device eligibility requirements of § 419.66(b)(4) because it is not an instrument, apparatus, implement or item for which depreciation and financing expenses are recovered, and it is not a supply or material furnished incident to a service.
The criteria for establishing new device categories are specified at § 419.66(c). The first criterion, at § 419.66(c)(1), provides that CMS determines that a device to be included in the category is not appropriately described by any of the existing categories or by any category previously in effect, and was not being paid for as an outpatient service as of December 31, 1996. We have not identified an existing pass-through payment device category that describes X-WRAP®. The applicant proposed a pass-through device category for X-WRAP® with a category descriptor of “Amniotic Membrane Soft Tissue Allografts”. We invited public comments on this issue.
We did not receive any public comments on this issue, and at this time, we have not identified an existing pass-through category that describes X-WRAP®.
The second criterion for establishing a device category, at § 419.66(c)(2), provides that CMS determines that a device to be included in the category has demonstrated that it will substantially improve the diagnosis or treatment of an illness or injury or improve the functioning of a malformed body part compared to the benefits of a device or devices in a previously established category or other available treatment. With regard to the substantial clinical improvement criterion, the applicant submitted a list of studies in the application that showed general effectiveness of amniotic fluid and amniotic membrane-based products. However, these studies were not specific to the X-WRAP® product. The applicant also submitted one study
Based on the evidence submitted, we believe there are insufficient data to determine whether X-WRAP® offers a substantial clinical improvement over other treatments for wound care. We invited public comments on whether the X-WRAP® meets the substantial clinical improvement criterion.
The third criterion for establishing a device category, at § 419.66(c)(3), requires us to determine that the cost of the device is not insignificant, as described in § 419.66(d). Section 419.66(d) includes three cost significance criteria that must each be met. The applicant provided the following information in support of the cost significance requirements. The applicant stated that several CPT codes would be used to report X-WRAP®, including: CPT codes 29826, 29827, 29828, 23473, 23420, 23412, 27605, 27650, 29891, 29888, 29889, 28008, 22551, 22856, 27179, 29861, 29862, 15271, 15272, 15273, and 15277. To meet the cost criterion for device pass-through payment, a device must pass all three tests for cost threshold for at least one APC. These CPT codes are assigned to APCs 5121 through 5125 (Level 1 through Level 5 Musculoskeletal Procedures) and APCs 5054 and 5055 (Level 4 and Level 5 Skin Procedures). For our calculations, we used APC 5121 (Level 1 Musculoskeletal Procedures), which had a CY 2016 payment rate of $1,455 and a device offset amount of $15.86 at the time the application was received. According to the applicant, the X-WRAP® product is available in several sizes, the largest being 4x8 cm with a cost of $5,280.
Section 419.66(d)(1), the first cost significance requirement, provides that the estimated average reasonable cost of devices in the category must exceed 25 percent of the applicable APC payment amount for the service related to the category of devices. The estimated average reasonable cost of $5,280 for X-WRAP® exceeds the applicable APC payment amount for the service related to the category of devices of $1,455 by 363 percent ($5,280/$1,455 × 100 = 363 percent). Therefore, we stated in the proposed rule that it appears that X-WRAP® meets the first cost significance test.
The second cost significance test, at § 419.66(d)(2), provides that the estimated average reasonable cost of the devices in the category must exceed the cost of the device-related portion of the APC payment amount for the related service by at least 25 percent, which means that the device cost needs to be at least 125 percent of the offset amount (the device related portion of the APC found on the offset list). The average reasonable cost of $5,280 for X-WRAP® exceeds the device-related portion of the APC payment amount of $15.86 by 33,291 percent ($5,280/$15.86) × 100 = 33,291 percent). Therefore, we stated in the proposed rule that it appears that X-WRAP® meets the second cost significance test.
The third cost significance test, at § 419.66(d)(3), requires that the difference between the estimated average reasonable cost of the devices in the category and the portion of the APC payment amount for the device must exceed 10 percent of the APC payment amount for the related service. The difference between the average reasonable cost of $5,280 for X-WRAP® and the portion of the APC payment amount for the device of $15.86 exceeds the APC payment amount for the related service of $1,455 by 361 percent (($5280−$15.86)/$1455 × 100 = 361 percent). Therefore, we stated in the proposed rule that it appears that X-WRAP® meets the third cost significance test.
We invited public comments on whether X-WRAP® meets the device pass-through payment cost criteria discussed in this section.
We did not receive any public comments on this issue. We continue to believe that X-WRAP® meets the device pass-through payment cost criteria.
After consideration of the public comments we received, we are not approving device pass-through payment status for the X-WRAP® product for CY 2018.
Under the OPPS, prior to CY 2017, device-intensive APCs were defined as those APCs with a device offset greater than 40 percent (79 FR 66795). In assigning device-intensive status to an APC, the device costs of all of the procedures within the APC were calculated and the geometric mean device offset of all of the procedures had to exceed 40 percent. Almost all of the procedures assigned to device-intensive APCs utilize devices, and the device costs for the associated HCPCS codes exceed the 40-percent threshold. The no cost/full credit and partial credit device policy (79 FR 66872 through 66873) applies to device-intensive APCs and is discussed in detail in section IV.B.4. of this final rule with comment period. A related device policy was the requirement that certain procedures assigned to device-intensive APCs require the reporting of a device code on the claim (80 FR 70422). For further background information on the device-intensive APC policy, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70421 through 70426).
As stated above, prior to CY 2017, the device-intensive methodology assigned device-intensive status to all procedures requiring the implantation of a device, which were assigned to an APC with a device offset greater than 40 percent. Historically, the device-intensive designation was at the APC level and applied to the applicable procedures within that given APC. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79658), we changed our methodology to assign device-intensive status to all procedures that require the implantation of a device and have an individual HCPCS code-level device offset of greater than 40 percent, regardless of the APC assignment. Under this policy, all procedures with significant device costs (defined as a device offset of more than 40 percent) are assigned device-intensive status, regardless of their APC placement. Also, we believe that a HCPCS code-level device offset is, in most cases, a better representation of a procedure's device cost than an APC-wide average device offset based on the average device offset of all of the procedures assigned to an APC. Unlike a device offset calculated at the APC level, which is a weighted average offset for all devices used in all of the procedures assigned to an APC, a HCPCS code-level device offset is calculated using only claims for a single HCPCS code. We believe that such a methodological change results in a more accurate representation of the cost attributable to implantation of a high-cost device, which ensures consistent device-intensive designation of procedures with a significant device cost. Further, we believe a HCPCS code-level device offset removes inappropriate device-intensive status to procedures without a significant device
Under our CY 2017 finalized policy, procedures that have an individual HCPCS code-level device offset of greater than 40 percent are identified as device-intensive procedures and are subject to all the policies applicable to procedures assigned device-intensive status under our established methodology, including our policies on device edits and device credits. Therefore, all procedures requiring the implantation of a medical device and that have an individual HCPCS code-level device offset of greater than 40 percent are subject to the device edit and no cost/full credit and partial credit device policies, discussed in sections IV.B.3. and IV.B.4. of this final rule with comment period, respectively.
In addition, for new HCPCS codes describing procedures requiring the implantation of medical devices that do not yet have associated claims data, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79658), we finalized a policy for CY 2017 to apply device-intensive status with a default device offset set at 41 percent for new HCPCS codes describing procedures requiring the implantation of a medical device that do not yet have associated claims data until claims data are available to establish the HCPCS code-level device offset for the procedures. This default device offset amount of 41 percent is not calculated from claims data; instead, it is applied as a default until claims data are available upon which to calculate an actual device offset for the new code. The purpose of applying the 41-percent default device offset to new codes that describe procedures that implant medical devices is to ensure ASC access for new procedures until claims data become available. However, in certain rare instances, for example, in the case of a very expensive implantable device, we may temporarily assign a higher offset percentage if warranted by additional information such as pricing data from a device manufacturer (81 FR 79658). Once claims data are available for a new procedure requiring the implantation of a medical device, device-intensive status will be applied to the code if the HCPCS code-level device offset is greater than 40 percent, according to our finalized policy of determining device-intensive status by calculating the HCPCS code-level device offset.
The full listing of proposed CY 2018 device-intensive procedures was included in Addendum P to the proposed rule (which is available via the Internet on the CMS Web site). The full listing of the final CY 2018 device-intensive procedures is included in Addendum P to this final rule with comment period.
In response to comments received in the CY 2017 OPPS/ASC final rule with comment period, we specified that additional information for our consideration of an offset percentage higher than the default of 41 percent for new HCPCS codes describing procedures requiring the implantation (or in some cases the insertion) of a medical device that do not yet have associated claims data, such as pricing data or invoices from a device manufacturer, should be directed to the Division of Outpatient Care, Mail Stop C4-01-26, Centers for Medicare and Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244-1850, or electronically at
We did not propose any changes to this policy for CY 2018.
In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66795), we
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79658 through 79659), we changed our policy for CY 2017 and subsequent years to apply the CY 2016 device coding requirements to the newly defined (individual HCPCS code-level device offset greater than 40 percent) device-intensive procedures. For CY 2017 and subsequent years, we also specified that any device code, when reported on a claim with a device-intensive procedure, will satisfy the edit. In addition, we created HCPCS code C1889 to recognize devices furnished during a device-intensive procedure that are not described by a specific Level II HCPCS Category C-code. Reporting HCPCS code C1889 with a device-intensive procedure will satisfy the edit requiring a device code to be reported on a claim with a device-intensive procedure.
We did not propose any changes to this policy for CY 2018.
To ensure equitable OPPS payment when a hospital receives a device without cost or with full credit, in CY 2007, we implemented a policy to reduce the payment for specified device-dependent APCs by the estimated portion of the APC payment attributable to device costs (that is, the device offset) when the hospital receives a specified device at no cost or with full credit (71 FR 68071 through 68077). Hospitals were instructed to report no cost/full credit device cases on the claim using the “FB” modifier on the line with the procedure code in which the no cost/full credit device is used. In cases in which the device is furnished without cost or with full credit, hospitals were instructed to report a token device charge of less than $1.01. In cases in which the device being inserted is an upgrade (either of the same type of device or to a different type of device) with a full credit for the device being replaced, hospitals were instructed to report as the device charge the difference between the hospital's usual charge for the device being implanted and the hospital's usual charge for the device for which it received full credit. In CY 2008, we expanded this payment adjustment policy to include cases in which hospitals receive partial credit of 50 percent or more of the cost of a specified device. Hospitals were instructed to append the “FC” modifier to the procedure code that reports the service provided to furnish the device when they receive a partial credit of 50 percent or more of the cost of the new device. We refer readers to the CY 2008 OPPS/ASC final rule with comment period for more background information on the “FB” and “FC” modifiers payment adjustment policies (72 FR 66743 through 66749).
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75005 through 75007), beginning in CY 2014, we modified our policy of reducing OPPS payment for specified APCs when a hospital furnishes a specified device without cost or with a full or partial credit. For CY 2013 and prior years, our policy had been to reduce OPPS payment by 100 percent of the device offset amount when a hospital furnishes a specified device without cost or with a full credit and by 50 percent of the device offset amount when the hospital receives partial credit in the amount of 50 percent or more of the cost for the specified device. For CY 2014, we reduced OPPS payment, for the applicable APCs, by the full or partial credit a hospital receives for a replaced device. Specifically, under this modified policy, hospitals are required to report on the claim the amount of the credit in the amount portion for value code “FD” (Credit Received from the Manufacturer for a Replaced Medical Device) when the hospital receives a credit for a replaced device that is 50 percent or greater than the cost of the device. For CY 2014, we also limited the OPPS payment deduction for the applicable APCs to the total amount of the device offset when the “FD” value code appears on a claim. For CY 2015, we continued our existing policy of reducing OPPS payment for specified APCs when a hospital furnishes a specified device without cost or with a full or partial credit and to use the three
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79659 through 79660), for CY 2017 and subsequent years, we finalized our policy to reduce OPPS payment for device-intensive procedures, by the full or partial credit a provider receives for a replaced device, when a hospital furnishes a specified device without cost or with a full or partial credit. Under our current policy, hospitals continue to be required to report on the claim the amount of the credit in the amount portion for value code “FD” when the hospital receives a credit for a replaced device that is 50 percent or greater than the cost of the device.
In addition, for CY 2017 and subsequent years, we finalized our policy to use the following three criteria for determining the procedures to which our final policy applies: (1) All procedures must involve implantable devices that would be reported if device insertion procedures were performed; (2) the required devices must be surgically inserted or implanted devices that remain in the patient's body after the conclusion of the procedure (at least temporarily); and (3) the procedure must be device intensive; that is, the device offset amount must be significant, which is defined as exceeding 40 percent of the procedure's mean cost.
We did not propose any changes to this policy for CY 2018 and did not receive any public comments on this policy.
For CY 2016, we used our equitable adjustment authority under section 1833(t)(2)(E) of the Act and used the median cost (instead of the geometric mean cost per our standard methodology) to calculate the payment rate for the implantable miniature telescope procedure described by CPT code 0308T (Insertion of ocular telescope prosthesis including removal of crystalline lens or intraocular lens prosthesis), which is the only code assigned to APC 5494 (Level 4 Intraocular Procedures) (80 FR 70388). We note that, as stated in the CY 2017 OPPS/ASC proposed rule (81 FR 45656), we proposed to reassign the procedure described by CPT code 0308T to APC 5495 (Level 5 Intraocular Procedures) for CY 2017, but it would be the only procedure code assigned to APC 5495. The payment rates for a procedure described by CPT code 0308T (including the predecessor HCPCS code C9732) were $15,551 in CY 2014, $23,084 in CY 2015, and $17,551 in CY 2016. The procedure described by CPT code 0308T is a high-cost device-intensive surgical procedure that has a very low volume of claims (in part because most of the procedures described by CPT code 0308T are performed in ASCs), and we believe that the median cost is a more appropriate measure of the central tendency for purposes of calculating the cost and the payment rate for this procedure because the median cost is impacted to a lesser degree than the geometric mean cost by more extreme observations. We stated that, in future rulemaking, we would consider proposing a general policy for the payment rate calculation for very low-volume device-intensive APCs (80 FR 70389).
For CY 2017, we proposed and finalized a payment policy for low-volume device-intensive procedures that is similar to the policy applied to the procedure described by CPT code 0308T in CY 2016. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79660 through 79661), we established our current policy that the payment rate for any device-intensive procedure that is assigned to a clinical APC with fewer than 100 total claims for all procedures in the APC be calculated using the median cost instead of the geometric mean cost, for the reasons described above for the policy applied to the procedure described by CPT code 0308T in CY 2016. The CY 2017 final rule geometric mean cost for the procedure described by CPT code 0308T (based on 19 claims containing the device HCPCS C-code in accordance with the device-intensive edit policy) was approximately $21,302, and the median cost was approximately $19,521. The final CY 2017 payment rate (calculated using the median cost) is approximately $18,984.
For CY 2018, in the CY 2018 OPPS/ASC proposed rule (82 FR 33620), we proposed to continue with our current policy of establishing the payment rate for any device-intensive procedure that is assigned to a clinical APC with fewer than 100 total claims for all procedures in the APC based on calculations using the median cost instead of the geometric mean cost. For CY 2018, this policy would continue to apply only to a procedure described by CPT code 0308T in APC 5495 because this APC is the only clinical APC containing a device-intensive procedure with fewer than 100 total claims in the APC. As we have stated before (81 FR 79660), we believe that this approach will help to mitigate significant year-to-year payment rate fluctuations while preserving accurate claims data-based payment rates for low-volume device-intensive procedures. The CY 2018 proposed rule median cost for the procedure described by CPT code 0308T was approximately $17,643.75. The proposed CY 2018 payment rate (calculated using the median cost and the claims that reported the device consistent with our device edit policy for device intensive procedures) was approximately $16,963.69.
After consideration of the public comments we received, we are finalizing our proposal, without modification, that the payment rate for
Section 1833(t)(6) of the Act provides for temporary additional payments or “transitional pass-through payments” for certain drugs and biologicals. Throughout this final rule with comment period, the term “biological” is used because this is the term that appears in section 1861(t) of the Act. A “biological” as used in this final rule with comment period includes (but is not necessarily limited to) a “biological product” or a “biologic” as defined in the Public Health Service Act. As enacted by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), this pass-through payment provision requires the Secretary to make additional payments to hospitals for: Current orphan drugs, as designated under section 526 of the Federal Food, Drug, and Cosmetic Act; current drugs and biologicals and brachytherapy sources used in cancer therapy; and current radiopharmaceutical drugs and biologicals. “Current” refers to those types of drugs or biologicals mentioned above that are hospital outpatient services under Medicare Part B for which transitional pass-through payment was made on the first date the hospital OPPS was implemented.
Transitional pass-through payments also are provided for certain “new” drugs and biologicals that were not being paid for as an HOPD service as of December 31, 1996 and whose cost is “not insignificant” in relation to the OPPS payments for the procedures or services associated with the new drug or biological. For pass-through payment purposes, radiopharmaceuticals are included as “drugs.” As required by statute, transitional pass-through payments for a drug or biological described in section 1833(t)(6)(C)(i)(II) of the Act can be made for a period of at least 2 years, but not more than 3 years, after the payment was first made for the product as a hospital outpatient service under Medicare Part B. CY 2018 pass-through drugs and biologicals and their designated APCs are assigned status indicator “G” in Addenda A and B to this final rule with comment period (which are available via the Internet on the CMS Web site).
Section 1833(t)(6)(D)(i) of the Act specifies that the pass-through payment amount, in the case of a drug or biological, is the amount by which the amount determined under section 1842(o) of the Act for the drug or biological exceeds the portion of the otherwise applicable Medicare OPD fee schedule that the Secretary determines is associated with the drug or biological. The methodology for determining the pass-through payment amount is set forth in regulations at 42 CFR 419.64. These regulations specify that the pass-through payment equals the amount determined under section 1842(o) of the Act minus the portion of the APC payment that CMS determines is associated with the drug or biological.
Section 1847A of the Act establishes the average sales price (ASP) methodology, which is used for payment for drugs and biologicals described in section 1842(o)(1)(C) of the Act furnished on or after January 1, 2005. The ASP methodology, as applied under the OPPS, uses several sources of data as a basis for payment, including the ASP, the wholesale acquisition cost (WAC), and the average wholesale price (AWP). In this final rule with comment period, the term “ASP methodology” and “ASP-based” are inclusive of all data sources and methodologies described therein. Additional information on the ASP methodology can be found on the CMS Web site at:
The pass-through application and review process for drugs and biologicals is described on the CMS Web site at:
As required by statute, transitional pass-through payments for a drug or biological described in section 1833(t)(6)(C)(i)(II) of the Act can be made for a period of at least 2 years, but not more than 3 years, after the payment was first made for the product as a hospital outpatient service under Medicare Part B. Our current policy is to accept pass-through applications on a quarterly basis and to begin pass-through payments for newly approved pass-through drugs and biologicals on a quarterly basis through the next available OPPS quarterly update after the approval of a product's pass-through status. However, prior to CY 2017, we expired pass-through status for drugs and biologicals on an annual basis through notice-and-comment rulemaking (74 FR 60480). In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79662), we finalized a policy change, beginning with pass-through drugs and biologicals newly approved in CY 2017 and subsequent calendar years, to allow for a quarterly expiration of pass-through payment status for drugs and biologicals to afford a pass-through payment period that is as close to a full 3 years as possible for all pass-through drugs, biologicals, and radiopharmaceuticals.
This change eliminated the variability of the pass-through payment eligibility period, which previously varied based on when a particular application was initially received. We adopted this change for pass-through approvals beginning on or after CY 2017, to allow, on a prospective basis, for the maximum pass-through payment period for each pass-through drug without exceeding the statutory limit of 3 years.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33621), we proposed that the pass-through payment status of 19 drugs and biologicals would expire on December 31, 2017, as listed in Table 21 of the proposed rule (82 FR 33622). All of these drugs and biologicals will have received OPPS pass-through payment for at least 2 years and no more than 3 years by December 31, 2017. These drugs and biologicals were approved for pass-through payment status on or before January 1, 2016. In accordance with the policy finalized last year and described above, pass-through payment status for drugs and biologicals newly approved in CY 2017 and subsequent years will expire on a quarterly basis, with a pass-through payment period as close to 3 years as possible. With the exception of those groups of drugs and biologicals that are always packaged when they do not have pass-through payment status (specifically, anesthesia drugs; drugs, biologicals, and radiopharmaceuticals that function as
One commenter, the manufacturer of Amyvid, urged CMS to extend pass-through payment status for another year on the basis that CMS could not have paid a legitimately billed claim for Amyvid in CY 2015, given the manufacturer's assertion regarding CED trial sites' dates of approval and start dates for patient enrollment. In addition, while the commenter acknowledged that the period of drug and biological pass-through payment status starts on the first date on which payment is made for the drug or biological as an outpatient hospital service (42 CFR 419.64(c)(2)), the commenter believed that an erroneous payment by Medicare should not have triggered the start of pass-through payment for Amyvid in 2015. In addition, the commenter asserted that expiration of pass-through payment status for Amyvid prior to completion of the CED trial will adversely affect the trial results. The commenter requested that, if CMS finalized expiration of pass-through payment status as proposed, CMS create a new APC for PET procedures with Amyvid to avoid violating the 2 times rule—which provides that items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median cost (or mean cost, if elected by the Secretary) for an item or service in the APC group is more than 2 times greater than the lowest median cost (or mean cost, if elected by the Secretary) for an item or service within the same APC group. The commenter stated that the median cost of Amyvid is approximately $2,756, over two times the median cost of the PET scan procedure.
One commenter, a manufacturer of another radiopharmaceutical, recommended that CMS allow for those products whose pass-through payment status will expire after a period of at least 2 years and no more than 3 years to expire as proposed, as a matter of applying policy consistently.
Several commenters recommended that CMS allow products covered by Medicare in the context of coverage with evidence development (CED) clinical trial to retain their pass-through status for the duration of the CED trial.
Based on our claims analysis, we found that HCPCS code A9586 was billed by hospital providers 14 times in CY 2015, with 1 claim being paid. Based on our review of provider enrollment in the CED trials, it appears that this paid Medicare claim from CY 2015 was submitted from a CED clinical trial participant and not paid in error as the commenter suggests. According to section 1833(t)(6)(C)(i)(II) of the Act and the regulations at 42 CFR 419.66(g), the pass-through payment eligibility period begins on the first date on which pass-through payment is made. Because there is a paid claim from CY 2015, the pass-through payment period for HCPCS code A9586 began in CY 2015. Therefore, based on the CY 2015 paid claim for HCPCS code A9586 as a hospital outpatient service, which triggered the start of the pass-through payment period, we are expiring pass-through payment status on December 31, 2017. From the start of the pass-through payment period through December 31, 2017, Medicare will have provided an OPPS pass-through payment for at least 2 years and no more than 3 years by December 31, 2017. Extending pass-through payment status into CY 2018 would cause pass-through payments for HCPCS code A9586 to extend into a fourth year, thereby exceeding the pass-through payment period authorized by section 1833(t)(6)(C)(i)(II) of the Act.
In addition, regarding the commenters' concern that expiration of pass-through payment status for Amyvid, and subsequent packaging of it as a “policy-packaged” drug, will skew trial results (presumably because providers will not receive an ASP-based payment), we disagree, given that analysis of CY 2016 claims data across different sites of care shows that the vast majority of billings for HCPCS code A9586 is concentrated in the physician office and the independent diagnostic testing facility (IDTF) setting. Further, we note that hospitals are not precluded from billing for HCPCS code A9586 in the context of a CED trial once its pass-through payment status expires. We also note that the payment for HCPCS A9586 would be reflected in the payment rate for the associated procedure.
With respect to the request that we create a new APC for PET procedures with Amyvid, we do not believe it is appropriate, prudent, or practicable to create unique APCs for specific drugs or biologicals or other individual items
With respect to the commenters' request that we allow drug or biological pass-through payment status for products covered by CED for the duration of the CED trial, we reiterate that the statute limits the period of pass-through payment eligibility to at least 2 years, but no more than 3 years, after the product's first payment as a hospital outpatient service under Medicare Part B. As such, we are unable to extend pass-through payment status beyond 3 years.
Finally, with respect to the commenter's support of our proposal to finalize the expiration of pass-through payment status as proposed for consistent policy application, we agree with the commenter.
In summary, we are finalizing our proposal to expire pass-through payment status for HCPCS code A9586 on December 31, 2017. Because pass-through payment was effective in CY 2015, HCPCS code A9586 will have had pass-through payment status for at least 2 years but no more than 3 years in accordance with section 1833(t)(6) of the Act.
• The language used to construct the “packaging as a surgical supply” policy is overly broad and not consistent with Congressional intent that requires clinically comparable APC groups. CMS has not defined surgery or provided a rationale for applying different packaging policies to surgery than would be applied to other drugs with therapeutic indications;
• Mischaracterization of drugs used in surgery as “supplies”, given regulatory requirements that apply to drugs. The FDA-approved label indicates its specific use in intraocular procedures;
• Packaging Omidria and other drugs as surgical supplies creates barriers to access, especially in ASC settings, low-volume HOPDs, and hospitals with low percentage of insured patients (presumably because providers may choose lower cost alternatives because separate payment would no longer be made);
• Packaging Omidria and other drugs as surgical supplies may affect quality of care improvements and patient outcomes; and
• Packaging drugs as “surgical supplies” interferes with physician discretion and is inconsistent with the principles that guide packaging under the OPPS.
A few commenters requested that CMS consider a narrow exception to the “drug as a supply” packaging policy to enable separate payment for Omidria.
We agree with the commenter who stated that we should expire the drug-pass-through payment status for drugs and biologicals as proposed, to allow for consistent application of our policy.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to expire the pass-through payment status of the 19 drugs and biologicals listed in Table 69 below on December 31, 2017.
The final packaged or separately payable status of each of these drugs or biologicals is listed in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33622), we proposed to continue pass-through payment status in CY 2018 for 38 drugs and biologicals. None of these drugs and biologicals will have received OPPS pass-through payment for at least 2 years and no more than 3 years by December 31, 2017. These drugs and biologicals, which were approved for pass-through payment status between January 1, 2016, and July 1, 2017, were listed in Table 22 of the proposed rule (82 FR 33623). The APCs and HCPCS codes for these drugs and biologicals approved for pass-through payment status through July 1, 2017 were assigned status indicator “G” in Addenda A and B to the proposed rule (which are available via the Internet on the CMS Web site).
Section 1833(t)(6)(D)(i) of the Act sets the amount of pass-through payment for pass-through drugs and biologicals (the pass-through payment amount) as the difference between the amount authorized under section 1842(o) of the Act and the portion of the otherwise applicable OPD fee schedule that the Secretary determines is associated with the drug or biological. For CY 2018, we proposed to continue to pay for pass-through drugs and biologicals at ASP+6 percent, equivalent to the payment rate these drugs and biologicals would receive in the physician's office setting in CY 2018. We proposed that a $0 pass-through payment amount would be paid for pass-through drugs and biologicals under the CY 2018 OPPS because the difference between the amount authorized under section 1842(o) of the Act, which was proposed at ASP+6 percent, and the portion of the otherwise applicable OPD fee schedule that the Secretary determines is appropriate, which was proposed at ASP+6 percent, is $0.
In the case of policy-packaged drugs (which include the following: Anesthesia drugs; drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure (including contrast agents, diagnostic radiopharmaceuticals, and stress agents); and drugs and biologicals that function as supplies when used in a surgical procedure), we proposed that their pass-through payment amount would be equal to ASP+6 percent for CY 2018 because, if not for their pass-through payment status, payment for these products would be packaged into the associated procedure.
In addition, we proposed to continue to update pass-through payment rates on a quarterly basis on the CMS Web site during CY 2018 if later quarter ASP submissions (or more recent WAC or AWP information, as applicable) indicate that adjustments to the payment rates for these pass-through drugs or biologicals are necessary. For a full description of this policy, we refer readers to the CY 2006 OPPS/ASC final rule with comment period (70 FR 68632 through 68635).
For CY 2018, consistent with our CY 2017 policy for diagnostic and therapeutic radiopharmaceuticals, we proposed to provide payment for both diagnostic and therapeutic radiopharmaceuticals that are granted pass-through payment status based on the ASP methodology. As stated earlier, for purposes of pass-through payment, we consider radiopharmaceuticals to be drugs under the OPPS. Therefore, if a diagnostic or therapeutic radiopharmaceutical receives pass-through payment status during CY 2018, we proposed to follow the standard ASP methodology to determine the pass-through payment rate that drugs receive under section 1842(o) of the Act, which was proposed at ASP+6 percent. If ASP data are not available for a radiopharmaceutical, we proposed to provide pass-through payment at WAC+6 percent, the equivalent payment provided to pass-through payment drugs and biologicals without ASP information. If WAC information also is not available, we proposed to provide payment for the pass-through radiopharmaceutical at 95 percent of its most recent AWP.
After consideration of the public comments we received, we are finalizing our proposal to provide
The 50 drugs and biologicals that continue to have pass-through payment status for CY 2018 or have been granted pass-through payment status as of January 2018 are shown in Table 70 below.
Under the regulations at 42 CFR 419.2(b), nonpass-through drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure are packaged in the OPPS. This category includes diagnostic radiopharmaceuticals, contrast agents, stress agents, and other diagnostic drugs. Also under 42 CFR 419.2(b), nonpass-through drugs and biologicals that function as supplies in a surgical procedure are packaged in the OPPS. This category includes skin substitutes and other surgical-supply drugs and biologicals. As described earlier, section 1833(t)(6)(D)(i) of the Act specifies that the transitional pass-through payment amount for pass-through drugs and biologicals is the difference between the amount paid under section 1842(o) of the Act and the otherwise applicable OPD fee schedule amount. Because a payment offset is necessary in order to provide an appropriate transitional pass-through payment, we deduct from the pass-through payment for policy packaged drugs, biologicals, and radiopharmaceuticals an amount reflecting the portion of the APC payment associated with predecessor products in order to ensure no duplicate payment is made. This amount reflecting the portion of the APC payment associated with predecessor products is called the payment offset.
The payment offset policy applies to all policy packaged drugs, biologicals, and radiopharmaceuticals. For a full description of the payment offset policy as applied to diagnostic radiopharmaceuticals, contrast agents, stress agents, and skin substitutes, we refer readers to the discussion in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70430 through 70432). In the CY 2018 OPPS/ASC proposed rule (82 FR 33624), for CY 2018, as we did in CY 2017, we proposed to continue to apply the same policy packaged offset policy to payment for pass-through diagnostic radiopharmaceuticals, pass-through contrast agents, pass-through stress agents, and pass-through skin substitutes. The proposed APCs to which a payment offset may be applicable for pass-through diagnostic radiopharmaceuticals, pass-through contrast agents, pass-through stress agents, and pass-through skin substitutes were identified in Table 23 of the proposed rule.
After consideration of the public comments we received, we are finalizing our proposal, without modification, for CY 2018, to continue to apply the same policy-packaged offset policy to payment for pass-through diagnostic radiopharmaceuticals, pass-through contrast agents, pass-through stress agents, and pass-through skin substitutes as we did in CY 2017.
We also are finalizing our proposal to continue to post annually on the CMS Web site at:
In accordance with section 1833(t)(16)(B) of the Act, the threshold for establishing separate APCs for payment of drugs and biologicals was set to $50 per administration during CYs 2005 and 2006. In CY 2007, we used the four quarter moving average Producer Price Index (PPI) levels for Pharmaceutical Preparations (Prescription) to trend the $50 threshold forward from the third quarter of CY 2005 (when the Pub. L. 108-173 mandated threshold became effective) to the third quarter of CY 2007. We then rounded the resulting dollar amount to the nearest $5 increment in order to determine the CY 2007 threshold amount of $55. Using the same methodology as that used in CY 2007 (which is discussed in more detail in the CY 2007 OPPS/ASC final rule with comment period (71 FR 68085 through 68086)), we set the packaging threshold for establishing separate APCs for drugs and biologicals at $110 for CY 2017 (81 FR 79665).
Following the CY 2007 methodology, for this CY 2018 OPPS/ASC final rule with comment period, we used the most recently available four quarter moving average PPI levels to trend the $50 threshold forward from the third quarter of CY 2005 to the third quarter of CY 2018 and rounded the resulting dollar amount ($118.52) to the nearest $5 increment, which yielded a figure of $120. In performing this calculation, we used the most recent forecast of the quarterly index levels for the PPI for Pharmaceuticals for Human Use (Prescription) (Bureau of Labor Statistics series code WPUSI07003) from CMS' Office of the Actuary.
Therefore, for this CY 2018 OPPS/ASC final rule with comment period, using the CY 2007 OPPS methodology, we are finalizing a packaging threshold for CY 2018 of $120.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33625), to determine the proposed CY 2018 packaging status for all nonpass-through drugs and biologicals that are not policy packaged, we calculated, on a HCPCS code-specific basis, the per day cost of all drugs, biologicals, and therapeutic radiopharmaceuticals (collectively called “threshold-packaged” drugs) that had a HCPCS code in CY 2016 and were paid (via packaged or separate payment) under the OPPS. We used data from CY 2016 claims processed before January 1, 2017 for this calculation. However, we did not perform this calculation for those drugs and biologicals with multiple HCPCS codes that include different dosages, as described in section V.B.1.d. of the proposed rule, or for the following policy-packaged items that we proposed to continue to package in CY 2018: anesthesia drugs; drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure; and drugs and biologicals that function as supplies when used in a surgical procedure.
In order to calculate the per day costs for drugs, biologicals, and therapeutic radiopharmaceuticals to determine their proposed packaging status in CY 2018, we used the methodology that was described in detail in the CY 2006 OPPS proposed rule (70 FR 42723 through 42724) and finalized in the CY 2006 OPPS final rule with comment period (70 FR 68636 through 68638). For each drug and biological HCPCS code, we used an estimated payment rate of ASP+6 percent (which is the payment rate we proposed for separately payable drugs and biologicals for CY 2018, as discussed in more detail in section V.B.2.b. of the proposed rule) to calculate the CY 2018 proposed rule per day costs. We used the manufacturer submitted ASP data from the fourth quarter of CY 2016 (data that were used for payment purposes in the physician's office setting, effective April 1, 2017) to determine the proposed rule per day cost.
As is our standard methodology, for CY 2018, we proposed to use payment rates based on the ASP data from the first quarter of CY 2017 for budget neutrality estimates, packaging determinations, impact analyses, and completion of Addenda A and B to the proposed rule (which are available via the Internet on the CMS Web site) because these were the most recent data available for use at the time of development of the proposed rule. These data also were the basis for drug payments in the physician's office setting, effective April 1, 2017. For items that did not have an ASP-based payment rate, such as some therapeutic radiopharmaceuticals, we used their mean unit cost derived from the CY 2016 hospital claims data to determine their per day cost.
We proposed to package items with a per day cost less than or equal to $120, and identify items with a per day cost greater than $120 as separately payable. Consistent with our past practice, we cross-walked historical OPPS claims data from the CY 2016 HCPCS codes that were reported to the CY 2017 HCPCS codes that we displayed in Addendum B to the proposed rule (which is available via the Internet on the CMS Web site) for proposed payment in CY 2018.
After consideration of the public comments we received, and consistent with our methodology for establishing the packaging threshold using the most recent PPI forecast data, we are adopting a CY 2018 packaging threshold of $120.
Our policy during previous cycles of the OPPS has been to use updated ASP and claims data to make final
Payment rates for HCPCS codes for separately payable drugs and biologicals included in Addenda A and B for this final rule with comment period are based on ASP data from the third quarter of CY 2017. These data are the basis for calculating payment rates for drugs and biologicals in the physician's office setting using the ASP methodology, effective October 1, 2017. These payment rates will be updated in the January 2018 OPPS update, based on the most recent ASP data to be used for physician's office and OPPS payment as of January 1, 2018. For items that do not currently have an ASP-based payment rate, we proposed to recalculate their mean unit cost from all of the CY 2016 claims data and updated cost report information available for this CY 2018 final rule with comment period to determine their final per day cost.
Consequently, as stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33625), the packaging status of some HCPCS codes for drugs, biologicals, and therapeutic radiopharmaceuticals in the proposed rule may be different from the same drug HCPCS code's packaging status determined based on the data used for this final rule with comment period. Under such circumstances, in the CY 2018 OPPS/ASC proposed rule, we proposed to continue to follow the established policies initially adopted for the CY 2005 OPPS (69 FR 65780) in order to more equitably pay for those drugs whose cost fluctuates relative to the proposed CY 2018 OPPS drug packaging threshold and the drug's payment status (packaged or separately payable) in CY 2017. These established policies have not changed for many years and are the same as described in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70434). Specifically, for CY 2018, consistent with our historical practice, we proposed to apply the following policies to these HCPCS codes for drugs, biologicals, and therapeutic radiopharmaceuticals whose relationship to the drug packaging threshold changes based on the updated drug packaging threshold and on the final updated data:
• HCPCS codes for drugs and biologicals that were paid separately in CY 2017 and that were proposed for separate payment in CY 2018, and that then have per day costs equal to or less than the CY 2018 final rule drug packaging threshold, based on the updated ASPs and hospital claims data used for this CY 2018 final rule, would continue to receive separate payment in CY 2018.
• HCPCS codes for drugs and biologicals that were packaged in CY 2017 and that were proposed for separate payment in CY 2018, and that then have per day costs equal to or less than the CY 2018 final rule drug packaging threshold, based on the updated ASPs and hospital claims data used for this CY 2018 final rule, would remain packaged in CY 2018.
• HCPCS codes for drugs and biologicals for which we proposed packaged payment in CY 2018 but then have per day costs greater than the CY 2018 final rule drug packaging threshold, based on the updated ASPs and hospital claims data used for this CY 2018 final rule, would receive separate payment in CY 2018.
We did not receive any public comments on our proposal to recalculate the mean unit cost for items that do not currently have an ASP-based payment rate from all of the CY 2016 claims data and updated cost report information available for this CY 2018 final rule with comment period to determine their final per day cost. We also did not receive any public comments on our proposal to continue to follow the established policies initially adopted for the CY 2005 OPPS (69 FR 65780), when the packaging status of some HCPCS codes for drugs, biologicals, and therapeutic radiopharmaceuticals in the proposed rule may be different from the same drug HCPCS code's packaging status determined based on the data used for the final rule with comment period. Therefore, for CY 2018, we are finalizing these two CY 2018 proposals without modification.
As mentioned briefly earlier, in the OPPS, we package several categories of drugs, biologicals, and radiopharmaceuticals, regardless of the cost of the products. Because the products are packaged according to the policies in 42 CFR 419.2(b), we refer to these packaged drugs, biologicals, and radiopharmaceuticals as “policy-packaged” drugs, biologicals, and radiopharmaceuticals. These policies are either longstanding or based on longstanding principles and inherent to the OPPS and are as follows:
• Anesthesia, certain drugs, biologicals, and other pharmaceuticals; medical and surgical supplies and equipment; surgical dressings; and devices used for external reduction of fractures and dislocations (§ 419.2(b)(4));
• Intraoperative items and services (§ 419.2(b)(14));
• Drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure (including but not limited to, diagnostic radiopharmaceuticals, contrast agents, and pharmacologic stress agents (§ 419.2(b)(15)); and
• Drugs and biologicals that function as supplies when used in a surgical procedure (including, but not limited to, skin substitutes and similar products that aid wound healing and implantable biologicals) (§ 419.2(b)(16)).
The policy at § 419.2(b)(16) is broader than that at § 419.2(b)(14). As we stated in the CY 2015 OPPS/ASC final rule with comment period: “We consider all items related to the surgical outcome and provided during the hospital stay in which the surgery is performed, including postsurgical pain management drugs, to be part of the surgery for purposes of our drug and biological surgical supply packaging policy” (79 FR 66875). The category described by § 419.2(b)(15) is large and includes diagnostic radiopharmaceuticals, contrast agents, stress agents, and some other products. The category described by § 419.2(b)(16) includes skin substitutes and some other products. We believe it is important to reiterate that cost consideration is not a factor when determining whether an item is a surgical supply (79 FR 66875).
We did not make any proposals to revise our policy-packaged drug policy. We solicited public comment on the general OPPS packaging policies as discussed in section II.A.3.d. of this final rule with comment period.
Radiopharmaceuticals for which we have not established a separate APC will receive packaged payment under the OPPS. We provide payment for diagnostic radiopharmaceuticals based on a proxy for average acquisition cost. We continue to believe that the line-item estimated cost for a diagnostic radiopharmaceutical in our claims data is a reasonable approximation of average acquisition and preparation and handling costs for diagnostic radiopharmaceuticals.
In addition, we note that not all manufacturers would be able to submit ASP data through the established ASP reporting methodology. Therefore, if we were to use ASP data to package the costs of some diagnostic radiopharmaceuticals, but use hospital claims data for others, our methodologies for packaging the costs of diagnostic radiopharmaceuticals into their associated nuclear medicine procedures would be inconsistent among nuclear medicine procedures. The foundation of a system of relative weights is the relativity of the costs of all services to one another, as derived from a standardized system that uses standardized inputs and a consistent methodology. Adoption of a ratesetting methodology for certain APCs containing nuclear medicine procedures that is different from the standard APC ratesetting methodology would undermine this relativity. For this reason, we do not believe it would be appropriate to use external pricing information in place of the costs derived from the claims and Medicare cost report data because to do so would distort the relativity that is fundamental to the integrity of the OPPS.
With respect to the request to provide an additional payment for radiopharmaceuticals that are granted pass-through payment status, the commenter did not provide information on what expenses or costs incurred by providers would be covered by an additional payment. We continue to believe that a single payment is appropriate for radiopharmaceuticals with pass-through payment status in CY 2018 and that the payment rate of ASP+6 percent is appropriate to provide payment for both the radiopharmaceutical's acquisition cost and any associated nuclear medicine handling and compounding costs.
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 74938), we unconditionally packaged skin substitute products into their associated surgical procedures as part of a broader policy to package all drugs and biologicals that function as supplies when used in a surgical procedure. As part of the policy to finalize the packaging of skin substitutes, we also finalized a methodology that divides the skin substitutes into a high cost group and a low cost group, in order to ensure adequate resource homogeneity among APC assignments for the skin substitute application procedures (78 FR 74933).
Skin substitutes assigned to the high cost group are described by HCPCS codes 15271 through 15278. Skin substitutes assigned to the low cost group are described by HCPCS codes C5271 through C5278. Geometric mean costs for the various procedures are calculated using only claims for the skin substitutes that are assigned to each group. Specifically, claims billed with HCPCS code 15271, 15273, 15275, or 15277 are used to calculate the
Each of the HCPCS codes described above are assigned to one of the following three skin procedure APCs according to the geometric mean cost for the code: APC 5053 (Level 3 Skin Procedures) (HCPCS codes C5271, C5275, and C5277); APC 5054 (Level 4 Skin Procedures) (HCPCS codes C5273, 15271, 15275, and 15277); or APC 5055 (Level 5 Skin Procedures) (HCPCS code 15273). In CY 2017, the payment rate for APC 5053 (Level 3 Skin Procedures) was $466, the payment rate for APC 5054 (Level 4 Skin Procedures) was $1,468, and the payment rate for APC 5055 (Level 5 Skin Procedures) was $2,575. This information also is available in Addenda A and B of the CY 2017 OPPS/ASC final rule with comment period (which is available via the Internet on the CMS Web site).
We have continued the high cost/low cost categories policy since CY 2014, and in the CY 2018 OPPS/ASC proposed rule (82 FR 33626 through 33627), we proposed to continue it for CY 2018 with the modification discussed below. Under this current policy, skin substitutes in the high cost category are reported with the skin substitute application CPT codes, and skin substitutes in the low cost category are reported with the analogous skin substitute HCPCS C-codes. For a discussion of the CY 2014 and CY 2015 methodologies for assigning skin substitutes to either the high cost group or the low cost group, we refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 74932 through 74935) and the CY 2015 OPPS/ASC final rule with comment period (79 FR 66882 through 66885).
For a discussion of the high cost/low cost methodology that was adopted in CY 2016 and has been in effect since then, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70434 through 70435). For CY 2018, as in CY 2016 and CY 2017, we proposed to continue to determine the high/low cost status for each skin substitute product based on either a product's geometric mean unit cost (MUC) exceeding the geometric MUC threshold or the product's per day cost (PDC) (the total units of a skin substitute multiplied by the mean unit cost and divided by the total number of days) exceeding the PDC threshold. For CY 2018, as for CY 2017, we proposed to assign each skin substitute that exceeds either the MUC threshold or the PDC threshold to the high cost group. In addition, as described in more detail later in this section, for CY 2018, as for CY 2017, we proposed to assign any skin substitute with an MUC or a PDC that does not exceed either the MUC threshold or the PDC threshold to the low cost group. For CY 2018, we proposed that any skin substitute product that was assigned to the high cost group in CY 2017 would be assigned to the high cost group for CY 2018, regardless of whether it exceeds or falls below the CY 2018 MUC or PDC threshold.
For this CY 2018 OPPS/ASC final rule with comment period, consistent with the methodology as established in the CY 2014 through CY 2017 final rules with comment period, we analyzed updated CY 2016 claims data to calculate the MUC threshold (a weighted average of all skin substitutes' MUCs) and the PDC threshold (a weighted average of all skin substitutes' PDCs). The final CY 2018 MUC threshold is $46 per cm
For CY 2018, we proposed to continue to assign skin substitutes with pass-through payment status to the high cost category. However, there are no skin substitutes that are proposed to have pass-through payment status for CY 2018. We proposed to assign skin substitutes with pricing information but without claims data to calculate a geometric MUC or PDC to either the high cost or low cost category based on the product's ASP+6 percent payment rate as compared to the MUC threshold. If ASP is not available, we stated in the proposed rule that we would use WAC+6 percent or 95 percent of AWP to assign a product to either the high cost or low cost category. We also stated in the proposed rule that new skin substitutes without pricing information would be assigned to the low cost category until pricing information is available to compare to the CY 2018 MUC threshold. For a discussion of our existing policy under which we assign skin substitutes without pricing information to the low cost category until pricing information is available, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70436).
Some skin substitute manufacturers have raised concerns about significant fluctuation in both the MUC threshold and the PDC threshold from year to year. The fluctuation in the thresholds may result in the reassignment of several skin substitutes from the high cost group to the low cost group which, under current payment rates, can be a difference of approximately $1,000 in the payment amount for the same procedure. In addition, these stakeholders were concerned that the inclusion of cost data from skin substitutes with pass-through payment status in the MUC and PDC calculations would artificially inflate the thresholds. Skin substitute stakeholders requested that CMS consider alternatives to the current methodology used to calculate the MUC and PDC thresholds and also requested that CMS consider whether it might be appropriate to establish a new cost group in between the low cost group and the high cost group to allow for assignment of moderately priced skin substitutes to a newly created middle group.
We share the goal of promoting payment stability for skin substitute products and their related procedures as price stability allows hospitals using such products to more easily anticipate future payments associated with these products. We have attempted to limit year to year shifts for skin substitute products between the high cost and low cost groups through multiple initiatives implemented since CY 2014, including: establishing separate skin substitute application procedure codes for low-cost skin substitutes (78 FR 74935); using a skin substitute's MUC calculated from outpatient hospital claims data instead of an average of ASP+6 percent as the primary methodology to assign products to the high cost or low cost group (79 FR 66883); and establishing the PDC threshold as an alternate methodology to assign a skin substitute to the high cost group (80 FR 70434 through 70435).
In order to allow additional time to evaluate concerns and suggestions from stakeholders about the volatility of the MUC and PDC thresholds, for CY 2018, we proposed that a skin substitute that was assigned to the high cost group for CY 2017 would be assigned to the high cost group for CY 2018, even if it does not exceed the CY 2018 MUC or PDC thresholds. Our analysis has found that seven skin substitute products that would have otherwise been assigned to the low cost group for CY 2018 would instead be assigned to the high cost group under this proposed policy. The skin substitute products affected by this proposed policy were identified with an “*” in Table 24 of the proposed rule (82 FR 33627 through 33628). For CY 2019 and subsequent years, we requested public comments on how we should calculate data for products in determining the MUC and PDC
We stated in the proposed rule that the goal of our proposal to retain the same skin substitute cost group assignments in CY 2018 as in CY 2017 is to maintain similar levels of payment for skin substitute products for CY 2018 while we study our current skin substitute payment methodology to determine whether refinement to the existing policies is consistent with our policy goal of providing payment stability for skin substitutes. We requested public comments on the methodologies that are used to calculate pricing thresholds as well as the payment groupings that recognize a low cost group and a high cost group. We stated that we are especially interested in suggestions that are based on analysis of Medicare claims data from hospital outpatient departments that might better promote improved payment stability for skin substitute products under the OPPS. This proposal was intended to apply for CY 2018 to allow time for the public to submit other ideas that could be evaluated for the CY 2019 rulemaking.
In summary, we proposed to assign skin substitutes with a MUC or a PDC that does not exceed either the MUC threshold or the PDC threshold to the low cost group, unless the product was assigned to the high cost group in CY 2017, in which case we proposed to assign the product to the high cost group for CY 2018, regardless of whether it exceeds the CY 2018 MUC or PDC threshold. We also proposed to assign to the high cost group skin substitute products that exceed the CY 2018 MUC or PDC threshold and assign to the low cost group skin substitute products that did not exceed either the CY 2017 or CY 2018 MUC or PDC thresholds and were not assigned to the high cost group in CY 2017. We proposed to continue to use payment methodologies including ASP+6 percent, WAC+6 percent, or 95 percent of AWP for skin substitute products that have pricing information but do not have claims data to determine if their costs exceed the CY 2018 MUC threshold. Finally, we proposed to continue to assign new skin substitute products without pricing information to the low cost group.
After consideration of the public comments we received, we are finalizing our proposals without modification for CY 2018. Table 72 below displays the CY 2018 cost category assignment for each skin substitute product.
For this final rule with comment period, we have identified 10 skin
In the CY 2010 OPPS/ASC final rule with comment period (74 FR 60490 through 60491), we finalized a policy to make a single packaging determination for a drug, rather than an individual HCPCS code, when a drug has multiple HCPCS codes describing different dosages because we believed that adopting the standard HCPCS code-specific packaging determinations for these codes could lead to inappropriate payment incentives for hospitals to report certain HCPCS codes instead of others. We continue to believe that making packaging determinations on a drug-specific basis eliminates payment incentives for hospitals to report certain HCPCS codes for drugs and allows hospitals flexibility in choosing to report all HCPCS codes for different dosages of the same drug or only the lowest dosage HCPCS code. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33628), we proposed to continue our policy to make packaging determinations on a drug-specific basis, rather than a HCPCS code-specific basis, for those HCPCS codes that describe the same drug or biological but different dosages in CY 2018.
For CY 2018, in order to propose a packaging determination that is consistent across all HCPCS codes that describe different dosages of the same drug or biological, we aggregated both our CY 2016 claims data and our pricing information at ASP+6 percent across all of the HCPCS codes that describe each distinct drug or biological in order to determine the mean units per day of the drug or biological in terms of the HCPCS code with the lowest dosage descriptor. The following drugs did not have pricing information available for the ASP methodology for the CY 2018 OPPS/ASC proposed rule, and as is our current policy for determining the packaging status of other drugs, we used the mean unit cost available from the CY 2016 claims data to make the proposed packaging determinations for these drugs: HCPCS code J7100 (infusion, dextran 40,500 ml) and HCPCS code J7110 (infusion, dextran 75,500 ml).
For all other drugs and biologicals that have HCPCS codes describing different doses, we then multiplied the proposed weighted average ASP+6 percent per unit payment amount across all dosage levels of a specific drug or biological by the estimated units per day for all HCPCS codes that describe each drug or biological from our claims data to determine the estimated per day cost of each drug or biological at less than or equal to the proposed CY 2018 drug packaging threshold of $120 (so that all HCPCS codes for the same drug or biological would be packaged) or greater than the proposed CY 2018 drug packaging threshold of $120 (so that all HCPCS codes for the same drug or biological would be separately payable). The proposed packaging status of each drug and biological HCPCS code to which this methodology would apply in CY 2018 was displayed in Table 25 of the CY 2018 OPPS/ASC proposed rule (82 FR 33629).
We did not receive any public comments on this proposal. Therefore, for CY 2018, we are finalizing our CY 2018 proposal, without modification, to continue our policy to make packaging determinations on a drug-specific basis, rather than a HCPCS code-specific basis, for those HCPCS codes that describe the same drug or biological but different dosages. Table 73 below displays the final packaging status of each drug and biological HCPCS code to which the finalized methodology applies for CY 2018.
Section 1833(t)(14) of the Act defines certain separately payable radiopharmaceuticals, drugs, and biologicals and mandates specific payments for these items. Under section 1833(t)(14)(B)(i) of the Act, a “specified covered outpatient drug” (known as a SCOD) is defined as a covered outpatient drug, as defined in section 1927(k)(2) of the Act, for which a separate APC has been established and that either is a radiopharmaceutical agent or is a drug or biological for which payment was made on a pass-through basis on or before December 31, 2002.
Under section 1833(t)(14)(B)(ii) of the Act, certain drugs and biologicals are designated as exceptions and are not included in the definition of SCODs. These exceptions are—
• A drug or biological for which payment is first made on or after January 1, 2003, under the transitional pass-through payment provision in section 1833(t)(6) of the Act.
• A drug or biological for which a temporary HCPCS code has not been assigned.
• During CYs 2004 and 2005, an orphan drug (as designated by the Secretary).
Section 1833(t)(14)(A)(iii) of the Act requires that payment for SCODs in CY 2006 and subsequent years be equal to the average acquisition cost for the drug for that year as determined by the Secretary, subject to any adjustment for overhead costs and taking into account the hospital acquisition cost survey data collected by the Government Accountability Office (GAO) in CYs 2004 and 2005, and later periodic surveys conducted by the Secretary as set forth in the statute. If hospital acquisition cost data are not available, the law requires that payment be equal to payment rates established under the methodology described in section 1842(o), section 1847A, or section 1847B of the Act, as calculated and adjusted by the Secretary as necessary. We refer to this alternative methodology as the “statutory default.” Most physician Part B drugs are paid at ASP+6 percent in accordance with section 1842(o) and section 1847A of the Act.
Section 1833(t)(14)(E)(ii) of the Act provides for an adjustment in OPPS payment rates for SCODs to take into account overhead and related expenses, such as pharmacy services and handling costs. Section 1833(t)(14)(E)(i) of the Act required MedPAC to study pharmacy overhead and related expenses and to make recommendations to the Secretary regarding whether, and if so how, a payment adjustment should be made to compensate hospitals for overhead and related expenses. Section 1833(t)(14)(E)(ii) of the Act authorizes the Secretary to adjust the weights for ambulatory procedure classifications for SCODs to take into account the findings of the MedPAC study.
It has been our policy since CY 2006 to apply the same treatment to all separately payable drugs and biologicals, which include SCODs, and drugs and biologicals that are not SCODs. Therefore, we apply the payment methodology in section 1833(t)(14)(A)(iii) of the Act to SCODs, as required by statute, but we also apply it to separately payable drugs and biologicals that are not SCODs, which is a policy determination rather than a statutory requirement. In the CY 2018 OPPS/ASC proposed rule (82 FR 33630), we proposed to apply section 1833(t)(14)(A)(iii)(II) of the Act to all separately payable drugs and biologicals, including SCODs. Although we do not distinguish SCODs in this discussion, we note that we are required to apply section 1833(t)(14)(A)(iii)(II) of the Act to SCODs, but we also are applying this provision to other separately payable drugs and biologicals, consistent with our history of using the same payment methodology for all separately payable drugs and biologicals.
For a detailed discussion of our OPPS drug payment policies from CY 2006 to CY 2012, we refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68383 through 68385). In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68386 through 68389), we first adopted the statutory default policy to pay for separately payable drugs and biologicals at ASP+6 percent based on section 1833(t)(14)(A)(iii)(II) of the Act. We continued this policy of paying for separately payable drugs and biologicals at the statutory default for CY 2014, CY 2015, CY 2016, and CY 2017 (81 FR 79673).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33630), for CY 2018, we proposed to continue our payment policy that has been in effect from CY 2013 to present and pay for separately payable drugs and biologicals at ASP+6 percent in accordance with section 1833(t)(14)(A)(iii)(II) of the Act (the statutory default). We proposed that the ASP+6 percent payment amount for separately payable drugs and biologicals requires no further adjustment and represents the combined acquisition and pharmacy overhead payment for drugs and biologicals. We also proposed that payments for separately payable drugs and biologicals are included in the budget neutrality adjustments, under the requirements in section 1833(t)(9)(B) of the Act, and that the budget neutral weight scalar is not applied in determining payments for these separately paid drugs and biologicals.
We note that we proposed, as specified below, to pay for separately payable, nonpass-through drugs acquired with a 340B discount at a rate of ASP minus 22.5 percent. We refer readers to the full discussion of this proposal in section V.B.7. of the proposed rule and this final rule with comment period.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to pay for separately payable drugs and biologicals at ASP+6 percent based on section 1833(t)(14)(A)(iii)(II) of the Act (the statutory default). The ASP+6 percent payment amount for separately payable drugs and biologicals requires no further adjustment and represents the combined acquisition and pharmacy overhead payment for drugs and biologicals for CY 2018. In addition, we are finalizing our proposal that payment for separately payable drugs and biologicals be included in the budget neutrality adjustments, under the requirements of section 1833(t)(9)(B) of the Act, and that the budget neutral weight scalar is not applied in determining payment of these separately paid drugs and biologicals. We refer readers to section V.B.7. of the final rule with comment period for the final payment policy for drugs acquired with a 340B discount.
We note that separately payable drug and biological payment rates listed in Addenda A and B to this final rule with comment period (available via the Internet on the CMS Web site), which illustrate the final CY 2018 payment of
For CY 2016 and CY 2017, we finalized a policy to pay for biosimilar biological products based on the payment allowance of the product as determined under section 1847A of the Act and to subject nonpass-through biosimilar biological products to our annual threshold-packaged policy (for CY 2016, 80 FR 70445 through 70446; and for CY 2017, 81 FR 79674). In the CY 2018 OPPS/ASC proposed rule (82 FR 33630), for CY 2018, we proposed to continue this same payment policy for biosimilar biological products.
We noted in the proposed rule that public comments on the Medicare Part B biosimilar biological product payment policy should be submitted in response to the biosimilar biological product payment policy comment solicitation in the CY 2018 MPFS proposed rule.
Comments related to 340B and biosimilar biological products are discussed in section V.B.7. of this final rule with comment period.
After consideration of the public comments we received, we are finalizing our proposed payment policy for biosimilar biological products, with the following technical correction: All biosimilar biological products will be eligible for pass-through payment and not just the first biosimilar biological product for a reference product.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33630), for CY 2018, we proposed to continue the payment policy for therapeutic radiopharmaceuticals that began in CY 2010. We pay for separately paid therapeutic radiopharmaceuticals under the ASP methodology adopted for separately payable drugs and biologicals. If ASP information is unavailable for a therapeutic radiopharmaceutical, we base therapeutic radiopharmaceutical payment on mean unit cost data derived from hospital claims. We believe that the rationale outlined in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60524 through 60525) for applying the principles of separately payable drug pricing to therapeutic radiopharmaceuticals continues to be appropriate for nonpass-through, separately payable therapeutic radiopharmaceuticals in CY 2018. Therefore, we proposed for CY 2018 to pay all nonpass-through, separately payable therapeutic radiopharmaceuticals at ASP+6 percent, based on the statutory default described in section 1833(t)(14)(A)(iii)(II) of the Act. For a full discussion of ASP-based payment for therapeutic radiopharmaceuticals, we refer readers to the CY 2010 OPPS/ASC final rule with comment period (74 FR 60520 through 60521). We also proposed to rely on CY 2016 mean unit cost data derived from hospital claims data for payment rates for therapeutic radiopharmaceuticals for which ASP data are unavailable and to update the payment rates for separately payable therapeutic radiopharmaceuticals according to our usual process for updating the payment rates for separately payable drugs and biologicals on a quarterly basis if updated ASP information is unavailable. For a complete history of the OPPS payment policy for therapeutic radiopharmaceuticals, we refer readers to the CY 2005 OPPS final rule with comment period (69 FR 65811), the CY 2006 OPPS final rule with comment period (70 FR 68655), and the CY 2010 OPPS/ASC final rule with comment period (74 FR 60524). The proposed CY 2018 payment rates for nonpass-through, separately payable therapeutic radiopharmaceuticals were in Addenda A and B to the proposed rule (which are
After consideration of the public comments we received, we are finalizing our proposal, without modification, to continue to pay all nonpass-through, separately payable therapeutic radiopharmaceuticals at ASP+6 percent. We also are finalizing our proposal to continue to rely on CY 2016 mean unit cost data derived from hospital claims data for payment rates for therapeutic radiopharmaceuticals for which ASP data are unavailable. The CY 2018 final rule payment rates for nonpass-through separately payable therapeutic radiopharmaceuticals are included in Addenda A and B to this final rule with comment period (which are available via the Internet on the CMS Web site).
Radioisotopes are widely used in modern medical imaging, particularly for cardiac imaging and predominantly for the Medicare population. Some of the Technetium-99 (Tc-99m), the radioisotope used in the majority of such diagnostic imaging services, is produced in legacy reactors outside of the United States using highly enriched uranium (HEU).
The United States would like to eliminate domestic reliance on these reactors, and is promoting the conversion of all medical radioisotope production to non-HEU sources. Alternative methods for producing Tc-99m without HEU are technologically and economically viable, and conversion to such production has begun. We expect that this change in the supply source for the radioisotope used for modern medical imaging will introduce new costs into the payment system that are not accounted for in the historical claims data.
Therefore, beginning in CY 2013, we finalized a policy to provide an additional payment of $10 for the marginal cost for radioisotopes produced by non-HEU sources (77 FR 68323). Under this policy, hospitals report HCPCS code Q9969 (Tc-99m from non-highly enriched uranium source, full cost recovery add-on per study dose) once per dose along with any diagnostic scan or scans furnished using Tc-99m as long as the Tc-99m doses used can be certified by the hospital to be at least 95 percent derived from non-HEU sources (77 FR 68321).
We stated in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68321) that our expectation is that this additional payment will be needed for the duration of the industry's conversion to alternative methods to producing Tc-99m without HEU. We also stated that we would reassess, and propose if necessary, on an annual basis whether such an adjustment continued to be necessary and whether any changes to the adjustment were warranted (77 FR 68316). We have reassessed this payment for CY 2018 and did not identify any new information that would cause us to modify payment. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33631), for CY 2018, we proposed to continue to provide an additional $10 payment for radioisotopes produced by non-HEU sources.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to continue the policy of providing an additional $10 payment for radioisotopes produced by non-HEU sources for CY 2018, which will be the sixth year in which this policy is in effect in the OPPS. We will continue to reassess this policy annually, consistent with the original policy in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68319).
For CY 2017, we provided payment for blood clotting factors under the same methodology as other nonpass-through separately payable drugs and biologicals under the OPPS and continued paying an updated furnishing fee (81 FR 79676). That is, for CY 2017, we provided payment for blood clotting factors under the OPPS at ASP+6 percent, plus an additional payment for the furnishing fee. We note that when blood clotting factors are provided in
In the CY 2018 OPPS/ASC proposed rule (82 FR 33631), for CY 2018, we proposed to pay for blood clotting factors at ASP+6 percent, consistent with our proposed payment policy for other nonpass-through, separately payable drugs and biologicals, and to continue our policy for payment of the furnishing fee using an updated amount. Our policy to pay for a furnishing fee for blood clotting factors under the OPPS is consistent with the methodology applied in the physician's office and in the inpatient hospital setting. These methodologies were first articulated in the CY 2006 OPPS final rule with comment period (70 FR 68661) and later discussed in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66765). The proposed furnishing fee update was based on the percentage increase in the Consumer Price Index (CPI) for medical care for the 12-month period ending with June of the previous year. Because the Bureau of Labor Statistics releases the applicable CPI data after the MPFS and OPPS/ASC proposed rules are published, we were not able to include the actual updated furnishing fee in the proposed rules. Therefore, in accordance with our policy, as finalized in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66765), we proposed to announce the actual figure for the percent change in the applicable CPI and the updated furnishing fee calculated based on that figure through applicable program instructions and posting on the CMS Web site at:
After consideration of the public comments we received, we are finalizing our proposal, without modification, to provide payment for blood clotting factors under the same methodology as other separately payable drugs and biologicals under the OPPS and to continue payment of an updated furnishing fee. We will announce the actual figure of the percent change in the applicable CPI and the updated furnishing fee calculation based on that figure through the applicable program instructions and posting on the CMS Web site.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33631), for CY 2018, we proposed to continue to use the same payment policy as in CY 2017 for nonpass-through drugs, biologicals, and radiopharmaceuticals with HCPCS codes but without OPPS hospital claims data, which describes how we determine the payment rate for drugs, biologicals, or radiopharmaceuticals without an ASP. For a detailed discussion of the payment policy and methodology, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70442 through 70443). The proposed CY 2018 payment status of each of the nonpass-through drugs, biologicals, and radiopharmaceuticals with HCPCS codes but without OPPS hospital claims data was listed in Addendum B to the proposed rule, which is available via the Internet on the CMS Web site.
After consideration of the public comments we received, we are finalizing our CY 2018 proposal without modification, including our proposal to assign drug or biological products status indicator “K” and pay for them separately for the remainder of CY 2018 if pricing information becomes available. The CY 2018 payment status of each of the nonpass-through drugs, biologicals, and radiopharmaceuticals with HCPCS codes but without OPPS hospital claims data is listed in Addendum B to this final rule with comment period, which is available via the Internet on the CMS Web site.
The 340B Program, which was established by section 340B of the Public Health Service Act by the Veterans Health Care Act of 1992, is administered by the Health Resources and Services Administration (HRSA) within HHS. The 340B Program allows participating hospitals and other health care providers to purchase certain “covered outpatient drugs” (as defined under section 1927(k) of the Act and interpreted by HRSA through various guidance documents) at discounted prices from drug manufacturers. The statutory intent of the 340B Program is to maximize scarce Federal resources as much as possible, reaching more eligible patients, and providing care that is more comprehensive.
The 340B statute defines which health care providers are eligible to participate in the program (“covered entities”). In addition to Federal health care grant recipients, covered entities include hospitals with a Medicare disproportionate share hospital (DSH) percentage above 11.75 percent. However, under Public Law 111-148, section 7101 expanded eligibility to critical access hospitals (CAHs), children's hospitals with a DSH adjustment greater than 11.75 percent, sole community hospitals (SCHs) with a DSH adjustment percentage of 8.0 percent or higher, rural referral centers (RRCs) with a DSH adjustment percentage of 8.0 percent or higher, and freestanding cancer hospitals with a DSH adjustment percentage above 11.75 percent. In accordance with section 340B(a)(4)(L)(i) of the Public Health Service Act, all participating hospital types must also meet other criteria.
HRSA calculates the ceiling price for each covered outpatient drug. The ceiling price is the drug's average manufacturer price (AMP) minus the unit rebate amount (URA), which is a statutory formula that varies depending on whether the drug is an innovator
As we discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33632 and 33633), several recent studies and reports on Medicare Part B payments for 340B purchased drugs highlight a difference in Medicare Part B drug spending between 340B hospitals and non-340B hospitals as well as varying differences in the amount by which the Part B payment exceeds the drug acquisition cost.
In its May 2015 Report to Congress, MedPAC analyzed Medicare hospital outpatient claims (excluding CAHs) along with information from HRSA on which hospitals participate in the 340B Program. MedPAC included data on all separately payable drugs under the OPPS except for vaccines and orphan drugs provided by freestanding cancer hospitals, RRCs, and SCHs. To estimate costs that 340B hospitals incur to acquire drugs covered under the OPPS, MedPAC generally used the formula for calculating the 340B ceiling price: (AMP)—unit rebate amount (URA) × drug package size. The URA is determined by law and depends upon whether a drug is classified as single source, innovator multiple source, non-innovator multiple source, a clotting factor drug, or an exclusively pediatric drug. CMS provides this URA information to States as a courtesy. However, drug manufacturers remain responsible for correctly calculating the URA for their covered outpatient drugs. More information on the URA calculation and the Medicaid Drug Rebate Program may be found on the Web site at:
Because MedPAC did not have access to AMP data, it used each drug's ASP as a proxy for AMP. MedPAC noted that ASP is typically slightly lower than AMP. The AMP is defined under section 1927(k)(1) of the Act as the average price paid to the manufacturer by wholesalers in the United States for drugs distributed to the retail pharmacy class of trade, minus customary prompt pay discounts. Manufacturers participating in Medicaid are required to report AMP data quarterly to the Secretary, and these prices are confidential. As described under section 1847A of the Act, the ASP is a manufacturer's unit sales of a drug to all purchasers in the United States in a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter. The ASP is net of any price concessions such as volume, prompt pay, and cash discounts. Certain sales are exempt from the calculation of ASP, including sales at a nominal charge and 340B discounts.
In addition, MedPAC noted that, due to data limitations, its estimates of ceiling prices are conservative and likely higher (possibly much higher) than actual ceiling prices. Further details on the methodology used to calculate the average minimum discount for separately payable drugs can be found in Appendix A of MedPAC's May 2015 Report to Congress. In this report, MedPAC estimated that, on average, hospitals in the 340B Program “receive a minimum discount of 22.5 percent of the [ASP] for drugs paid under the [OPPS].”
In its March 2016 Report to Congress (page 79), MedPAC noted that another report, which MedPAC attributed to the Office of the Inspector General (OIG), recently estimated that discounts across all 340B providers (hospitals and certain clinics) average 33.6 percent of ASP, allowing these providers to generate significant profits when they administer Part B drugs. According to the U.S. Government Accountability Office (GAO) report, the amount of the 340B discount ranges from an estimated 20 to 50 percent discount, compared to what the entity would have otherwise paid to purchase the drug. In addition, participation in the PVP often results in a covered entity paying a subceiling price on some covered outpatient drugs (estimated to be approximately 10 percent below the ceiling price) (U.S. Department of Health and Human Services, HRSA FY 2018 Budget Justification). Participation in the PVP is voluntary and free.
As noted in the CY 2018 OPPS/ASC proposed rule, with respect to chemotherapy drugs and drug administration services, MedPAC examined Medicare Part B spending for 340B and non-340B hospitals for a 5-year period from 2008 to 2012 and found that “Medicare spending grew faster among hospitals that participated in the 340B Program for all five years than among hospitals that did not participate in the 340B Program at any time during [the study] period” (MedPAC May 2015 Report to Congress, page 14). This is just one example of drug spending increases that are correlated with participation in the 340B Program and calls into question whether Medicare's current policy to pay for separately payable drugs at ASP+6 percent is appropriate in light of the discounted rates at which 340B hospitals acquire such drugs.
Further, GAO found that “in both 2008 and 2012, per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B DSH hospitals than at non-340B hospitals.” According to the GAO report, this indicates that, on average, beneficiaries at 340B DSH hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at the other non-340B hospitals in GAO's analysis. For example, in 2012, average per beneficiary spending at 340B DSH hospitals was $144, compared to approximately $60 at non-340B hospitals. The differences did not appear to be explained by the hospital characteristics GAO examined or patients' health status (GAO Report 15-442, page 20).
Under the OPPS, all hospitals (other than CAHs, which are paid based on 101 percent of reasonable costs as required by section 1834(g) of the Act) are currently paid the same rate for separately payable drugs (ASP+6 percent), regardless of whether the hospital purchased the drug at a
In the CY 2009 OPPS/ASC final rule with comment period (73 FR 68655), we requested comments regarding the drug costs of hospitals that participate in the 340B Program and whether we should consider an alternative drug payment methodology for participating 340B hospitals. As noted above, in the time since that comment solicitation, access to the 340B Program was expanded under section 7101 of Public Law 111-148, which amended section 340B(a)(4) of the Public Health Service Act to expand the types of covered entities eligible to participate in the 340B Program. It is estimated that covered entities saved $3.8 billion on outpatient drugs purchased through the 340B Program in 2013.
MedPAC and OIG have recommended alternative drug payment methodologies for hospitals that participate in the 340B Program. In its March 2016 Report to Congress, MedPAC recommended a legislative proposal related to payment for Part B drugs furnished by 340B hospitals under which Medicare would reduce payment rates for 340B hospitals' separately payable 340B drugs by 10 percent of the ASP and direct the program savings from reducing Part B drug payment rates to the Medicare funded uncompensated care pool.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33633 through 33634), we proposed changes to our current Medicare Part B drug payment methodology for 340B hospitals that we believe would better, and more appropriately, reflect the resources and acquisition costs that these hospitals incur. Such changes would allow the Medicare program and Medicare beneficiaries to pay less for drugs when hospitals participating in the 340B Program furnish drugs to Medicare beneficiaries that are purchased under the 340B Program.
Our goal is to make Medicare payment for separately payable drugs more aligned with the resources expended by hospitals to acquire such drugs while recognizing the intent of the 340B Program to allow covered entities, including eligible hospitals, to stretch scarce resources in ways that enable hospitals to continue providing access to care for Medicare beneficiaries and other patients. Medicare expenditures on Part B drugs have been rising and are projected to continue to rise faster than overall health spending, thereby increasing this sector's share of health care spending due to a number of underlying factors such as new higher price drugs and price increases for existing drugs.
Data limitations inhibit our ability to identify which drugs were acquired under the 340B Program in the Medicare OPPS claims data. This lack of information within the claims data has limited researchers' and our ability to precisely analyze differences in acquisition cost of 340B and non-340B acquired drugs with Medicare claims data. Accordingly, in the CY 2018 OPPS/ASC proposed rule (82 FR 33633), we stated our intent to establish a modifier, to be effective January 1, 2018, for hospitals to report with separately payable drugs that were not acquired under the 340B Program. Because a significant portion of hospitals paid under the OPPS participate in the 340B Program, we stated our belief that it is appropriate to presume that a separately payable drug reported on an OPPS claim was purchased under the 340B Program, unless the hospital identifies that the drug was not purchased under the 340B Program. We stated in the proposed rule that we intended to provide further details about this modifier in this CY 2018 OPPS/ASC final rule with comment period and/or through
A summary of public comments received and our responses pertaining to the modifier are included later in this section. As described in detail later in this section, we are implementing the modifier such that it is required for drugs that were acquired under the 340B Program instead of requiring its use on drugs that were
Further, we note that the confidentiality of ceiling and subceiling prices limits our ability to precisely calculate the price paid by 340B hospitals for a particular covered outpatient drug. We recognize that each separately payable OPPS drug will have a different ceiling price (or subceiling price when applicable). Accordingly, we stated in the proposed rule that we believe using an average discounted price was appropriate for our proposal. Therefore, for CY 2018, we proposed to apply an average discounted price of 22.5 percent of the ASP for nonpass-through separately payable drugs purchased under the 340B Program, as estimated by MedPAC (MedPAC's May 2015 Report to Congress, page 7).
In the near-term, we believe that the estimated average minimum discount MedPAC calculated—22.5 percent of the ASP—adequately represents the average minimum discount that a 340B participating hospital receives for separately payable drugs under the OPPS. Given the limitations in calculating a precise discount for each OPPS separately payable drug, we did not attempt to do so for the proposed rule. Instead, we stated that we believed that using the analysis from the MedPAC report is appropriate and noted that the analysis is spelled out in detail and can be replicated by interested parties. As MedPAC noted, its estimate was conservative and the actual average discount experienced by 340B hospitals is likely much higher than 22.5 percent of the ASP. As GAO mentioned, discounts under the 340B Program range from 20 to 50 percent of the ASP (GAO-11-836, page 2). We believe that such reduced payment would meet the requirements under section 1833(t)(14)(A)(iii)(II) of the Act, which states that if hospital acquisition cost data are not available, the payment for an applicable drug shall be the average price for the drug in the year established under section 1842(o), section 1847A, or section 1847B of the Act, as the case may be, as calculated and adjusted by the Secretary as necessary. We do not have hospital acquisition cost data for 340B drugs and, therefore, proposed to continue to pay for these drugs under our authority at section 1833(t)(14)(A)(iii)(II) of the Act at ASP, and then to adjust that amount by applying a reduction of 22.5 percent, which, as explained throughout this section, is the adjustment we believe is necessary for drugs acquired under the 340B Program.
Specifically, in the CY 2018 OPPS/ASC proposed rule, we proposed to apply section 1833(t)(14)(A)(iii)(II) of the Act to all separately payable drugs and biologicals, including SCODs. However, we proposed to exercise the Secretary's authority to adjust the applicable payment rate as necessary and, for separately payable drugs and biologicals (other than drugs with pass-through payment status and vaccines) acquired under the 340B Program, we proposed to adjust the rate to ASP minus 22.5 percent, which we believe better represents the average acquisition cost for these drugs and biologicals.
As indicated earlier, because ceiling prices are confidential, we are unable to publicly disclose those prices or set payment rates in a way that would allow the public to determine the ceiling price for a particular drug. We believe that the MedPAC analysis that found the average minimum discount of 22.5 percent of ASP adequately reflects the average minimum discount that 340B hospitals paid under the OPPS receive. In addition, we believe that using an average discount to set payment rates for OPPS separately payable drugs would achieve the dual goals of (1) adjusting payments to better reflect resources expended to acquire such drugs, and (2) protecting the confidential nature of discounts applied to a specific drug. Moreover, we do not believe that Medicare beneficiaries should be liable for a copayment rate that is tied to the current methodology of ASP+6 percent when the actual cost to the hospital to purchase the drug under the 340B Program is much lower than the ASP for the drug.
We note that MedPAC excluded vaccines from its analysis because vaccines are not covered under the 340B Program, but it did not exclude drugs with pass-through payment status. Further, because data used to calculate ceiling prices are not publicly available, MedPAC instead estimated “the lower bound of the average discount received by 340B hospitals for drugs paid under the [OPPS]” (MedPAC May 2015 Report to Congress, page 6). Accordingly, it is likely that the average discount is higher, potentially significantly higher, than the average minimum of 22.5 percent that MedPAC found through its analysis. In the proposed rule, we encouraged the public to analyze the analysis presented in Appendix A of MedPAC's May 2015 Report to Congress.
As noted earlier, we believe that the discount amount of 22.5 percent below the ASP reflects the average minimum discount that 340B participating hospitals receive for drugs acquired under the 340B Program, and in many cases, the average discount may be higher for some covered outpatient drugs due to hospital participation in the PVP, substitution of ASP (which includes additional rebates) for AMP, and that drugs with pass-through payment status were included rather than excluded from the MedPAC analysis. We believe that a payment rate of ASP+6 percent does not sufficiently recognize the significantly lower acquisition costs of such drugs incurred by a 340B-participating hospital. Accordingly, as noted earlier, we proposed to reduce payment for separately payable drugs, excluding drugs on pass-through payment status and vaccines, that were acquired under the 340B Program by 22.5 percent of ASP for all drugs for which a hospital does not append on the claim the modifier mentioned in the proposed rule and discussed further in this final rule with comment period. (As detailed later in this section, we are instead requiring hospitals to append the applicable modifier on the claim line with any drugs that were acquired under the 340B Program.)
Finally, as detailed in the impact analysis section (section XIX.A.5.a.2) of the proposed rule, we also proposed that the reduced payments for separately payable drugs and biologicals purchased under the 340B Program are included in the budget neutrality adjustments, under the requirements in section 1833(t)(9)(B) of the Act, and that the budget neutral weight scalar is not applied in determining payments for these separately paid drugs and biologicals purchased under the 340B Program. In that section, we also solicited public comments on whether we should apply all or part of the savings generated by this payment reduction to increase payments for specific services paid under the OPPS, or under Part B generally, in CY 2018, rather than simply increasing the conversion factor. In particular, we
One of these commenters stated that the proposals would reduce drug costs for seniors by an estimated $180 million a year; help to stop hospital “abuses” of the 340B program; and help reverse the “perverse incentives” that have driven the closure and consolidation of the nation's community cancer care system.
Another commenter, representing a large network of community-based oncology practices, noted that since 2008, 609 community cancer practices have been acquired or become affiliated with hospitals, with 75 percent of those community cancer practices acquired by 340B-participating hospitals. The commenter stated that the consolidation in oncology care has resulted in a 30 percent shift in the site of service for chemotherapy administration from the physician office setting to the more costly hospital outpatient setting.
One commenter, an organization representing community oncology practices, cited several issues that the proposal would help address, including that only a small minority of 340B participating hospitals are using the program to benefit patients in need; cancer patients in need are being denied care at 340B participating hospitals or placed on wait lists; and hospitals are making extreme profits on expensive cancer drugs and are consolidating the nation's cancer care system, reducing patient choice and access and shifting care away from the private, physician-owned community oncology clinics into the more expensive 340B hospital setting, which is increasing costs for Medicare and its beneficiaries. In addition, this commenter stated that the increasing scope and magnitude of required 340B discounts are increasing drug prices to record-breaking levels as manufacturers factor these discounts into pricing decisions. The commenter also cited a report that it recently released that suggests, and provides anecdotal evidence supporting, that some 340B hospitals offered little charity care and turned away some patients in need because those patients were uninsured.
With respect to the magnitude of the proposed payment reduction of ASP minus 22.5 percent, one commenter noted that although the proposed decrease in payment may seem “severe,” ASP minus 22.5 percent is the minimum discount that hospitals in the 340B Program receive. The commenter further noted that, with 340B discounts on brand drugs approaching, and even exceeding, 50 percent, there is still substantial savings—on the order of 50 percent drug margins—for hospitals to use to provide direct and indirect patient benefits. The commenter also noted that this proposal would result in cost-sharing savings to Medicare beneficiaries, for whom drug cost is an important component of overall outpatient cancer care costs.
Some commenters urged HHS, specifically CMS and HRSA, to work with Congress to reform the 340B Program. One commenter requested greater transparency and accountability on how 340B savings are being used, as well as a specific definition of the “340B patient,” which the commenter noted would require a legislative change.
As previously stated, CMS does not administer the 340B Program. Accordingly, feedback related to eligibility for the 340B Program as well as 340B Program policies are outside the scope of the proposed rule and are not addressed in this final rule with comment period.
One commenter, an individual who supported the proposal, stated that although the majority of patients with Medicare Part B coverage have supplemental coverage to pay their coinsurance, significant numbers do not have this additional protection. The commenter noted that, for a drug that is paid at $10,000 per month, the price reduction would save a beneficiary approximately $500 a month, which may be the difference between getting treatment and foregoing treatment due to financial reasons.
Another commenter, a large organization with many members who are Medicare beneficiaries, stated that the proposal would provide a measure
In addition, one commenter, a large organization representing its physician and medical student members, commented that it shares the Administration's interest in addressing the rising costs of drugs and biologicals. The commenter appreciated that the proposal would address a longstanding concern: That the current payment policy for Part B drugs creates strong incentives to move Medicare beneficiary care from lower cost sites of care (such as physician offices) to higher cost sites of care (such as hospital outpatient departments). The commenter noted that many smaller physician practices have had to refer cancer and other patients who need chemotherapy and other expensive drugs to the hospital outpatient setting because the ASP+6 percent payment does not always cover a physician's acquisition cost, thereby undermining continuity of care and creating burdens for frail and medically compromised patients.
This commenter also stated that, given the 340B Program's focus on low-income patients, it is imperative to ensure that an across-the-board reduction actually reflects the size of the 340B discount to avoid creating barriers to access, should both physician practices and the hospital outpatient departments be unable to cover actual acquisition costs. Further, the commenter noted that it is essential that “a bright line policy does not inadvertently deleteriously impact patient access in all sites of care.” Finally, the commenter stated that, while the proposed policy alters the relative disparity between payments for some hospital outpatient departments and physician practices, it still does not address the persistent challenges physician practices face in obtaining payment that covers acquisition costs.
As a general matter, we note that, even though many beneficiaries have supplemental coverage, beneficiaries often pay a premium for such supplemental coverage and those plans make coinsurance payments for the beneficiary. Thus, to the extent Medicare would be lessening the coinsurance amount such supplemental plans would have to make, we would expect the price of such plans to decrease or otherwise reflect these lower costs in the future, thereby lowering the amount that beneficiaries pay for supplemental plan coverage. Further, for those Medicare beneficiaries who do not have supplemental coverage at all or who have a supplemental plan that does not cover all of a beneficiary's cost-sharing obligation, the proposed policy would directly lower out-of-pocket spending for 340B-acquired drugs for those beneficiaries.
In addition, we note that in the hospital setting, not only are beneficiaries liable for cost-sharing for drugs they receive, but they also incur a “facility fee” solely because the drug was furnished in the hospital setting. As described in section II.A.3.b. of this final rule with comment period, for CY 2018, we are adopting a policy to conditionally package Level 1 and Level 2 Drug Administration services and believe that these steps, taken together, may help encourage site-neutral care in that beneficiaries may receive the same drugs and drug administration services at the physician office setting without a significant difference in their financial liability between settings.
As previously stated, we believe that ASP minus 22.5 percent is a lower bound estimate of the average discount given to hospitals participating in the 340B Program. Accordingly, we disagree that this proposal represents a “bright-line” policy that would hinder safety-net hospitals' ability to treat patients.
While the commenter's request that HHS develop proposals to lower underlying drug prices is outside the scope of the proposals made in the proposed rule, we note that lowering the price of pharmaceuticals is a top priority, and we are committed to finding ways for Medicare payment policy not to incentivize use of overpriced drugs. With respect to Medicare Part B drug payment under the OPPS, we believe that reducing payments on 340B purchased drugs to better align with hospital acquisition costs directly lowers drug costs for those beneficiaries who receive a covered outpatient drug from a 340B participating hospital by reducing their copayments. Further, to the extent that studies have found that 340B participating hospitals tend to use more high cost drugs, we believe that this proposal helps address the incentive for hospitals to utilize these drugs in this manner solely for financial reasons.
The expansion of 340B entities, the volume of 340B discounted drugs, and the affordability of drugs are outside the authority conferred by section 1833(t) of the Act (and, thus, are outside the scope of the proposed rule), and we see no reason to withdraw the proposal solely on account of these issues not being addressed by the proposal. Likewise, we note that the public comments on Medicare Part B drug payment in the physician office setting are also outside the scope of the proposed rule, and, therefore, are not addressed in this final rule with comment period.
These commenters urged that, rather than “punitively targeting” 340B safety-net hospitals serving vulnerable patients, including those in rural areas, CMS instead redirect its efforts to halt the “unchecked, unsustainable increases” in the price of drugs.
Many commenters challenged the statutory authority of various aspects of the proposal. These comments are summarized into the broad categories below. For the reasons stated below, we disagree with these comments and believe that our proposal is within our statutory authority to promulgate.
Another commenter stated that the Secretary's limited adjustment authority under section 1833(t)(14)(A)(iii)(II) of the Act does not “extend so far as to gut” what it referred to as an “explicit statutory directive”. For example, the commenter referred the agency to
Some commenters, including an organization representing over 1,300 providers enrolled in the 340B Program, argued that the proposal would take away almost the entire 340B discount for many 340B drugs, especially brand name drugs (which they asserted were many of the drugs affected by the proposal). These commenters asserted that the Secretary does not have the authority to calculate and adjust 340B-acquired drug rates in this manner and noted that the standard 340B ceiling price for a brand name drug is AMP minus 23.1 percent, although the price can be lower if the drug's best price is lower or if the manufacturer increases the price of the drug more quickly than the rate of inflation. In addition, the commenters asserted that if a brand name drug's 340B ceiling price was based on the standard formula, the proposal would strip the hospital of nearly all its 340B savings because “AMP has been found to be close to ASP.” Thus, the commenters asserted, the proposed payment rate of ASP minus 22.5 percent is nearly identical to AMP minus 23.1 percent, leaving the hospital with “virtually no 340B savings.”
Some commenters stated that the proposal mistakenly assumes that 340B hospitals purchase most 340B drugs at subceiling prices negotiated by the PVP. These commenters noted that some hospitals estimate that less than 10 percent of the drugs affected by the proposal are available at a subceiling price.
In addition, some commenters contended that subclause (I) of section 1833(t)(14)((A)(iii) establishes that the payment rate for subsequent years be set to the average acquisition cost of the drug taking into account hospital acquisition costs survey data collected through surveys meeting precise statutory requirements, and that such subclause does not provide adjustment authority for the agency. They stated that subclause (II) of section 1833(t)(14)((A)(iii) of the Act directs CMS, where acquisition cost data are not available, to set payment rates by reference to ASP provisions. Considered in context, the commenters stated that the statute reflects Congress's intent to limit CMS' authority to set payment rates and, consequently, is consistent with adjustment authority under subclause (II)—to convey only limited authority for any agency to adjust the payment rate. The commenters referred to
Finally, some commenters raised concern over the Secretary's use of the May 2015 MedPAC estimate as support for the 340B payment proposal. These commenters stated that the Secretary did not conduct his own independent analysis to support the payment proposal nor did he provide justification for use of MedPAC's analysis. One commenter stated that the Secretary cannot implement a payment cut of the magnitude proposed without providing a sufficient and replicable methodology that supports the proposal and that relying on a MedPAC analysis does not suffice for this “important fiduciary, and legal, requirement.”
As previously stated, MedPAC's estimate of ASP minus 22.5 percent represents a lower bound estimate of the average minimum discount and the actual discount is likely much higher—up to 50 percent higher, according to some estimates, for certain drugs. In some cases, beneficiary coinsurance alone exceeds the amount the hospital paid to acquire the drug under the 340B Program (OIG November 2015, Report OEI-12-14-00030, page 9). We did not
With respect to the comments about the PVP, as previously stated, by the end of FY 2015, the PVP had nearly 7,600 products available to participating entities below the 340B ceiling price, including 3,557 covered outpatient drugs with an estimated average savings of 10 percent below the 340B ceiling price. Participation in the PVP is voluntary and free, and we are aware of no reason that an eligible entity would not participate.
Furthermore, we disagree that the Secretary's authority under section 1834(t)(14)(A)(iii)(II) of the Act to calculate and adjust drugs rates as necessary is limited to what some might consider minor changes and find no evidence in the statute to support that position. As previously stated, we believe that ASP minus 22.5 percent represents the average minimum discount that hospitals paid under the OPPS received for drugs acquired under the 340B Program and reiterate that, in many instances, the discount is much higher. Thus, we are using this authority to apply a downward adjustment that is necessary to better reflect acquisition costs of those drugs.
We also note generally that the OPPS statute authorized the Secretary to establish appropriate Medicare OPPS payment rates for covered outpatient drugs. After specifically setting forth the payment methodology for 2004 and 2005, Congress provided that the Secretary could set OPPS drug prices in one of two ways: Using the average acquisition cost for the drug for that year, or using the average price for that drug in the year. However, in either case, prices set using either benchmark may be adjusted by the Secretary. Such adjustments may occur under section 1833(t)(14)(A)(iii)(II) of the Act if the Secretary determines they are “necessary for purposes of” section 1833(t)(14) of the Act, and this paragraph of the Medicare OPPS statute repeatedly discusses terms like “hospital acquisition cost” and “variation in hospital acquisition costs”, and specifically notes in one section that it is within the Secretary's authority to determine that the payment rate for one drug “may vary by hospital group.” It would be odd for Congress to have a significant delegation of authority to the Secretary, use these specific terms and considerations throughout section 1833(t)(14) of the Act, and then assume the Secretary is foreclosed from taking into account those considerations in adjusting ASP “as necessary for purposes” of section 1833(t)(14) of the Act. The Secretary is generally empowered to adjust drug prices “as necessary” for the overall purposes of section 1833(t)(14) of the Act, and there is nothing in section 1833(t)(14) of the Act to indicate the Secretary is foreclosed from varying Medicare OPPS payment for a drug, depending on whether a 340B hospital acquired that drug at such a substantially lower acquisition cost.
One commenter stated that the Secretary impermissibly conflates the two alternative methods for setting payment rates, “essentially discarding Congress' requirement that any survey data used in setting payment rates must be derived from statistically rigorous surveys.” This commenter asserted that the Secretary is using MedPAC's estimate of average discounts as a proxy or replacement for the surveys required under subsection (iii)(I).
As previously stated, we believe that using an average discount to set payment rates for separately payable 340B-acquired drugs will achieve the dual goals of (1) adjusting payments to better reflect resources expended to acquire such drugs and (2) protecting the confidential nature of discounts applied to a specific drug. Furthermore, our proposed and finalized policy will lower OPPS payment rates for Medicare beneficiaries who receive drugs at hospitals subject to the 340B payment reduction.
In addition, we do not believe that the fact that we have not historically utilized our adjustment authority under section 1833(t)(14)(A)(iii)(II) of the Act to adjust payment amounts for separately payable 340B-acquired drugs means we are permanently barred from adjusting these payments where, as here, we have provided a reasoned explanation for doing so. We continue to believe, as the commenter noted, that ASP+6 percent requires no further adjustment for drugs that are not acquired under the 340B Program because, at this time, we have not found similar evidence of the difference between the statutory benchmark (ASP+6 percent) and average hospital acquisition costs for such drugs. However, that is not the case for 340B-acquired drugs. As explained in detail throughout this section, we believe that a payment amount of ASP minus 22.5 percent for drugs acquired under the 340B Program is better aligned to hospitals' acquisition costs and thus this adjustment, for drugs acquired under the 340B Program, is necessary for Medicare OPPS payment policy.
In contrast, commenters asserted that Congress has been wholly silent on the relationship between 340B and Medicare Part B, which indicates Congress's intent that Medicare should not “encroach” upon the 340B Program by “redistributing [340B] discounts to non-340B providers.” The commenters noted that the 340B statute and Medicare have coexisted for several years and that Congress has had ample
Commenters further asserted that the proposed cut to 340B hospitals is also contrary to Congress's intent for the 340B Program to enable safety-net providers to reach more patients and furnish more comprehensive services and would undermine this purpose by preventing the operation of the 340B statute. These commenters suggested that, although manufacturers would still have to give 340B discounts, 340B participating hospitals would receive no benefit from those discounts; thus, the statutory purpose of 340B would be fatally undermined.
Furthermore, we are unaware of legislative history or other evidence to corroborate the commenters' belief that Congress' silence on the relationship between 340B and Medicare Part B OPPS payments should be viewed as constraining the Secretary's ability under section 1833(t)(14) of the Act as to how to calculate payment rates for drugs acquired under the 340B Program under the OPPS. While legislative silence can be difficult to interpret, we note that Congress' silence regarding the 340B Program in enacting Medicare OPPS payment for certain drugs would create the opposite inference. The 340B Program existed well before Congress enacted the Medicare OPPS and payment for certain drugs. If Congress wanted to exempt 340B drugs or entities with a 340B agreement from Medicare OPPS payment for drugs generally, it easily could have done so. Instead, Congress provided for Medicare OPPS drug payments “as calculated and adjusted by the Secretary as necessary,” without any mention of, or restriction regarding, the already existent 340B Program.
We also disagree with commenters who believe that implementing the OPPS payment methodology for 340B-acquired drugs as proposed will “eviscerate” or “gut” the 340B Program. As discussed earlier in the background section, the findings from several 340B studies conducted by the GAO, OIG, and MedPAC show a wide range of discounts that are afforded to 340B hospitals, with some reports finding discounts of up to 50 percent. As stated in the proposed rule, we believe ASP minus 22.5 percent is a conservative estimate of the discount for 340B-acquired drugs and that even with the reduced payment, hospitals will continue to receive savings that can be directed at programs and services to carry out the intent of the 340B Program.
With respect to the comment that the proposal would frustrate the intent of the 340B Program and redirect Medicare payments to other hospitals that do not participate in the 340B Program, we reiterate that we proposed to redistribute the savings in an equal and offsetting manner to all hospitals paid under the OPPS, including those in the 340B Program, in accordance with the budget neutrality requirements under section 1833(t)(9)(B) of the Act. However, we remain interested in exploring ways to better target the offsetting amount to those hospitals that serve low-income and uninsured patients, as measured by uncompensated care. Details on the redistribution of funds are included in section XVIII. of this final rule with comment period.
At the August 21, 2017 meeting of the HOP Panel, the Panel made the following recommendations with respect to the proposed policy for OPPS payment for drugs acquired under the 340B Program:
The Panel recommended that CMS:
• Not finalize its proposal to revise the payment rate for drugs purchased under the 340B Program;
• Collect data from public comments and other sources, such as State
• Assess the regulatory burden of changing the payment rate and the potential impact on 340B hospitals of redistributing dollars saved.
In addition, one commenter suggested that the proposal was “procedurally defective” because the proposal was solely articulated through preamble and did not propose to amend the Code of Federal Regulations (CFR). The commenter asserted that the proposal cannot be implemented without a change to the Medicare regulations and stated that the Medicare statute requires CMS to issue regulations when altering the substantive standards for payment.
Another commenter stated that CMS' proposal also violates section 1833(t)(2)(E) of the Act because the agency is not authorized and did not offer a reasoned basis for applying savings achieved as a result of its proposal to reduce significantly payments to 340B hospitals to Part B services generally. Likewise, a few commenters stated that the Administrative Procedure Act (APA) requires the Secretary to offer a “reasoned basis” for proposing to take an unprecedented action. The commenters suggested that, as a matter of longstanding policy and practice, the Secretary has never applied such a sweeping change to drug rates nor has it ever applied savings from OPPS outside of the OPPS.
With respect to the HOP Panel, we believe that this comment reflects a misunderstanding of the Panel's role in advising the Secretary. Section 1833(t)(9)(A) of the Act provides that the Secretary shall consult with an expert outside advisory panel composed of an appropriate selection of representatives of providers to review (and advise the Secretary concerning) the clinical integrity of the groups and weights. Such panel may use data collected or developed by entities and organizations (other than the Department of Health and Human Services) in conducting such review.
The provisions described under section 1833(t)(9)(A) of the Act do not impose an obligation on the Secretary to consult with the HOP Panel
While we are not accepting the HOP Panel's recommendation not to finalize the payment reduction for drugs purchased under the 340B Program, as discussed later in this section, we are modifying our position on the modifier in an effort to ease administrative burden on providers, taking into account the way in which the modifier is used in several State Medicaid programs, as the Panel recommended. In addition, we have collected data from public comments on the potential impact of revising the payment rate, implementing a modifier, and the effects of possible mechanisms for redistributing the “savings” (or the dollars that result) from changing the payment rate and have assessed the regulatory burden of changing the payment rate and the potential impact on 340B hospitals of redistributing dollars saved, all of which were steps the HOP Panel recommended we take.
Regarding the comments asserting that the Secretary is out of compliance with procedures used to promulgate regulations as described under section 1871 of the Act (42 U.S.C. 1395hh), we note that we have received public comments on our interpretation of the Medicare statute, and we respond to those comments above. We further note that we did not establish in the Code of Federal Regulations the rates for separately payable, nonpass-through drugs and biologicals in past rulemakings. Because we have not adopted regulation text that prescribes the specific payment amounts for separately payable, nonpass-through drugs and biologicals, there was no regulation text to amend to include our proposed payment methodology for drugs acquired under the 340B Program. However, this does not mean that payment rates for separately payable drugs were not available to the public. That information is available in Addendum B to this final rule with comment period, which lists the national payment rates for services paid under the OPPS, including the payment rates for separately payable drugs and biologicals based on ASP+6 percent. We note that we have not provided the reduced payment rates for separately payable drugs and biologicals acquired under the 340B Program in Addendum B, but hospitals can arrive at those rates using the ASP+6 percent rate that is included in Addendum B. Finally, with respect to comments on redistribution of the dollars that result from the 340B payment policy, we are finalizing our proposal to achieve budget neutrality for the payment reduction for 340B-acquired drugs through an increase in the conversion factor. We disagree that our proposal to apply budget neutrality in accordance with section 1833(t)(9)(B) of the Act violates the APA or statutory authority. Further, we note that if we decide to take a different approach with respect to the redistribution of funds for budget neutrality in the future, we will consider such approach in future rulemaking.
In addition, as noted earlier in this section, in the hospital setting, not only are beneficiaries liable for cost-sharing for drugs they receive, but they also incur a “facility fee” solely because the drug was furnished in the hospital setting. As described in section II.A.3.b. of this final rule with comment period, for CY 2018, we are adopting a policy to conditionally package Level 1 and Level 2 drug administration services and believe that these steps taken together may help encourage site-neutral care in that beneficiaries may receive the same drugs and drug administration services at the physician office setting without a significant difference in their financial liability between settings.
Further, as we stated in the proposed rule, the GAO reported that the amount of the 340B discount ranges from an estimated 20 to 50 percent discount, compared to what the entity would have otherwise paid to purchase the drug. In addition, voluntary participation in the PVP results in a covered entity paying a subceiling price on certain covered outpatient drugs (estimated to be approximately 10 percent below the ceiling price). (U.S. Department of Health and Human Services, HRSA FY 2018 Budget Justification)
Accordingly, we continue to believe that ASP minus 22.5 percent represents a conservative estimate of the average minimum discount that 340B-enrolled hospitals paid under the OPPS receive for drugs purchased with a 340B Program discount and that hospitals likely receive an even steeper discount on many drugs, especially brand name drugs. We also continue to believe that section 1833(t)(14)(A)(iii)(II) of the Act allows the Secretary to make adjustments, if hospital acquisition cost data is not available, as necessary, so that the Medicare payment rate better represents the acquisition cost for drugs and biologicals that have been acquired with a 340B discount.
With respect to MedPAC's comment regarding targeting the savings to uncompensated care, we refer readers to section XVIII.A.5. of this final rule with comment period.
Commenters noted that rural hospitals enrolled in the 340B Program depend on the drug discounts to provide access to expensive, necessary care such as labor and delivery and oncology infusions. The commenters stated that rural Americans are more likely to be older, sicker, and poorer than their urban counterparts. The commenter gave examples of rural hospitals that have used profit margins on 340B-acquired drugs to offset uncompensated care and staff emergency departments. In addition, the commenters stated that a portion of rural hospitals are excluded from purchasing orphan drugs through the 340B Program. Therefore, the commenters stated, these hospitals often use their 340B savings to offset the expense of purchasing orphan drugs, which they note comprise a growing number of new drug approvals.
In addition, a commenter representing several 340B-enrolled hospitals stated that multiple hospitals report that the 340B Program is the reason the hospital can provide oncology infusions in their local community and that the chemotherapy infusion centers tend to be small with variation in patients served based on the needs of the community. The commenter stated that, without the 340B Program, many rural hospitals would likely need to stop providing many of the outpatient infusions, thereby forcing patients to either travel 35 miles (in the case of SCHs which must generally be located at least 35 miles from the nearest like hospital) to another facility or receive care in a hospital inpatient setting, which is a more costly care setting. Another commenter, a member of Congress representing a district in the State of Ohio, commented that while the 340B Program is in need of reform, the program remains an important safety net for rural hospitals in Ohio and around the country. The commenter stated that 340B hospitals offer safety-net programs to their communities, including opioid treatment programs, behavioral health science programs, and others. The commenter further stated that the 340B drug payment proposal did not address broader structural issues with the 340B Program itself, including lack of oversight and clear guidance and definitions, and that the proposal could harm the hospitals that the 340B Program was intended to help. In addition, the commenter noted that “arbitrary cuts” to the 340B Program for safety-net hospitals could have detrimental impacts on the economic growth and opportunities in the communities those hospitals serve and that the proposal does not advance the larger goals of 340B Program reform.
One commenter noted that SCHs face 47.5 percent higher levels of bad debt and 55 percent lower profit margins. Thus, even with 340B discounts, the commenter argued that rural hospitals like rural SCHs are financially threatened. Commenters also noted that rural hospitals are typically located in lower income economic areas and are not able to absorb the proposed reduction in drug payment for 340B purchased drugs. Moreover, commenters suggested that the proposal disproportionately impacts rural hospitals compared to its effect on urban hospitals.
Finally, commenters requested that, if CMS finalizes the policy as proposed, CMS exempt hospitals with a RRC or SCH designation from the alternative 340B drug payment policy. The commenters asserted that RRCs and SCHs are rural safety-net hospitals that provide localized care for Medicare beneficiaries and also serve as “economic engines” for many rural communities.
Medicare has long recognized the particularly unique needs of rural communities and the financial challenges rural hospital providers face. Across the various Medicare payment systems, CMS has established a number of special payment provisions for rural providers to maintain access to care and to deliver high quality care to beneficiaries in rural areas. With respect to the OPPS, section 1833(t)(13) of the Act provided the Secretary the authority to make an adjustment to OPPS payments for rural hospitals, effective January 1, 2006, if justified by a study of the difference in costs by APC between hospitals in rural areas and hospitals in urban areas. Our analysis showed a difference in costs for rural SCHs. Therefore, for the CY 2006 OPPS, we finalized a payment adjustment for rural SCHs of 7.1 percent for all services and procedures paid under the OPPS, excluding separately payable drugs and biologicals, brachytherapy sources, and devices paid under the pass-through payment policy, in accordance with section 1833(t)(13)(B) of the Act. We have continued this 7.1 percent payment adjustment since 2006.
In the CY 2018 OPPS/ASC proposed rule, we sought public comment for future policy refinements on whether, due to access to care issues, exceptions should be granted to certain groups of hospitals, such as those with special adjustments under the OPPS (for example, rural SCHs or PPS-exempt cancer hospitals) if a policy were adopted to adjust OPPS payments for drugs acquired under the 340B program.
With respect to RRCs, we note that there is no special payment designation for RRCs under the OPPS. By definition, RRCs must have at least 275 beds and therefore are larger relative to rural SCHs. In addition, RRCs are not subject to a distance requirement from other hospitals. Accordingly, at this time, we are not exempting RRCs from the 340B payment adjustment.
For CY 2018, we are excluding rural SCHs (as described under the regulations at 42 CFR 412.92 and designated as rural for Medicare purposes) from this policy. We may revisit our policy to exempt rural SCHs, as well as other hospital designations for exemption from the 340B drug payment reduction, in the CY 2019 OPPS rulemaking.
An organization representing PPS-exempt cancer hospitals commented that CMS' proposal would severely harm the hospitals that treat the most vulnerable and underserved patients and communities, undermining these hospitals' ability to continue providing programs designed to improve access to services. The commenter believed that assumptions alluded to in the CY 2018 OPPS/ASC proposed rule, which suggested that providers are abusing the savings generated from the 340B Program or potentially creating incentives to over utilize drugs, are inaccurate and that clinicians provide the care that is necessary to treat a patient's disease. The commenter suggested that CMS work with, or defer to, HRSA to first conduct a complete analysis of how the 340B Program is utilized for the benefit of patients prior to proposing any changes to Medicare payment for drugs purchased through the program.
Specifically, in accordance with section 1833(t)(7)(D)(ii) of the Act, we make transitional outpatient payments (TOPs) to both children's and PPS-exempt cancer hospitals. That is, these hospitals are permanently held harmless to their “pre-BBA amount,” and they receive hold harmless payments to ensure that they do not receive a payment that is lower in amount under the OPPS than the payment amount they would have received before implementation of the OPPS. Accordingly, if we were to reduce drug payments to these hospitals on a per claim basis, it is very likely that the reduction in payment would be paid back to these hospitals at cost report settlement, given the TOPs structure.
Accordingly, we believe it is appropriate to exempt children's and PPS-exempt cancer hospitals from the alternative 340B drug payment methodology for CY 2018. Therefore, for CY 2018, we are excluding children's and PPS-exempt cancer hospitals from the alternative 340B drug payment policy. As discussed in a later section in this final rule with comment period, because we are redistributing the dollars in a budget neutral manner within the OPPS through an offsetting increase to the conversion factor, children's hospitals and PPS-exempt cancer hospitals will receive a higher payment when providing a non-drug service.
In summary, we are adopting for CY 2018 an exemption for rural SCHs, children's hospitals, and PPS-exempt cancer hospitals from the alternative 340B drug payment methodology. These three types of hospitals will not be subject to a reduced drug payment for drugs that are purchased under the 340B Program in CY 2018. We may revisit the specific types of hospitals excluded, if any, from the 340B payment policy in CY 2019 rulemaking. However, as discussed in more detail below, it remains important to collect information on which drugs being billed to Medicare were acquired under the 340B Program. Accordingly, these three types of hospitals will still be required to report an informational modifier “TB” for tracking and monitoring purposes. We may revisit this 340B drug payment policy, including whether these types of hospitals should continue to be excepted from the reduced Medicare payment rate, in future rulemaking.
Another commenter, a different pharmaceutical manufacturer, requested that CMS exclude biosimilar biological products from the proposed payment adjustment until such time as the biosimilar biological product market is better established. The commenter indicated that while a biosimilar biological product is less expensive to the Medicare program, hospitals are incented by the 340B Program to purchase the originator product because of “the spread” or payment differential with respect to the originator product. Moreover, the commenter stated that applying the proposed adjustment to payment for biosimilar biological products in certain hospitals will retain market share for the more expensive reference product that is further compounded by market practices of volume-based rebates and exclusionary contracts for the reference product.
Therefore, given the policy changes affecting coding and payment for biosimilar biological products that we are adopting in the CY 2018 MPFS final rule and this CY 2018 OPPS/ASC final rule with comment period, we disagree with the commenters that we should exclude biosimilar biological products from the 340B payment policy or use our equitable adjustment authority under section 1833(t)(2)(E) of the Act to adjust payment to ASP minus 22.5 percent of the reference product for biosimilar biological products with pass-through payment status. We believe the statutory provision on transitional drug pass-through payment under section 1833(t)(6)(D)(i) of the Act provides for an explicit payment for drugs eligible for pass-through payment. Therefore, we are unable to accept the commenter's request to pay a biosimilar biological product on pass-through payment status the reduced 340B payment rate. We are adopting a policy that any biosimilar biological product with pass-through payment status will be exempt from the alternative payment methodology for 340B drugs and will continue to be paid at ASP+6 percent of the reference product. Biosimilar biological products that are not on pass-through payment status will be paid ASP minus 22.5 percent of the reference product. We believe it is appropriate to pay this amount for biosimilar biological products as it is consistent with the amount paid for non-340B-acquired biosimilar biological products, which is ASP+6 percent of the reference product. Currently, there are two biosimilar biological products available on the market and both are on pass-through payment status for the entirety of CY 2018. Therefore, no biosimilar biological products currently available will be affected by the alternative payment methodology for 340B-acquired drugs for CY 2018. We recognize the concerns about paying different rates for similar drugs and biologicals and continue to assess the feasibility and practicality of an alternative 340B payment adjustment for biosimilar biological products in the future.
In the CY 2017 OPPS/ASC final rule with comment period, we discussed the provision of section 603 of the Bipartisan Budget Act of 2015 (Pub. L. 144-74), enacted on November 2, 2015, which amended section 1833(t) of the Act. Specifically, this provision amended the OPPS statute at section 1833(t) by amending paragraph (1)(B) and adding a new paragraph (21). As a general matter, under sections 1833(t)(1)(B)(v) and (t)(21) of the Act, applicable items and services furnished by certain off-campus outpatient departments of a provider on or after January 1, 2017, are not considered covered outpatient department services as defined under section 1833(t)(1)(B) of the Act for purposes of payment under the OPPS and are instead paid “under the applicable payment system” under Medicare Part B if the requirements for such payment are otherwise met (81 FR 79699). We issued an interim final rule with comment period along with the CY 2017 OPPS/ASC final rule with comment period to establish the MPFS as the “applicable payment system,” which will apply in most cases, and payment rates under the MPFS for non-excepted items and services furnished by nonexcepted off-campus outpatient provider based departments (PBDs) (81 FR 79720). (Other payment systems, such as the Clinical Laboratory Fee Schedule, continue to apply in appropriate cases.) That is, items and services furnished by nonexcepted off-campus outpatient PBDs, are nonexcepted items and services that are not covered outpatient services, and thus, are not payable under the OPPS. Rather, these nonexcepted items and services are paid “under the applicable payment system,” which, in this case, is generally the MPFS.
As we discussed in the CY 2017 OPPS/ASC interim final with comment period (81 FR 79718) and reiterated in the CY 2018 MPFS final rule, payment for Part B drugs that would be separately payable under the OPPS (assigned status indicator “K”) but are not payable under the OPPS because they are furnished by nonexcepted off-campus outpatient PBDs will be paid in
Regarding a January 1, 2018, implementation date for the modifier, some commenters expressed concern and doubted their ability to implement the modifier as described in the proposed rule accurately. The commenters indicated that additional time would be needed to adapt billing systems, allow for testing of claims reported with the modifier, and educate staff. Based on discussion of how the modifier would work in the proposed rule, the commenters stated that hospitals would either have to append the modifier to the claim at the time the drug is furnished, or retroactively apply the modifier, thus delaying claims submission to Medicare.
The commenters provided detailed descriptions on hospital pharmacy set up, including information on software tools to support inventory management of drugs dispensed to 340B and non-340B patients (based on HRSA definition of an eligible patient). One commenter indicated that the drug supply system used for purchasing covered outpatient drugs is completely separate from—and does not necessarily communicate with—the hospital's pharmacy drug dispensing and patient billing systems. While these software tools enable split-billing to distinguish 340B and non-340B patients, the commenters noted that this patient determination is typically not done in real time when a drug is administered. Commenters noted that 340B hospitals that use split-billing software do not receive information on 340B patient status on a daily basis and the proposal could result in delayed billing. The commenters stated that hospitals typically make these determinations retrospectively and it may be 3 to 10 days post-dispensing before the hospital knows whether a drug was replenished under 340B or at regular pricing. The commenters noted that, under this “replenishment model,” hospitals track how many 340B-eligible drugs are used, and once enough drugs are dispensed to complete a package, they will replenish the drug at the 340B rate. As such, the commenters argued that hospitals do not know when the drug is dispensed whether it will cost them the 340B rate or the wholesale acquisition cost (WAC). Therefore, the commenters expressed concern that the modifier requirement as described in the proposed rule would result in billing delays and, for some hospitals, may cause a short-term interruption in cash flow.
In addition, the commenters requested that, while the payment reduction would apply to nonpass-through separately payable drugs purchased with a 340B discount, CMS accept the modifier when reported with drug HCPCS codes that are packaged (and for which no separate payment will be made) to reduce or prevent operational burden that may be caused if affected providers have to determine on a claim-by-claim basis whether a drug is eligible for separate payment.
With respect to State Medicaid programs that also require a modifier to identify 340B-purchased drugs on outpatient claims, the commenters noted that CMS' proposal would be counter to Medicaid requirements and would create confusion and add complexity for providers who treat Medicaid recipients in multiple states. The commenters reported that many State Medicaid programs require a modifier to identify drugs that were purchased under 340B to administer their Medicaid drug rebate programs to prevent duplicate discounts on 340B drugs. The commenters suggested that if CMS reversed its position on application of the modifier, it would ensure crossover claims (claims transferred from Medicare to Medicaid) are correctly interpreted by State Medicaid programs so that they can appropriately request manufacturer rebates on drugs not purchased under the 340B Program. Moreover, some commenters believed that if CMS required the modifier to be reported for 340B-purchased drugs, State Medicaid programs would also adopt the modifier, leading to national uniformity in reporting of 340B drugs.
Finally, in the event that CMS required the modifier on claims for 340B drugs, rather than non-340B drugs, commenters sought clarity on whether the modifier applies only to drugs purchased under the 340B Program which are subject to a ceiling price payment from the manufacturer or if the modifier would also apply to drugs purchased by a 340B-registered facility, but purchased under the Prime Vendor Program for which only 340B facilities are eligible. One commenter asked that CMS emphasize that 340B pricing is not available on drugs furnished to hospital inpatients.
After considering the administrative and financial challenges associated with providers reporting the modifier as described in the CY 2018 OPPS/ASC proposed rule, and in order to reduce regulatory burden, we are reversing our position on how the modifier will be used by providers to effectuate the payment adjustment for 340B-purchased drugs.
Specifically, beginning January 1, 2018, providers who are not excepted from the 340B payment adjustment will report modifier “JG” (Drug or biological acquired with 340B Drug Pricing Program Discount) to identify if a drug
In addition, beginning January 1, 2018, providers that are excepted from the 340B drug payment policy for CY 2018, which include rural SCHs, children's hospitals, and PPS-exempt cancer hospitals, should not report modifier ”JG”. Instead, these excepted providers should report the informational modifier “TB” (Drug or Biological Acquired With 340B Drug Pricing Program Discount, Reported for Informational Purposes) to identify OPPS separately payable drugs purchased with a 340B discount. The informational modifier “TB” will facilitate the collection and tracking of 340B claims data for OPPS providers that are excepted from the payment adjustment in CY 2018. However, use of modifier “TB” will not trigger a payment adjustment and these providers will receive ASP+6 percent for separately payable drugs furnished in CY 2018, even if such drugs were acquired under the 340B Program.
For drugs administered to dual-eligible beneficiaries (that is, beneficiaries covered under both Medicare and Medicaid) for whom covered entities do not receive a discount under the 340B Program, the State Medicaid programs should be aware of modifier “JG” to help further prevent inappropriate billing of manufacturer rebates.
With respect to comments about timing to operationalize a modifier, we note that hospitals have been on notice since the proposed rule went on display at the Office of the Federal Register on July 13, 2017 that we intended to establish a modifier to implement the policy for payment of drugs acquired under the 340B Program, if finalized. In addition, the modifier will not be required until January 1, 2018, which after display of this final rule with comment period will give hospitals two additional months to operationalize the modifier. Under section 1835(a) of the Act, providers have 12 months after the date of service to timely file a claim for payment. Therefore, for those hospitals that may need more time to ensure that they are in compliance with the modifier requirements, they have 12 months from the date of service to do so.
Further, to the extent many hospitals already report a modifier through their State Medicaid program, we believe that also requiring the modifier on outpatient claims for 340B-acquired drugs paid for under the OPPS would not be a significant administrative burden and would promote consistency between the two programs. With respect to providers in States that are not currently required to report a modifier under the Medicaid program, we note that providers are nonetheless responsible for ensuring that drugs are furnished to “covered patients” under the 340B Program and, therefore, should already have a tracking mechanism in place to ensure that they are in compliance with this requirement. Furthermore, modifiers are commonly used for payment purposes; in this case, the presence of the modifier will enable us to pay the applicable 340B drug rate of ASP minus 22.5 percent and track these claims in the Medicare data (in the case of “JG” modifier) and will allow us to track other drugs billed on claims that are not subject to the payment reduction (modifier “TB”). In addition, the presence of the both modifiers will enable Medicare and other entities to conduct research on 340B-acquired drugs in the future.
We remind readers that our 340B payment policy applies to only OPPS separately payable drugs (status indicator “K”) and does not apply to vaccines (status indicator “L” or “M”), or drugs with transitional pass-through payment status (status indicator “G”).
Finally, Federal law permits Medicare to recover its erroneous payments. Medicare requires the return of any payment it erroneously paid as the primary payer. Medicare can also fine providers for knowingly, willfully, and repeatedly billing incorrectly coded claims. Providers are required to submit accurate claims, maintain current knowledge of Medicare billing policies, and ensure all documentation required to support the validity of the services reported on the claim is available upon request.
In summary, for CY 2018, in accordance with section 1833(t)(14)(A)(iii)(II) of the Act, separately payable Part B drugs (assigned status indicator “K”), other than vaccines and drugs on pass-through payment status, that meet the definition of “covered outpatient drug” as defined in the section 1927(k) of the Act, that are acquired through the 340B Program or through the 340B PVP at or below the 340B ceiling price will be paid at the ASP minus 22.5 percent when billed by a hospital paid under the OPPS that is not excepted from the payment adjustment. Part B drugs or biologicals excluded from the 340B payment adjustment include vaccines (assigned status indicator “L” or “M”) and drugs with OPPS transitional pass-through payment status (assigned status indicator “G”). Medicare will continue to pay drugs that were not purchased with a 340B discount at ASP+6 percent.
Effective January 1, 2018, biosimilar biological products not on pass-through payment status that are purchased through the 340B program or through the 340B PVP will be paid at ASP minus 22.5 percent of the reference product's ASP, while biosimilar biological products on drug pass-through payment status will continue to be paid ASP+6 percent of the reference product.
To effectuate the payment adjustment for 340B-acquired drugs, CMS is implementing modifier “JG”, effective January 1, 2018. Hospitals paid under the OPPS, other than a type of hospital excluded from the OPPS (such as CAHs or those hospitals paid under the Maryland waiver) or excepted from the 340B drug payment policy for CY 2018, are required to report modifier “JG” on the same claim line as the drug HCPCS code to identify a 340B-acquired drug. For CY 2018, rural SCHs, children's hospitals and PPS-exempt cancer hospitals will be excepted from the 340B payment adjustment. These hospitals will be required to report informational modifier “TB” for 340B-acquired drugs, and will continue to be paid ASP+6 percent.
To maintain budget neutrality within the OPPS, the estimated $1.6 billion in reduced drug payments from adoption of this final alternative 340B drug payment methodology will be redistributed in an equal offsetting amount to all hospitals paid under the
We may revisit the alternative 340B drug payment methodology in CY 2019 rulemaking.
As discussed above, we recognize there are data limitations in estimating the average discount for 340B drugs. In the CY 2018 OPPS/ASC proposed rule (82 FR 33634 through 33635), we welcomed stakeholder input with regard to MedPAC's May 2015 analysis and the resulting estimate of ASP minus 22.5 percent as the proposed payment rate for separately payable, nonpass-through OPPS drugs purchased under the 340B Program in CY 2018. We also requested comment on whether we should adopt a different payment rate to account for the average minimum discount of OPPS drugs purchased under the 340B Program. Also, we sought comment on whether the proposal to pay ASP minus 22.5 percent for 340B-acquired drugs should be phased in over time (such as over a period of 2 to 3 years).
In addition, we recognize that the acquisition costs for drugs may vary among hospitals, depending on a number of factors such as size, patient volume, labor market area and case-mix. Accordingly, in the longer term, we are interested in exploring ways to more closely align the actual acquisition costs that hospitals incur rather than using an average minimum discounted rate that would apply uniformly across all 340B hospitals. In the proposed rule, we requested public comment on whether, as a longer term option, Medicare should require 340B hospitals to report their acquisition costs in addition to charges for each drug on the Medicare claim. Having the acquisition cost on a drug-specific basis would enable us to pay a rate under the OPPS that is directly tied to the acquisition costs for each separately payable drug. To the extent that the acquisition costs for some drugs may equal the ceiling price for a drug, we recognize that there may be challenges with keeping the ceiling price confidential as required by section 1927(b)(3)(D) of the Act and we sought comment on this point.
Lastly, for consideration for future policy refinements, we requested public comment on (1) whether, due to access to care issues, exceptions should be granted to certain groups of hospitals, such as those with special adjustments under the OPPS (for example, rural SCHs or PPS-exempt cancer hospitals) if a policy were adopted to adjust OPPS payments to 340B participating hospitals (if so, describe how adjusted rates for drugs purchased under the 340B Program would disproportionately affect access in these provider settings); (2) whether other types of drugs, such as blood clotting factors, should also be excluded from the reduced payment; and (3) whether hospital-owned or affiliated ASCs have access to 340B discounted drugs.
We received feedback on a variety of issues in response to the comment solicitation on additional future considerations. These comments are summarized below.
In addition, one commenter recommended that CMS develop a process for stakeholders to request exemptions from the alternative 340B payment methodology that CMS would evaluate using objective patient guidelines designed to ensure patient access.
It is unclear to us whether the commenter meant that radiopharmaceuticals are not considered covered outpatient drugs under the OPPS or not considered a covered outpatient drug for purposes of the 340B Program. We assume the commenter was referring to the definition of covered outpatient drug for purposes of the 340B Program and, as such, these comments are outside the scope of the CY 2018 OPPS/ASC proposed rule. We refer commenters to HRSA with questions related to the 340B Program.
Section 1833(t)(6)(E) of the Act limits the total projected amount of transitional pass-through payments for drugs, biologicals, radiopharmaceuticals, and categories of devices for a given year to an “applicable percentage,” currently not to exceed 2.0 percent of total program payments estimated to be made for all covered services under the OPPS furnished for that year. If we estimate before the beginning of the calendar year that the total amount of pass-through payments in that year would exceed the applicable percentage, section 1833(t)(6)(E)(iii) of the Act requires a uniform prospective reduction in the amount of each of the transitional pass-through payments made in that year to ensure that the limit is not exceeded. We estimate the pass-through spending to determine whether payments exceed the applicable percentage and the appropriate prorata reduction to the conversion factor for the projected level of pass-through spending in the following year to ensure that total estimated pass-through spending for the prospective payment year is budget neutral, as required by section 1833(t)(6)(E) of the Act.
For devices, developing an estimate of pass-through spending in CY 2018 entails estimating spending for two groups of items. The first group of items consists of device categories that are currently eligible for pass-through payment and that will continue to be eligible for pass-through payment in CY 2018. The CY 2008 OPPS/ASC final rule with comment period (72 FR 66778) describes the methodology we have used in previous years to develop the pass-through spending estimate for known device categories continuing into the applicable update year. The second group of items consists of items that we know are newly eligible, or project may be newly eligible, for device pass-through payment in the remaining quarters of CY 2017 or beginning in CY 2018. The sum of the CY 2018 pass-through spending estimates for these two groups of device categories equals the total CY 2018 pass-through spending estimate for device categories with pass-through payment status. We base the device pass-through estimated payments for each device category on the amount of payment as established in section 1833(t)(6)(D)(ii) of the Act, and as outlined in previous rules, including the CY 2014 OPPS/ASC final rule with comment period (78 FR 75034 through 75036). We note that, beginning in CY 2010, the pass-through evaluation process and pass-through payment for implantable biologicals newly approved for pass-through payment beginning on or after January 1, 2010, that are surgically inserted or implanted (through a surgical incision or a natural orifice) use the device pass-through process and payment methodology (74 FR 60476). As has been our past practice (76 FR 74335), in the CY 2018 OPPS/ASC proposed rule (82 FR 33635), we proposed to include an estimate of any implantable biologicals eligible for pass-through payment in our estimate of pass-through spending for devices. Similarly, we finalized a policy in CY 2015 that applications for pass-through payment for skin substitutes and similar products be evaluated using the medical device pass-through process and payment methodology (76 FR 66885 through 66888). Therefore, as we did beginning in CY 2015, for CY 2018, we also proposed to include an estimate of any skin substitutes and similar products in our estimate of pass-through spending for devices.
For drugs and biologicals eligible for pass-through payment, section 1833(t)(6)(D)(i) of the Act establishes the pass-through payment amount as the amount by which the amount authorized under section 1842(o) of the Act (or, if the drug or biological is covered under a competitive acquisition contract under section 1847B of the Act, an amount determined by the Secretary equal to the average price for the drug or biological for all competitive acquisition areas and year established under such section as calculated and adjusted by the Secretary) exceeds the portion of the otherwise applicable fee schedule amount that the Secretary determines is associated with the drug or biological. Because we proposed to pay for most nonpass-through separately payable drugs and biologicals under the CY 2018 OPPS at ASP+6 percent, and because we proposed to pay for CY 2018 pass-through drugs and biologicals at ASP+6 percent, as we discussed in section V.A. of the proposed rule, our estimate of drug and biological pass-through payment for CY 2018 for this group of items was $0, as discussed below. In the proposed rule, we noted that our estimate did not reflect the proposed payment policy for drugs purchased through the 340B program, as we discussed in section V.A. of the proposed rule.
Furthermore, payment for certain drugs, specifically diagnostic radiopharmaceuticals and contrast agents without pass-through payment status, is packaged into payment for the associated procedures, and these products will not be separately paid. In addition, we policy-package all nonpass-through drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure and drugs and biologicals that function as supplies when used in a surgical procedure, as discussed in section II.A.3. of the proposed rule and this final rule with comment period. In the CY 2018 OPPS/ASC proposed rule (82 FR 33635 through 33636), we proposed that all of these policy-packaged drugs and biologicals with pass-through payment status would be paid at ASP+6 percent, like other pass-through drugs and biologicals, for CY 2018. Therefore, our estimate of pass-through payment for policy-packaged drugs and biologicals with pass-through payment status approved prior to CY 2018 was not $0, as discussed below. In section V.A.5. of the proposed rule, we discussed our policy to determine if the costs of certain policy-packaged drugs or biologicals are already packaged into the existing APC structure. If we
Similar to pass-through spending estimates for devices, the first group of drugs and biologicals requiring a pass-through payment estimate consists of those products that were recently made eligible for pass-through payment and that will continue to be eligible for pass-through payment in CY 2018. The second group contains drugs and biologicals that we know are newly eligible, or project will be newly eligible in the remaining quarter of CY 2017 or beginning in CY 2018. The sum of the CY 2018 pass-through spending estimates for these two groups of drugs and biologicals equals the total CY 2018 pass-through spending estimate for drugs and biologicals with pass-through payment status.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33636), we proposed to set the applicable pass-through payment percentage limit at 2.0 percent of the total projected OPPS payments for CY 2018, consistent with section 1833(t)(6)(E)(ii)(II) of the Act and our OPPS policy from CY 2004 through CY 2017 (81 FR 79676 through 79678).
For the first group, consisting of device categories that are currently eligible for pass-through payment and will continue to be eligible for pass-through payment in CY 2018, there are no active categories for CY 2018. Because there are no active device categories for CY 2018, we proposed an estimate for the first group of devices of $0.
We did not receive any public comments on our proposed estimate for the first group of devices. For this final rule with comment period, using the latest available data, we calculated a CY 2018 spending estimate for this first group of devices of $0.
In estimating our proposed CY 2018 pass-through spending for device categories in the second group, we included: Device categories that we knew at the time of the development of the proposed rule will be newly eligible for pass-through payment in CY 2018; additional device categories that we estimated could be approved for pass-through status subsequent to the development of the proposed rule and before January 1, 2018; and contingent projections for new device categories established in the second through fourth quarters of CY 2018. In the CY 2018 OPPS/ASC proposed rule (82 FR 33636), we proposed to use the general methodology described in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66778), while also taking into account recent OPPS experience in approving new pass-through device categories. For the proposed rule, the estimate of CY 2018 pass-through spending for this second group of device categories was $10 million.
We did not receive any public comments on our proposed estimate for the second group of devices. For this final rule with comment period, using the latest available data, we calculated a CY 2018 spending estimate for this second group of devices of $10 million.
To estimate proposed CY 2018 pass-through spending for drugs and biologicals in the first group, specifically those drugs and biologicals recently made eligible for pass-through payment and continuing on pass-through payment status for CY 2018, we proposed to use the most recent Medicare hospital outpatient claims data regarding their utilization, information provided in the respective pass-through applications, historical hospital claims data, pharmaceutical industry information, and clinical information regarding those drugs or biologicals to project the CY 2018 OPPS utilization of the products.
For the known drugs and biologicals (excluding policy-packaged diagnostic radiopharmaceuticals, contrast agents, drugs, biologicals, and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure, and drugs and biologicals that function as supplies when used in a surgical procedure) that will be continuing on pass-through payment status in CY 2018, we estimated the pass-through payment amount as the difference between ASP+6 percent and the payment rate for nonpass-through drugs and biologicals that will be separately paid at ASP+6 percent, which is zero for this group of drugs. Because payment for policy-packaged drugs and biologicals is packaged if the product was not paid separately due to its pass-through payment status, we proposed to include in the CY 2018 pass-through estimate the difference between payment for the policy-packaged drug or biological at ASP+6 percent (or WAC+6 percent, or 95 percent of AWP, if ASP or WAC information is not available) and the policy-packaged drug APC offset amount, if we determine that the policy-packaged drug or biological approved for pass-through payment resembles a predecessor drug or biological already included in the costs of the APCs that are associated with the drug receiving pass-through payment. For the proposed rule, using the proposed methodology described above, we calculated a CY 2018 proposed spending estimate for this first group of drugs and biologicals of approximately $7.7 million.
We did not receive any public comments on our proposed spending estimate for this first group of drugs and biologicals. For this final rule with comment period, using the latest available data, we calculated a CY 2018 spending estimate for this first group of drugs and biologicals of approximately $9.83 million. We note that this estimate does not reflect drugs purchased with a 340B discount and therefore subject to a payment reduction based on final policy for CY 2018.
To estimate proposed CY 2018 pass-through spending for drugs and biologicals in the second group (that is, drugs and biologicals that we knew at the time of development of the proposed rule were newly eligible for pass-through payment in CY 2018, additional drugs and biologicals that we estimated could be approved for pass-through status subsequent to the development of the proposed rule and before January 1, 2017, and projections for new drugs and biologicals that could be initially eligible for pass-through payment in the second through fourth quarters of CY 2018), we proposed to use utilization estimates from pass-through applicants, pharmaceutical industry data, clinical information, recent trends in the per unit ASPs of hospital outpatient drugs, and projected annual changes in service volume and intensity as our basis for making the CY 2018 pass-through payment estimate. We also proposed to consider the most recent OPPS experience in approving new pass-through drugs and biologicals. Using our proposed methodology for estimating CY 2018 pass-through payments for this second group of drugs, we calculated a proposed spending estimate for this second group of drugs and biologicals of approximately $8.5 million.
We did not receive any public comments on our proposed methodology or the proposed spending estimate for this second group of drugs. Therefore, for CY 2018, we are continuing to use the general methodology described earlier. For this final rule with comment period, based on the latest available data, we calculated a CY 2018 spending estimate for this second group of drugs and biologicals of approximately $8.23 million.
In summary, in accordance with the methodology described earlier in this section, for this final rule with comment period, we estimate that total pass-through spending for the device categories and the drugs and biologicals that are continuing to receive pass-through payment in CY 2018 and those device categories, drugs, and biologicals that first become eligible for pass-through payment during CY 2018 is approximately $28.06 million (approximately $10 million for device categories and approximately $18.06 million for drugs and biologicals) compared to the proposed $26.2 million (approximately $10 million for device categories and approximately $16.2 million for drugs and biologicals)), which represents 0.04 percent of total projected OPPS payments for CY 2018 (approximately $70 billion). Therefore, we estimate that pass-through spending in CY 2018 will not amount to 2.0 percent of total projected OPPS CY 2018 program spending.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33637), for CY 2018, we proposed to continue with our current clinic and emergency department (ED) hospital outpatient visits payment policies. For a description of the current clinic and ED hospital outpatient visits policies, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70448). We also proposed to continue with and not propose any change to our payment policy for critical care services for CY 2018. For a description of the current payment policy for critical care services, we refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70449), and for the history of the payment policy for critical care services, we refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75043). In the proposed rule, we sought public comments on any changes to these codes that we should consider for future rulemaking cycles. We continued to encourage those parties who comment to provide the data and analysis necessary to justify any suggested changes.
We did not receive any public comments on our proposals for CY 2018. Therefore, we are finalizing our proposal, without modification, to continue our current clinic and ED hospital outpatient visits and critical care services payment policies. We also did not receive any public comments on any changes to these codes that we should consider for future rulemaking cycles.
A partial hospitalization program (PHP) is an intensive outpatient program of psychiatric services provided as an alternative to inpatient psychiatric care for individuals who have an acute mental illness, which includes, but is not limited to, conditions such as depression, schizophrenia, and substance use disorders. Section 1861(ff)(1) of the Act defines partial hospitalization services as the items and services described in paragraph (2) prescribed by a physician and provided under a program described in paragraph (3) under the supervision of a physician pursuant to an individualized, written plan of treatment established and periodically reviewed by a physician (in consultation with appropriate staff participating in such program), which sets forth the physician's diagnosis, the type, amount, frequency, and duration of the items and services provided under the plan, and the goals for treatment under the plan. Section 1861(ff)(2) of the Act describes the items and services included in partial hospitalization services. Section 1861(ff)(3)(A) of the Act specifies that a PHP is a program furnished by a hospital to its outpatients or by a community mental health center (CMHC), as a distinct and organized intensive ambulatory treatment service, offering less than 24-hour-daily care, in a location other than an individual's home or inpatient or residential setting. Section 1861(ff)(3)(B) of the Act defines a CMHC for purposes of this benefit.
Section 1833(t)(1)(B)(i) of the Act provides the Secretary with the authority to designate the OPD services to be covered under the OPPS. The Medicare regulations that implement this provision specify, at 42 CFR 419.21, that payments under the OPPS will be made for partial hospitalization services furnished by CMHCs as well as Medicare Part B services furnished to hospital outpatients designated by the Secretary, which include partial hospitalization services (65 FR 18444 through 18445).
Section 1833(t)(2)(C) of the Act requires the Secretary, in part, to establish relative payment weights for covered outpatient department (OPD) services (and any groups of such services described in section 1833(t)(2)(B) of the Act) based on median (or, at the election of the Secretary, mean) hospital costs using data on claims from 1996 and data from the most recent available cost reports. In pertinent part, section 1833(t)(2)(B) of the Act provides that the Secretary may establish groups of covered OPD services, within a classification system developed by the Secretary for covered OPD services, so that services classified within each group are comparable clinically and with respect to the use of resources. In accordance with these provisions, we have developed the PHP APCs. Because a day of care is the unit that defines the structure and scheduling of partial hospitalization services, we established a per diem payment methodology for the PHP APCs, effective for services furnished on or after July 1, 2000 (65 FR 18452 through 18455). Under this methodology, the median per diem costs were used to calculate the relative payment weights for the PHP APCs. Section 1833(t)(9)(A) of the Act requires the Secretary to review, not less often than annually, and revise the groups, the relative payment weights, and the wage and other adjustments described in section 1833(t)(2) of the Act to take into account changes in medical practice, changes in technology, the addition of new services, new cost data, and other relevant information and factors.
We began efforts to strengthen the PHP benefit through extensive data analysis, along with policy and payment changes finalized in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66670 through 66676). In that final rule with comment period, we made two refinements to the methodology for computing the PHP median: The first remapped 10 revenue codes that are common among hospital-based PHP claims to the most appropriate cost centers; and the second refined our methodology for computing the PHP median per diem cost by computing a separate per diem cost for each day rather than for each bill.
In CY 2009, we implemented several regulatory, policy, and payment changes, including a two-tier payment approach for partial hospitalization services under which we paid one
For CY 2010, we retained the two-tier payment approach for partial hospitalization services and used only hospital-based PHP data in computing the PHP APC per diem costs, upon which PHP APC per diem payment rates are based. We used only hospital-based PHP data because we were concerned about further reducing both PHP APC per diem payment rates without knowing the impact of the policy and payment changes we made in CY 2009. Because of the 2-year lag between data collection and rulemaking, the changes we made in CY 2009 were reflected for the first time in the claims data that we used to determine payment rates for the CY 2011 rulemaking (74 FR 60556 through 60559).
In the CY 2011 OPPS/ASC final rule with comment period (75 FR 71994), we established four separate PHP APC per diem payment rates: Two for CMHCs (APC 0172 (for Level 1 services) and APC 0173 (for Level 2 services)) and two for hospital-based PHPs (APC 0175 (for Level 1 services) and 0176 (for Level 2 services)), based on each provider type's own unique data. For CY 2011, we also instituted a 2-year transition period for CMHCs to the CMHC APC per diem payment rates based solely on CMHC data. Under the transition methodology, CMHC APCs Level 1 and Level 2 per diem costs were calculated by taking 50 percent of the difference between the CY 2010 final hospital-based PHP median costs and the CY 2011 final CMHC median costs and then adding that number to the CY 2011 final CMHC median costs. A 2-year transition under this methodology moved us in the direction of our goal, which is to pay appropriately for partial hospitalization services based on each provider type's data, while at the same time allowing providers time to adjust their business operations and protect access to care for Medicare beneficiaries. We also stated that we would review and analyze the data during the CY 2012 rulemaking cycle and, based on these analyses, we might further refine the payment mechanism. We refer readers to section X.B. of the CY 2011 OPPS/ASC final rule with comment period (75 FR 71991 through 71994) for a full discussion.
In addition, in accordance with section 1301(b) of the Health Care and Education Reconciliation Act of 2010 (HCERA 2010), we amended the description of a PHP in our regulations to specify that a PHP must be a distinct and organized intensive ambulatory treatment program offering less than 24-hour daily care other than in an individual's home or in an inpatient or residential setting. In accordance with section 1301(a) of HCERA 2010, we revised the definition of a CMHC in the regulations to conform to the revised definition now set forth under section 1861(ff)(3)(B) of the Act (75 FR 71990).
For CY 2012, as discussed in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74348 through 74352), we determined the relative payment weights for partial hospitalization services provided by CMHCs based on data derived solely from CMHCs and the relative payment weights for partial hospitalization services provided by hospital-based PHPs based exclusively on hospital data.
In the CY 2013 OPPS/ASC final rule with comment period, we finalized our proposal to base the relative payment weights that underpin the OPPS APCs, including the four PHP APCs (APCs 0172, 0173, 0175, and 0176), on geometric mean costs rather than on the median costs. We established these four PHP APC per diem payment rates based on geometric mean cost levels calculated using the most recent claims and cost data for each provider type. For a detailed discussion on this policy, we refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68406 through 68412).
In the CY 2014 OPPS/ASC proposed rule (78 FR 43621 through 43622), we solicited comments on possible future initiatives that may help to ensure the long-term stability of PHPs and further improve the accuracy of payment for PHP services, but proposed no changes. In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75050 through 75053), we summarized the comments received on those possible future initiatives. We also continued to apply our established policies to calculate the four PHP APC per diem payment rates based on geometric mean per diem costs using the most recent claims data for each provider type. For a detailed discussion on this policy, we refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75047 through 75050).
In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66902 through 66908), we continued to apply our established policies to calculate the four PHP APC per diem payment rates based on PHP APC geometric mean per diem costs, using the most recent claims and cost data for each provider type.
In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70455 through 70465), we described our extensive analysis of the claims and cost data and ratesetting methodology. We found aberrant data from some hospital-based PHP providers that were not captured using the existing OPPS ±3 standard deviation trims for extreme CCRs and excessive CMHC charges resulting in CMHC geometric mean costs per day that were approximately the same as or more than the daily payment for inpatient psychiatric facility services. Consequently, we implemented a trim to remove hospital-based PHP service days that use a CCR that was greater than 5 (CCR5) to calculate costs for at least one of their component services, and a trim on CMHCs with a geometric mean cost per day that is above or below 2 (±2) standard deviations from the mean. We stated in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70456) that, without using a trimming process, the data from these providers would inappropriately skew the geometric mean per diem cost for Level 2 CMHC services.
In addition, in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70459 through 70460), we corrected a cost inversion that occurred in the final rule data with respect to hospital-based PHP providers. We corrected the cost inversion with an equitable adjustment to the actual geometric mean per diem costs by increasing the Level 2 hospital-based PHP APC geometric mean per diem costs and decreasing the Level 1 hospital-based PHP APC geometric mean per diem costs by the same factor, to result in a percentage difference equal to the average percent difference between the hospital-based Level 1 PHP APC and the Level 2 PHP APC for partial hospitalization services from CY 2013 through CY 2015.
Finally, we renumbered the PHP APCs, which were previously 0172, 0173, 0175, and 0176, to 5851, 5852, 5861, and 5862, respectively. For a detailed discussion of the PHP ratesetting process, we refer readers to
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79687 through 79691), we continued to apply our established policies to calculate the PHP APC per diem payment rates based on geometric mean per diem costs using the most recent claims and cost data for each provider type. However, we finalized a policy to combine the Level 1 and Level 2 PHP APCs for CMHCs and to combine the Level 1 and Level 2 APCs for hospital-based PHPs because we believed this would best reflect actual geometric mean per diem costs going forward, provide more predictable per diem costs, particularly given the small number of CMHCs, and generate more appropriate payments for these services, for example by avoiding the cost inversions for hospital-based PHPs addressed in the CY 2016 and CY 2017 OPPS/ASC final rules with comment period (80 FR 70459 and 81 FR 79682). We implemented an 8-percent outlier cap for CMHCs to mitigate potential outlier billing vulnerabilities by limiting the impact of inflated CMHC charges on outlier payments. We will continue to monitor the trends in outlier payments and consider policy adjustments as necessary.
For a comprehensive description on the background of the PHP payment policy, we refer readers to the CY 2016 and CY 2017 OPPS/ASC final rules with comment period (80 FR 70453 through 70455 and 81 FR 79678 through 79680).
For CY 2018, in the CY 2018 OPPS/ASC proposed rule (82 FR 33639), we proposed to continue to apply our established policies to calculate the PHP APC per diem payment rates based on geometric mean per diem costs using the most recent claims and cost data for each provider type. Specifically, we proposed to continue to use CMHC APC 5853 (Partial Hospitalization (3 or More Services Per Day)) and hospital-based PHP APC 5863 (Partial Hospitalization (3 or More Services Per Day)). We proposed to continue to calculate the geometric mean per diem costs for CY 2018 for APC 5853 for CMHCs using only CY 2016 CMHC claims data and the most recent CMHC cost data, and the CY 2018 geometric mean per diem costs for APC 5863 for hospital-based PHPs using only CY 2016 hospital-based PHP claims data and the most recent hospital cost data.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33639), for CY 2018 and subsequent years, we proposed to follow the PHP ratesetting methodology described in section VIII.B.2. of the CY 2016 OPPS/ASC final rule with comment period (80 FR 70462 through 70466) to determine the PHP APCs' geometric mean per diem costs and to calculate the payment rates for APCs 5853 and 5863, incorporating the modifications made in our CY 2017 OPPS/ASC final rule with comment period. As discussed in section VIII.B.1. of the CY 2017 OPPS/ASC final rule with comment period (81 FR 79680 through 79687), we finalized our proposal that, for CY 2017 and subsequent years, the geometric mean per diem cost for hospital-based PHP APC 5863 would be based upon actual hospital-based PHP claims and costs for PHP service days providing 3 or more services. Similarly, we finalized our proposal that, for CY 2017 and subsequent years, the geometric mean per diem cost for CMHC APC 5853 would be based upon actual CMHC claims and costs for CMHC service days providing 3 or more services.
The CMHC or hospital-based PHP APC per diem costs are the provider-type specific costs derived from the most recent claims and cost data. The CMHC or hospital-based PHP APC per diem payment rates are the national unadjusted payment rates calculated from the CMHC or hospital-based PHP APC per diem costs, after applying the OPPS budget neutrality adjustments described in section II.A.4. of this final rule with comment period.
We proposed to apply our established methodologies in developing the CY 2018 geometric mean per diem costs and payment rates, including the application of a ±2 standard deviation trim on costs per day for CMHCs and a CCR>5 hospital service day trim for hospital-based PHP providers. These two trims were finalized in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70455 through 70462) for CY 2016 and subsequent years.
For the CY 2018 proposed rule, prior to calculating the proposed geometric mean per diem cost for CMHC APC 5853, we prepared the data by first applying trims and data exclusions, and assessing CCRs as described in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70463 through 70465), so that ratesetting is not skewed by providers with extreme data. For this CY 2018 OPPS/ASC final rule with comment period, we followed the same data preparation steps. Before any trims or exclusions, there were 50 CMHCs in the final PHP claims data file (compared to 47 CMHCs in the CY 2018 OPPS/ASC proposed rule). Under the ±2 standard deviation trim policy, we excluded any data from a CMHC for ratesetting purposes when the CMHC's geometric mean cost per day was more than ±2 standard deviations from the geometric mean cost per day for all CMHCs. By applying this trim for CY 2018 ratesetting, in this final rule with comment period, we excluded 3 CMHCs with geometric mean per diem costs per day below the trim's lower limit of $47.44 and 1 CMHC above the trim's upper limit of $427.72 from the final ratesetting for CY 2018. This standard deviation trim removed 4 providers from ratesetting whose data would have skewed the calculated final geometric mean per diem cost.
In accordance with our PHP ratesetting methodology, in the proposed rule, we also removed service days with no wage index values because we use the wage index data to remove the effects of geographic variation in costs prior to APC geometric mean per diem cost calculation (80 FR 70465). In this CY 2018 final rule ratesetting, no CMHCs were missing wage index data for all of their service days. Therefore, we did not exclude any CMHCs due to lack of wage index data.
In addition to our trims and data exclusions, before determining the PHP APC geometric mean per diem costs, we also assess CCRs (80 FR 70463). Our longstanding PHP OPPS ratesetting methodology defaults any CMHC CCR>1 to the statewide hospital ancillary CCR (80 FR 70457). In this CY 2018 final rule ratesetting, we identified one CMHC that had a CCR>1. This CMHC's CCR was 1.002, and it was defaulted to its appropriate statewide hospital ancillary CCR for CY 2018 ratesetting purposes.
In summary, these data preparation steps adjusted the CCR for 1 CMHC and excluded 4 CMHCs, resulting in the inclusion of a total of 46 CMHCs in our CY 2018 final rule ratesetting modeling (compared to 39 CMHCs in our proposed rule ratesetting modeling in the CY 2018 OPPS/ASC proposed rule). The trims removed 864 CMHC claims from the 16,242 total CMHC claims, resulting in 15,378 CMHC claims used in ratesetting. We believe that excluding providers with extremely low or high geometric mean costs per day or extremely low or high CCRs protects CMHCs from having that data inappropriately skew the calculation of
After applying all of the above trims, exclusions, or adjustments, the final CY 2018 geometric mean per diem cost for all CMHCs for providing 3 or more services per day (APC 5853) is $143.22 (compared to the proposed geometric mean per diem cost of $128.81).
For the CY 2018 proposed rule and for this CY 2018 final rule with comment period, we followed a data preparation process for hospital-based PHP providers that is similar to that used for CMHCs by applying trims and data exclusions as described in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70463 through 70465) so that our ratesetting is not skewed by providers with extreme data. Before any trimming or exclusions, there were 424 hospital-based PHP providers in the CY 2016 final PHP claims data used in this CY 2018 OPPS/ASC final rule with comment period (compared to 420 hospital-based PHPs in the CY 2018 OPPS/ASC proposed rule).
For hospital-based PHP providers, we applied a trim on hospital service days when the CCR was greater than 5 at the cost center level. The CCR>5 hospital service day trim removed hospital-based PHP service days that use a CCR>5 to calculate costs for at least one of their component services. Unlike the ±2 standard deviation trim, which excluded CMHC providers that failed the trim, the CCR>5 trim excluded any hospital-based PHP service day where any of the services provided on that day were associated with a CCR>5. Applying this trim removed from our final rule ratesetting service days from 8 hospital-based PHP providers with CCRs ranging from 5.2024 to 17.5702. However, all of the service days for these 8 hospital-based PHP providers had at least one service associated with a CCR>5, so the trim removed these providers entirely from our final rule ratesetting. In addition, 16 hospital-based PHPs reported zero daily costs, and therefore were removed for having no days with PHP payment; 1 hospital-based PHP was removed for missing wage index data; and 1 hospital-based PHP was removed by the OPPS ±3 standard deviation trim on costs per day.
Therefore, we excluded 26 hospital-based PHP providers, resulting in 398 hospital-based PHP providers in the data used for final rule ratesetting (compared to 393 hospital-based PHPs in the CY 2018 OPPS/ASC proposed rule). In addition, 2 hospital-based PHP providers were defaulted to using their overall hospital ancillary CCR due to outlier cost center CCR values (72.7362 and 117.1943). After completing these data preparation steps, we calculated the final geometric mean per diem cost for hospital-based PHP APC 5863 for hospital-based PHP services. The final geometric mean per diem cost for hospital-based PHP providers that provide 3 or more services per service day (hospital-based PHP APC 5863) is $208.09 (compared to $213.60 from the CY 2018 OPPS/ASC proposed rule).
We received a few public comments relating to our proposal to use our established methodology and policies in developing the PHP geometric mean per diem costs.
One commenter disagreed with CMS paying CMHCs and hospital-based PHPs differently for providing the exact same services and believed that the APCs distinguished by provider type hurts rather than rewards CMHCs for being more cost effective than hospital-based PHPs. The commenter referred to a 2011 bill introduced in the Congress to address the “inequity” of the current payment system and stated that CMHCs should be paid the same rate as hospital-based PHPs. This commenter also stated that setting CMHCs' payment rates based on a small number of CMHCs does not reflect the actual cost of providing these services and expressed concern that basing payments at the mean or median level would result in half of CMHCs receiving payments less than their costs, which would guarantee that more CMHCs would close, further limiting access to care.
We do not believe that the single-tier payment system will lead to a reduction in the number of PHPs, but rather that the increased stability in CMHC and hospital-based PHP payment rates will provide more stability for the PHP APCs. In addition, the calculated rates for APCs 5853 and 5863 continue to be based upon the actual costs of CMHCs and hospital-based PHPs, respectively. Therefore, we believe that the payment rates for the single-tier PHP APCs should be an appropriate approximation of provider costs, and should not result in reduced access to care.
Because the single-tier PHP APCs 5853 and 5863 became effective January 1, 2017, we will have to wait until our CY 2017 claims data are available to determine any effect of the payment rates for these APCs on the provision of services per day. We will continue to monitor PHP data for any unintended consequences resulting from the single-tier APC policy.
The OPPS pays for hospital outpatient services, including partial hospitalization services. This system bases payment on the geometric mean per diem costs of providing services using provider data from claims and cost reports. We calculate the PHP APC geometric mean per diem costs based on the data provided for each type of provider to determine payment for these services. We believe that this system provides appropriate payment for partial hospitalization services based on actual provider costs. The final PHP APC geometric mean per diem costs for CY 2018 reflect these actual provider costs.
Regarding the 2011 bill introduced in the Congress that would have required CMHCs and hospital-based PHPs to be paid at the same rate, we note that this bill was not enacted.
The difference in payment between CMHCs and hospital-based PHPs is based upon differences in resource use (or costs). When Congress required the Secretary to implement an outpatient prospective payment system, it generally required that this payment system group clinically similar covered services with respect to resource use (section 1833(t)(2) of the Act). Because the resource uses of CMHCs and hospital-based PHPs are different, these two provider types are paid under different APCs, based on their actual resource use.
Because the cost of providing partial hospitalization services differs significantly by site of service, we established different PHP APC payment rates for hospital-based PHPs and CMHCs in the CY 2011 OPPS/ASC final rule with comment period (75 FR 71991 through 71994). However, we allowed a 2-year transition to the CMHC payment rates based solely on CMHC data. With respect to the continued use of PHP APC geometric mean per diem costs for determining payment rates by provider, we refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68406 through 68412) for a discussion of the implementation of this policy. The resulting payment rates reflect the geometric mean cost of what providers expend to maintain such programs, based on data provided by CMHCs and hospital-based PHPs, which we believe are an improvement over the payment rates under the two-tier methodology calculated based on median costs using only hospital-based data.
Most (if not all) of the costs associated with adhering to CoPs should be captured in the cost report data used in ratesetting and, therefore, are accounted for when computing the geometric mean per diem costs. The reduction to bad debt reimbursement was a result of provisions of section 3201 of the Middle Class Tax Extension and Job Creation Act of 2012 (Pub. L. 112-96). The reduction to bad debt reimbursement impacted all providers eligible to receive bad debt reimbursement, as discussed in the CY 2013 End-Stage Renal Disease final rule (77 FR 67518). Medicare currently reimburses bad debt for eligible providers at 65 percent.
We appreciate the commenter's input regarding the effect any reduction in PHP payment rates would have on access to care, but we disagree with the commenter's assertion that CMS is only concerned about access to hospital-based PHPs. We are working to strengthen continued access to
We agree that both CMHCs and hospital-based PHPs serve some of the most disadvantaged Medicare beneficiaries, and appreciate the care that these providers give. We remain concerned about access to all PHP services, and particularly about the small numbers of CMHCs. The CY 2016 PHP data file of claims used for CY 2018 ratesetting showed only 50 CMHCs before we applied our data trims. We want to ensure that CMHCs remain a viable option as providers of mental health care, and will continue to explore policy options for strengthening the PHP benefit and increasing access to the valuable services provided by CMHCs and hospital-based PHPs.
We did not receive any public comments on the hospital-based PHP geometric mean per diem costs.
After consideration of the public comments we received, we are finalizing our proposals to apply our established policies to calculate the PHP APC per diem payment rates based on geometric mean per diem costs using the most recent claims and cost data for each provider type. Specifically, we are finalizing our proposal to continue to pay CMHCs using APC 5853 (Partial Hospitalization (3 or More Services Per Day)) and to continue to pay hospital-based PHPs using APC 5863 (Partial Hospitalization (3 or More Services Per Day)). We calculated the geometric mean per diem costs for CY 2018 for APC 5853 for CMHCs using only CY 2016 CMHC claims data and the most recent CMHC cost data, and the CY 2018 geometric mean per diem costs for APC 5863 for hospital-based PHPs using only CY 2016 hospital-based PHP claims data and the most recent hospital cost data. We also are finalizing our proposal to continue applying our established trim methodologies, including the application of a ±2 standard deviation trim on costs per day for CMHCs and a CCR>5 hospital service day trim for hospital-based PHP providers.
The final CY 2018 PHP APC geometric mean per diem costs for CMHC PHP APC 5853 are $143.22 and for hospital-based PHP APC 5863 are $208.09, as shown in Table 74 below. The final PHP APC payment rates are included in Addendum A to this final rule with comment period (which is available via the Internet on the CMS Web site).
In the CY 2016 OPPS/ASC final rule with comment period (81 FR 79684 through 79685), we expressed concern over the low frequency of individual therapy provided to beneficiaries. The final CY 2016 claims data used for this CY 2018 final rule with comment period revealed some increases in the provision of individual therapy compared to CY 2015 claims data. In the CY 2016 final claims data, hospital-based PHPs provided individual therapy on 4.7 percent of days with only 3 services and 5.8 percent of days with 4 or more services (compared to 4.0 percent and 6.2 percent, respectively, in CY 2015). Similarly, in the CY 2016 final claims data, CMHCs provided individual therapy on 8.5 percent of days with only 3 services provided and 5.0 percent of days with 4 or more services provided (compared to 7.9 percent and 4.4 percent, respectively, in CY 2015 claims).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33640), we stated that we are aware that our single-tier payment policy may influence a change in service provision because providers are able to obtain payment that is heavily weighted to the cost of providing 4 or more services when they provide only 3 services. We indicated that we are interested in ensuring that providers furnish an appropriate number of services to beneficiaries enrolled in PHPs. Therefore, with the CY 2017 implementation of APC 5853 and APC 5863 for providing 3 or more PHP services per day, we are continuing to monitor utilization of days with only 3 PHP services.
For this CY 2018 final rule with comment period, we used the final update of the CY 2016 claims data. The final CY 2016 claims data showed that PHPs maintained an appropriately low utilization of 3 service days compared to CY 2015. Hospital-based PHPs have increased their provision of services since CY 2015 by providing fewer days with 3 services only, and more days with 5 or more services. CMHCs have remained steady in providing an appropriately low level of 3 service days.
As we noted in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79685), we will continue to monitor the provision of days with only 3 services, particularly now that the single-tier PHP APCs 5853 and 5863 are in place for providing 3 or more services per day to CMHCs and hospital-based PHPs, respectively.
It is important to reiterate our expectation that days with only 3 services are meant to be an exception and not the typical PHP day. In the CY 2009 OPPS/ASC final rule with comment period, we clearly stated that we consider the acceptable
In the CY 2009 OPPS/ASC final rule with comment period (73 FR 68694), we codified patient eligibility criteria to reflect the intensive nature of a PHP. At that time, we noted that many of the patient eligibility criteria had been longstanding policy requirements that did not reflect a change in policy. The added regulatory text was intended to strengthen and enhance the integrity of the PHP benefit. We further stated that because PHP is provided in lieu of inpatient care, it should be a highly structured and clinically intensive program. Our goal was to improve the level of service furnished in a day of PHP, while also ensuring that the appropriate population utilizes the PHP benefit (73 FR 68695).
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33641 through 33642), when we codified these eligibility criteria, we acknowledged commenters' concerns related to the eligibility requirement that a patient must require a minimum of 20 hours per week of therapeutic services as evidenced in their plan of care. For example, we recognized commenters' concerns that it may sometimes be difficult for patients to receive 20 hours per week of therapeutic services, such as when transitioning into or out of a PHP program (73 FR 68695). Therefore, to permit flexibility in treating PHP patients, we require a minimum of 20 hours per week of therapeutic services, with the understanding that patients may not always meet this minimum, and qualified the requirement by adding “as evidenced in their plan of care.” This eligibility requirement only addresses the minimum amount of PHP services beneficiaries must require as evidenced in their plan of care. It does not address whether or not beneficiaries
Most recently, we discussed the 20 hours of services requirement in the CY 2017 rulemaking when we reminded providers that our regulations at §§ 410.43(a)(3) and (c)(1) continue to require that PHP beneficiaries must require a minimum of 20 hours per week of therapeutic services as evidenced in their plan of care, and that PHP services must be furnished in accordance with a physician certification and the beneficiary's plan of care reflecting that need.
We analyzed CY 2015 and CY 2016 PHP claims data to assess the intensity of PHP services provided, using PHP-allowable HCPCS codes and provider and service date information. To calculate the number of hours of PHP services provided to each beneficiary each day, we assumed each unit of service equaled 1 hour of time. Each service day was then mapped to its Sunday through Saturday calendar week, and the number of PHP hours per week was calculated for each beneficiary. Next, the service weeks for each beneficiary were sorted chronologically and assessed: The first service week in a continuous series of service weeks was flagged as an “Admission” week, and the last service week in a continuous series of service weeks was flagged as a “Discharge” week. We removed from the analysis the admission and discharge weeks for each beneficiary to permit us to assess the intensity of services provided to beneficiaries fully engaged in PHPs (that is, those in “nontransitional” weeks). We then calculated the total number of service weeks and the number of service weeks with at least 20 PHP hours for each beneficiary. These two values were then used to determine the percentage of nontransitional service weeks that met the 20-hour PHP threshold for each beneficiary.
As stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33641), we found that a majority of PHP patients did not receive at least 20 hours of PHP services per week. Approximately half of Medicare beneficiaries receiving PHP services received 20 hours or more of services in 50 percent or more of nontransitional weeks. In CY 2016 claims data, only 16.4 percent of Medicare beneficiaries in CMHCs and 34.8 percent of Medicare beneficiaries in hospital-based PHPs received at least 20 hours of PHP services in 100 percent of nontransitional weeks.
Overall, the data suggest that some PHP beneficiaries may not be receiving the intensive services that eligible beneficiaries actually need. In the CY 2018 OPPS/ASC proposed rule, we stated that we were concerned about these findings, and encouraged PHPs to review their admission practices and ensure they are providing the services beneficiaries need.
Given similar concerns, in the CY 2017 OPPS/ASC final rule with comment period, we solicited public comments on potential future editing of PHP claims for the 20 hours per week minimum eligibility requirement and on strengthening the tie between a beneficiary's receipt of 20 hours per week of PHP services and payment for those services (81 FR 79686). We received a number of public comments in response to our solicitation, which we addressed in the CY 2018 OPPS/ASC proposed rule (82 FR 33641 through 33642).
In the CY 2018 OPPS/ASC proposed rule, we solicited public comments on the advisability of applying a payment requirement conditioned on a beneficiary's receipt of a minimum of 20 hours of therapeutic services per week. We also solicited public comments addressing the need for exceptions to such a policy. Specifically, we wanted to know and understand the type of occurrences or circumstances that would cause a PHP patient to not receive at least 20 hours of PHP services per week, particularly where payment would still be appropriate.
A few commenters suggested that CMS forego editing, and instead implement a targeted medical review of those providers whose data are problematic. These and other commenters suggested that CMS educate the PHP provider community about a 20-hour per week minimum service requirement. A number of commenters suggested that CMS reissue the rescinded Special Edition 1607 MedLearn Matters article and its associated Change Request 9880, about messaging on the remittance advice to providers. One commenter suggested that CMS include beneficiaries in any communications about a 20-hour per week minimum service requirement.
Several commenters believed that it would be premature to edit claims until CMS could determine the effect of the single-tier payment system on provision of services. These commenters urged a delay in editing until the CY 2019 rulemaking when CMS could analyze the CY 2017 data (the first year that could show the effect of the single-tier payment system on provision of services) and monitor utilization in the meantime. A few commenters stated that CMS should not require weekly billing of claims in order to implement payment editing of the 20-hour requirement, as it would increase providers' administrative burden because it would increase the number of claims providers would be required to submit.
Some commenters cited language from the CY 2009 OPPS/ASC final rule with comment period which implemented this eligibility requirement: That CMS stated it is to be documented in the plan of care and the language did not require PHP patients to
One commenter was concerned that a 20-hour minimum service requirement, combined with limiting payment to essentially a 3-service encounter, would not fully serve the patients and would push patients out of PHPs and into “Intensive Outpatient Programs (IOPs).” One commenter stated that if there were editing for a 20-hour requirement, the PHP revenue for one provider, for example, would decline by $100,000 at a time when the provider is struggling to find nursing staff, and its psychiatry and nursing costs are rising.
Multiple commenters described reasons why PHP patients are sometimes unable to attend the program for 20 hours per week. Commenters suggested exceptions for weather, acute illness or comorbid disease, family or childcare issues, holidays, transportation problems, other medical or social service appointments, court or legal appointments, and local emergencies or disasters. Several commenters discussed problems with medication compliance and medication adjustments, the cognitive effects of which could make attending for 20 hours per week clinically suboptimal. Several commenters noted that an overly strict edit could result in inappropriate changes and reduce access to PHP services.
We wish to correct two erroneous assumptions included in the comments. First, we have not rescinded Change Request 9880 about messaging on the provider remittance advice. This Change Request is available online at:
Our goal is for PHP providers to continue to have flexibility in providing PHP services. However, we must ensure that Medicare beneficiaries enrolled in PHPs are legitimately eligible for PHP services and receive appropriately intensive treatment. As we seek to understand the usage of PHP services by Medicare beneficiaries, we also will continue to monitor the intensity of services provided on a weekly basis.
As discussed in the CY 2004 OPPS final rule with comment period (68 FR 63469 through 63470), after examining the costs, charges, and outlier payments for CMHCs, we concluded that establishing a separate OPPS outlier policy for CMHCs would be appropriate. Beginning in CY 2004, we created a separate outlier policy specific to the estimated costs and OPPS payments provided to CMHCs. We designated a portion of the estimated OPPS outlier threshold specifically for CMHCs, consistent with the percentage of projected payments to CMHCs under the OPPS each year, excluding outlier payments, and established a separate outlier threshold for CMHCs.
The separate outlier threshold for CMHCs resulted in $1.8 million in outlier payments to CMHCs in CY 2004, and $0.5 million in outlier payments to CMHCs in CY 2005. In contrast, in CY 2003, more than $30 million was paid to CMHCs in outlier payments. We note that, in the CY 2009 OPPS/ASC final rule with comment period, we also established an outlier reconciliation policy to address charging aberrations related to OPPS outlier payments (73 FR 68594 through 68599). In CY 2017, we implemented a CMHC outlier payment cap to be applied at the provider level, such that in any given year, an individual CMHC will receive no more than a set percentage of its CMHC total per diem payments in outlier payments (81 FR 79692 through 79695). This outlier payment cap only affects CMHCs, and does not affect other provider types. This outlier payment cap is in addition to and separate from the current outlier policy and reconciliation policy in effect. We finalized the CMHC outlier payment cap to be set at 8 percent of the CMHC's total per diem payments (81 FR 79694 through 79695).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33642), we proposed to continue to designate a portion of the estimated 1.0 percent hospital outpatient outlier threshold specifically for CMHCs, consistent with the percentage of projected payments to CMHCs under the OPPS in CY 2018, excluding outlier payments. This policy results in CMHC outliers being paid under limited circumstances associated with costs from complex cases, rather than as a substitute for the standard PHP payment to CMHCs. In the CY 2018 OPPS/ASC proposed rule, we also noted that CMHCs are projected to receive 0.02 percent of total hospital outpatient payments in CY 2018, excluding outlier payments. Therefore, we proposed to designate approximately 0.0027 percent of the estimated 1.0 percent hospital outpatient outlier threshold for CMHCs. As we do for each rulemaking cycle, we have updated the CMHC CCRs and claims data used to model the PHP payments rates for this final rule with comment period.
Based on our simulations of CMHC payments for CY 2018, in the proposed rule, we proposed to continue to set the cutoff point for outlier payments for CY 2018 at 3.4 times the highest CMHC APC payment rate implemented for that calendar year, which for CY 2018 is the payment rate for CMHC APC 5853. In addition, we proposed to continue to apply the same outlier payment percentage that applies to hospitals. Therefore, for CY 2018, we proposed to continue to pay 50 percent of CMHC APC geometric mean per diem costs over the cutoff point. For example, for CY 2018, if a CMHC's cost for partial hospitalization services paid under CMHC APC 5853 exceeds 3.4 times the proposed payment rate for CMHC APC 5853, the outlier payment would be calculated as 50 percent of the amount by which the cost exceeds 3.4 times the payment rate for CMHC APC 5853.
In section II.G. of the proposed rule, for the hospital outpatient outlier payment policy, we proposed to set a fixed dollar threshold in addition to an APC multiplier threshold. APC 5853 is the only APC for which CMHCs may receive payment under the OPPS, and is for providing a defined set of services that are relatively low cost when compared to other OPPS services. As such, it is not necessary to also impose a fixed dollar threshold on CMHCs. Therefore, we did not propose to set a dollar threshold for CMHC outlier payments.
In summary, we proposed to continue to calculate our CMHC outlier threshold and CMHC outlier payments according to our established policies.
We did not receive any public comments on these proposals. Therefore, we are finalizing our proposals to continue to calculate CMHC outlier threshold and CMHC outlier payments according to our established policies. Using the updated data for this final rule with comment period, CMHCs are projected to receive 0.03 percent of total hospital outpatient payments in CY 2018, excluding outlier payments. Therefore, for CY 2018 we are designating approximately 0.02 percent of the estimated 1.0 percent hospital outpatient outlier threshold for CMHCs.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74352 through 74353) for a full historical discussion of our longstanding policies on how we identify procedures that are typically provided only in an inpatient setting (referred to as the inpatient only (IPO) list) and, therefore, will not be paid by Medicare under the OPPS, and on the criteria that we use to review the IPO list each year to determine whether or not any procedures should be removed from the list. The complete list of codes that will be paid by Medicare in CY 2018 as inpatient only procedures is included as Addendum E to this final rule with comment period (which is available via the Internet on the CMS Web site).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33642 through 33645), for CY 2018, we proposed to use the same methodology (described in the November 15, 2004 final rule with comment period (69 FR 65834)) of reviewing the current list of procedures on the IPO list to identify any procedures that may be removed from the list. We have established five criteria that are part of this methodology. As
1. Most outpatient departments are equipped to provide the services to the Medicare population.
2. The simplest procedure described by the code may be performed in most outpatient departments.
3. The procedure is related to codes that we have already removed from the IPO list.
4. A determination is made that the procedure is being performed in numerous hospitals on an outpatient basis.
5. A determination is made that the procedure can be appropriately and safely performed in an ASC, and is on the list of approved ASC procedures or has been proposed by us for addition to the ASC list.
Using the above-listed criteria, in the CY 2018 OPPS/ASC proposed rule (82 FR 33643 and 33644), we identified the procedures described by the following codes that we proposed to remove from the IPO list for CY 2018: CPT code 27447 (Arthroplasty, knee, condyle and plateau; medical and lateral compartments with or without patella resurfacing (total knee arthroplasty)) and CPT code 55866 (Laparoscopy, surgical prostatectomy, retropubic radical, including nerve sparing, includes robotic assistance, when performed). The procedures that we proposed to remove from the IPO list for CY 2018 and subsequent years, including the HCPCS code, long descriptors, and the CY 2018 payment indicators, were displayed in Table 29 of the proposed rule.
We note that we address the public comments we received on removing the procedure described by CPT code 55866 from the IPO list under section IX.B.2. of this final rule with comment period. We address the public comments we received on removing CPT code 27447 from the IPO list under section IX.B.3. of this final rule with comment period.
In the CY 2018 OPPS/ASC proposed rule, we proposed to remove CPT code 55866 from the IPO list and to assign it to C-APC 5362 (Level 2 Laparoscopy & Related Services) with status indicator “J1”. We stated in the proposed rule that after consulting with stakeholders and our clinical advisors regarding the procedure described by CPT code 55866, we believe that this procedure meets criteria 1 and 2. We sought comment on whether the public believes that these criteria are met and whether CPT code 55866 meets any other of the five criteria cited earlier.
For a number of years, total knee arthroplasty (TKA) has been a topic of discussion for removal from the IPO list with both stakeholder support and opposition. Most recently, in the CY 2017 OPPS/ASC proposed rule (81 FR 45679 through 45681), we sought public comments on the removal of the TKA procedure from the IPO list from interested parties, including specifically: Medicare beneficiaries and advocate associations for Medicare beneficiaries; orthopedic surgeons and physician specialty societies that represent orthopedic surgeons who perform TKA procedures; hospitals and hospital trade associations; and any other interested stakeholders. In the CY 2017 proposed rule comment solicitation, we requested stakeholder input on whether the TKA procedure met the established criteria used to identify procedures to remove from the IPO list. We also requested input regarding how to modify current Medicare payment models that include TKA, such as the Bundled Payments for Care Improvement (BPCI) and the Comprehensive Care for Joint Replacement (CJR) initiatives, if the procedure was removed from the IPO list.
Below is a summary of the public comments we received in response to the comment solicitation in the CY 2017 OPPS/ASC proposed rule. These public comments were varied and nuanced.
• A number of commenters believed that continued refinements to the TKA surgical procedure allowed it to be performed safely on properly selected Medicare beneficiaries in the outpatient setting. A number of facilities indicated that they were currently performing TKA procedures on an outpatient basis in both the HOPD and ASC on non-Medicare patients. Commenters who supported removing the TKA procedure from the IPO list also noted recent peer-reviewed publications that reported on investigations of the feasibility of outpatient TKA with positive results; that is, TKA outpatients did not experience higher rates of complications or readmissions in comparison to TKA inpatients.
• A minority of commenters (including teaching hospital stakeholders and some professional organizations representing orthopedic surgeons) stated that the risk of postsurgical complications was too high for patients with the TKA procedure performed in the outpatient setting for the Medicare population and noted that patients appropriate for the TKA procedure performed on an outpatient basis tend to be younger, more active, have fewer complications, and have more at home support than most Medicare beneficiaries. These commenters also believed there was insufficient research on the TKA procedure performed on an outpatient basis to definitively claim that the procedure could be safely performed in the outpatient setting.
• Some commenters noted that if the TKA procedure was removed from the IPO list, inpatient TKA cases should not be subject to Recovery Audit Contractor (RAC) review for appropriate site-of-service. In addition, some commenters expressed concerns about the effect that removing the TKA procedure from the IPO list could have on the BPCI and CJR Medicare payment models. We stated in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79699) that we would consider all public comments received in future policymaking.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33643), we stated that we have reviewed the clinical characteristics of the TKA procedure and related evidence, including current
In the CY 2018 OPPS/ASC proposed rule, we stated that we believe that the TKA procedure described by CPT code 27447 meets a number of criteria for removal from the IPO list, including criteria 1, 2, and 4. We sought comments on whether the public believes that these criteria are met and whether the TKA procedure meets any other of the five criteria stated in the beginning of this section. In the proposed rule, we also proposed that CPT code 27447 would be assigned to C-APC 5115 (Level 5 Musculoskeletal Procedures) with status indicator “J1”.
In addition, some commenters requested that CMS explicitly state that the surgeon is the final arbiter of the appropriate site for the surgical procedure, that CMS provide an incentive for outpatient and ambulatory settings performing TKA, PHA, and THA to be a part of a registry such as the American Joint Replacement Registry, and that CMS confirm that surgeons will continue to have the option to select the appropriate setting (inpatient or outpatient) for the procedure.
Some commenters expressed concerns that removal of TKA from the IPO list may lead commercial payers to implement coverage policies that would drive these surgeries from the inpatient setting to lower cost outpatient settings that may not be sufficiently prepared to handle the complexities or risks associated with some outpatient TKA procedures. Further, some commenters stated that removing TKA from the IPO list could drive TKA to specific facilities based on cost alone, which could result in significant further stresses in isolated rural care settings.
While we continue to expect providers who perform outpatient TKA on Medicare beneficiaries to use comprehensive patient selection criteria to identify appropriate candidates for the procedure, we believe that the surgeons, clinical staff, and medical specialty societies who perform outpatient TKA and possess specialized clinical knowledge and experience are most suited to create such guidelines. Therefore, we do not expect to create or endorse specific guidelines or content for the establishment of providers' patient selection protocols. However, we remind commenters that the “2-midnight” rule continues to be in effect and was established to provide guidance on when an inpatient admission would be appropriate for payment under Medicare Part A (inpatient hospital services). In general, this guidance provides that if the physician expects the beneficiary to require hospital care that spans at least 2 midnights and admits the beneficiary based upon that expectation, the case is appropriate for payment under the IPPS (80 FR 70539). For stays for which the physician expects the patient to need less than 2 midnights of hospital care, an inpatient admission is payable under Medicare Part A on a case-by-case basis if the documentation in the medical record supports the admitting physician's determination that the patient requires inpatient hospital care. This documentation and the physician's admission decision are subject to medical review, which is discussed in greater detail below (80 FR 70541). The 2-midnight rule does not apply to procedures on the IPO list; that is, medically necessary procedures that are on the IPO list are appropriate for Medicare Part A payment without regard to the actual or expected length of stay (80 FR 70539).
With regard to the behavior of commercial insurance providers and site selection for outpatient TKA, while we believe that these comments are out of the scope of the proposed rule, we note that commercial providers are responsible for establishing their own rules governing payment for services.
We agree that the physician should take the beneficiaries' need for post-surgical services into account when selecting the site of care to perform the surgery. We would expect that Medicare beneficiaries who are selected for outpatient TKA would be less medically complex cases with few comorbidities and would not be expected to require SNF care following surgery. Instead, we expect that many of these beneficiaries would be appropriate for discharge to home (with outpatient therapy) or home health care. We believe that comprehensive patient selection protocols should be implemented to properly identify these beneficiaries. However, we do not believe that Medicare should establish such protocols and believe that physicians and providers should select an appropriate patient selection protocol.
With respect to the billing concern, we rely on hospitals to bill all HCPCS codes accurately in accordance with their code descriptors and CPT and CMS instructions, as applicable, and to report charges on claims and charges and costs on their Medicare hospital cost reports appropriately (77 FR 68324). As we do every year, we will review and evaluate the APC groupings based on the latest available data in the next rulemaking cycle.
After consideration of the public comments we received, we are finalizing our proposal to remove the TKA procedure described by CPT code 27447 from the IPO list beginning in CY 2018 and to assign the TKA procedure to C-APC 5115 with status indicator “J1”.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33643 and 33644), we proposed that if we finalized our proposal to remove the TKA procedure described by CPT code 27447 from the IPO list, we would also prohibit RAC review of patient status for TKA procedures performed in the inpatient setting for a period of 2 years to allow providers time to gain experience with these procedures in the outpatient setting. We believe this approach will help ensure that hospitals can determine whether to perform the procedure on a hospital outpatient or hospital inpatient basis without taking into account the possibility of an inpatient TKA claim being denied upon a patient status review by a RAC. That is, given that this surgical procedure is newly eligible for payment under either the IPPS or the OPPS, we proposed that RAC patient status reviews of a hospital claim is prohibited for a period of 2 years. We note that RAC reviews of TKA procedures described by CPT code 27447 will continue to be permitted for issues other than patient status as an inpatient or outpatient, including those for underlying medical necessity.
Commenters who responded to the CY 2018 OPPS/ASC proposed rule also requested that CMS remove several additional procedures from the IPO list. These additional procedures are listed in Table 77 below.
After evaluating the above list of codes that commenters requested to be removed from the IPO list against our established criteria, we believe that CPT codes 43282, 43772, 43773, 43774 meet several criteria to be removed from the IPO list, including criteria 3. Accordingly, we are removing these four CPT codes from the IPO list for CY 2018 and assigning them to APCs in this final rule with comment period.
For the remaining CPT codes requested to be removed from the IPO list that describe joint replacement procedures, because of the strong public interest and numerous comments that we have received from stakeholders regarding our proposals to remove other joint replacement procedures, namely the TKA procedure, from the IPO list, we are not removing these procedures from the IPO list at this time to allow for further discussion. We will take these requests into consideration and any proposed policy changes regarding these procedures will be announced in future rulemaking. A further discussion of the comment solicitation of the possible removal of partial hip arthroplasty (PHA) and total hip arthroplasty (THA) procedures from the IPO list is included under section IX.C. of this final rule with comment period.
One commenter requested that CMS add the procedure described by CPT code 92941 (Percutaneous transluminal revascularization of acute total/subtotal occlusion during acute myocardial infarction, coronary artery or coronary artery bypass graft, any combination of intracoronary stent, artherectomy and angioplasty, including aspiration thrombectomy when performed, single vessel) to the IPO list because this procedure is performed emergently to treat acute myocardial infarction patients.
We evaluated the procedure described by CPT code 92941 against our criteria, and we agree with the commenter that CPT code 92941 should be added to the IPO list.
After consideration of the public comments we received and for the reasons discuss previously, we are removing the following procedures from the IPO list for CY 2018: CPT codes 27447, 43282, 43772, 43773, 43774, and 55866. We also are adding CPT code 92941 to the IPO list for CY 2018. The specific procedures, including the CPT code, long descriptors, and the CY 2018 status indicators, are displayed in Table 78 below.
The complete list of codes (the IPO list) that will be paid by Medicare in CY 2018 as inpatient only procedures is included as Addendum E to this final rule with comment period (which is available via the Internet on the CMS Web site).
Partial hip arthroplasty (PHA), CPT code 27125 (Hemiarthroplasty, hip, partial (eg, femoral stem prosthesis, bipolar arthroplasty)), and total hip arthroplasty (THA) or total hip replacement, CPT code 27130 (Arthroplasty, acetabular and proximal femoral prosthetic replacement (total hip arthroplasty), with or without autograft or allograft), have traditionally been considered inpatient surgical procedures. The procedures were placed on the original IPO list in the CY 2001 OPPS final rule (65 FR 18780). In 2000, the primary factors that were used to determine the assignment of a procedure to the IPO list were as follows: (1) The invasive nature of the procedure; (2) the need for at least 24 hours of postoperative care; and (3) the underlying physical condition of the patient who would require the surgery (65 FR 18455). In 2000, the geometric mean average length of stay for the DRG to which uncomplicated PHA and THA procedures were assigned was 4.6 days, and in 2016, the average length of stay for current uncomplicated PHA and THA procedures for the MS-DRG was 2.7 days.
In the CY 2017 OPPS/ASC proposed rule, we solicited public comments on the possible removal of total knee arthroplasty (TKA) from the IPO list (81 FR 45679 through 45681). Included in the public comments received related to the removal of TKA from the IPO list were several comments in support of removal of THA from the IPO list as well. Among those commenters expressing support for removal of THA from the IPO list were several surgeons and other stakeholders who believed that, given thorough preoperative screening by medical teams with significant experience and expertise involving hip replacement procedures, the THA procedure could be provided on an outpatient basis for some Medicare beneficiaries. These commenters noted significant success involving same day discharge for patients who met the screening criteria and whose experienced medical teams were able to perform the procedure early enough in the day for the patients to achieve postoperative goals, allowing home discharge by the end of the day. The commenters believed that the benefits of providing the THA procedure on an outpatient basis will lead to significant enhancements in patient well-being, improved efficiency, and cost savings to the Medicare program, including shorter hospital stays resulting in fewer medical complications, improved results, and enhanced patient satisfaction.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33644 and 33645), recent innovations have enabled surgeons to perform the PHA and THA procedures on an outpatient basis on non-Medicare patients (both in the HOPD and in the ASC). These innovations in PHA and THA care include minimally invasive techniques, improved perioperative anesthesia, alternative postoperative pain management, and expedited rehabilitation protocols. Patients undergoing minimally invasive surgical procedures instead of open surgical techniques generally benefit from a shorter hospital stay. However, not all patients are candidates for minimally invasive PHA or THA. Commenters on the CY 2017 OPPS/ASC proposed rule comment solicitation on the TKA procedure have stated that benefits of outpatient PHA and THA procedures include a likelihood of fewer complications, more rapid recovery, increased patient satisfaction, recovery at home with the assistance of family members, and a likelihood of overall improved outcomes. On the contrary, unnecessary inpatient hospitalization exposes patients to the risk of hospital-acquired conditions such as infections and a host of other iatrogenic mishaps.
We stated in the CY 2018 OPPS/ASC proposed rule that, like most surgical procedures, both PHA and THA need to be tailored to the individual patient's needs. Patients with a relatively low anesthesia risk and without significant comorbidities who have family members at home who can assist them may likely be good candidates for an outpatient PHA or THA procedure. These patients may be determined to also be able to tolerate outpatient rehabilitation in either an outpatient facility or at home postsurgery. On the other hand, patients with multiple medical comorbidities, aside from their osteoarthritis, would more likely require inpatient hospitalization and possibly postacute care in a skilled nursing facility or other facility. Surgeons who have discussed outpatient PHA and THA procedures in public comments in response to our CY 2017 OPPS/ASC proposed rule comment solicitation on the TKA procedure have emphasized the importance of careful patient selection and strict protocols to optimize outpatient hip replacement outcomes. These protocols typically manage all aspects of the patient's care, including the at-home preoperative and postoperative environment, anesthesia, pain management, and rehabilitation to maximize rapid recovery, ambulation, and performance of activities of daily living.
We also noted in the proposed rule that not uncommonly we receive questions from the public about the IPO list that lead us to believe that some members of the public may misunderstand certain aspects of the IPO list. Therefore, two important principles of the IPO list must be reiterated at the outset of this discussion. First, just because a procedure is not on the IPO list does not mean that the procedure cannot be performed on an inpatient basis. IPO list procedures must be performed on an inpatient basis (regardless of the expected length of the hospital stay) in order to qualify for Medicare payment, but procedures that are not on the IPO list can be and very often are performed on individuals who are inpatients (as well as individuals who are hospital outpatients and ASC patients). Second, the IPO list status of a procedure has no effect on the MPFS professional payment for the procedure. Whether or not a procedure is on the IPO list is not in any way a factor in the MPFS payment methodology.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33645), we sought public comments on whether we should remove the procedures described by CPT codes 27125 and 27130 from the IPO list from all interested parties, including the following groups or individuals: Medicare beneficiaries and advocate associations for Medicare beneficiaries; orthopedic surgeons and physician specialty societies that represent orthopedic surgeons who perform PHA and/or THA procedures; hospitals and hospital trade associations; and any other interested stakeholders. We sought public comments on the following questions:
• Are most outpatient departments equipped to provide PHA and/or THA to some Medicare beneficiaries?
• Can the simplest procedure described by CPT codes 27125 and 27130 be performed in most outpatient departments?
• Are the procedures described by CPT codes 27125 and 27130 sufficiently related to or similar to other procedures we have already removed from the IPO list?
• How often is the procedure described by CPT codes 27125 and 27130 being performed on an outpatient
• Would it be clinically appropriate for some Medicare beneficiaries in consultation with his or her surgeon and other members of the medical team to have the option of either a PHA or THA procedure as a hospital outpatient, which may or may not include a 24-hour period of recovery in the hospital after the operation?
In addition, we sought public comments on whether the PHA and THA procedures may meet the criteria to be added to the ASC Covered Procedures List. We refer readers to section XII.C.1.d. of this final rule with comment period for a complete discussion of the ASC Covered Procedures List.
Finally, as noted when we solicited public comment on removing the TKA procedure from the IPO list in the CY 2017 rulemaking, we solicited public comment on the effect of removing the TKA procedure from the IPO list on the CJR Model and the BPCI Model. We refer readers to the CY 2017 OPPS/ASC proposed rule for a discussion of questions we raised for public comments, and we again sought public comment on the effect of removing the PHA and THA procedures from the IPO list on these models. For a discussion of these models in the CY 2017 rulemaking, we refer readers to 81 FR 79698 through 79699.
Other commenters, including ambulatory surgery centers, physicians, and beneficiaries, supported the removal of PHA and THA from the IPO list. These commenters stated that the procedures were appropriate for certain Medicare beneficiaries and most outpatient departments are equipped to provide THA to some Medicare beneficiaries. They also referenced their own personal successful experiences with outpatient THA.
Finally, commenters stated concerns regarding the effect of removing THA on the pricing methodologies, target pricing, and reconciliation process of the procedure in certain Medicare payment models (that is, the CJR and the BPCI models). They requested modifications to these models if the THA procedure is removed from the IPO list and requested that these procedures be suspended from quality programs such as the Hospital Readmissions Reduction Program, the Hospital Value-Based Purchasing Program, and Hospital Inpatient Quality Reporting Program if they are removed from the IPO list.
Section 603 of the Bipartisan Budget Act of 2015 (Pub. L. 114-74), enacted on November 2, 2015, amended section 1833(t) of the Act by amending paragraph (1)(B) and adding a new paragraph (21). As a general matter, under sections 1833(t)(1)(B)(v) and (t)(21) of the Act, applicable items and services furnished by certain off campus outpatient departments of a provider on or after January 1, 2017, will not be considered covered OPD services as defined under section 1833(t)(1)(B) of the Act for purposes of payment under the OPPS and will instead be paid “under the applicable payment system” under Medicare Part B if the requirements for such payment are otherwise met. To be considered part of a hospital, an off-campus department of a hospital must meet the provider-based criteria established under 42 CFR 413.65. The implementation of section 603 of the Bipartisan Budget Act of 2015 was finalized in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79699 through 79719) and interim final rule with comment period (79720 through 79729).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33645 through 33648), we did not propose any policies to limit clinical service line expansion or volume increases at excepted off-campus provider-based departments (PBDs). However, we stated that we would continue to monitor claims data for changes in billing patterns and utilization, and continue to invite public comments on the issue of service expansion.
We received a number of comments from various stakeholders regarding both clinical service line expansion and volume increases, as well as other topics not discussed in the CY 2018 OPPS/ASC proposed rule, including relocation and change of ownership. We appreciate all of the comments received, and we will consider them as we consider whether to pursue future rulemaking on these issues.
We also received some public comments regarding issues that are outside the scope of the policies addressed in the CY 2018 OPPS/ASC proposed rule, including comments related to the proposed payment adjustment applied for nonexcepted items and services furnished by nonexcepted off-campus PBDs, which are addressed in the CY 2018 MPFS final rule, and comments regarding technical billing questions. With respect to the payment adjustment for nonexcepted items and services furnished by nonexcepted off-campus PBDs and changes to the payment relativity adjuster, we refer readers to the CY 2018 MPFS final rule for that information and, more broadly, for the payment rates under the MPFS that will apply to nonexcepted items and services furnished by nonexcepted off-campus PBDs for CY 2018. We expect the CY 2018 MPFS final rule to be issued on or about the same date as this OPPS/ASC final rule with comment. Comments submitted regarding technical billing questions are addressed through applicable program instructions.
As discussed in the CY 2018 OPPS/ACS proposed rule (82 FR 33648), in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79699), we finalized a number of proposals to implement section 603 of the Bipartisan Budget Act of 2016 (Pub. L. 114-74), enacted on November 2, 2015, which
Section 16002(a) of the 21st Century Cures Act (Pub. L. 114-255) amended the Act at section 1833(t)(20)(B) and provided that, with respect to applicable items and services furnished during 2017 or a subsequent year, the term “off-campus outpatient department of a provider” excludes certain cancer hospitals. To meet this exclusion, section 16002(a) requires that such cancer hospitals (1) be described in section 1886(d)(1)(B)(v) of the Act; and (2) for hospital outpatient departments that meet the requirements for 42 CFR 413.65, after November 1, 2015 and before December 15, 2016, that the Secretary has received from the provider an attestation that the department met such requirements not later than 60 days after the date of enactment of section 16002 (December 13, 2016), or, for departments that meet the requirements after December 13, 2016, the Secretary has received from the provider an attestation that the department met the requirements not later than 60 days after the date the department first met the requirements of 42 CFR 413.65. As we stated in the CY 2018 OPPS/ASC proposed rule, through operational guidance, we have provided direction to all MACs regarding this provision. We also have provided guidance on this provision to hospital providers, which can be found on the CMS Web site at:
Section 16002(b) of Public Law 114-255 amended section 1833(t)(18) of the Act by adding a new subparagraph (C) that requires the Secretary, in applying 42 CFR 419.43(i) for services furnished on or after January 1, 2018, to use a target payment-to-cost ratio (PCR) that is 1 percentage point less than the target PCR that would otherwise apply. In addition to the 1 percentage point reduction, the Secretary may consider making an additional percentage point reduction to the target PCR that takes into account payment rates for applicable items and services described in section 1833(t)(21)(C) of the Act other than for services furnished by certain cancer hospitals. Further, in making any budget neutrality adjustments under section 1833(t) of the Act, the Secretary shall not take into account the reduced expenditures that result from application of section 1833(t)(18)(C) of the Act. We refer readers to section II.F. of this final rule with comment period for a discussion on the calculation of the target PCR for cancer hospitals for CY 2018.
Section 4011 of the 21st Century Cures Act (Pub. L. 114-255), enacted on December 13, 2016, amended section 1834 of the Act by adding a new subsection (t). New section 1834(t) of the Act provides that, in order to facilitate price transparency with respect to items and services for which payment may be made either to a hospital outpatient department or to an ambulatory surgical center under Title XVIII, the Secretary shall, for 2018 and each year thereafter, make available to the public via a searchable Web site, with respect to an appropriate number of items and services, the estimated payment amount for the item or service under the OPPS and ASC payment system and the estimated beneficiary liability applicable to the item or service. In the CY 2018 OPPS/ASC proposed rule (82 FR 33648), we announced our plan to establish the searchable Web site required by section 1834(t) of the Act. We indicated that details regarding the Web site will be issued through our subregulatory process. We stated in the proposed rule that we anticipate that the Web site will be made available in early CY 2018.
Section 218(b) of the Protecting Access to Medicare Act of 2014 (PAMA) (Pub. L. 113-93) added subsection (q) to section 1834 of the Act, which directs the Secretary to establish a program to promote the use of appropriate use criteria (AUC) for advanced diagnostic imaging services (the AUC program). Section 1834(q)(1)(B) of the Act defines AUC as criteria that are evidence-based (to the extent feasible) and assist professionals who order and furnish applicable imaging services to make the most appropriate treatment decisions for a specific clinical condition. The current policies for the AUC program for advanced diagnostic imaging services are codified in the regulations at 42 CFR 414.94.
There are four components of the AUC program for advanced diagnostic imaging services program. In the CY 2016 MPFS final rule with comment period (80 FR 71102 through 71116 and 80 FR 71380 through 71382), we addressed the first component of the Medicare AUC program. The first component includes the requirements and process for the establishment and specification of the AUC. In the CY 2017 MPFS final rule (81 FR 80403 through 80428 and 81 FR 80554 through 80555), we addressed the second component of the AUC program. The second component includes the specification of qualified clinical decision support mechanisms (CDSMs). A CDSM is the electronic tool through which the ordering practitioner consults AUC. In the CY 2018 OPPS/ASC proposed rule (82 FR 33648 and 33649), we stated that we had proposed in the CY 2018 MPFS proposed rule to address the third component of the AUC program. The third component includes the requirements for an ordering professional to consult with a qualified CDSM when ordering an applicable imaging service, and for the furnishing professional to include that consultation information on claims for the service that is furnished in an applicable setting and paid under an applicable payment system. Based on the statutory language of section 1834(q)(4)(B) of the Act, the AUC program applies to advanced imaging services for which payment is made under the following applicable payment systems: The MPFS; the OPPS; and the ASC payment system. The fourth component of the program is prior authorization for outlier ordering professionals. This component will be discussed in future rulemaking.
We indicated in the CY 2018 OPPS/ASC proposed rule that public
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33649), in the CY 2009 OPPS/ASC proposed rule and final rule with comment period (73 FR 41518 through 41519 and 73 FR 68702 through 68704, respectively), we clarified that direct supervision is required for hospital outpatient therapeutic services covered and paid by Medicare that are furnished in hospitals as well as in PBDs of hospitals, as set forth in the CY 2000 OPPS final rule with comment period (65 FR 18525). In the CY 2010 OPPS/ASC final rule with comment period (74 FR 60575 through 60591), we finalized a technical correction to the title and text of the applicable regulation at 42 CFR 410.27 to clarify that this standard applies in CAHs as well as hospitals. In response to concerns expressed by the hospital community, in particular CAHs and small rural hospitals, that they would have difficulty meeting this standard, on March 15, 2010, we instructed all MACs not to evaluate or enforce the supervision requirements for therapeutic services provided to outpatients in CAHs from January 1, 2010 through December 31, 2010, while the agency revisited the supervision policy during the CY 2011 OPPS/ASC rulemaking cycle.
Due to continued concerns expressed by CAHs and small rural hospitals, we extended this notice of nonenforcement (“enforcement instruction”) as an interim measure for CY 2011, and expanded it to apply to small rural hospitals having 100 or fewer beds (75 FR 72007). We continued to consider the issue further in our annual OPPS notice-and-comment rulemaking, and implemented an independent review process in 2012 to obtain advice from the HOP Panel on this matter (76 FR 74360 through 74371). Under this process used since CY 2012, the HOP Panel considers and advises CMS regarding stakeholder requests for changes in the required level of supervision of individual hospital outpatient therapeutic services. In addition, we extended the enforcement instruction through CY 2012 and CY 2013. The enforcement instruction has not been in effect since December 31, 2013. Congress has taken legislative action (Pub. L. 113-198 and Pub. L. 114-112) to extend nonenforcement of the direct supervision requirement for hospital outpatient therapeutic services in CAHs and small rural hospitals having 100 or fewer beds since December 31, 2013. The latest legislative action (Pub. L. 114-255) extended nonenforcement until December 31, 2016. The current enforcement instruction is available on the CMS Web site at:
As discussed in the CY 2018 OPPS/ASC proposed rule, stakeholders have consistently requested that CMS continue the nonenforcement of the direct supervision requirement for hospital outpatient therapeutic services for CAHs and small rural hospitals having 100 or fewer beds. Stakeholders stated that some small rural hospitals and CAHs have insufficient staff available to furnish direct supervision. The primary reason stakeholders cited for this request is the difficulty that CAHs and small rural hospitals have in recruiting physicians and nonphysician practitioners to practice in rural areas. These stakeholders noted that it is particularly difficult to furnish direct supervision for critical specialty services, such as radiation oncology services, that cannot be directly supervised by a hospital emergency department physician or nonphysician practitioner because of the volume of emergency patients or lack of specialty expertise. In addition, we are not aware of any quality of care complaints from beneficiaries or providers relating to the enforcement instruction related to direct physician supervision.
Therefore, in the CY 2018 OPPS/ASC proposed rule, we proposed to reinstate the enforcement instruction for outpatient therapeutic services furnished in CAHs and small rural hospitals having 100 or fewer beds for CYs 2018 and 2019 to give these CAHs and small rural hospitals more time to comply with the supervision requirements for outpatient therapeutic services and to give all parties additional time to submit specific services to be evaluated by the HOP Panel for a recommended change in the supervision level. We stated that these hospitals will continue to be subject to conditions of participation for hospitals and other Medicare rules regarding supervision. We welcomed public comments on this proposal.
With respect to applying the nonenforcement policy to CY 2017, we proposed to reinstate the enforcement instruction prospectively, for services administered beginning on the effective date of this final rule with comment period, which is scheduled for January 1, 2018; and we are finalizing that proposal. We anticipate issuing guidance outside of this rule to address enforcement policy for the direct supervision requirement for outpatient therapeutic services for CY 2017.
After consideration of the public comments we received, we are finalizing our proposal, without modification, to reinstate the nonenforcement policy for direct supervision enforcement of outpatient therapeutic services furnished in CAHs and small rural hospitals having 100 or fewer beds, and to reinstate our enforcement instruction for CYs 2018 and 2019.
Section 502 of Division O, title V of the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), which was enacted on December 18, 2015, contains provisions to incentivize the transition from traditional X-ray imaging to digital radiography. In particular, section 502(b) of Public Law 114-113 amended section 1833(t)(16) of the Act by adding subparagraph (F), which includes provisions that limit payment for film X-ray imaging services and computed radiography imaging services.
Section 1833(t)(16)(F)(i) of the Act specifies that, effective for services furnished during 2017 or a subsequent year, the payment under the OPPS for imaging services that are X-rays taken using film (including the X-ray component of a packaged service) that would otherwise be made under the OPPS (without application of subparagraph (F)(i) and before application of any other adjustment under section 1833(t) of the Act) shall be reduced by 20 percent. Section 1833(t)(16)(F)(iii) of the Act provides that the reductions made under section 1833(t)(16)(F) of the Act shall not be considered an adjustment under section 1833(t)(2)(E) of the Act, and shall not be implemented in a budget neutral manner.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33649 through 33650), consistent with section 1833(t)(16)(F)(iv) of the Act, which requires the implementation of the reductions in payment set forth in subparagraph (F) through appropriate mechanisms, which may include modifiers, we implemented section 1833(t)(16)(F)(i) of the Act by establishing the modifier “FX” (X-ray taken using film), effective January 1, 2017. The payment for X-rays taken using film and furnished during 2017 or a subsequent year is reduced by 20 percent when modifier “FX” (X-ray taken using film) is reported with the appropriate HCPCS codes. The applicable HCPCS codes describing imaging services can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site). When payment for an X-ray service taken using film is packaged into the payment for another item or service under the OPPS, no separate payment for the X-ray service is made and, therefore, there is no payment amount that can be attributed to the X-ray service. Accordingly, the amount of the payment reduction for a packaged film X-ray service is $0 (20 percent of $0). Further discussion of these policies and modifier “FX” can be found in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79729 through 79730).
Section 1833(t)(16)(F)(ii) of the Act provides for a phased-in reduction of payments for imaging services that are taken using computed radiography technology (as defined in section 1848(b)(9)(C) of the Act). Payments for such services (including the X-ray component of a packaged service) furnished during CY 2018, 2019, 2020, 2021, or 2022, that would otherwise be determined under section 1833(t) of the Act (without application of subparagraph (F)(ii) and before application of any other adjustment), will be reduced by 7 percent, and if such services are furnished during CY 2023 or a subsequent year, by 10 percent. For purposes of this reduction, computed radiography technology is defined in section 1848(b)(9)(C) of the Act as cassette-based imaging which utilizes an imaging plate to create the image involved. (82 FR 33650).
To further implement this provision, we stated in the proposed rule that we were establishing a new modifier (82 FR 33650), specifically, “FY” (X-ray taken using computed radiography technology/cassette-based imaging), as permitted by section 1833(t)(16)(F)(iv) of the Act, that would be reported on claims to identify those HCPCS codes that describe X-rays taken using computed radiography technology. (We note that modifier “FY” was listed as placeholder “XX” in the CY 2018 OPPS/ASC proposed rule and that we indicated (82 FR 33650) that the 2-digit modifier and long descriptor would be described in this final rule with comment period.) We proposed that the payment reduction would be taken when this payment modifier is reported with the applicable HCPCS code(s) to describe imaging services that are taken using computed radiography technology (82 FR 33650). In the proposed rule, we stated that the applicable HCPCS codes describing imaging services could be found in Addendum B to the proposed rule (which is available via the Internet on the CMS Web site). When payment for an X-ray service taken using computed radiography imaging is packaged into the payment for another item or service under the OPPS, no separate payment for the X-ray service is made and, therefore, there is no payment amount that can be attributed to the X-ray. Accordingly, the amount of the payment reduction for a packaged X-ray service would be $0 (7 percent of $0, and 10 percent of $0). We invited public comments on these proposals.
In addition, in accordance with section 1833(t)(16)(F)(ii) of the Act, payments for X-rays taken using computed radiography technology will be reduced by 7 percent during CY 2018, 2019, 2020, 2021, or 2022, and thereafter by 10 percent when furnished during CY 2023 or a subsequent year. Specifically, the payment reduction will apply when the “FY” modifier is reported with the applicable HCPCS code(s) to describe imaging services that are taken using computed radiography technology. In addition, when payment for an X-ray service taken using computed radiography imaging is packaged into the payment for another item or service under the OPPS, no separate payment for the X-ray service is made and, therefore, there is no payment amount that can be attributed to the X-ray. Accordingly, the amount of the payment reduction for a packaged X-ray service will be $0 (7 percent of $0, and 10 percent of $0). We note that the applicable HCPCS codes describing imaging services could be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site).
One commenter suggested that, to truly incentivize the transition to digital radiography technology, CMS should offer bonus payments similar to the recently proposed 2015 Certified Health Record Technology (CEHRT) bonus under the Quality Payment Program (QPP) Year 2. This same commenter recommended that, in lieu of bonus payments, CMS work with Congress to implement a delay of these cuts for the useful life of a typical computed radiography machine (5 years) to allow practices time to replace older equipment with digital radiography technology.
Other commenters further indicated there is no clinical benefit to using digital radiography systems, and that, for certain clinical situations, computed radiography systems are preferable. Still other commenters stated that the reduction in payments not only penalizes hospitals, particularly in rural and underserved communities that do not have the financial resources to update their equipment systems, but would also force small clinics and hospitals to no longer provide imaging services that require computed radiography technology.
After consideration of the public comments we received, we are finalizing our proposal to establish a new modifier “FY” (X-ray taken using computed radiography technology/cassette-based imaging) as permitted by section 1833(t)(16)(F)(iv) of the Act, that will be reported on claims to identify those HCPCS codes that describe X-rays taken using computed radiography technology. The payment reduction will be taken when this modifier is reported with the applicable HCPCS code(s) to describe imaging services that are taken using computed radiography technology. The applicable HCPCS codes describing imaging services can be found in Addendum B to this final rule with comment period (which is available via the Internet on the CMS Web site).
In addition, although we adopted the payment reduction for the film X-ray imaging services, as required by section 1833(t)(16)(F)(i) of the Act in the CY 2017 OPPS/ASC final rule with comment period, we did not adopt corresponding regulation text. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33650 and 33723 through 33724), we proposed to add new regulation text at 42 CFR 419.71 to codify our existing policies and our proposed policies for computed radiography technology services. We proposed to add the definition of “computed radiography technology,” as it is defined in section 1848(b)(9)(C) of the Act, in paragraph (a) of proposed new § 419.71. We stated that the proposed regulation text under paragraph (b) of proposed new § 419.71 would specify the 20-percent reduction for film X-ray imaging services. We proposed that the phased-in payment reduction for computed radiography technology imaging services would be codified at paragraph (c) of proposed new § 419.71. Finally, we proposed that paragraph (d) of proposed new § 419.71
We did not receive any public comments on our proposed regulation text. Therefore, we are finalizing our proposal to codify our previously adopted and newly finalized policies regarding section 1833(t)(16)(F) of the Act, without modifications.
As we discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33650), the date of service (DOS) is a required data field on all Medicare claims for laboratory services. However, a laboratory service may take place over a period of time—the date the physician orders the laboratory test, the date the specimen is collected from the patient, the date the laboratory accesses the specimen, the date the laboratory performs the test, and the date results are produced may occur on different dates. In the final rule on coverage and administrative policies for clinical diagnostic laboratory services published in the
A special rule was developed to apply to “archived” specimens. For laboratory tests that use an archived specimen, we established that the DOS is the date the specimen was obtained from storage (66 FR 58792).
In 2002, we issued Program Memorandum AB-02-134 which permitted contractors discretion in making determinations regarding the length of time a specimen must be stored to be considered “archived.” In response to comments requesting that we issue a national standard to clarify when a stored specimen can be considered “archived,” in the Procedures for Maintaining Code Lists in the Negotiated National Coverage Determinations for Clinical Diagnostic Laboratory Services final notice, published in the
In the final rule with comment period entitled, in relevant part, “Revisions to Payment Policies, Five-Year Review of Work Relative Value Units, Changes to the Practice Expense Methodology Under the Physician Fee Schedule, and Other Changes to Payment Under Part B” published in the
• The test is ordered by the patient's physician at least 14 days following the date of the patient's discharge from the hospital;
• The specimen was collected while the patient was undergoing a hospital surgical procedure;
• It would be medically inappropriate to have collected the sample other than during the hospital procedure for which the patient was admitted;
• The results of the test do not guide treatment provided during the hospital stay; and
• The test was reasonable and medically necessary for the treatment of an illness.
As we stated in the MPFS final rule, we established these five criteria, which we refer to as the “14-day rule,” to distinguish laboratory tests performed as part of post-hospital care from the care a beneficiary receives in the hospital. When the 14-day rule applies, laboratory tests are not bundled into the hospital stay, but are instead paid separately under Medicare Part B (as explained in more detail below).
We also revised the DOS requirements for a chemotherapy sensitivity test performed on live tissue. As discussed in the MPFS final rule (71 FR 69706), we agreed with commenters that these tests, which are primarily used to determine post-hospital chemotherapy care for patients who also require hospital treatment for tumor removal or resection, appear to be unrelated to the hospital treatment in cases where it would be medically inappropriate to collect a test specimen other than at the time of surgery, especially when the specific drugs to be tested are ordered at least 14 days following hospital discharge. As a result, we revised the DOS policy for chemotherapy sensitivity tests, based on our understanding that the results of these tests, even if they were available immediately, would not typically affect the treatment regimen at the hospital. Specifically, we modified the DOS for chemotherapy sensitivity tests performed on live tissue in § 414.510(b)(3) so that the DOS is the date the test was performed if the following conditions are met:
• The decision regarding the specific chemotherapeutic agents to test is made at least 14 days after discharge;
• The specimen was collected while the patient was undergoing a hospital surgical procedure;
• It would be medically inappropriate to have collected the sample other than during the hospital procedure for which the patient was admitted;
• The results of the test do not guide treatment provided during the hospital stay; and
• The test was reasonable and medically necessary for the treatment of an illness.
We explained in the MPFS final rule that, for chemotherapy sensitivity tests that meet this DOS policy, Medicare would allow separate payment under Medicare Part B, that is, separate from the payment for hospital services.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33651), the DOS requirements at 42 CFR 414.510 are used to determine whether a hospital bills Medicare for a clinical diagnostic laboratory test (CDLT) or whether the laboratory performing the test bills Medicare directly. This is because separate regulations at 42 CFR
Under our current rules, if a test meets all DOS requirements in § 414.510(b)(2)(i) or § 414.510(b)(3), the DOS is the date the test was performed, and the laboratory would bill Medicare directly for the test and would be paid under the Clinical Laboratory Fee Schedule (CLFS) directly by Medicare. However, if the test does
In recent rulemakings, we have reviewed appropriate payment under the OPPS for certain diagnostic tests that are not commonly performed by hospitals. In CY 2014, we finalized a policy to package certain CDLTs under the OPPS (78 FR 74939 through 74942 and 42 CFR 419.2(b)(17) and 419.22(l)). In CYs 2016 and 2017, we made some modifications to this policy (80 FR 70348 through 70350; 81 FR 79592 through 79594). Under our current policy, certain CDLTs that are listed on the CLFS are packaged as integral, ancillary, supportive, dependent, or adjunctive to the primary service or services provided in the hospital outpatient setting during the same outpatient encounter and billed on the same claim. Specifically, we conditionally package most CDLTs and only pay separately for a laboratory test when it is: (1) The only service provided to a beneficiary on a claim; (2) considered a preventive service; (3) a molecular pathology test; or (4) an advanced diagnostic laboratory test (ADLT) that meets the criteria of section 1834A(d)(5)(A) of the Act (78 FR 74939 through 74942; 80 FR 70348 through 70350; and 81 FR 79592 through 79594). In the CY 2016 OPPS/ASC final rule with comment period, we excluded all molecular pathology laboratory tests from packaging because we believed these relatively new tests may have a different pattern of clinical use, which may make them generally less tied to a primary service in the hospital outpatient setting than the more common and routine laboratory tests that are packaged.
For similar reasons, in the CY 2017 OPPS/ASC final rule with comment period, we extended the exclusion to also apply to all ADLTs that meet the criteria of section 1834A(d)(5)(A) of the Act.
Section 1834A of the Act, as established by section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), requires significant changes to how Medicare pays for CDLTs under the CLFS. Section 216(a) of PAMA also establishes a new subcategory of CDLTs known as ADLTs with separate reporting and payment requirements under section 1834A of the Act. In the CLFS final rule published in the
As defined in § 414.502, an ADLT is a CLDT covered under Medicare Part B that is offered and furnished only by a single laboratory. In addition, an ADLT cannot be sold for use by a laboratory other than the single laboratory that designed the test or a successor owner. Also, an ADLT must meet either Criterion (A), which implements section 1834A(d)(5)(A) of the Act, or Criterion (B), which implements section 1834A(d)(5)(B) of the Act, as follows:
•
Or:
•
Generally, under the revised CLFS, ADLTs are paid using the same methodology based on the weighted median of private payor rates as other CDLTs. However, updates to ADLT payment rates occur annually instead of every 3 years. The payment methodology for ADLTs is detailed in the CLFS final rule (81 FR 41076 through 41083).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33650 through 33653), we described the history of our laboratory DOS policy and discussed potentially modifying the DOS policy for certain ADLTs and molecular pathology tests. We explained that, recently, we have heard from certain laboratory stakeholders about operational issues the current laboratory DOS policy creates for hospitals and laboratories with regard to molecular pathology tests and laboratory tests they expect will be designated by CMS as ADLTs that meet the criteria of section 1834A(d)(5)(A) of the Act. These stakeholders have expressed that although these particular tests are not packaged under the OPPS, under current DOS policy, if the tests are ordered within 14 days of a patient's discharge from the hospital, Medicare still treats the tests as though they were ordered and furnished by the hospital itself. Under those circumstances, laboratories cannot directly seek Medicare payment for the molecular pathology test or ADLT. The hospital must bill Medicare for the test, and the laboratory must seek payment from the hospital. Specifically, we noted that stakeholders representing laboratories have expressed the following concerns:
• The current DOS policy permits hospitals to bill for tests they did not perform and that may have no relationship to or bearing on treatment received by the patient while in the hospital.
• The DOS policy may create inconsistent billing for specialty laboratories. For example, if the hospital is located in a different jurisdiction than the MAC used by the laboratory, a different MAC may be billed.
• Hospitals may be discouraged from utilizing ADLTs because billing for such tests that are not performed by hospitals could create administrative and financial complexities.
• The DOS policy is a potential barrier to CMS' goal of promoting personalized medicine because the policy may disproportionately impact smaller laboratories performing innovative diagnostic tests.
• Billing complexities may affect beneficiary access to needed laboratory tests and therapies. For example, orders might be delayed until at least 14 days after discharge or even canceled to avoid the DOS policy. This may restrict patient access to tests and reduce efficacy of treatment plans due to hospitals delaying or foregoing patient testing to avoid financial risk.
• The DOS policy may limit access for Medicare beneficiaries under original Medicare fee-for-service (that is, Medicare Part A and Part B) due to the fact that Medicare Advantage Plans under Medicare Part C and private payors allow laboratories to bill directly for tests they perform.
As we stated in the proposed rule (82 FR 33652), we recognize that the current laboratory DOS rule may impose administrative difficulties for hospitals and laboratories that furnish laboratory tests that are excluded from OPPS packaging and therefore paid separately at CLFS payment rates. Hospitals may be reluctant to bill Medicare for laboratory tests they do not perform, which as noted by stakeholders, could lead to delays in patient access to care.
In light of the concerns raised by stakeholders, we stated in the proposed rule that we were considering potential modifications to the DOS policy that would allow laboratories to bill Medicare directly for certain laboratory tests excluded from the OPPS packaging policy. We noted that one approach under consideration would create a new exception to the DOS policy for molecular pathology tests and ADLTs that meet the criteria of section 1834A(5)(A) of the Act and have been granted ADLT status by CMS. As we stated in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79592 through 79594), we believe these tests are relatively new and may have a different pattern of clinical use than more conventional laboratory tests, which may make them generally less tied to a primary service in the hospital outpatient setting than more common and routine laboratory tests that are packaged. In the proposed rule, we sought public comment on whether these tests, by their nature, are appropriately separable from the hospital stay that preceded the test and therefore should have a DOS that is the date of performance rather than the date of collection.
As an example, we stated that we would consider modifying 42 CFR 414.510(b) by adding a new paragraph (5) to establish that in the case of a molecular pathology test or an ADLT that meets the criteria of section 1834A(d)(5)(A) of the Act, the DOS must be the date the test was performed only if:
• The physician orders the test following the date of a hospital outpatient's discharge from the hospital outpatient department;
• The specimen was collected from a hospital outpatient during an encounter (as both are defined 42 CFR 410.2);
• It would be medically inappropriate to have collected the sample from the hospital outpatient other than during the hospital outpatient encounter;
• The results of the test do not guide treatment provided during the hospital outpatient encounter; and
• The test was reasonable and medically necessary for the treatment of an illness.
We requested specific comments on this potential modification to the current laboratory DOS policy, which would allow laboratories to bill Medicare directly for molecular pathology tests and ADLTs that meet the criteria of section 1834A(d)(5)(A) of the Act and have been granted ADLT status by CMS, when the specimen is collected during a hospital outpatient procedure and the test is ordered after the patient is discharged from the hospital outpatient department. We also noted that we would consider finalizing this modification (82 FR 33653).
Commenters also reiterated previous concerns regarding administrative and billing complexities resulting from the current DOS policy that may affect timely beneficiary access to necessary molecular pathology tests. These commenters noted that hospitals may be reluctant to order a test that the hospital itself does not perform until at least 14 days following the date the patient is discharged from the hospital outpatient department so that the laboratory performing the test may bill Medicare directly for the test. One commenter explained that, for molecular pathology tests performed by an independent laboratory that is not affiliated with the hospital, the administrative complexity of the current laboratory DOS policy frequently leads hospitals to delay ordering of these tests.
In addition, several commenters recommended specific modifications to the potential revisions to laboratory DOS policy discussed in the CY 2018 OPPS/ASC proposed rule. These suggested modifications are summarized below.
•
•
•
A few additional commenters suggested regulatory language to modify the existing laboratory DOS policy in accordance with the specific recommendations discussed previously. Specifically, these commenters suggested adding a new exception to the DOS policy so that, in the case of a molecular pathology test or an ADLT that meets the criteria of section 1834A(d)(5) of the Act, or a test that is a MAAA, the date of service must be the date the test was performed only if: (1) The specimen was collected from a hospital outpatient during an encounter (as both are defined 42 CFR 410.2); (2) it was medically appropriate to have collected the sample from the hospital outpatient during the hospital outpatient encounter; (3) the results of the test do not guide treatment provided during the hospital outpatient encounter; and (4) the test was reasonable and medically necessary for the diagnosis or treatment of an illness or injury.
In addition, we agree with the commenters that requiring the physician to order the test following the date of a hospital outpatient's discharge from the hospital outpatient department (as we described in the proposed rule) could also inappropriately exclude tests performed on liquid-based specimens from the DOS exception, because a blood test is typically ordered before the sample is collected. We proposed including the order date requirement for the same reason we included such a requirement in the 14-day rule: Because we believe it is more difficult to determine that a test ordered before discharge is appropriately separable from the hospital stay that preceded the test (71 FR 69706). However, as discussed more fully below, we believe the ADLTs and molecular pathology tests excluded from the OPPS packaging policy are, by their nature, tests that are used to determine posthospital care, and therefore can be legitimately distinguished from the care the patient receives in the hospital even if they are ordered prior to the patient's discharge. Therefore, we do not believe it is necessary to include an order date requirement as part of this exception. However, to help ensure that only tests that are not related to the care provided in the hospital fall under this provision, we will specify that the tests must be
We note that some of the commenters' suggested modifications to our potential DOS revisions are inconsistent with the current OPPS packaging policy and would result in allowing the laboratory to bill Medicare directly for a test that is not paid at the CLFS rate but paid under the hospital OPPS bundled rate. In the proposed rule (82 FR 33652), we specifically discussed creating an exception to the current DOS policy for ADLTs approved by CMS under section 1834A(d)(5)(A) of the Act and molecular pathology tests because we have already recognized that these tests may have a different pattern of clinical use than more conventional laboratory tests, which may make them generally less tied to a primary service in the hospital outpatient setting than the more common and routine tests that are packaged. In addition, these tests are already paid separately outside of the OPPS at CLFS payment rates. We note that laboratory tests granted ADLT status under section 1834A(d)(5)(B) of the Act
As noted previously in this section, we believe the current laboratory DOS policy creates administrative complexities for hospitals and laboratories with regard to molecular pathology tests and laboratory tests expected to be designated by CMS as ADLTs that meet the criteria of section 1834A(d)(5)(A) of the Act. Under the current laboratory DOS policy, if the tests are ordered less than 14 days following a hospital outpatient's discharge from the hospital outpatient department, laboratories generally cannot bill Medicare directly for the molecular pathology test or ADLT. In those circumstances, the hospital must bill Medicare for the test, and the laboratory must seek payment from the hospital. We have heard from commenters that because ADLTs are performed by only a single laboratory and molecular pathology tests are often performed by only a few laboratories, and hospitals may not have the technical ability to perform these complex tests, the hospital may be reluctant to bill Medicare for a test it would not typically (or never) perform. As a result, the hospital might delay ordering the test until at least 14 days after the patient is discharged from the hospital outpatient department or even cancel the order to avoid the DOS policy, which may restrict a patient's timely access to these tests. In addition, we have heard from commenters that the current laboratory DOS policy may disproportionately limit access for Medicare beneficiaries under original Medicare fee-for-service (that is, Medicare Part A and Part B) because Medicare Advantage plans under Medicare Part C and other private payors allow laboratories to bill directly for tests they perform.
We also recognize that greater consistency between the laboratory DOS rules and the current OPPS packaging policy would be beneficial and would address some of the administrative and billing issues created by the current DOS policy. As noted previously, we exclude all molecular pathology tests and ADLTs under section 1834A(d)(5)(A) of the Act from the OPPS packaging policy because we believe these tests may have a different pattern of clinical use, which may make them generally less tied to a primary service in the hospital outpatient setting than the more common and routine laboratory tests that are packaged. Under the current DOS policy, we have established exceptions that permit the DOS to be the date of performance for certain tests that we believe are not related to the hospital treatment and are used to determine posthospital care. We believe a similar exception is justified for the molecular pathology tests and ADLTs excluded from the OPPS packaging policy, which we understand are used to guide and manage the patient's care after the patient is discharged from the hospital outpatient department. We believe that, like the other tests currently subject to DOS exceptions, these tests can legitimately be distinguished from the care the patient receives in the hospital, and thus we would not be unbundling services that are appropriately associated with hospital treatment. Moreover, as noted previously, these tests are already paid separately outside of the OPPS at CLFS payment rates. Therefore, we agree with the commenters that the laboratory performing the test should be permitted to bill Medicare directly for these tests, instead of relying on the hospital to bill Medicare on behalf of the laboratory under arrangements.
For these reasons and in light of the commenters' suggestions, we are revising the current laboratory DOS policy at 42 CFR 414.510(b) for tests granted ADLT status by CMS under section 1834A(d)(5)(A) of the Act and molecular pathology tests that are excluded from the OPPS packaging policy under 42 CFR 419.2(b), so that the performing laboratory may bill and be paid by Medicare directly for these tests under the circumstances described below. The revision will provide an exception to the general laboratory DOS rule—that is, the DOS is the date the specimen was collected—so that the DOS for these tests is the date the laboratory test was performed. This exception to the current laboratory DOS policy will only apply to tests granted ADLT status by CMS under paragraph (1) of the definition of “advanced diagnostic laboratory test” in 42 CFR 414.502, which CMS promulgated to implement section 1834A(d)(5)(A) of the Act, and molecular pathology tests excluded from the OPPS packaging policy as defined in 42 CFR 419.2(b). By adding an exception to the current laboratory DOS policy at 42 CFR 414.510(b) for molecular pathology tests and ADLTs that are excluded from the OPPS packaging policy under 42 CFR 419.2(b), the performing laboratory will be required to bill Medicare directly for tests that meet this exception. The hospital will no longer bill Medicare for these tests, and the laboratory will no longer have to seek payment from the hospital for these tests, if all of the conditions are met.
We note that this new exception to the laboratory DOS policy will
In order to allow a laboratory to bill Medicare directly for an ADLT or molecular pathology test excluded from the OPPS packaging policy, we are modifying 42 CFR 414.510(b) by adding a new paragraph (5) to establish that, in the case of a molecular pathology test or a test designated by CMS as an ADLT under paragraph (1) of the definition of advanced diagnostic laboratory test in 42 CFR 414.502, the DOS of the test must be the date the test was performed only if—
• The test was performed following a hospital outpatient's discharge from the hospital outpatient department;
• The specimen was collected from a hospital outpatient during an encounter (as both are defined in 42 CFR 410.2);
• It was medically appropriate to have collected the sample from the hospital outpatient during the hospital outpatient encounter;
• The results of the test do not guide treatment provided during the hospital outpatient encounter; and
• The test was reasonable and medically necessary for the treatment of an illness.
We intend to continue to study the laboratory DOS policy and determine whether any additional changes are warranted. In particular, we will consider whether there should be any changes to the current 14-day rule, including whether to address any inconsistencies with our new exception, and any changes to the “under arrangements” provisions, including with respect to the hospital inpatient setting. We expect to propose any future changes to the laboratory DOS policy through notice-and-comment rulemaking.
One commenter stated that consistency between the DOS for hospital inpatients and hospital outpatients is important for evaluating data on patient outcomes. For example, the commenter noted that laboratory tests ordered for hospital inpatients do not have the tests' HCPCS code(s) on the inpatient claim. As a result, CMS cannot track patients who have received these tests using claims data, or evaluate how advanced testing contributes to cancer care and other advanced treatments, or evaluate the total cost of care. To that end, a few commenters suggested that CMS use coding modifiers to identify ADLTs and molecular pathology tests that do not guide treatment during an inpatient hospital stay so that separate payment can be made at the HCPCS code level for these laboratory tests.
In contrast to the commenters suggesting a laboratory DOS revision for both hospital outpatients and hospital inpatients, one commenter requested that CMS limit revisions to the laboratory DOS policy to outpatient laboratory tests that are excluded from the OPPS packaging policy and separately payable at CLFS rates because it would merely change which entity bills for the laboratory test. The commenter noted that because all laboratory testing ordered on specimens obtained from hospital
In the CY 2018 OPPS/ASC proposed rule (82 FR 33653), we also indicated that we were considering potentially revising the DOS rule to create an exception only for ADLTs that meet the criteria in section 1834A(d)(5)(A) of the Act. This exception would not cover molecular pathology tests. We stated that we were considering this approach because ADLTs approved by CMS under Criterion (A), like all ADLTs, are offered and furnished only by a single laboratory (as defined in 42 CFR 414.502). The hospital, or another laboratory, that is not the single laboratory (as defined in 42 CFR 414.502), cannot furnish the ADLT. Therefore, we noted in the proposed rule that there may be additional beneficiary access concerns for these ADLTs that may not apply to molecular pathology tests, and that could be addressed by allowing the laboratories to bill Medicare directly for these tests. For example, a hospital may not have an arrangement with the single laboratory that furnishes a particular ADLT, which could lead the hospital to delay the order for the ADLT until 14 days after the patient's discharge to avoid financial risk and thus potentially delay medically necessary care for the beneficiary.
We stated in the proposed rule that we believe the circumstances may be different for molecular pathology tests, which are not required to be furnished by a single laboratory. In particular, we understood there may be “kits” for certain molecular pathology tests that a hospital can purchase, allowing the hospital to perform the test. Therefore, we stated that molecular pathology tests may not present the same concerns of delayed access to medically necessary care as ADLTs, which
Thus, in the proposed rule, we requested specific comments on potentially creating an exception to the DOS policy that is limited to ADLTs that meet the criteria in section 1834A(d)(5)(A) of the Act and have been granted ADLT status by CMS. We also requested public comments on how the current laboratory DOS policy may affect billing for other separately payable laboratory test codes that are not packaged under the OPPS, such as a laboratory test that is the only service provided to a beneficiary on a claim or molecular pathology tests.
In addition, a few commenters indicated that beneficiary access issues similar to those for ADLTs, which are furnished by a single laboratory, may also exist for molecular pathology tests because molecular pathology testing is highly specialized and may be performed by only a few laboratories. The commenters also noted that a coverage policy for a given molecular pathology test may have only been issued by a MAC in the jurisdiction in which the laboratory is located. This could be problematic if the hospital that is billing for the test is located in a different MAC jurisdiction from the laboratory, and the MAC processing claims for the jurisdiction in which the hospital is located has not made a coverage determination for the test.
A few other commenters explained that molecular pathology tests are important tools that guide patient treatment plans and that many hospitals currently lack the in-house technical expertise and Clinical Laboratory Improvement Amendments (CLIA) licensure to perform these tests and, therefore, send them out to a performing laboratory. The commenters noted that molecular pathology “kits” (as referenced by CMS in the CY 2018 OPPS/ASC proposed rule) are different from those used for other CDLTs. For example, the commenters explained that molecular pathology test kits require the hospital to have the highest licensure level under CLIA, as well as obtain specialized training for correct use and interpretation of the results, and that most hospitals are unlikely to have either the expertise or the technology to use these kits. To ensure appropriate access to molecular pathology tests by rural and community hospitals, as well as academic and specialty hospitals, the commenters requested that the revisions to the current laboratory DOS policy apply to both ADLTs and molecular pathology tests.
Finally, in the CY 2018 OPPS/ASC proposed rule (82 FR 33653), we invited public comments on alternative approaches to addressing stakeholders' concerns regarding the DOS policy, such as potentially modifying the “under arrangements” provisions in 42 CFR 410.42 and 411.15(m). Specifically, we requested comments on whether an exception should be added to § 410.42(b) and/or § 411.15(m)(3) for molecular pathology tests and ADLTs that are excluded from the OPPS packaging policy under 42 CFR 419.2(b) and how such an exception should be framed.
In addition, a few commenters noted that certain practitioner services, such as physician services and nurse practitioner services, are not performed by the hospital outpatient department and paid under a separate fee schedule, and therefore, are currently excluded from the “under arrangements” provisions. They contended that adding an exception to the “under arrangements” provisions for nonpackaged laboratory tests which are paid at the CLFS rates would be consistent with the exceptions for other services (for example, physician services) paid separately from the hospital service.
A few commenters also provided specific recommendations on how CMS should revise the “under arrangements” regulations at §§ 410.42(b) and 411.15(m). Similar to their recommendations for revising the laboratory DOS policy, the commenters suggested adding an exception to the “under arrangements” provisions for molecular pathology tests,
In summary, after considering the public comments we received, we are adding an additional exception to our current laboratory DOS regulations at § 414.510(b)(5) so that the DOS for molecular pathology tests and tests designated by CMS as Criterion (A) ADLTs is the date the test was performed only if: (1) The test was performed following a hospital outpatient's discharge from the hospital outpatient department; (2) the specimen was collected from a hospital outpatient during an encounter (as both are defined in § 410.2); (3) it was medically appropriate to have collected the sample from the hospital outpatient during the hospital outpatient encounter; (4) the results of the test do not guide treatment provided during the hospital outpatient encounter; and (5) the test was reasonable and medically necessary for the treatment of an illness. This new exception to the laboratory DOS policy will enable laboratories performing Criterion (A) ADLTs and molecular pathology tests excluded from the OPPS packaging policy to bill Medicare directly for those tests, instead of requiring them to seek payment from the hospital outpatient department.
Payment status indicators (SIs) that we assign to HCPCS codes and APCs serve an important role in determining payment for services under the OPPS. They indicate whether a service represented by a HCPCS code is payable under the OPPS or another payment system and also whether particular OPPS policies apply to the code.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33653), for CY 2018, we did not propose to make any changes to the definitions of status indicators that were listed in Addendum D1 to the CY 2017 OPPS/ASC final rule with comment period available on the CMS Web site at:
We requested public comments on the proposed definitions of the OPPS status indicators for CY 2018. We did not receive any public comments. We believe that the existing CY 2017 definitions of the OPPS status indicators continue to be appropriate for CY 2018. Therefore, we are finalizing our proposed CY 2018 definitions of the OPPS status indicators without modifications.
The complete list of the payment status indicators and their definitions that apply for CY 2018 is displayed in Addendum D1 to this final rule with comment period, which is available on the CMS Web site at:
The CY 2018 payment status indicator assignments for APCs and HCPCS codes are shown in Addendum A and Addendum B, respectively, to this final rule with comment period, which are available on the CMS Web site at:
In the CY 2018 OPPS/ASC proposed rule (82 FR 33654), we proposed to use four comment indicators for the CY 2018 OPPS. These comment indicators, “CH”, “NC”, “NI”, and “NP”, are in effect for CY 2017 and we proposed to continue their use in CY 2018. The proposed CY 2018 OPPS comment indicators are as follows:
• “CH”—Active HCPCS code in current and next calendar year, status indicator and/or APC assignment has changed; or active HCPCS code that will be discontinued at the end of the current calendar year.
• “NC”—New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year for which we requested comments in the proposed rule, final APC assignment; comments will
• “NI”—New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, interim APC assignment; comments will be accepted on the interim APC assignment for the new code.
• “NP”—New code for the next calendar year or existing code with substantial revision to its code descriptor in the next calendar year as compared to current calendar year, proposed APC assignment; comments will be accepted on the proposed APC assignment for the new code.
We requested public comments on our proposed use of comment indicators for CY 2018. We did not receive any public comments. We believe that the CY 2017 definitions of the OPPS comment indicators continue to be appropriate for CY 2018. Therefore, we are continuing to use those definitions without modification for CY 2018.
The definitions of the final OPPS comment indicators for CY 2018 are listed in Addendum D2 to this final rule with comment period, which is available on the CMS Web site at:
For a detailed discussion of the legislative history and statutory authority related to payments to ASCs under Medicare, we refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74377 through 74378) and the June 12, 1998 proposed rule (63 FR 32291 through 32292). For a discussion of prior rulemaking on the ASC payment system, we refer readers to the CYs 2012, 2013, 2014, 2015, 2016, and 2017 OPPS/ASC final rules with comment period (76 FR 74378 through 74379; 77 FR 68434 through 68467; 78 FR 75064 through 75090; 79 FR 66915 through 66940; 80 FR 70474 through 70502; and 81 FR 79732 through 79753, respectively).
Under 42 CFR 416.2 and 416.166 of the Medicare regulations, subject to certain exclusions, covered surgical procedures in an ASC are surgical procedures that are separately paid under the OPPS, that would not be expected to pose a significant risk to beneficiary safety when performed in an ASC, and for which standard medical practice dictates that the beneficiary would not typically be expected to require active medical monitoring and care at midnight following the procedure (“overnight stay”). We adopted this standard for defining which surgical procedures are covered under the ASC payment system as an indicator of the complexity of the procedure and its appropriateness for Medicare payment in ASCs. We use this standard only for purposes of evaluating procedures to determine whether or not they are appropriate to be furnished to Medicare beneficiaries in ASCs. We define surgical procedures as those described by Category I CPT codes in the surgical range from 10000 through 69999 as well as those Category III CPT codes and Level II HCPCS codes that directly crosswalk or are clinically similar to procedures in the CPT surgical range that we have determined do not pose a significant safety risk, that we would not expect to require an overnight stay when performed in ASCs, and that are separately paid under the OPPS (72 FR 42478).
In the August 2, 2007 final rule (72 FR 42495), we also established our policy to make separate ASC payments for the following ancillary items and services when they are provided integral to ASC covered surgical procedures: (1) Brachytherapy sources; (2) certain implantable items that have pass-through payment status under the OPPS; (3) certain items and services that we designate as contractor-priced, including, but not limited to, procurement of corneal tissue; (4) certain drugs and biologicals for which separate payment is allowed under the OPPS; and (5) certain radiology services for which separate payment is allowed under the OPPS. In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66932 through 66934), we expanded the scope of ASC covered ancillary services to include certain diagnostic tests within the medicine range of CPT codes for which separate payment is allowed under the OPPS when they are provided integral to an ASC covered surgical procedure. Covered ancillary services are specified in § 416.164(b) and, as stated previously, are eligible for separate ASC payment. Payment for ancillary items and services that are not paid separately under the ASC payment system is packaged into the ASC payment for the covered surgical procedure.
We update the lists of, and payment rates for, covered surgical procedures and covered ancillary services in ASCs in conjunction with the annual proposed and final rulemaking process to update the OPPS and the ASC payment system (§ 416.173; 72 FR 42535). We base ASC payment and policies for most covered surgical procedures, drugs, biologicals, and certain other covered ancillary services on the OPPS payment policies, and we use quarterly change requests (CRs) to update services covered under the OPPS. We also provide quarterly update CRs for ASC covered surgical procedures and covered ancillary services throughout the year (January, April, July, and October). We release new and revised Level II HCPCS codes and recognize the release of new and revised CPT codes by the AMA and make these codes effective (that is, the codes are recognized on Medicare claims) via these ASC quarterly update CRs. We recognize the release of new and revised Category III CPT codes in the July and January CRs. These updates implement newly created and revised Level II HCPCS and Category III CPT codes for ASC payments and update the payment rates for separately paid drugs and biologicals based on the most recently submitted ASP data. New and revised Category I CPT codes, except vaccine codes, are released only once a year, and are implemented only through the January quarterly CR update. New and revised Category I CPT vaccine codes are released twice a year and are implemented through the January and July quarterly CR updates. We refer readers to Table 41 in the CY 2012 OPPS/ASC proposed rule for an example of how this process, which we finalized in the CY 2012 OPPS/ASC final rule with comment period, is used to update HCPCS and CPT codes (76 FR 42291; 76 FR 74380 through 74381).
In our annual updates to the ASC list of, and payment rates for, covered surgical procedures and covered ancillary services, we undertake a review of excluded surgical procedures (including all procedures newly proposed for removal from the OPPS
Since the implementation of the ASC prospective payment system, we have defined a “surgical” procedure under the payment system as any procedure described within the range of Category I CPT codes that the CPT Editorial Panel of the American Medical Association (AMA) defines as “surgery” (CPT codes 10000 through 69999) (72 FR 42478). We also have included as “surgical,” procedures that are described by Level II HCPCS codes or by Category III CPT codes that directly crosswalk or are clinically similar to procedures in the CPT surgical range that we have determined do not pose a significant safety risk, would not expect to require an overnight stay when performed in an ASC, and are separately paid under the OPPS (72 FR 42478).
As we noted in the CY 2008 final rule that implemented the revised ASC payment system, using this definition of surgery would exclude from ASC payment certain invasive, “surgery-like” procedures, such as cardiac catheterization or certain radiation treatment services that are assigned codes outside the CPT surgical range (72 FR 42477). We stated in that final rule that we believed continuing to rely on the CPT definition of surgery is administratively straightforward, is logically related to the categorization of services by physician experts who both establish the codes and perform the procedures, and is consistent with a policy to allow ASC payment for all outpatient surgical procedures (72 FR 42477).
Recently, some stakeholders have suggested that certain procedures that are outside the CPT surgical range but that are similar to surgical procedures currently covered in an ASC setting should be ASC covered surgical procedures. For example, these stakeholders stated that certain cardiac catheterization services, cardiac device programming services, and electrophysiology services should be added to the covered surgical procedures list. While we continue to believe that using the CPT code range to define surgery represents a logical, appropriate, and straightforward approach to defining a surgical procedure, we also believe it may be appropriate for us to use the CPT surgical range as a guide rather than a requirement as to whether a procedure is surgical, which would give us more flexibility to include “surgery-like” procedures on the ASC Covered Procedures List (CPL). We are cognizant of the dynamic nature of ambulatory surgery and the continued shift of services from the inpatient setting to the outpatient setting over the past decade. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33655), we solicited public comments regarding services that are described by Category I CPT codes outside of the surgical range, or Level II HCPCS codes or Category III CPT codes that do not directly crosswalk and are not clinically similar to procedures in the CPT surgical range, but that nonetheless may be appropriate to include as covered surgical procedures that are payable when furnished in the ASC setting. In particular, we stated our interest in the public's views regarding additional criteria we might use to consider when a procedure that is surgery-like could be included on the ASC CPL. We requested that commenters on this issue take into consideration whether each individual procedure can be safely and appropriately performed in an ASC, as required by the regulations at 42 CFR 416.166 (including that standard medical practice dictates that the beneficiary would not typically be expected to require active medical monitoring and care at midnight following the procedure), and whether the procedure requires the resources, staff, and equipment typical of an ASC. We also indicated that we were interested in the public's views on whether and how, if we were to include such services as ASC covered surgical procedures, we would need to revise our definition of ASC covered surgical procedures.
Other commenters suggested that CMS develop and solicit comments on a clear definition and criteria for surgical site selection. Commenters also suggested patient selection and risk stratification protocols that would harmonize the different criteria of hospital outpatient departments and ASCs. In addition, they recommended that further clinical evaluation of the consequences to the Medicare population be performed before revising the definition of ASC covered surgical procedures.
Many commenters supported revising the definition of ASC covered surgical procedures. Commenters supporting the revision of the definition of ASC covered surgical procedures suggested that the CPT surgical code range (10000-69999) has not properly accounted for technical advances in treatment and does not include invasive procedures that do not pose a significant safety risk, do not require an overnight stay for Medicare patients, and would otherwise be appropriate procedures to be added to the ASC list of covered surgical procedures. For example, some commenters believed that several catheter-based procedures would be appropriately performed in the ASC setting. Further, commenters stated that CMS has relied on alternative definitions of a surgical procedure in other operations of the Medicare program that are broader than the current definition of an ASC covered surgical procedure.
Category I CPT, Category III CPT, and Level II HCPCS codes are used to report procedures, services, items, and supplies under the ASC payment system. Specifically, we recognize the following codes on ASC claims:
• Category I CPT codes, which describe surgical procedures and vaccine codes;
• Category III CPT codes, which describe new and emerging technologies, services, and procedures; and
• Level II HCPCS codes, which are used primarily to identify items, supplies, temporary procedures, and services not described by CPT codes.
We finalized a policy in the August 2, 2007 final rule (72 FR 42533 through 42535) to evaluate each year all new and revised Category I and Category III CPT codes and Level II HCPCS codes that describe surgical procedures, and to make preliminary determinations during the annual OPPS/ASC rulemaking process regarding whether or not they meet the criteria for payment in the ASC setting as covered surgical procedures and, if so, whether or not they are office-based procedures. In addition, we identify new and revised codes as ASC covered ancillary services based upon the final payment policies of the revised ASC payment system. In prior rulemakings, we refer to this process as recognizing new codes. However, this process has always involved the recognition of new and revised codes. We consider revised codes to be new when they have substantial revision to their code descriptors that necessitate a change in the current ASC payment indicator. To clarify, we refer to these codes as new and revised in this CY 2018 OPPS/ASC final rule with comment period.
We have separated our discussion below based on when the codes are released and whether we propose to solicit public comments in the CY 2018 OPPS/ASC proposed rule (and respond to those comments in the CY 2018 OPPS/ASC final rule with comment period) or whether we are soliciting public comments in this CY 2018 OPPS/ASC final rule with comment period (and responding to those comments in the CY 2019 OPPS/ASC final rule with comment period).
We note that we sought public comments in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79735 through 79736) on the new and revised Level II HCPCS codes effective October 1, 2016, or January 1, 2017. These new and revised codes, with an effective date of October 1, 2016, or January 1, 2017, were flagged with comment indicator “NI” in Addenda AA and BB to the CY 2017 OPPS/ASC final rule with comment period to indicate that we were assigning them an interim payment status and payment rate, if applicable, which were subject to public comment following publication of the CY 2017 OPPS/ASC final rule with comment period. We are responding to public comments and finalize the treatment of these codes under the ASC payment system in this CY 2018 OPPS/ASC final rule with comment period.
In Table 79 below, we summarize our process for updating codes through our ASC quarterly update CRs, seeking public comments, and finalizing the treatment of these new codes under the OPPS.
In the April 2017 ASC quarterly update (Transmittal 3726, CR 9998, dated March 03, 2017), we added six new drug and biological Level II HCPCS codes to the list of covered ancillary services. Table 31 of the proposed rule listed the new Level II HCPCS codes that were implemented April 1, 2017, along with their payment indicators for CY 2018.
We invited public comments on these proposed payment indicators and the proposed payment rates for the new Level II HCPCS codes that were recognized as ASC covered ancillary services in April 2017 through the quarterly update CRs, as listed in Table 31 of the proposed rule. We proposed to finalize their payment indicators and their payment rates in the CY 2018 OPPS/ASC final rule with comment period.
We did not receive any public comments regarding the proposed ASC payment indicators and payment rates. Therefore, we are adopting as final the CY 2018 proposed payment indicators for these codes, as indicated in Table 80. We note that several of the HCPCS C-codes have been replaced with HCPCS J-codes, effective January 1, 2018. Their replacement codes are listed in Table 80. The final payment rates for these codes can be found in Addendum BB to this final rule with comment period (which is available via the Internet on
In the July 2017 ASC quarterly update (Transmittal 3792, CR 10138, dated June 9, 2017), we added seven new Level II HCPCS codes to the list of covered surgical procedures and ancillary services. Table 32 of the proposed rule listed the new Level II HCPCS codes that are effective July 1, 2017. The proposed payment rates, where applicable, for these July codes were included in Addendum BB to the proposed rule (which is available via the Internet on the CMS Web site).
Through the July 2017 quarterly update CR, we also implemented ASC payment for one new Category III CPT code as an ASC covered surgical procedure, effective July 1, 2017. This code was listed in Table 33 of the proposed rule, along with its proposed payment indicator. The proposed payment rate for this new Category III CPT code was included in Addendum AA to the proposed rule (which is available via the Internet on the CMS Web site).
We invited public comments on these proposed payment indicators and the proposed payment rates for the new Category III CPT code and Level II HCPCS codes that were or are expected to be newly recognized as ASC covered surgical procedures or covered ancillary services in July 2017 through the quarterly update CRs, as listed in Tables 32 and 33 of the proposed rule. We proposed to finalize their payment indicators and their payment rates in the CY 2018 OPPS/ASC final rule with comment period.
After consideration of the public comment we received, we are finalizing the proposed payment indicators for the new Category III CPT code and Level II HCPCS codes that were newly recognized as ASC covered surgical procedures or covered ancillary services in July 2017 through the quarterly update CRs, as indicated in Table 81 below. We note that several of the HCPCS C- and Q-codes have been replaced with HCPCS J-codes, effective January 1, 2018. Their replacement codes are listed in Table 81 below. The CY 2018 final payment rates, where applicable, for these July codes can be found in Addendum BB to this final rule with comment period rule (which is available via the Internet on the CMS Web site). Table 82 below lists Category III CPT code 0474T, along with its final payment indicator. The CY 2018 final payment rate for this new Category III CPT code can be found in Addendum AA to the final rule with comment period (which is available via the Internet on the CMS Web site).
As has been our practice in the past, we incorporate those new and revised Level II HCPCS codes that are effective January 1 in the final rule with comment period, thereby updating the OPPS and the ASC payment system for the following calendar year. These codes are released to the public via the CMS HCPCS Web site, and also through the January OPPS quarterly update CRs. In the past, we also released new and revised Level II HCPCS codes that are effective October 1 through the October OPPS quarterly update CRs and incorporated these new codes in the final rule with comment period.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33657), for CY 2018, consistent with our established policy, we proposed that the Level II HCPCS codes that will be effective October 1, 2017, and January 1, 2018, would be flagged with comment indicator “NI” in Addendum B to the CY 2018 OPPS/ASC final rule with comment period to indicate that we have assigned the codes an interim OPPS payment status for CY 2018. We did not receive any public comments on our proposal. As we stated we would do in the proposed rule, we are inviting public comments in this CY 2018 OPPS/ASC final rule with comment period on the interim payment indicators and payment rates for these codes that will be finalized in the CY 2019 OPPS/ASC final rule with comment period.
For new and revised CPT codes effective January 1, 2018, that were received in time to be included in the CY 2018 OPPS/ASC proposed rule, we proposed APC and status indicator assignments (82 FR 33657). We stated in the proposed rule that we would accept comments and finalize the APC and status indicator assignments in the CY 2018 OPPS/ASC final rule with comment period. For those new/revised CPT codes that were received too late for inclusion in the CY 2018 OPPS/ASC proposed rule, we stated that we may either make interim final assignments in the final rule with comment period or possibly use HCPCS G-codes that mirror the predecessor CPT codes and retain the current APC and status indicator assignments for a year until we can propose APC and status indicator assignments in the following year's rulemaking cycle.
We stated in the proposed rule that, for the CY 2018 ASC update, the new and revised CY 2018 Category I and III CPT codes will be effective on January 1, 2018, and were included in ASC Addendum AA and Addendum BB to the proposed rule (which are available via the Internet on the CMS Web site). The new and revised CY 2018 Category I and III CPT codes were assigned to comment indicator “NP” to indicate that the code is new for the next calendar year or the code is an existing code with substantial revision to its code descriptor in the next calendar year, as compared to the current calendar year, and that comments will be accepted on the proposed payment indicator. Further, in the proposed rule, we reminded readers that the CPT code descriptors that appear in Addendum AA and Addendum BB are short descriptors and do not fully describe the complete procedure, service, or item described by the CPT code. Therefore, we included the 5-digit placeholder codes and their long descriptors for the new and revised CY 2018 CPT codes in Addendum O to the proposed rule (which is available via the Internet on the CMS Web site) so that the public can have time to adequately comment on our proposed payment indicator assignments. We stated in the proposed rule that the 5-digit placeholder codes can be found in Addendum O, specifically under the column labeled “CY 2018 OPPS/ASC Proposed Rule 5-Digit Placeholder Code,” to the proposed rule. We stated that the final CPT code numbers would be included in the CY 2018 OPPS/ASC final rule with comment period. We noted that not every code listed in Addendum O is subject to comment. For the new/revised Category I and III CPT codes, we requested comments on only those codes that are assigned to comment indicator “NP”.
In summary, we solicited public comments on the proposed CY 2018 payment indicators for the new and revised Category I and III CPT codes that will be effective January 1, 2018. The CPT codes were listed in Addendum AA and Addendum BB to the proposed rule with short descriptors only. We
After consideration of the public comments we received, we are finalizing, without modification, the proposed CY 2018 ASC payment indicator assignments for new and revised CPT codes, effective January 1, 2018. The final CY 2018 payment indicators for the new and revised Category I and III CPT codes (with their final CPT code numbers) that will be effective January 1, 2018 are listed in Addendum AA and Addendum BB to this final rule with comment period with short descriptors only. We list them again in Addendum O to the final rule with comment period with long descriptors.
In the August 2, 2007 ASC final rule, we finalized our policy to designate as “office-based” those procedures that are added to the ASC list of covered surgical procedures in CY 2008 or later years that we determine are performed predominantly (more than 50 percent of the time) in physicians' offices based on consideration of the most recent available volume and utilization data for each individual procedure code and/or, if appropriate, the clinical characteristics, utilization, and volume of related codes. In that rule, we also finalized our policy to exempt all procedures on the CY 2007 ASC list from application of the office-based classification (72 FR 42512). The procedures that were added to the ASC list of covered surgical procedures beginning in CY 2008 that we determined were office-based were identified in Addendum AA to that rule by payment indicator “P2” (Office-based surgical procedure added to ASC list in CY 2008 or later with MPFS nonfacility PE RVUs; payment based on OPPS relative payment weight); “P3” (Office-based surgical procedures added to ASC list in CY 2008 or later with MPFS nonfacility PE RVUs; payment based on MPFS nonfacility PE RVUs); or “R2” (Office-based surgical procedure added to ASC list in CY 2008 or later without MPFS nonfacility PE RVUs; payment based on OPPS relative payment weight), depending on whether we estimated the procedure would be paid according to the standard ASC payment methodology based on its OPPS relative payment weight or at the MPFS nonfacility PE RVU-based amount.
Consistent with our final policy to annually review and update the list of covered surgical procedures eligible for payment in ASCs, each year we identify covered surgical procedures as either temporarily office-based (these are new procedure codes with little or no utilization data that we have determined are clinically similar to other procedures that are permanently office-based), permanently office-based, or nonoffice-based, after taking into account updated volume and utilization data.
In developing the CY 2018 OPPS/ASC proposed rule and this final rule with comment period, we followed our policy to annually review and update the covered surgical procedures for which ASC payment is made and to identify new procedures that may be appropriate for ASC payment, including their potential designation as office-based. We reviewed CY 2016 volume and utilization data and the clinical characteristics for all covered surgical procedures that are assigned payment indicator “G2” (Nonoffice-based surgical procedure added in CY 2008 or later; payment based on OPPS relative payment weight) in CY 2016, as well as for those procedures assigned one of the temporary office-based payment indicators, specifically “P2”, “P3”, or “R2” in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79736 through 79738).
As discussed in the CY 2018 OPPS/ASC proposed rule, our review of the CY 2016 volume and utilization data resulted in our identification of two covered surgical procedures, CPT code 37241 (Vascular embolize/occlude venous) and CPT code 67227
We also reviewed CY 2016 volume and utilization data and other information for 10 procedures designated as temporary office-based in Tables 48 and 49 in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79736 through 79738). Of these 10 procedures, there were very few claims in our data and no claims data for 8 procedures: CPT code 0402T (Collagen cross-linking of cornea (including removal of the corneal epithelium and intraoperative pachymetry when performed)); CPT code 10030 (Image-guided fluid collection drainage by catheter (eg, abscess, hematoma, seroma, lymphocele, cyst), soft tissue (eg, extremity, abdominal wall, neck), percutaneous); CPT code 36473 (Endovenous ablation therapy of incompetent vein, extremity, inclusive of all imaging guidance and monitoring, percutaneous, mechanochemical; first vein treated); CPT code 36901 (Introduction of needle(s) and/or catheter(s), dialysis circuit, with diagnostic angiography of the dialysis circuit, including all direct puncture(s) and catheter placement(s), injection(s) of contrast, all necessary imaging from the arterial anastomosis and adjacent artery through entire venous outflow including the inferior or superior vena cava, fluoroscopic guidance, radiological supervision and interpretation and image documentation and report); CPT code 64461 (Paravertebral block (PVB) (paraspinous block), thoracic; single injection site (includes imaging guidance, when performed); CPT code 64463 (Paravertebral block (PVB) (paraspinous block), thoracic; continuous infusion by catheter (includes imaging guidance, when performed)); CPT code 65785 (Implantation of intrastromal corneal ring segments); and CPT code 67229 (Treatment of extensive or progressive retinopathy, one or more sessions; preterm infant (less than 37 weeks gestation at birth), performed from birth up to 1 year of age (for example, retinopathy of prematurity), photocoagulation or cryotherapy). Consequently, we proposed to maintain the temporary office-based designations for these eight codes for CY 2018. We listed all of these codes for which we proposed to maintain the temporary office-based designations for CY 2018 in Table 35 of the proposed rule. The procedures for which the proposed office-based designations for CY 2018 are temporary also were indicated by asterisks in Addendum AA to the proposed rule (which is available via the Internet on the CMS Web site).
The volume and utilization data for one procedure that has a temporary office-based designation for CY 2017, HCPCS code G0429 (Dermal injection procedure(s) for facial lipodystrophy syndrome (LDS) and provision of Radiesse or Sculptra dermal filler, including all items and supplies), is sufficient to indicate that this procedure is performed predominantly in physicians' offices and, therefore, should be assigned an office-based payment indicator in CY 2018. Consequently, we proposed to assign payment indicator “P2/P3” to this covered surgical procedure code in CY 2018.
HCPCS code 0299T (Extracorporeal shock wave for integumentary wound healing, high energy, including topical application and dressing care; initial wound) was finalized for temporary office-based status in the CY 2017 OPPS/ASC final rule with comment period. However, this code will be deleted by the AMA, effective December 31, 2017.
We invited public comment on our proposals.
After consideration of the public comment we received, for CY 2018 we are finalizing our proposal, without modification, to designate the procedures listed in Table 84 below as temporary office-based.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33660), for CY 2018, we proposed to designate one new CY 2018 CPT code for ASC covered surgical procedures as temporary office-based, as displayed in Table 36 of the proposed rule. After reviewing the clinical characteristics, utilization, and volume of related procedure codes, we determined that the procedure described by this new CPT code would be predominantly performed in physicians' offices. However, because we had no utilization data for the procedure specifically described by this new CPT code, we proposed to make the office-based designation temporary rather than permanent, and we stated that we will reevaluate the procedure when data become available. The procedure for which the proposed office-based designation for CY 2018 is temporary was indicated by asterisks in Addendum AA to the proposed rule (which is available via the Internet on the CMS Web site).
We did not receive any public comments on our proposal. Therefore, for CY 2018, we are finalizing our proposal, without modification, to designate CPT code 38222 as temporary office-based for CY 2018 as displayed in Table 85 of this final rule with comment period. The procedure for which the office-based designation for CY 2018 is temporary is indicated by asterisks in Addendum AA to this final rule with comment period (which is available via the Internet on the CMS Web site).
As discussed in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79739 through 79740), we implemented a payment methodology for calculating the ASC payment rates for covered surgical procedures that are designated as device-intensive. Under § 416.171(b)(2) of the regulations, we define an ASC device-intensive procedure as a procedure with a HCPCS code-level device offset of greater than 40 percent when calculated according to the standard OPPS APC ratesetting methodology.
According to this ASC payment methodology, we apply the device offset percentage based on the standard OPPS APC ratesetting methodology to the OPPS national unadjusted payment to determine the device cost included in the OPPS payment rate for a device-intensive ASC covered surgical procedure, which we then set as equal to the device portion of the national unadjusted ASC payment rate for the procedure. We calculate the service portion of the ASC payment for device-intensive procedures by applying the uniform ASC conversion factor to the service (non-device) portion of the OPPS relative payment weight for the device-intensive procedure. Finally, we sum the ASC device portion and ASC service portion to establish the full payment for the device-intensive procedure under the revised ASC payment system.
We also finalized that device-intensive procedures will be subject to all of the payment policies applicable to procedures designated as an ASC device-intensive procedure under our established methodology, including our policies on device credits and discontinued procedures.
In addition, in the CY 2017 OPPS/ASC final rule with comment period, we adopted a policy for new HCPCS codes describing procedures involving the implantation of medical devices that do not yet have associated claims data, to designate these procedures as device-intensive with a default device offset set at 41 percent until claims data are available to establish the HCPCS code-level device offset for the procedures (81 FR 79739 through 79740). This default device offset amount of 41 percent would not be calculated from claims data; instead, it would be applied as a default until claims data are available upon which to calculate an actual device offset for the new code. The purpose of applying the 41-percent default device offset to new codes that describe procedures that involve the implantation of medical devices would be to ensure ASC access for new procedures until claims data become available. However, in certain rare instances, for example, in the case of a very expensive implantable device, we may temporarily assign a higher offset percentage if warranted by additional information, such as pricing data from a device manufacturer. Once claims data are available for a new procedure involving the implantation of a medical device, the device-intensive designation will be applied to the code if the HCPCS code device offset is greater than 40 percent, according to our policy of determining device-intensive status, by calculating the HCPCS code-level device offset.
In the CY 2018 OPPS/ASC proposed rule, for CY 2018, we proposed to update the ASC list of covered surgical procedures that are eligible for payment according to our device-intensive procedure payment methodology, reflecting the proposed individual HCPCS code device-offset percentages based on CY 2016 OPPS claims and cost report data available for the proposed rule (82 FR 33660).
The ASC covered surgical procedures that we proposed to designate as device-intensive, and therefore subject to the device-intensive procedure payment methodology for CY 2018, are assigned payment indicator “J8” and were included in Addendum AA to the proposed rule (which is available on the CMS Web site). The CPT code, the CPT code short descriptor, the proposed CY 2018 ASC payment indicator, and an indication of whether the full credit/partial credit (FB/FC) device adjustment policy would apply also were included in Addendum AA to the proposed rule.
We invited public comments on the proposed list of ASC device-intensive procedures.
After consideration of the public comments we received, we are designating the ASC covered surgical procedures displayed in Addendum AA as device-intensive and subject to the device-intensive procedure payment methodology for CY 2018. The CPT code, the CPT code short descriptor, the final CY 2018 ASC payment indicator, and an indication of whether the full credit/partial credit (FB/FC) device adjustment policy will apply are included in the ASC policy file labeled “CY 2018 ASC Procedures to which the No Cost/Full Credit and Partial Credit Device Adjustment Policy Applies,”' which is available via the Internet on the CMS Web site at:
Our ASC payment policy for costly devices implanted in ASCs at no cost/full credit or partial credit, as set forth in § 416.179 of our regulations, is consistent with the OPPS policy that was in effect until CY 2014. Specifically, the OPPS policy that was in effect through CY 2013 provided a reduction in OPPS payment by 100 percent of the device offset amount when a hospital furnishes a specified device without cost or with a full credit and by 50 percent of the device offset amount when the hospital receives partial credit in the amount of 50 percent or more of the cost for the specified device (77 FR 68356 through 68358). The established ASC policy reduces payment to ASCs when a specified device is furnished without cost or with full credit or partial credit for the cost of the device for those ASC covered surgical procedures that are assigned to APCs under the OPPS to which this policy applies. We refer readers to the CY 2009 OPPS/ASC final rule with comment period for a full discussion of the ASC payment adjustment policy for no cost/full credit and partial credit devices (73 FR 68742 through 68744).
As discussed in section IV.B. of the CY 2014 OPPS/ASC final rule with comment period (78 FR 75005 through 75006), we finalized our proposal to modify our former policy of reducing OPPS payment for specified APCs when a hospital furnishes a specified device without cost or with a full or partial credit. Formerly, under the OPPS, our policy was to reduce OPPS payment by 100 percent of the device offset amount when a hospital furnished a specified device without cost or with a full credit and by 50 percent of the device offset amount when the hospital received partial credit in the amount of 50 percent or more (but less than 100 percent) of the cost for the specified device. For CY 2014, we finalized our proposal to reduce OPPS payment for applicable APCs by the full or partial credit a provider receives for a replaced device, capped at the device offset amount.
Although we finalized our proposal to modify the policy of reducing payments when a hospital furnishes a specified device without cost or with full or partial credit under the OPPS, in that final rule with comment period (78 FR 75076 through 75080), we finalized our proposal to maintain our ASC policy for reducing payments to ASCs for specified device-intensive procedures when the ASC furnishes a device without cost or with full or partial credit. Unlike the OPPS, there is currently no mechanism within the ASC claims processing system for ASCs to submit to CMS the actual amount received when furnishing a specified device at full or partial credit. Therefore, under the ASC payment system, we finalized our proposal for CY 2014 to continue to reduce ASC payments by 100 percent or 50 percent of the device offset amount when an ASC furnishes a device without cost or with full or partial credit, respectively.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33661), we proposed to update the list of ASC covered device-intensive procedures that would be subject to the no cost/full credit and partial credit device adjustment policy for CY 2018. Specifically, when a device-intensive procedure is subject to the no cost/full credit or partial credit device adjustment policy and is performed to implant a device that is furnished at no cost or with full credit from the manufacturer, the ASC would append the HCPCS “FB” modifier on the line in the claim with the procedure to implant the device. The contractor would reduce payment to the ASC by the device offset amount that we estimate represents the cost of the device when the necessary device is furnished without cost or with full credit to the ASC. We continue to believe that the reduction of ASC payment in these circumstances is necessary to pay appropriately for the covered surgical procedure furnished by the ASC.
For partial credit, we proposed to reduce the payment for implantation procedures that are subject to the no cost/full credit or partial credit device adjustment policy by one-half of the device offset amount that would be applied if a device was provided at no cost or with full credit, if the credit to the ASC is 50 percent or more (but less than 100 percent) of the cost of the new device. The ASC would append the HCPCS “FC” modifier to the HCPCS code for a device-intensive surgical procedure that is subject to the no cost/full credit or partial credit device adjustment policy, when the facility receives a partial credit of 50 percent or more (but less than 100 percent) of the cost of a device. To report that the ASC received a partial credit of 50 percent or more (but less than 100 percent) of the cost of a new device, ASCs would have the option of either: (1) Submitting the claim for the device replacement procedure to their Medicare contractor after the procedure's performance, but prior to manufacturer acknowledgment of credit for the device, and subsequently contacting the contractor regarding a claim adjustment, once the credit determination is made; or (2) holding the claim for the device implantation procedure until a determination is made by the manufacturer on the partial credit and submitting the claim with the “FC” modifier appended to the implantation procedure HCPCS code if the partial credit is 50 percent or more (but less than 100 percent) of the cost of the replacement device. Beneficiary coinsurance would be based on the reduced payment amount. As finalized in the CY 2015 OPPS/ASC final rule with comment period (79 FR 66926), to ensure our policy covers any situation involving a device-intensive procedure where an ASC may receive a device at no cost/full credit or partial credit, we apply our FB/FC policy to all device-intensive procedures.
We invited public comments on our proposals to adjust ASC payments for no cost/full credit and partial credit devices.
We did not receive any public comment on these proposals. Therefore, we are finalizing these proposals without modification. Specifically, we will apply the HCPCS “FB”/“FC” modifier policy to all device-intensive procedures in CY 2018. For CY 2018, we will reduce the payment for the procedures listed in the ASC device adjustment file by the full device offset amount if a device is furnished without cost or with full credit. ASCs must append the HCPCS modifier “FB” to the HCPCS code for a surgical procedure listed in the ASC device adjustment file previously mentioned when the device
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33661), we conducted a review of HCPCS codes that currently are paid under the OPPS, but not included on the ASC list of covered surgical procedures, to determine if changes in technology and/or medical practice affected the clinical appropriateness of these procedures for the ASC setting. Based on this review, we proposed to update the list of ASC covered surgical procedures by adding three procedures to the list for CY 2018. These procedures included procedures described by CPT codes 22856, 22858, and 58572. We determined that these three procedures are separately paid under the OPPS, would not be expected to pose a significant risk to beneficiary safety when performed in an ASC, and would not be expected to require active medical monitoring and care of the beneficiary at midnight following the procedure. Therefore, we proposed to include these three procedures on the list of ASC covered surgical procedures for CY 2018.
The procedures that we proposed to add to the ASC list of covered surgical procedures, including the HCPCS code long descriptors and the proposed CY 2018 payment indicators, were displayed in Table 37 of the proposed rule. We invited public comments on our proposals.
After consideration of the public comments we received, we are finalizing our proposal to add the three procedures described by CPT codes 22856, 22858, and 58572 to the ASC list of covered surgical procedures. The procedures that we are adding to the ASC list of covered surgical procedures, including the code long descriptors and the final CY 2018 payment indicators, are displayed in Table 86 below.
As we discussed in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68724), we adopted a policy to include, in our annual evaluation of the ASC list of covered surgical procedures, a review of the procedures that are being proposed for removal from the OPPS IPO list for possible inclusion on the ASC list of covered surgical procedures.
In the CY 2017 OPPS/ASC proposed rule (81 FR 45679 through 45681), we solicited comments regarding whether the TKA procedure described by CPT code 27447 should be removed from the OPPS IPO list. During the comment period, some stakeholders requested that CMS also add the TKA procedure to the list of surgical procedures covered in an ASC setting. In the CY 2017 OPPS/ASC proposed rule, we solicited public
In considering whether or not the TKA procedure should be added to the ASC list of covered surgical procedures, we requested that commenters take into consideration the regulations at 42 CFR 416.2 and 416.166. We indicated that commenters should assess, for example, whether this procedure would be expected to pose a significant risk to beneficiary safety when performed in an ASC, whether standard medical practice dictates that the beneficiary would typically be expected to require active medical monitoring and care at midnight following the procedure (“overnight stay”), and whether this procedure would fall under our general exclusions for covered surgical procedures at 42 CFR 416.166(c) (for example, would it generally result in extensive blood loss, require major or prolonged invasion of body cavities, directly involve major blood vessels, among others).
As discussed in the CY 2018 OPPS/ASC proposed rule, we evaluated each of the procedures described by CPT codes 27447 and 55866 that we proposed to remove from the OPPS IPO list for CY 2018 according to the criteria for inclusion on the list of ASC covered surgical procedures, and considered whether they should be added to the list of ASC covered surgical procedures for CY 2018. We stated that, because our understanding is that these procedures typically require more than 24 hours of active medical care following the procedure, we believed they should continue to be excluded from the list of ASC covered surgical procedures.
In addition, in the CY 2018 OPPS/ASC proposed rule, we solicited comments on whether CPT codes 27125 (Hemiarthroplasty, hip, partial (eg, femoral stem prosthesis, bipolar arthroplasty)) and 27130 (Arthroplasty, acetabular and proximal femoral prosthetic replacement (total hip arthroplasty), with or without autograft or allograft) meet the criteria to be removed from the OPPS IPO list, as discussed in section IX. of the proposed rule. As noted in that section, we also solicited comments on whether these two procedures meet the criteria to be added to the ASC covered surgical procedures list.
Some commenters suggested a stepwise approach to transitioning TKA to the ASC setting and recommended allowing performance of 1 to 2 years in the hospital outpatient department setting before adding TKA to the ASC covered surgical procedures list. Other commenters recommended that ASCs obtain enhanced certification from a national accrediting organization that certifies an ASC meets higher quality standards to safely perform joint arthroplasty procedures.
Some commenters opposed adding procedures described by CPT codes 27447, 27125, 27130, and 55866 to the ASC covered surgical procedures list. These commenters believed that the vast majority of ASCs are not equipped to safely perform these procedures on patients and that the vast majority of Medicare patients are not suitable candidates to receive “overnight” joint arthroplasty procedures in an ASC setting.
As we discussed in section XII.A.3. of this final rule with comment period, we solicited public comments regarding our definition of a surgical procedures and whether services described by Category I CPT codes outside of the surgical range (10000-69999), or Level II HCPCS codes or Category III CPT codes that do not directly crosswalk and are not clinically similar to procedures in the CPT surgical range, may nonetheless be appropriate to include as covered surgical procedures that are payable when furnished in the ASC setting. We did not propose any revisions to our definition of covered surgical procedures, and, for CY 2018, we continue to use the current definition of surgical procedure.
We appreciate the commenters' recommendations for procedures that may be suitable candidates to include on the list of ASC covered surgical procedures. We acknowledge that some of the procedures may be “surgery-like.” However, we remain concerned that these procedures may impose a significant safety risk to the Medicare population in an ASC setting. For CY 2018, we continue to rely on defining surgical procedures as those that are described by Category I CPT codes within the surgical range, or Level II HCPCS codes or Category III CPT codes that directly crosswalk or are clinically similar to procedures in the CPT surgical range. Therefore, we do not believe that the remaining codes should be added to the list of ASC covered surgical procedures for CY 2018 because they do not meet our criteria for inclusion on the list. However, we will take these comments into consideration in future rulemakings.
Our ASC payment policies for covered surgical procedures under the revised ASC payment system are fully described in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66828 through 66831). Under our established policy, we use the ASC standard ratesetting methodology of multiplying the ASC relative payment weight for the procedure by the ASC conversion factor for that same year to calculate the national unadjusted payment rates for procedures with payment indicators “G2” and “A2”. Payment indicator “A2” was developed to identify procedures that were included on the list of ASC covered surgical procedures in CY 2007 and, therefore, were subject to transitional payment prior to CY 2011. Although the 4-year transitional period has ended and payment indicator “A2” is no longer required to identify surgical procedures subject to transitional payment, we retained payment indicator “A2” because it is used to identify procedures that are exempted from the application of the office-based designation.
The rate calculation established for device-intensive procedures (payment indicator “J8”) is structured so that the packaged device payment amount is the same as under the OPPS, and only the service portion of the rate is subject to the ASC standard ratesetting methodology. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79732 through 79753), we updated the CY 2016 ASC payment rates for ASC covered surgical procedures with payment indicators of “A2”, “G2”, and “J8” using CY 2015 data, consistent with the CY 2017 OPPS update. We also updated payment rates for device-intensive procedures to incorporate the CY 2017 OPPS device offset percentages calculated under the standard APC ratesetting methodology, as discussed earlier in this section.
Payment rates for office-based procedures (payment indicators “P2”, “P3”, and “R2”) are the lower of the MPFS nonfacility PE RVU-based amount (we refer readers to the CY 2018 MPFS proposed and final rules) or the amount calculated using the ASC standard rate setting methodology for the procedure. In the CY 2017 OPPS/ASC final rule with comment period, we updated the payment amounts for office-based procedures (payment indicators “P2”, “P3”, and “R2”) using the most recent available MPFS and OPPS data. We compared the estimated CY 2017 rate for each of the office-based procedures, calculated according to the ASC standard rate setting methodology, to the MPFS nonfacility PE RVU-based amount to determine which was lower and, therefore, would be the CY 2017 payment rate for the procedure under our final policy for the revised ASC payment system (§ 416.171(d)).
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75081), we finalized our proposal to calculate the CY 2014 payment rates for ASC covered surgical procedures according to our established methodologies, with the exception of device removal procedures.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33663), we proposed to update ASC payment rates for CY 2018 and subsequent years using the established rate calculation methodologies under § 416.171 and using our definition of device-intensive procedures, as discussed in section XII.C.1.b. of the proposed rule. Because the proposed OPPS relative payment weights are based on geometric mean costs, the ASC system would use geometric means to determine proposed relative payment weights under the ASC standard methodology. We proposed to continue to use the amount calculated under the ASC standard ratesetting methodology for procedures assigned payment indicators “A2” and “G2”.
We proposed to calculate payment rates for office-based procedures (payment indicators “P2”, “P3”, and “R2”) and device-intensive procedures (payment indicator “J8”) according to our established policies and, for device-intensive procedures, using our modified definition of device-intensive procedures, as discussed in section XII.C.1.b. of the proposed rule. Therefore, we proposed to update the payment amount for the service portion of the device-intensive procedures using the ASC standard rate setting methodology and the payment amount for the device portion based on the proposed CY 2018 OPPS device offset percentages that have been calculated using the standard OPPS APC ratesetting methodology. Payment for office-based procedures would be at the lesser of the proposed CY 2018 MPFS nonfacility PE RVU-based amount or the proposed CY 2018 ASC payment amount calculated according to the ASC standard ratesetting methodology.
As we did for CYs 2014 through 2017, for CY 2018, we proposed to continue our policy for device removal procedures, such that device removal procedures that are conditionally packaged in the OPPS (status indicators “Q1” and “Q2”) would be assigned the current ASC payment indicators associated with these procedures and would continue to be paid separately under the ASC payment system.
We invited public comments on these proposals.
• CPT 62321 (Cervicothoracic epidural);
• CPT 62323 (Lumbosacral epidural);
• CPT 64490 (Cervicothoracic facet joint injection);
• CPT 64493 (Lumbosacral facet joint injection);
• CPT G0620 (Sacroiliac joint injection); and
• CPT 62264 (Percutaneous adhesiolysis).
After consideration of the public comments we received, we are finalizing our proposed policies, without modification, to calculate the CY 2018 payment rates for ASC covered surgical procedures according to our established methodologies using the modified definition of device-intensive procedures. For those covered office-based surgical procedures where the payment rate is the lower of the final rates under the ASC standard ratesetting methodology and the MPFS nonfacility PE RVU-based amount, the final payment indicators and rates set forth in this final rule with comment period are based on a comparison using the MPFS PE RVUs and conversion factor effective January 1, 2018. For a discussion of the MPFS rates, we refer readers to the CY 2018 MPFS final rule with comment period.
Our payment policies under the ASC payment system for covered ancillary services vary according to the particular type of service and its payment policy under the OPPS. Our overall policy provides separate ASC payment for certain ancillary items and services integrally related to the provision of ASC covered surgical procedures that are paid separately under the OPPS and provides packaged ASC payment for other ancillary items and services that are packaged or conditionally packaged (status indicators “N”, “Q1”, and “Q2”) under the OPPS. In the CY 2013 OPPS/ASC rulemaking (77 FR 45169 and 77 FR 68457 through 68458), we further clarified our policy regarding the payment indicator assignment of codes that are conditionally packaged in the OPPS (status indicators “Q1” and “Q2”). Under the OPPS, a conditionally packaged code describes a HCPCS code where the payment is packaged when it is provided with a significant procedure but is separately paid when the service appears on the claim without a significant procedure. Because ASC services always include a surgical procedure, HCPCS codes that are
Our ASC payment policies provide separate payment for drugs and biologicals that are separately paid under the OPPS at the OPPS rates. We generally pay for separately payable radiology services at the lower of the MPFS nonfacility PE RVU-based (or technical component) amount or the rate calculated according to the ASC standard ratesetting methodology (72 FR 42497). However, as finalized in the CY 2011 OPPS/ASC final rule with comment period (75 FR 72050), payment indicators for all nuclear medicine procedures (defined as CPT codes in the range of 78000 through 78999) that are designated as radiology services that are paid separately when provided integral to a surgical procedure on the ASC list are set to “Z2” so that payment is made based on the ASC standard ratesetting methodology rather than the MPFS nonfacility PE RVU amount (“Z3”), regardless of which is lower.
Similarly, we also finalized our policy to set the payment indicator to “Z2” for radiology services that use contrast agents so that payment for these procedures will be based on the OPPS relative payment weight using the ASC standard ratesetting methodology and, therefore, will include the cost for the contrast agent (42 CFR 416.171(d)(2)).
ASC payment policy for brachytherapy sources mirrors the payment policy under the OPPS. ASCs are paid for brachytherapy sources provided integral to ASC covered surgical procedures at prospective rates adopted under the OPPS or, if OPPS rates are unavailable, at contractor-priced rates (72 FR 42499). Since December 31, 2009, ASCs have been paid for brachytherapy sources provided integral to ASC covered surgical procedures at prospective rates adopted under the OPPS.
Our ASC policies also provide separate payment for: (1) Certain items and services that CMS designates as contractor-priced, including, but not limited to, the procurement of corneal tissue; and (2) certain implantable items that have pass-through payment status under the OPPS. These categories do not have prospectively established ASC payment rates according to ASC payment system policies (72 FR 42502 and 42508 through 42509; 42 CFR 416.164(b)). Under the ASC payment system, we have designated corneal tissue acquisition and hepatitis B vaccines as contractor-priced. Corneal tissue acquisition is contractor-priced based on the invoiced costs for acquiring the corneal tissue for transplantation. Hepatitis B vaccines are contractor-priced based on invoiced costs for the vaccine.
Devices that are eligible for pass-through payment under the OPPS are separately paid under the ASC payment system and are contractor-priced. Under the revised ASC payment system (72 FR 42502), payment for the surgical procedure associated with the pass-through device is made according to our standard methodology for the ASC payment system, based on only the service (non-device) portion of the procedure's OPPS relative payment weight if the APC weight for the procedure includes other packaged device costs. We also refer to this methodology as applying a “device offset” to the ASC payment for the associated surgical procedure. This ensures that duplicate payment is not provided for any portion of an implanted device with OPPS pass-through payment status.
In the CY 2015 OPPS/ASC final rule with comment period (79 FR 66933 through 66934), we finalized that, beginning in CY 2015, certain diagnostic tests within the medicine range of CPT codes for which separate payment is allowed under the OPPS are covered ancillary services when they are integral to an ASC covered surgical procedure. We finalized that diagnostic tests within the medicine range of CPT codes include all Category I CPT codes in the medicine range established by CPT, from 90000 to 99999, and Category III CPT codes and Level II HCPCS codes that describe diagnostic tests that crosswalk or are clinically similar to procedures in the medicine range established by CPT. In the CY 2015 OPPS/ASC final rule with comment period, we also finalized our policy to pay for these tests at the lower of the MPFS nonfacility PE RVU-based (or technical component) amount or the rate calculated according to the ASC standard ratesetting methodology (79 FR 66933 through 66934). We finalized that the diagnostic tests for which the payment is based on the ASC standard ratesetting methodology be assigned to payment indicator “Z2” and revised the definition of payment indicator “Z2” to include a reference to diagnostic services and those for which the payment is based on the MPFS nonfacility PE RVU-based amount be assigned payment indicator “Z3,” and revised the definition of payment indicator “Z3” to include a reference to diagnostic services.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33663), for CY 2018 and subsequent years, we proposed to update the ASC payment rates and to make changes to ASC payment indicators, as necessary, to maintain consistency between the OPPS and ASC payment system regarding the packaged or separately payable status of services and the proposed CY 2018 OPPS and ASC payment rates and subsequent year payment rates. We also proposed to continue to set the CY 2018 ASC payment rates and subsequent year payment rates for brachytherapy sources and separately payable drugs and biologicals equal to the OPPS payment rates for CY 2018 and subsequent year payment rates.
Covered ancillary services and their proposed payment indicators for CY 2018 were listed in Addendum BB to the proposed rule (which is available via the Internet on the CMS Web site). For those covered ancillary services where the payment rate is the lower of the proposed rates under the ASC standard rate setting methodology and the MPFS proposed rates, the proposed payment indicators and rates set forth in the proposed rule were based on a comparison using the proposed MPFS rates effective January 1, 2018. For a discussion of the MPFS rates, we referred readers to the CY 2018 MPFS proposed rule that is available on the CMS Web site at:
We did not receive public comments on our proposals regarding payment for covered ancillary services. Therefore, we are finalizing these policies as proposed for CY 2018.
Our process for reviewing applications to establish new classes of NTIOLs is as follows:
• Applicants submit their NTIOL requests for review to CMS by the annual deadline. For a request to be considered complete, we require submission of the information that is
• We announce annually, in the proposed rule updating the ASC and OPPS payment rates for the following calendar year, a list of all requests to establish new NTIOL classes accepted for review during the calendar year in which the proposal is published. In accordance with section 141(b)(3) of Public Law 103-432 and our regulations at 42 CFR 416.185(b), the deadline for receipt of public comments is 30 days following publication of the list of requests in the proposed rule.
• In the final rule updating the ASC and OPPS payment rates for the following calendar year, we—
++ Provide a list of determinations made as a result of our review of all new NTIOL class requests and public comments;
++ When a new NTIOL class is created, identify the predominant characteristic of NTIOLs in that class that sets them apart from other IOLs (including those previously approved as members of other expired or active NTIOL classes) and that is associated with an improved clinical outcome.
++ Set the date of implementation of a payment adjustment in the case of approval of an IOL as a member of a new NTIOL class prospectively as of 30 days after publication of the ASC payment update final rule, consistent with the statutory requirement.
++ Announce the deadline for submitting requests for review of an application for a new NTIOL class for the following calendar year.
We did not receive any requests for review to establish a new NTIOL class for CY 2018 by March 1, 2017, the due date published in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79748).
The current payment adjustment for a 5-year period from the implementation date of a new NTIOL class is $50 per lens. Since implementation of the process for adjustment of payment amounts for NTIOLs in 1999, we have not revised the payment adjustment amount, and we did not propose to revise the payment adjustment amount for CY 2018. The final ASC payment adjustment amount for NTIOLs for CY 2018 is $50.
In accordance with § 416.185(a) of our regulations, CMS announces that in order to be considered for payment effective beginning in CY 2019, requests for review of applications for a new class of new technology IOLs must be received at CMS by 5:00 p.m. EST, on March 1, 2018. Send requests to ASC/NTIOL, Division of Outpatient Care, Mailstop C4-05-17, Centers for Medicare and Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244-1850. To be considered, requests for NTIOL reviews must include the information requested on the CMS Web site at:
In addition to the payment indicators that we introduced in the August 2, 2007 final rule, we created final comment indicators for the ASC payment system in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66855). We created Addendum DD1 to define ASC payment indicators that we use in Addenda AA and BB to provide payment information regarding covered surgical procedures and covered ancillary services, respectively, under the revised ASC payment system. The ASC payment indicators in Addendum DD1 are intended to capture policy-relevant characteristics of HCPCS codes that may receive packaged or separate payment in ASCs, such as whether they were on the ASC list of covered services prior to CY 2008; payment designation, such as device-intensive or office-based, and the corresponding ASC payment methodology; and their classification as separately payable ancillary services, including radiology services, brachytherapy sources, OPPS pass-through devices, corneal tissue acquisition services, drugs or biologicals, or NTIOLs.
We also created Addendum DD2 that lists the ASC comment indicators. The ASC comment indicators used in Addenda AA and BB to the proposed rules and final rules with comment period serve to identify, for the revised ASC payment system, the status of a specific HCPCS code and its payment indicator with respect to the timeframe when comments will be accepted. The comment indicator “NP” is used in the OPPS/ASC proposed rule to indicate new codes for the next calendar year for which the interim payment indicator assigned is subject to comment. The comment indicator “NP” also is assigned to existing codes with substantial revisions to their descriptors, such that we consider them to be describing new services, as discussed in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60622). In the CY 2017 OPPS/ASC final rule with comment period, we responded to public comments and finalized the ASC treatment of all codes that were labeled with comment indicator “NP” in Addenda AA and BB to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70497).
The “CH” comment indicator is used in Addenda AA and BB to the proposed rule (which are available via the Internet on the CMS Web site) to indicate that the payment indicator assignment has changed for an active HCPCS code in the current year and the next calendar year; an active HCPCS code is newly recognized as payable in ASCs; or an active HCPCS code is discontinued at the end of the current calendar year. The “CH” comment indicators that are published in the final rule with comment period are provided to alert readers that a change has been made from one calendar year to the next, but do not indicate that the change is subject to comment.
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79748 through 79749), for CY 2017 and subsequent years, we finalized our policy to continue using the current comment indicators of “NP” and “CH”.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33665), for CY 2018, there are proposed new and revised Category I and III CPT codes as well as new and revised Level II HCPCS codes. Therefore, proposed Category I and III CPT codes that are new and revised for CY 2017 and any new and existing Level II HCPCS codes with substantial revisions to the code descriptors for CY 2018 compared to the CY 2017 descriptors that were included in ASC Addenda AA and BB to the proposed rule are labeled with proposed new comment indicator “NP” to indicate that these CPT and Level II HCPCS codes were open for comment as part of the proposed rule. Comment indicator “NP” in the proposed rule meant a new code for the next calendar
We stated in the proposed rule that we will respond to public comments on ASC payment and comment indicators and finalize their ASC assignment in the CY 2018 OPPS/ASC final rule with comment period. We referred readers to Addenda DD1 and DD2 to the proposed rule (which are available via the Internet on the CMS Web site) for the complete list of ASC payment and comment indicators proposed for the CY 2018 update.
We did not receive any public comments on the ASC payment and comment indicators. Therefore, we are finalizing their use as proposed without modification. Addenda DD1 and DD2 to this final rule with comment period (which are available via the Internet on the CMS Web site) contain the complete list of ASC payment and comment indicators for the CY 2018 update.
In the August 2, 2007 final rule (72 FR 42493), we established our policy to base ASC relative payment weights and payment rates under the revised ASC payment system on APC groups and the OPPS relative payment weights. Consistent with that policy and the requirement at section 1833(i)(2)(D)(ii) of the Act that the revised payment system be implemented so that it would be budget neutral, the initial ASC conversion factor (CY 2008) was calculated so that estimated total Medicare payments under the revised ASC payment system in the first year would be budget neutral to estimated total Medicare payments under the prior (CY 2007) ASC payment system (the ASC conversion factor is multiplied by the relative payment weights calculated for many ASC services in order to establish payment rates). That is, application of the ASC conversion factor was designed to result in aggregate Medicare expenditures under the revised ASC payment system in CY 2008 being equal to aggregate Medicare expenditures that would have occurred in CY 2008 in the absence of the revised system, taking into consideration the cap on ASC payments in CY 2007, as required under section 1833(i)(2)(E) of the Act (72 FR 42522). We adopted a policy to make the system budget neutral in subsequent calendar years (72 FR 42532 through 42533; 42 CFR 416.171(e)).
We note that we consider the term “expenditures” in the context of the budget neutrality requirement under section 1833(i)(2)(D)(ii) of the Act to mean expenditures from the Medicare Part B Trust Fund. We do not consider expenditures to include beneficiary coinsurance and copayments. This distinction was important for the CY 2008 ASC budget neutrality model that considered payments across the OPPS, ASC, and MPFS payment systems. However, because coinsurance is almost always 20 percent for ASC services, this interpretation of expenditures has minimal impact for subsequent budget neutrality adjustments calculated within the revised ASC payment system.
In the CY 2008 OPPS/ASC final rule with comment period (72 FR 66857 through 66858), we set out a step-by-step illustration of the final budget neutrality adjustment calculation based on the methodology finalized in the August 2, 2007 final rule (72 FR 42521 through 42531) and as applied to updated data available for the CY 2008 OPPS/ASC final rule with comment period. The application of that methodology to the data available for the CY 2008 OPPS/ASC final rule with comment period resulted in a budget neutrality adjustment of 0.65.
For CY 2008, we adopted the OPPS relative payment weights as the ASC relative payment weights for most services and, consistent with the final policy, we calculated the CY 2008 ASC payment rates by multiplying the ASC relative payment weights by the final CY 2008 ASC conversion factor of $41.401. For covered office-based surgical procedures, covered ancillary radiology services (excluding covered ancillary radiology services involving certain nuclear medicine procedures or involving the use of contrast agents, as discussed in section XII.D.2. of this final rule with comment period), and certain diagnostic tests within the medicine range that are covered ancillary services, the established policy is to set the payment rate at the lower of the MPFS unadjusted nonfacility PE RVU-based amount or the amount calculated using the ASC standard ratesetting methodology. Further, as discussed in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66841 through 66843), we also adopted alternative ratesetting methodologies for specific types of services (for example, device-intensive procedures).
As discussed in the August 2, 2007 final rule (72 FR 42517 through 42518) and as codified at § 416.172(c) of the regulations, the revised ASC payment system accounts for geographic wage variation when calculating individual ASC payments by applying the pre-floor and pre-reclassified IPPS hospital wage indexes to the labor-related share, which is 50 percent of the ASC payment amount based on a GAO report of ASC costs using 2004 survey data. Beginning in CY 2008, CMS accounted for geographic wage variation in labor costs when calculating individual ASC payments by applying the pre-floor and pre-reclassified hospital wage index values that CMS calculates for payment under the IPPS, using updated Core Based Statistical Areas (CBSAs) issued by OMB in June 2003.
The reclassification provision in section 1886(d)(10) of the Act is specific to hospitals. We believe that using the most recently available pre-floor and pre-reclassified IPPS hospital wage indexes results in the most appropriate adjustment to the labor portion of ASC costs. We continue to believe that the unadjusted hospital wage indexes, which are updated yearly and are used by many other Medicare payment systems, appropriately account for geographic variation in labor costs for ASCs. Therefore, the wage index for an ASC is the pre-floor and pre-reclassified hospital wage index under the IPPS of the CBSA that maps to the CBSA where the ASC is located.
On February 28, 2013, OMB issued OMB Bulletin No. 13-01, which provides the delineations of all Metropolitan Statistical Areas, Metropolitan Divisions, Micropolitan Statistical Areas, Combined Statistical Areas, and New England City and Town Areas in the United States and Puerto Rico based on the standards published on June 28, 2010 in the
Generally, OMB issues major revisions to statistical areas every 10 years, based on the results of the decennial census. However, OMB
OMB Bulletin No. 15-01 made changes that are relevant to the IPPS and ASC wage index. We refer readers to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79750) for a discussion of these changes and our implementation of these revisions.
As discussed in the CY 2018 OPPS/ASC proposed rule (82 FR 33667), for CY 2018, the proposed CY 2018 ASC wage indexes fully reflect the OMB labor market area delineations (including the revisions to the OMB labor market delineations discussed above, as set forth in OMB Bulletin No. 15-01).
We note that, in certain instances, there might be urban or rural areas for which there is no IPPS hospital that has wage index data that could be used to set the wage index for that area. For these areas, our policy has been to use the average of the wage indexes for CBSAs (or metropolitan divisions as applicable) that are contiguous to the area that has no wage index (where “contiguous” is defined as sharing a border). For example, for CY 2014, we applied a proxy wage index based on this methodology to ASCs located in CBSA 25980 (Hinesville-Fort Stewart, GA) and CBSA 08 (Rural Delaware).
When all of the areas contiguous to the urban CBSA of interest are rural and there is no IPPS hospital that has wage index data that could be used to set the wage index for that area, we determine the ASC wage index by calculating the average of all wage indexes for urban areas in the State (75 FR 72058 through 72059). (In other situations, where there are no IPPS hospitals located in a relevant labor market area, we continue our current policy of calculating an urban or rural area's wage index by calculating the average of the wage indexes for CBSAs (or metropolitan divisions where applicable) that are contiguous to the area with no wage index.)
We update the ASC relative payment weights each year using the national OPPS relative payment weights (and MPFS nonfacility PE RVU-based amounts, as applicable) for that same calendar year and uniformly scale the ASC relative payment weights for each update year to make them budget neutral (72 FR 42533). Consistent with our established policy, in the CY 2018 OPPS/ASC proposed rule (82 FR 33667), we proposed to scale the CY 2018 relative payment weights for ASCs according to the following method. Holding ASC utilization, the ASC conversion factor, and the mix of services constant from CY 2016, we proposed to compare the total payment using the CY 2017 ASC relative payment weights with the total payment using the CY 2018 ASC relative payment weights to take into account the changes in the OPPS relative payment weights between CY 2017 and CY 2018. We proposed to use the ratio of CY 2017 to CY 2018 total payments (the weight scalar) to scale the ASC relative payment weights for CY 2018. The proposed CY 2018 ASC weight scalar was 0.8995 and scaling would apply to the ASC relative payment weights of the covered surgical procedures, covered ancillary radiology services, and certain diagnostic tests within the medicine range of CPT codes, which are covered ancillary services for which the ASC payment rates are based on OPPS relative payment weights.
Scaling would not apply in the case of ASC payment for separately payable covered ancillary services that have a predetermined national payment amount (that is, their national ASC payment amounts are not based on OPPS relative payment weights), such as drugs and biologicals that are separately paid or services that are contractor-priced or paid at reasonable cost in ASCs. Any service with a predetermined national payment amount would be included in the ASC budget neutrality comparison, but scaling of the ASC relative payment weights would not apply to those services. The ASC payment weights for those services without predetermined national payment amounts (that is, those services with national payment amounts that would be based on OPPS relative payment weights) would be scaled to eliminate any difference in the total payment between the current year and the update year.
For any given year's ratesetting, we typically use the most recent full calendar year of claims data to model budget neutrality adjustments. At the time of the proposed rule, we had available 98 percent of CY 2016 ASC claims data.
To create an analytic file to support calculation of the weight scalar and budget neutrality adjustment for the wage index (discussed below), we summarized available CY 2016 ASC claims by ASC and by HCPCS code. We used the National Provider Identifier for the purpose of identifying unique ASCs within the CY 2016 claims data. We used the supplier zip code reported on the claim to associate State, county, and CBSA with each ASC. This file, available to the public as a supporting data file for the proposed rule, is posted on the CMS Web site at:
Under the OPPS, we typically apply a budget neutrality adjustment for provider level changes, most notably a change in the wage index values for the upcoming year, to the conversion factor. Consistent with our final ASC payment policy, for the CY 2017 ASC payment system and subsequent years, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79751 through 79753), we finalized our policy to calculate and apply a budget neutrality adjustment to the ASC conversion factor for supplier level changes in wage index values for the upcoming year, just as the OPPS wage index budget neutrality adjustment is calculated and applied to the OPPS conversion factor. For CY 2018, we calculated the proposed adjustment for the ASC payment system by using the most recent CY 2016 claims data available and estimating the difference in total payment that would be created by introducing the proposed CY 2018 ASC wage indexes. Specifically, holding CY 2016 ASC utilization, service-mix, and the proposed CY 2018 national payment rates after application of the weight scalar constant, we calculated the total adjusted payment using the CY 2017 ASC wage indexes (which would fully reflect the new OMB delineations) and the total adjusted payment using the proposed CY 2018 ASC wage indexes. We used the 50-percent labor-related share for both total adjusted payment calculations. We then compared the total adjusted payment calculated with the CY 2017 ASC wage indexes to the total adjusted payment calculated with the proposed CY 2018 ASC wage indexes and applied the resulting ratio of 1.0004 (the proposed CY 2018 ASC wage index budget neutrality adjustment) to the CY 2017 ASC conversion factor to calculate the proposed CY 2018 ASC conversion factor.
Section 1833(i)(2)(C)(i) of the Act requires that, if the Secretary has not updated amounts established under the revised ASC payment system in a calendar year, the payment amounts shall be increased by the percentage increase in the Consumer Price Index for all urban consumers (CPI-U), U.S. city average, as estimated by the Secretary for the 12-month period ending with the midpoint of the year involved. Therefore, the statute does not mandate the adoption of any particular update mechanism, but it requires the payment amounts to be increased by the CPI-U in the absence of any update. Because the Secretary updates the ASC payment amounts annually, we adopted a policy, which we codified at 42 CFR 416.171(a)(2)(ii), to update the ASC conversion factor using the CPI-U for CY 2010 and subsequent calendar years. Therefore, the annual update to the ASC payment system is the CPI-U (referred to as the CPI-U update factor).
Section 3401(k) of the Affordable Care Act amended section 1833(i)(2)(D) of the Act by adding a new clause (v), which requires that any annual update under the ASC payment system for the year, after application of clause (iv), shall be reduced by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act, effective with the calendar year beginning January 1, 2011. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable fiscal year, year, cost reporting period, or other annual period) (the “MFP adjustment”). Clause (iv) of section 1833(i)(2)(D) of the Act authorizes the Secretary to provide for a reduction in any annual update for failure to report on quality measures. Clause (v) of section 1833(i)(2)(D) of the Act states that application of the MFP adjustment to the ASC payment system may result in the update to the ASC payment system being less than zero for a year and may result in payment rates under the ASC payment system for a year being less than such payment rates for the preceding year.
In the CY 2012 OPPS/ASC final rule with comment period (76 FR 74516), we finalized a policy that ASCs begin submitting data on quality measures for services beginning on October 1, 2012 for the CY 2014 payment determination under the ASC Quality Reporting (ASCQR) Program. In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68499 through 68500), we finalized a methodology to calculate reduced national unadjusted payment rates using the ASCQR Program reduced update conversion factor that would apply to ASCs that fail to meet their quality reporting requirements for the CY 2014 payment determination and subsequent years. The application of the 2.0 percentage point reduction to the annual update factor, which currently is the CPI-U, may result in the update to the ASC payment system being less than zero for a year for ASCs that fail to meet the ASCQR Program requirements. We amended §§ 416.160(a)(1) and 416.171 to reflect these policies.
In accordance with section 1833(i)(2)(C)(i) of the Act, before applying the MFP adjustment, the Secretary first determines the “percentage increase” in the CPI-U, which we interpret cannot be a negative percentage. Thus, in the instance where the percentage change in the CPI-U for a year is negative, we would hold the CPI-U update factor for the ASC payment system to zero. For the CY 2014 payment determination and subsequent years, under section
For the proposed rule, based on IHS Global Inc.'s (IGI's) 2017 first quarter forecast with historical data through the fourth quarter of 2016, for the 12-month period ending with the midpoint of CY 2018, the CPI-U update was projected to be 2.3 percent. Also, based on IGI's 2017 first quarter forecast, the MFP adjustment for the period ending with the midpoint of CY 2018 was projected to be 0.4 percent. We finalized the methodology for calculating the MFP adjustment in the CY 2011 MPFS final rule with comment period (75 FR 73394 through 73396) and revised it in the CY 2012 MPFS final rule with comment period (76 FR 73300 through 73301) and the CY 2016 OPPS/ASC final rule with comment period (80 FR 70500 through 70501).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33668), for CY 2018, we proposed to reduce the CPI-U update of 2.3 percent by the MFP adjustment of 0.4 percentage point, resulting in an MFP-adjusted CPI-U update factor of 1.9 percent for ASCs meeting the quality reporting requirements. Therefore, we proposed to apply a 1.9 percent MFP-adjusted CPI-U update factor to the CY 2017 ASC conversion factor for ASCs meeting the quality reporting requirements. The ASCQR Program affected payment rates beginning in CY 2014 and, under this program, there is a 2.0 percentage point reduction to the CPI-U for ASCs that fail to meet the ASCQR Program requirements. We proposed to reduce the CPI-U update of 2.3 percent by 2.0 percentage points for ASCs that do not meet the quality reporting requirements and then apply the 0.4 percentage point MFP adjustment. Therefore, we proposed to apply a −0.1 percent MFP-adjusted CPI-U update factor to the CY 2017 ASC conversion factor for ASCs not meeting the quality reporting requirements. We also proposed that if more recent data are subsequently available (for example, a more recent estimate of the CY 2018 CPI-U update and MFP adjustment), we would use such data, if appropriate, to determine the CY 2018 ASC update for the final rule with comment period.
For CY 2018, we proposed to adjust the CY 2017 ASC conversion factor ($45.003) by the proposed wage index budget neutrality factor of 1.0004 in addition to the MFP-adjusted CPI-U update factor of 1.9 percent discussed above, which resulted in a proposed CY 2018 ASC conversion factor of $45.876 for ASCs meeting the quality reporting requirements. For ASCs not meeting the quality reporting requirements, we proposed to adjust the CY 2017 ASC conversion factor ($45.003) by the proposed wage index budget neutrality factor of 1.0004 in addition to the quality reporting/MFP-adjusted CPI-U update factor of −0.1 percent discussed above, which resulted in a proposed CY 2018 ASC conversion factor of $44.976.
We invited public comments on these proposals.
One commenter, a trade association representing several ASCs noted that surgical care in too many markets continues to be provided predominantly in hospitals, which the commenter attributed to Medicare's failure to pay competitive rates to ASCs. The commenter asserted that this lack of migration comes at a high price to the Medicare program, the taxpayers who fund it, and the beneficiaries who needlessly incur higher out-of-pocket expenses. This commenter also noted that the hospital market basket is comprised of data that reflects the cost of items and services necessary to furnish an outpatient surgical procedure, such as compensation, utilities, labor-related services and non-labor related services. In addition, in response to the comment solicitation on ASC payment reform (including the collection of cost data), described later in this section, this commenter stated its willingness to work with the Secretary to collaborate on ideas and asserted its belief that that the same types of costs that apply to the hospital outpatient department are also present in the ASC, but that it did not know if they are weighted the same. This commenter welcomed the opportunity to discuss how ASCs might potentially use a simple, cost-effective survey, perhaps voluntary in nature, that calculates expense categories as a percentage of total expenses to help determine the appropriate weights and price proxies for the ASC setting. The commenter noted that “a complicating factor, however, remains the heterogeneity of the ASC model—the range of size and specialty care varies greatly from one ASC to the next.”
Commenters also made the following arguments in support of replacing the CPI-U with the hospital market basket:
• The CPI-U does not accurately represent the costs borne by ASC facilities to furnish surgical services. Approximately 8.5 percent of the CPI-U inputs are directly related to health care, yet the CPI-U is based on consumer experience purchasing health care rather than a provider's experience necessary to furnish a health care service.
• ASCs are one of few remaining Medicare payment systems tied to the CPI-U. Most other systems use indices derived from the basket of goods those providers purchase (for example, ESRD PPS uses ESRD bundled market basket; FQHC PPS uses Medicare Economic Index; IPPS and OPPS uses the hospital market basket).
• The hospital market basket is a more accurate reflection of ASC costs because it is comprised of data that reflects the cost of items and services necessary to furnish an outpatient surgical procedure, such as compensation, utilities, labor-related services and nonlabor-related services.
MedPAC objected to the proposed 1.9 percent update based on CPI-U and recommended that CMS not update payments to ASCs in 2018, consistent with its recommendation to Congress in the March 2017 Report to the Congress. MedPAC contended that, because indicators of payment adequacy for ASCs—capacity and supply of providers, volume of services, access to capital, payment to providers per fee-for-service beneficiary—are positive, and in light of the importance of maintaining financial pressure on providers to constrain costs, the proposed 1.9 percent update is unnecessarily high. While MedPAC acknowledged that the CPI-U likely does not reflect ASC's cost structure because the CPI-U is heavily weighted for factors that have a relatively small effect on ASCs such as housing and transportation, it commented that it understood that the method for arriving at the proposed 1.9 percent CPI-U update is mandated by law. MedPAC strongly urged CMS to collect cost data from ASCs to better assess payment adequacy to ASCs.
Nonetheless, we recognize that ASCs may incur some of the same costs that hospitals incur and share the commenters' concern that the disparity in payments between the OPPS and ASC payment systems may affect migration from the HOPD setting to the less costly ASC setting. To the extent that it is clinically appropriate for a beneficiary to receive services in a lower cost setting, we believe it would be appropriate to continue to develop payment incentives and remove payment disincentives to facilitate this choice. We will continue to monitor access to services, such as by reviewing utilization in different settings and soliciting stakeholder input, to ascertain the degree to which choices are available. While there are several factors that contribute to the divergence in payment between the two systems, certain of which are identified in the comment solicitation on ASC payment reform, we believe that an alternative update factor could be a mitigating step to address the differential between OPPS and ASC payment. In other words, to the extent that the CPI-U has been lower than the hospital market basket, we believe this difference or gap has contributed to the difference between payments for services when they are provided by an ASC or a HOPD. Additionally, we believe that, in response to our proposal and comment solicitation, commenters have raised an important issue that merits consideration given the Administration's priorities, particularly those seeking to promote and improve affordability and accessibility of care. For example, under Executive Order 13813 (issued October 12, 2017), entitled “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States,” “it shall be the policy of the executive branch, to the extent consistent with law, to facilitate . . . the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people” and the Administration shall “continue to focus on promoting competition in healthcare markets and limiting excessive consolidation throughout the healthcare system.”
While MedPAC recommends a zero percent update, we do not believe that such update would serve to promote competition in health care markets and it could hinder ASCs' ability to provide services to Medicare beneficiaries at a lower cost than HOPDs. We know that the differential in payments between hospitals paid under the OPPS and the ASC has increased from approximately 65 percent in 2008 to approximately 56 percent in 2017. Accordingly, we plan to study this issue further to ensure ASCs can continue to offer lower cost surgical services to Medicare beneficiaries.
With respect to MedPAC's comment about collecting cost data and comments from ASCs expressing a willingness to work with CMS to share data in a way that balances administrative risk with the benefit of collecting such data, we will take these comments under advisement for future consideration, as discussed in greater detail in the comment solicitation section below. For the reasons stated above, we are finalizing our proposal to use the CPI-U update factor to update ASC rates for CY 2018. However, given the many comments supporting alternative update methodologies, such as the hospital market basket, and given our interest in site neutrality and the efficiency of care in the ASC setting, we intend to explore this issue further.
After consideration of the public comments we received, we are finalizing our proposal to apply our established methodology for determining the final CY 2018 ASC conversion factor. Using more complete CY 2016 data for this final rule with comment period than were available for the proposed rule, we calculated a wage index budget neutrality adjustment of 1.0007. Based on IGI's 2017 third quarter forecast, the CPI-U for the 12-month period ending with the midpoint of CY 2018 is now projected to be 1.7 percent, while the MFP adjustment (as discussed in the CY 2011 MPFS final rule with comment period (75 FR 73394 through 73396), and revised in the CY 2012 MPFS final rule with comment period (76 FR 73300 through 73301) and in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70500 through 70501)) is 0.5 percent, resulting in an MFP-adjusted CPI-U update factor of 1.2 percent for ASCs that meet the quality reporting requirements. The final ASC conversion factor of $45.575, for ASCs that meet the quality reporting requirements, is the product of the CY 2017 conversion factor of $45.003 multiplied by the wage index budget neutrality adjustment of 1.0007 and the MFP-adjusted CPI-U payment update of 1.2 percent. For ASCs that do not meet the quality reporting requirements, we are reducing the CPI-U update of 1.7 percent by 2.0 percentage points and then we are applying the 0.5 percentage point MFP adjustment, resulting in a −0.8 percent MFP adjusted CPI-U update factor for CY 2018. The final
In 1982, Medicare implemented the ASC benefit to provide payment to ASCs to perform certain covered surgical procedures.
The ASC facility payment rate was set as a standard overhead amount based on CMS' (known then as the Health Care Financing Administration (HCFA)) estimate of a fair fee, taking into account the costs incurred by ASCs generally in providing facility services in connection with the performance of a specific procedure. The Report of the Conference Committee accompanying section 934 of the Omnibus Budget Reconciliation Act of 1980 (Pub. L. 96-499), which enacted the ASC benefit in December 1980, states, “This overhead factor is expected to be calculated on a prospective basis . . . utilizing sample survey and similar techniques to establish reasonable estimated overhead allowances for each of the listed procedures which take account of volume (within reasonable limits)” (H.R. Rep. No 7479, 96th Cong., 2nd Sess. 134 (1980)).
In 1987, we updated the ASC facility payment rates for the first time since 1982. The updated rates were based on the projected increase in the CPI-U from September 1982 to January 1988. CMS (then, HCFA) rebased payments to ASCs in 1990, relying on a survey of 1986 ASC cost, charge, and utilization data. The ASC payments were updated annually based on the 1986 cost data until implementation of the revised ASC payment system in 2008.
Congress directed the GAO to conduct a study comparing the relative costs of procedures furnished in ASCs to those furnished in HOPDs paid under the OPPS, including examining the accuracy of the APC codes, with respect to surgical procedures furnished in ASCs. On November 30, 2006, the GAO published the statutorily mandated report entitled, “Medicare: Payment for Ambulatory Surgical Centers Should Be Based on the Hospital Outpatient Payment System” (GAO-07-86).
1. Appropriateness of using groups of covered services and relative weights established for the OPPS as the basis of payment for ASCs.
2. If the OPPS relative weights are appropriate for this purpose, whether the ASC payments should be based on a uniform percentage of the payment rates or weights under the OPPS, or should vary, or the weights should be revised based on specific procedures or types of services.
3. Whether a geographic adjustment should be used for ASC payment and, if so, the labor and nonlabor shares of such payment.
We refer readers to the CY 2008 OPPS/ASC final rule with comment period (71 FR 42474) for a detailed summary of the GAO's methodology, results, and recommendations. Notably, based on the findings from the study, the GAO recommended that CMS implement a payment system for procedures performed in ASCs based on the OPPS, taking into account the lower relative costs of procedures performed in ASCs compared to HOPDs in determining ASC payment rates.
We considered the report's methodology, findings, and recommendations implementing the current ASC payment system, effective in 2008 (71 FR 42474). Consistent with statutory requirements and the GAO's recommendations, we finalized policies to implement a revised ASC payment system based on the OPPS resource costs and relativity of service offerings.
The payment system for ASC facility services was designed as a prospective payment system to pay all procedures included in an APC a standard rate. Under a prospective payment system, payment is set to reflect the average cost to furnish a service. That is, some cases may be more costly than the average while others may be less costly. This type of payment system inherently provides incentives for each facility to be more efficient.
MedPAC conducts an annual review of the ASC payment system and submits its findings and recommendations in a report to Congress. As part of this review, MedPAC examines indicators such as beneficiaries' access to care, capacity and supply of providers, and volume of services, in part to assess the adequacy of Medicare payments to ASCs. Based on its analysis of indicators of payment adequacy, in its March 2017 Report to Congress, MedPAC found that the number of Medicare-certified ASCs had increased, beneficiaries' use of ASCs had increased, and access to capital has been adequate. As a result, for CY 2018, MedPAC stated that payments to ASCs are adequate and recommended that no payment update should be given for 2018 (that is, the update factor would be 0 percent). In addition, MedPAC recommended that Congress require ASCs to report cost data to enable the Commission to examine the growth of ASCs' costs over time and analyze Medicare payments relative to the costs of efficient providers, which would help inform decisions about the ASC update. Also, while MedPAC is concerned that the CPI-U may not reflect ASCs' cost structure, until cost information is available from ASCs, MedPAC cannot determine whether an alternative update factor would be more appropriate.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33668), we stated that we are broadly interested in feedback, including recommendations and ideas for ASC payment system reform. We recognize that ASCs provide a critically important access point to beneficiaries who may be too ill or have the need for too complicated a procedure to be treated in the physician office setting, but for whom hospital care is either not medically necessary or undesirable. The current ASC payment system was implemented in 2008 and major revisions have not been made since that time. Average ASC payment rates have declined relative to OPPS payments rates over the past 10 years, from 65 percent of average OPPS rates in CY 2008 to 56 percent (as proposed) of average OPPS rates in CY 2018. However, in the absence of ASC-specific cost data, it is difficult, if not impossible, to determine whether ASC facility payment rates are in line with
With respect to the update factor that is applied to ASC payments, section 1833(i)(2)(C)(i) of the Act requires that, if the Secretary has not updated the payment amounts established under the revised ASC payment system in a calendar year, the payment amounts shall be increased by the percentage increase in the Consumer Price Index for all urban consumers (CPI-U), (U.S. city average), as estimated by the Secretary for the 12-month period ending with the midpoint of the year involved. Therefore, the statute does not mandate the adoption of any particular update mechanism, except in the absence of any update, when it requires the payment amounts to be increased by the increase in the CPI-U.
CMS adopted a policy, codified at 42 CFR 416.171(a)(2)(ii), to update the ASC conversion factor using the CPI-U for CY 2010 and subsequent calendar years. Therefore, the annual update to the ASC payment system is the CPI-U (referred to as the CPI-U update factor). This update factor is adjusted by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act, as required by section 1833(i)(2)(D)(v) of the Act. In the CY 2018 OPPS/ASC proposed rule, we solicited comments on the ASC payment system update factor and indicated that we are interested in data from ASCs that would help determine whether the ASC payment system should continue to be updated by the CPI-U, or by an alternative update factor, such as the hospital market basket, the Medicare Economic Index, and a blend of update factors or other mechanism. The hospital market basket update is typically higher than the CPI-U, while the Medicare Economic Index is typically lower. Because the rate update is not applied in a budget neutral manner, applying a higher update factor would be a cost to the Medicare program while applying a lower update factor would result in savings to the Medicare program. As mentioned above, in the absence of an alternative update, the Act requires payments to ASCs to be increased in an amount equal to the percentage increase in the CPI-U.
With respect to the ASC update, in its March 2017 Report to Congress, MedPAC stated that ASCs have a much higher share of expenses for supplies and drugs than do hospitals or physician offices, a much smaller share of employee compensation costs than hospitals, and a smaller share of all other costs (such as rent) than physician offices. In the proposed rule, we sought public comments on information related to ASC costs for items such as supplies, drugs, employee compensation, rent, and other inputs, as compared to those of hospitals or physician offices, including qualitative and quantitative data from ASCs. We stated that information on the cost structure of ASCs will help to identify an appropriate alternative update factor.
In addition, we sought public comments on whether the Secretary should collect cost data from ASCs to use in determining ASC payment rates. To the extent commenters recommend that ASC cost data should be used in the determination of ASC payment rates, we sought comments on what specific method of cost collection commenters recommend (such as cost reports or a survey). We recognize that the submission of costs may be an administrative burden to ASCs, and we stated that we were interested in comments that detail how we could mitigate the burden of reporting costs on ASCs while also collecting enough data to reliably use such data in the determination of ASC costs. We noted that the ability to calculate ASC-specific costs may obviate the need for tying the ASC payment system to that of the OPPS. In addition, collecting cost data from ASCs could inform whether an alternative input price index would be an appropriate proxy for ASC costs or whether an ASC-specific market basket should be developed.
With respect to the ability to adopt payment policies that exist under the OPPS into the ASC payment system, as discussed in prior rulemaking, due to differences in the systems used to process claims for hospitals and ASCs, we were not able to implement certain OPPS payment policies in the ASC payment system, such as comprehensive APCs, conditional packaging, and the “FD” value modifier for device credits (79 FR 66923). ASC facilities report services on a professional claim (or CMS-1500) rather than an institutional claim (or UB-04) used by hospitals. The ASC claim form is processed in the Medicare Claims System (MCS), the same system used to process claims submitted by physicians and other clinicians, while hospital claims are processed through the Fiscal Intermediary Shared System (FISS). In part, because of differences in the claim form and the claims processing systems, it is not always possible to adopt OPPS payment policies into the ASC payment system. The resulting divergence in payment policies between the two systems may contribute to unintended disparities in payment rates for the same services. In the CY 2018 proposed rule, we stated that we were interested in stakeholder comments on whether billing on an institutional claim form rather than a professional claim form would address some of the issues affecting ASC payment reform.
As noted earlier in this section, we stated we were broadly interested in feedback from stakeholders and other interested parties on potential reforms to the current ASC payment system, including, but not limited to (1) the rate update factor applied to ASC payments, (2) whether and how ASCs should submit costs, (3) whether ASCs should bill on the institutional claim form rather than the professional claim form, and (4) other ideas to improve payment accuracy for ASCs.
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MedPAC recommended that CMS begin collecting new cost data and use that information to examine whether an existing Medicare price index is an appropriate proxy for the cost of ASC facilities or an ASC-specific market basket should be developed. MedPAC suggested that, to minimize burden on ASCs and CMS, CMS could require all ASCs to submit streamlined cost reports or require a random sample of ASCs to respond to annual surveys. For example, MedPAC recommended that CMS
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A few ASC facilities expressed support for requiring ASCs to bill on a UB-04 (institutional claim). These commenters stated they currently bill on a UB-04 for commercial payers and would benefit from a consistent claim form across all payers, especially for Medicare crossover claims. One commenter noted that billing on a UB-04 “is not a foreign concept” and that it warranted further exploration by CMS. A few commenters acknowledged that because not all ASCs currently bill on an UB-04, a transition period would be necessary to allow for successful implementation, though a suggested timeframe was not provided.
MedPAC also recommended that CMS transition ASCs to billing on an UB-04. MedPAC stated that because the ASC payment system is closely linked to the OPPS, to fully align OPPS payment policies with the ASC payment system, ASCs and hospitals should use the same claim form. However, MedPAC suggested that implementation of a requirement to bill on an UB-04 and to submit cost data should be staggered.
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Addenda AA and BB to this final rule with comment period (which are available on the CMS Web site) display the final updated ASC payment rates for CY 2018 for covered surgical procedures and covered ancillary services, respectively. For those covered surgical procedures and covered ancillary services where the payment rate is the lower of the final rates under the ASC standard ratesetting methodology and the MPFS final rates, the final payment indicators and rates set forth in this final rule with comment period are based on a comparison using the final MPFS rates that will be effective January 1, 2018. For a discussion of the MPFS rates, we refer readers to the CY 2018 MPFS final rule with comment period.
The final payment rates included in these addenda reflect the full ASC payment update and not the reduced payment update used to calculate payment rates for ASCs not meeting the quality reporting requirements under the ASCQR Program. These addenda contain several types of information related to the final CY 2018 payment rates. Specifically, in Addendum AA, a “Y” in the column titled “To be Subject to Multiple Procedure Discounting” indicates that the surgical procedure will be subject to the multiple procedure payment reduction policy. As discussed in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66829 through 66830), most covered surgical procedures are subject to a 50-percent reduction in the ASC payment for the lower-paying procedure when more than one procedure is performed in a single operative session.
Display of the comment indicator “CH” in the column titled “Comment Indicator” indicates a change in payment policy for the item or service, including identifying discontinued HCPCS codes, designating items or services newly payable under the ASC payment system, and identifying items or services with changes in the ASC payment indicator for CY 2018. Display of the comment indicator “NI” in the column titled “Comment Indicator” indicates that the code is new (or substantially revised) and that comments will be accepted on the interim payment indicator for the new code. Display of the comment indicator “NP” in the column titled “Comment Indicator” indicates that the code is new (or substantially revised) and that comments will be accepted on the ASC payment indicator for the new code.
The values displayed in the column titled “Final CY 2018 Payment Weight” are the final relative payment weights for each of the listed services for CY 2018. The final relative payment weights for all covered surgical procedures and covered ancillary services where the ASC payment rates are based on OPPS relative payment weights were scaled for budget neutrality. Therefore, scaling was not applied to the device portion of the device-intensive procedures, services that are paid at the MPFS nonfacility PE RVU-based amount, separately payable covered ancillary services that have a predetermined national payment amount, such as drugs and biologicals and brachytherapy sources that are separately paid under the OPPS, or services that are contractor-priced or paid at reasonable cost in ASCs.
To derive the final CY 2018 payment rate displayed in the “Final CY 2018 Payment Rate” column, each ASC payment weight in the “Final CY 2018 Payment Weight” column was multiplied by the final CY 2018 conversion factor of $45.575. The final conversion factor includes a budget neutrality adjustment for changes in the wage index values and the annual update factor as reduced by the productivity adjustment (as discussed in section XII.G.2.b. of this final rule with comment period).
In Addendum BB, there are no relative payment weights displayed in the “Final CY 2018 Payment Weight” column for items and services with predetermined national payment amounts, such as separately payable drugs and biologicals. The “Final CY 2018 Payment” column displays the final CY 2018 national unadjusted ASC payment rates for all items and services. The final CY 2018 ASC payment rates listed in Addendum BB for separately payable drugs and biologicals are based on ASP data used for payment in physicians' offices in October 2017.
Addendum EE provides the HCPCS codes and short descriptors for surgical procedures that are to be excluded from payment in ASCs for CY 2018.
CMS seeks to promote higher quality and more efficient healthcare for Medicare beneficiaries. Consistent with these goals, CMS has implemented quality reporting programs for multiple care settings including the quality reporting program for hospital outpatient care, known as the Hospital Outpatient Quality Reporting (OQR) Program, formerly known as the Hospital Outpatient Quality Data Reporting Program (HOP QDRP). The Hospital OQR Program is generally aligned with the quality reporting program for hospital inpatient services known as the Hospital Inpatient Quality Reporting (IQR) Program (formerly known as the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) Program).
In addition to the Hospital IQR and Hospital OQR Programs, CMS has
• Physicians and other eligible professionals, under the Physician Quality Reporting System (PQRS, formerly referred to as the Physician Quality Reporting Program Initiative (PQRI)). We note that 2018 is the last year of the PQRS payment adjustment. Beginning in 2019, eligible clinicians may be subject to upward or downward payment adjustments under the Merit-based Incentive Payment System (MIPS) or be able to earn a positive payment incentives through participation in certain advanced alternative payment models (APMs) under the Quality Payment Program (QPP) (81 FR 77008);
• Inpatient rehabilitation facilities, under the Inpatient Rehabilitation Facility Quality Reporting Program (IRF QRP);
• Long-term care hospitals, under the Long-Term Care Hospital Quality Reporting Program (LTCH QRP);
• PPS-exempt cancer hospitals, under the PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program;
• Ambulatory surgical centers, under the Ambulatory Surgical Center Quality Reporting (ASCQR) Program;
• Inpatient psychiatric facilities, under the Inpatient Psychiatric Facility Quality Reporting (IPFQR) Program;
• Home health agencies, under the Home Health Quality Reporting Program (HH QRP); and
• Hospices, under the Hospice Quality Reporting Program (HQRP).
In addition, CMS has implemented several value-based purchasing programs that link payment to performance, including the Hospital Value-Based Purchasing (VBP) Program; the Hospital-Acquired Condition (HAC) Reduction Program; and the End-Stage Renal Disease (ESRD) Quality Incentive Program (QIP); and the Quality Payment Program (QPP).
In implementing the Hospital OQR Program and other quality reporting programs, we have focused on measures that have high impact and support national priorities for improved quality and efficiency of care for Medicare beneficiaries as reflected in the National Quality Strategy (NQS) and the CMS Quality Strategy for conditions with reported wide cost and treatment variations despite established clinical treatment guidelines. To the extent possible under various authorizing statutes, our ultimate goal is to align the clinical quality measure requirements of the various quality reporting programs. As appropriate, we will consider the adoption of measures with electronic specifications to enable the collection of this information for our quality programs.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68467 through 68469) for a discussion on the principles underlying consideration for future measures that we intend to use in implementing this and other quality reporting programs. We did not propose any changes to these policies.
We refer readers to the CY 2011 OPPS/ASC final rule with comment period (75 FR 72064 through 72065) for a detailed discussion of the statutory history of the Hospital OQR Program.
We refer readers to the CY 2008 through 2017 OPPS/ASC final rules with comment period (72 FR 66860 through 66875; 73 FR 68758 through 68779; 74 FR 60629 through 60656; 75 FR 72064 through 72110; 76 FR 74451 through 74492; 77 FR 68467 through 68492; 78 FR 75090 through 75120; 79 FR 66940 through 66966; 80 FR 70502 through 70526; and 81 FR 79753 through 79797). We have also codified certain requirements under the Hospital OQR Program at 42 CFR 419.46. In the CY 2018 OPPS/ASC proposed rule (82 FR 33671), we proposed editorial changes to 42 CFR 419.46, replacing the terms “Web” and “Web site” with the terms “web” and “website,” respectively.
We did not receive any comments on our proposal. Therefore, we are finalizing our changes to 42 CFR 419.46 as proposed, by replacing the terms “Web” and “Web site” with the terms “web” and “website,” respectively.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74458 through 74460) for a detailed discussion of the priorities we consider for the Hospital OQR Program quality measure selection. We did not propose any changes to our measure selection policy.
We understand that social risk factors such as income, education, race and ethnicity, employment, disability, community resources, and social support (certain factors of which are also sometimes referred to as socioeconomic status (SES) factors or socio-demographic status (SDS) factors) play a major role in health. One of our core objectives is to improve beneficiary outcomes including reducing health disparities, and we want to ensure that all beneficiaries, including those with social risk factors, receive high quality care. In addition, we seek to ensure that the quality of care furnished by providers and suppliers is assessed as fairly as possible under our programs while ensuring that beneficiaries have adequate access to excellent care.
We have been reviewing reports prepared by the Office of the Assistant Secretary for Planning and Evaluation (ASPE)
As noted in the FY 2017 IPPS/LTCH PPS final rule, the NQF has undertaken a 2-year trial period in which new measures, measures undergoing maintenance review, and measures endorsed with the condition that they enter the trial period can be assessed to determine whether risk adjustment for selected social risk factors is appropriate
As we continue to consider the analyses and recommendations from these reports and the results of the NQF trial on risk adjustment for quality measures, we are continuing to work with stakeholders in this process. As we have previously communicated, we are concerned about holding providers to different standards for the outcomes of their patients with social risk factors because we do not want to mask potential disparities or minimize incentives to improve the outcomes for disadvantaged populations. Keeping this concern in mind, in the proposed rule we sought public comment on whether we should account for social risk factors in the Hospital OQR Program, and if so, what method or combination of methods would be most appropriate for accounting for social risk factors. Examples of methods include: Confidential reporting to providers of measure rates stratified by social risk factors; public reporting of stratified measure rates; and potential risk adjustment of a particular measure as appropriate based on data and evidence.
In addition, we requested public comment on which social risk factors might be most appropriate for reporting stratified measure scores and/or potential risk adjustment of a particular measure. Examples of social risk factors include, but are not limited to, dual eligibility/low-income subsidy, race and ethnicity, and geographic area of residence. We requested comments on which of these factors, including current data sources where this information would be available, could be used alone or in combination, and whether other data should be collected to better capture the effects of social risk. We will take commenters' input into consideration as we continue to assess the appropriateness and feasibility of accounting for social risk factors in the Hospital OQR Program.
We look forward to working with stakeholders as we consider the issue of accounting for social risk factors and reducing health disparities in CMS programs. Of note, implementing any of the above methods would be taken into consideration in the context of how this and other CMS programs operate (for example, data submission methods, availability of data, statistical considerations relating to reliability of data calculations, among others), so we also welcome comment on operational considerations. CMS is committed to ensuring that its beneficiaries have access to and receive excellent care, and that the quality of care furnished by providers and suppliers is assessed fairly in CMS programs.
We received extensive comments in response to our request for public comments on whether we should account for social risk factors in the Hospital OQR Program, and if so, what method or combination of methods would be most appropriate for accounting for social risk factors.
One commenter specifically recommended risk adjustment in quality measurement in the psychiatric setting. Another commenter recommended that when identifying social risk factors, CMS consider the relationship with the outcome of interest, a risk factor's presence at the start of care, and whether it can be modified or manipulated through providers' actions. A third commenter noted that approaches to risk adjustment should be measure-specific.
A few commenters recommended that CMS apply risk adjustment by stratifying providers into groups by proportion of patients that are at risk, noting that this approach does not require measure-level research and recommending that risk adjustment results be shared with providers. One commenter supported methodologies including providing confidential reporting of stratified measure rates to providers and risk adjustment of measures. Several commenters expressed concern with public reporting of risk adjusted data, while others recommended that publicly reported data specifically be risk adjusted.
A few commenters noted concern that adjusting for social risk factors will not address the underlying disparities that are associated with poor health outcomes and could instead lead to masking these disparities. One commenter noted that using social risk factors may not be appropriate until it is clear how the information is collected and shared. One commenter recommended that any risk adjustment methodology adopted adhere to CMS' previously adopted standards of setting minimum case volumes and using confidence intervals. Some commenters noted that better data sources for socioeconomic status are needed, including patient-level and community-level data sources.
As with previous policies, we intend to follow our previously adopted standards for setting case minimums. We refer readers to the CY 2009 OPPS/ASC final rule with comment period (73 FR 68773 through 68775) where we discuss these standards. In addition, we acknowledge that administrative claims data can be limited; we will investigate the feasibility and appropriateness of
We reiterate that we are committed to ensuring that CMS beneficiaries have access to and receive excellent care and that the quality of care furnished by providers and suppliers is assessed fairly in CMS programs. We thank the commenters, and we will consider their views as we develop further policy regarding social risk factors in the Hospital OQR Program.
One commenter recommended that the following variables not be used: American Society of Anesthesiologists score; range of motion; or mode of patient-reported outcome measure collection. Several commenters supported the use of dual eligible status as a factor, while one commenter opposed it and noted concern that that it does not reflect the conditions where the hospital is located and that there are variations between States in dual eligibility status.
We thank commenters for their suggestion that we allow collection of sociodemographic data elements in electronic health records, but note that the Hospital OQR Program does not yet include eCQMs. Any testing and methodologies used would be made transparent through future rulemaking, which includes the public notice and comment process. Moreover, any proposals would be made in future rulemaking after further analysis, research, and continued stakeholder engagement.
We thank all of the commenters for their input and will consider all suggestions as we continue to assess the issue of accounting for social risk factors within individual measures, the Hospital OQR Program as a whole, and across CMS quality programs.
We previously adopted a policy to retain measures from the previous year's Hospital OQR Program measure set for subsequent years' measure sets in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68471). Quality measures adopted in a previous year's rulemaking are retained in the Hospital OQR Program for use in subsequent years unless otherwise specified. We refer readers to that rule for more information. We did not propose any changes to our retention policy for previously adopted measures.
In the FY 2010 IPPS/LTCH PPS final rule (74 FR 43863), for the Hospital IQR Program, we finalized a process for immediate retirement, which we later termed “removal,” of Hospital IQR Program measures based on evidence that the continued use of the measure as specified raised patient safety concerns. We adopted the same immediate measure retirement policy for the Hospital OQR Program in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60634 through 60635). We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68472 through 68473) for a discussion of our reasons for changing the term “retirement” to “removal” in the Hospital OQR Program. We did not propose any changes to our policy to immediately remove measures as a result of patient safety concerns.
In the CY 2013 OPPS/ASC final rule with comment period, we finalized a set of criteria for determining whether to remove measures from the Hospital OQR Program. We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68472 through 68473) for a discussion of our policy on removal of quality measures from the Hospital OQR Program. The benefits of removing a measure from the Hospital OQR Program will be assessed on a case-by-case basis (79 FR 66941 through 66942). We note that, under this case-by-case approach, a measure will not be removed solely on the basis of meeting any specific criterion. We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68472 through 68473) for our list of factors considered in removing measures from the Hospital OQR Program. We did not
We refer readers to the CY 2015 OPPS/ASC final rule with comment period where we finalized our proposal to refine the criteria for determining when a measure is “topped-out” (79 FR 66942). We did not propose any changes to our “topped-out” criteria policy.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33673), we proposed to remove a total of six measures. Specifically, beginning with the CY 2020 payment determination, we proposed to remove: (1) OP-21: Median Time to Pain Management for Long Bone Fracture; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. In addition, beginning with the CY 2021 payment determination, we proposed to remove: (1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; and (4) OP-25: Safe Surgery Checklist. By removing these six measures, our intent is to alleviate the maintenance costs and administrative burden to hospitals associated with retaining them. While we proposed to remove two measures beginning with the CY 2020 payment determination and four measures for the CY 2021 payment determination, in this final rule, we are finalizing removal of all six measures for the CY 2020 payment determination. These are discussed in detail below.
We refer readers to the CY 2011 OPPS/ASC final rule with comment period (75 FR 72088), where we adopted the OP-21: Median Time to Pain Management for Long Bone Fracture measure. This process of care measure assesses the median time from emergency department arrival to time of initial oral, nasal, or parenteral pain medication (opioid and non-opioid) administration for emergency department patients with a principal diagnosis of long bone fracture (LBF).
We have previously finalized a policy to note that the benefits of removing a measure from the Hospital OQR Program will be assessed on a case-by-case basis (79 FR 66941 through 66942). Accordingly, although it does not exactly meet one of the specific measure removal criteria finalized for the Hospital OQR Program (77 FR 68472 through 68473), it has the potential to lead to negative unintended consequences (removal factor #7). Therefore, we proposed to remove OP-21: Median Time to Pain Management for Long Bone Fracture for the CY 2020 payment determination and subsequent years due to the concerns described in more detail below.
Given the growing body of evidence on the risks of opioid misuse, CMS has developed a strategy to impact the national opioid misuse epidemic by combating nonmedical use of prescription opioids, opioid use disorder, and overdose through the promotion of safe and appropriate opioid utilization, improved access to treatment for opioid use disorders, and evidence-based practices for acute and chronic pain management.
Due to the potential for a misinterpretation of the intent of the measure, we are concerned that OP-21: Median Time to Pain Management for Long Bone Fracture may create undue pressure for hospital staff to prescribe more opioids. We note that the measure only assesses the time to initial, acute administration of pain medication in a specific acute clinical situation, and does not promote long-term pain medication prescriptions. In fact, this measure assesses an element of appropriate pain management, specifically the time to pain medication administration in the case of long bone fracture. In addition, the measure assesses the use of both opioid and nonopioid pain medications. While we acknowledge that pain control is an important issue for patients and clinical care, and the measure does not call for increased opioid prescriptions, many factors outside the control of CMS quality program requirements may contribute to the perception of a link between the measure and opioid prescribing practices. Although we are not aware of any scientific studies that support an association between this measure and opioid prescribing practices, out of an abundance of caution, we proposed to remove the measure in order to remove any potential ambiguity and to avoid misinterpretation of the intent of the measure. We also note that, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79856), we removed the Pain Management dimension of the HCAHPS Survey in the Patient- and Caregiver-Centered Experience of Care/Care Coordination domain beginning with the FY 2018 program year for the Hospital VBP Program for similar reasons. In addition, in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38342), we finalized refinements to the former pain management questions in the HCAHPS Survey measure for the Hospital IQR Program.
We invited public comment on our proposal to remove the OP-21: Median Time to Pain Management for Long Bone Fracture measure for the CY 2020 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing the proposal to remove OP-21: Median Time to Pain Management for Long Bone Fracture for the CY 2020 payment determination and subsequent years, as proposed.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74468), where we adopted OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures beginning with the CY 2014 payment determination. This measure, which is submitted via a web-based tool, collects surgical procedure volume data on eight categories of procedures frequently performed in the outpatient hospital setting.
We believe there is a lack of evidence to support this measure's link to improved clinical quality. The measure requires hospitals to report on the volumes of surgical procedures performed at the facility.
We invited public comment on our proposal to removal the OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures measure for the CY 2020 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures for the CY 2020 payment determination and subsequent years, as proposed.
We refer readers to the CY 2008 OPPS/ASC final rule with comment period (referred to as “ED-AMI-2—Median Time to Fibrinolysis” in 72 FR 66862 through 66865) where we adopted OP-1: Median Time to Fibrinolysis beginning with services furnished in CY 2009. This chart-abstracted measure assesses the median time from ED arrival to administration of fibrinolytic therapy in ED patients with ST-segment elevation on the ECG performed closest to ED arrival and prior to transfer.
We believe that this measure meets the following measure removal criterion—the availability of a measure that is more strongly associated with desired patient outcomes for the particular topic (79 FR 66941). We note that the currently adopted OP-2: Fibrinolytic Therapy Received Within 30 Minutes of ED Arrival (72 FR 66862 through 66865) has been designed with a threshold that is based on a clinical standard, allows us to measure this topic area, and provides meaningful and clinically relevant data on the receipt of fibrinolytic therapy. National guidelines recommend that fibrinolytic therapy be given within 30 minutes of hospital arrival in patients with ST-segment elevation myocardial infarction.
We invited public comment on our proposal to remove OP-1: Median Time to Fibrinolysis for the CY 2021 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove OP-1: Median Time to Fibrinolysis with modification. Instead of beginning with the CY 2021 payment determination as proposed, we are finalizing the removal of this measure for the CY 2020 payment determination and subsequent years, one year earlier than proposed.
We refer readers to the CY 2008 OPPS/ASC final rule with comment period (72 FR 66862 through 66865) where we adopted OP-4: Aspirin at Arrival beginning with services furnished in CY 2009. This chart-abstracted measure assesses the rate of patients with chest pain or possible heart attack who received aspirin within 24 hours of arrival or before transferring from the emergency department.
We previously finalized two criteria for determining when a measure is “topped out” under the Hospital OQR Program: (1) When there is statistically indistinguishable performance at the 75th and 90th percentiles of national facility performance; and (2) when the measure's truncated coefficient of variation (COV) is less than or equal to 0.10 (79 FR 66942). Based on our analysis of Hospital OQR Program measure data, we have determined that performance on this measure is so high and unvarying that meaningful distinctions in improvement cannot be made; specifically, our analyses show that there is statistically indistinguishable performance at the 75th and 90th percentiles of national facility performance for this measure. These analyses are captured in the table below.
As displayed in the table above, there is no distinguishable difference in hospital performance between the 75th and 90th percentiles under the OP-4: Aspirin at Arrival measure, and the truncated coefficient of variation has been below 0.10 since 2014. Therefore, this measure meets both “topped out” measure criteria for the ASCQR Program.
Thus, we believe the burden of reporting this chart-abstracted measure is not justified by the value of retaining it in the program and we proposed to remove OP-4: Aspirin at Arrival from the program for the CY 2021 payment determination and subsequent years.
We invited public comment on our proposal to remove the OP-4: Aspirin at Arrival measure for the CY 2021 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove OP-4: Aspirin at Arrival measure with modification. Instead of beginning with the CY 2021 payment determination as proposed, we are finalizing the removal of this measure for the CY 2020 payment determination and subsequent years, one year earlier than proposed.
We refer readers to the CY 2011 OPPS/ASC final rule with comment period (75 FR 72087 through 72088) where we adopted OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional for the CY 2013 payment determination. This chart-abstracted measure assesses the time from ED arrival to provider contact for Emergency Department patients.
During regular measure maintenance, specific concerns about OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional were raised by a Technical Expert Panel (TEP), comprised of experts representing a variety of stakeholders and was convened by a CMS contractor. These concerns include: (1) Limited evidence linking the measure to improved patient outcomes; (2) validity concerns related to wait times and the accuracy of door-to-door time stamps; and (3) potential for skewed measure performance due to disease severity and institution-specific confounders. After our own analysis, we agree with the TEP's analysis and believe that this measure meets the following measure removal criterion: Performance or improvement on a measure does not result in better patient outcomes. As a result, we believe the burden of continuing to include this chart-abstracted measure in the program outweighs the benefits; and thus, we proposed to remove OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional for the CY 2021 payment determination and subsequent years.
We invited public comment on our proposal to remove OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional for the CY 2021 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional with modification. Instead of beginning with the CY 2021 payment determination as proposed, we are finalizing the removal of this measure for the CY 2020 payment determination and subsequent years, one year earlier than proposed.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74464 through 74466), where we adopted OP-25: Safe Surgery Checklist Use beginning with the CY 2014 payment determination. This structural measure of hospital process assesses whether a hospital employed a safe surgery checklist that covered each of the three critical perioperative periods (prior to administering anesthesia, prior to skin incision, and prior to patient leaving the operating room) for the entire data collection period. Based on our review of reported data under the measure, this measure meets our first criterion for measure removal that measure performance is so high and unvarying that meaningful distinctions and improvements in performance can no longer be made.
The Hospital OQR Program previously finalized two criteria for determining when a measure is “topped out”: (1) When there is statistically indistinguishable performance at the 75th and 90th percentiles of national facility performance; and (2) when the measure's truncated coefficient of variation is less than or equal to 0.10 (79 FR 66942). Our estimations indicate that performance on this measure is trending towards topped out status. This analysis is captured in the table below.
Based on the analysis above, the national rate of “Yes” response for the OP-25 measure is nearly 1.0, or 100 percent, nationwide, and has remained at this level for the last two years. In addition, the truncated coefficient of variation has decreased such that it is trending towards 0.10 and there is no distinguishable difference in hospital performance between the 75th and 90th percentiles. We have previously stated the benefits of removing a measure from the Hospital OQR Program will be assessed on a case-by-case basis (79 FR 66941 through 66942). We believe that removal of this measure from the Hospital OQR Program measure set is appropriate, as there is little room for improvement. We believe that safe surgical checklist is widely used and that hospitals will continue its use. In addition, removal of this measure would alleviate the administrative burden to hospitals associated with reporting on this measure. As such, we believe the reporting burden of this measure outweigh the benefits of keeping the measure in the Hospital OQR Program.
Therefore, we proposed to remove OP-25: Safe Surgery Checklist Use for the CY 2021 payment determination and subsequent years. We refer readers to section XIV.B.3.b.(2) of this final rule with comment period, where the ASCQR Program is finalizing a proposal to remove a similar measure.
We invited public comment on our proposal to remove the OP-25: Safe Surgery Checklist Use measure for the CY 2021 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove OP-25: Safe Surgery Checklist Use with modification. Instead of beginning with the CY 2021 payment determination as proposed, we are finalizing the removal of this measure for the CY 2020 payment determination and subsequent years, one year earlier than proposed.
We refer readers to the CY 2017 OPPS/ASC final rule with comment period where we adopted OP-37a-e (81 FR 79771 through 79784), and finalized data collection and data submission timelines (81 FR 79792 through 79794). These measures assess patients' experience with care following a procedure or surgery in a hospital outpatient department by rating patient experience as a means for empowering patients and improving the quality of their care.
In CY 2018 OPPS/ASC proposed rule (82 FR 33675), we proposed to delay implementation of the Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-Based Measures OP-37a-e beginning with the CY 2020 payment determination (2018 data collection) and subsequent years. Since our adoption of these measures, we have come to believe that we need to collect more operational and implementation data. Specifically, we want to ensure that the survey measures appropriately account for patient response rates, both aggregate and by survey administration method; reaffirm the reliability of national implementation of OAS CAHPS Survey data; and appropriately account for the burden associated with administering the survey in the outpatient setting of care. We note that commenters expressed concern over the burden associated with the survey in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79777). We believe that the voluntary national implementation of the survey, which began in January 2016, would provide valuable information moving forward.
We invited public comment on our proposal to delay the OAS CAHPS Survey measures beginning with the CY 2020 payment determination (2018 data collection) as discussed above.
After consideration of the public comments we received, we are finalizing the proposal to delay implementation of the Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based Measures (OP-37a-e) beginning with the CY 2020 payment determination (CY 2018 data collection) until further action in future rulemaking, as proposed. We refer readers to section XIV.B.4. of this final rule with comment where we are also finalizing delay of the OAS CAHPS Survey-based measures in the ASCQR Program.
We refer readers to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79784) for the previously finalized measure set for the Hospital OQR Program CY 2020 payment determination and subsequent years. These measures also are listed below.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33676), we did not propose any new measures for the Hospital OQR Program. However, beginning with the CY 2020 payment determination, in section XIII.B.4.c. of this final rule with comment period, we are finalizing proposals to remove six measures, and in section XIII.B.5. of this final rule with comment period, we are finalizing a proposal to delay OP-37a-e beginning with the CY 2020 payment determination (2018 data collection). The table below outlines the Hospital OQR Program measure set we are finalizing in this final rule with comment period for the CY 2020 payment determination and subsequent years.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33678), we requested public comment on: (1) Future measure topics; and (2) future development of OP-2: Fibrinolytic Therapy Received Within 30 Minutes of ED Arrival as an electronic clinical quality measure (eCQM). These are discussed in detail below.
We seek to develop a comprehensive set of quality measures to be available for widespread use for informed decision-making and quality improvement in the hospital outpatient setting. The current measure set for the Hospital OQR Program includes measures that assess process of care, imaging efficiency patterns, care transitions, ED throughput efficiency, Health Information Technology (health IT) use, care coordination, and patient safety. Measures are of various types, including those of process, structure, outcome, and efficiency. Through future rulemaking, we intend to propose new measures that help us further our goal of achieving better health care and improved health for Medicare beneficiaries who receive health care in hospital outpatient settings, while aligning quality measures across the Medicare program.
We are moving towards the use of outcome measures and away from the use of clinical process measures across our Medicare quality reporting and value-based purchasing programs. We invited public comments on possible measure topics for future consideration in the Hospital OQR Program. We specifically requested comment on any outcome measures that would be useful to add to the Hospital OQR Program as well as any clinical process measures that should be eliminated from the Hospital OQR Program.
We have previously stated that automated electronic extraction and reporting of clinical quality data, including measure results calculated automatically by appropriately certified health IT, could significantly reduce the administrative burden on hospitals under the Hospital OQR Program (81 FR 79785). In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79786), some commenters supported CMS' goal to incorporate electronic clinical quality measures (eCQMs) in the Hospital OQR Program.
OP-2: Fibrinolytic Therapy Received Within 30 Minutes of Emergency Department Arrival was finalized in the CY 2008 OPPS/ASC final rule with comment period (72 FR 66865), where
We are considering developing OP-2: Fibrinolytic Therapy Received Within 30 Minutes of Emergency Department Arrival
We invited public comment on the possible future development and future adoption of an eCQM version of OP-2: Fibrinolytic Therapy Received Within 30 Minutes of Emergency Department Arrival.
CMS maintains technical specifications for previously adopted Hospital OQR Program measures. These specifications are updated as we modify the Hospital OQR Program measure set. The manuals that contain specifications for the previously adopted measures can be found on the QualityNet Web site at:
For a history of our policies regarding maintenance of technical specifications for quality measures, we refer readers to the CY 2010 OPPS/ASC final rule with comment period (74 FR 60631), the CY 2011 OPPS/ASC final rule with comment period (75 FR 72069), and the CY 2013 OPPS/ASC final rule with comment period (77 FR 68469 through 68470). We did not propose any changes to our technical specifications policies.
We refer readers to the CY 2014 and CY 2017 OPPS/ASC final rules with comment period (78 FR 75092 and 81 FR 79791, respectively) for our previously finalized policies regarding public display of quality measures.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33679), we proposed to update public reporting for the OP-18: Median Time from ED Arrival to ED Departure for Discharged ED Patients measure.
OP-18 Median Time from ED Arrival to ED Departure for Discharged ED Patients was finalized for reporting for the CY 2013 payment determination and subsequent years in the CY 2011 OPPS/ASC final rule with comment period (75 FR 72086). This measure addresses ED efficiency in the form of the median time from ED arrival to time of departure from the ED for patients discharged from the ED (also known as ED throughput). Reducing the time patients spend in the ED can improve the quality of care. As discussed in the measure specifications and Measure Information Form (MIF),
Section 1833(t)(17)(E) of the Act, requires that the Secretary establish procedures to make data collected under the Hospital OQR Program available to the public and that such procedures must ensure that a hospital has the opportunity to review the data that are to be made public, with respect to the hospital prior to such data being made public. Currently, and as detailed in the OP-18 MIF, the OP-18 measure publicly reports data only for the calculations designated as OP-18b: Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Reporting Measure, which excludes psychiatric/mental health patients and transfer patients.
The ICD-10 diagnostic codes for OP-18c include numerous substance abuse codes for inclusion in this subset, along with numerous nonsubstance abuse codes. We believe it is important to publicly report data for OP-18c (Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Psychiatric/Mental Health Patients) to address a behavioral health gap in the publicly reported Hospital OQR Program measure set. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33679), we proposed to also publicly report OP-18c and begin public reporting as early as July of 2018 using data from patient encounters during the third quarter of 2017. In addition, we would make corresponding updates to our MIF to reflect these proposals,
In developing this proposal, we also considered proposing to publicly report around July 2019 (not 2018 as proposed) using data from patient encounters occurring during the first quarter of 2018. However, we decided against this timeline, because under this reporting option, we would not be able to publicly report behavioral health data until as early as July of 2019, creating a delay in our efforts to address the behavioral health data gap in the publicly reported measure set.
We invited public comment on our proposal to publicly report OP-18c: Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Psychiatric/Mental Health Patients beginning with third quarter 2017 data as discussed above.
A few commenters cited concerns that delays in discharging psychiatric patients are caused by a lack of community resources rather than poor quality of care. One commenter recommended that publicly displayed data for OP-18c also include data on mental health resources in the community to provide context for the data. Other commenters expressed concern that the data could incentivize limiting the care provided to these patients in the ED in order to discharge them quickly.
However, the comments received have shed some light on aspects of this particular subset of data that may need additional consideration prior to posting on the consumer-facing
Therefore, after considering the public comments we received, including these additional factors, we would like to err on the side of caution and take additional time for further consideration prior to posting this particular subset of data on
Based on the public comments we received, we intend to make measure data available in a downloadable data file rather than on
To be clear, data for what is referred to as OP-18b Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Reporting Measure will still continue to be made available on
After consideration of the public comments we received, we are finalizing the proposal, with modification, as discussed in our response above, such that we will make OP-18c rates available to the public on
The previously finalized QualityNet security administrator requirements, including setting up a QualityNet account and the associated timelines, are described in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75108 through 75109). In that final rule with comment period, we codified these procedural requirements at 42 CFR 419.46(a).
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75108 through 75109) and the CY 2016 OPPS/ASC final rule with comment period (80 FR 70519) for requirements for participation and withdrawal from the Hospital OQR Program. We also codified these procedural requirements at 42 CFR 419.46(a) and 42 CFR 419.46(b). In the CY 2018 OPPS/ASC proposed rule (82 FR 33679), we proposed changes to the NOP submission deadline, as described below.
We finalized in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75108 through 75109) that participation in the Hospital OQR Program requires that hospitals must: (1) Register on the QualityNet Web site before beginning to report data; (2) identify and register a QualityNet security administrator; and (3) complete and submit an online participation form available at the
• If a hospital has a Medicare acceptance date before January 1 of the year prior to the affected annual payment update, the hospital must complete and submit to CMS a completed Hospital OQR Program Notice of Participation Form by July 31 of the calendar year prior to the affected annual payment update.
• If a hospital has a Medicare acceptance date on or after January 1 of the year prior to the affected annual payment update, the hospital must submit a completed participation form no later than 180 days from the date identified as its Medicare acceptance date.
These requirements are also codified at 42 CFR 419.46(a).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33680), beginning with the CY 2020 payment determination, we
We believe this proposed timeline is appropriate, because registration with the QualityNet Web site is necessary to submit data. We believe that extending the NOP submission deadline will better enable hospitals to meet the Hospital OQR Program participation requirements.
As discussed above, we also proposed to make conforming revisions at 42 CFR 419.46(a).
We invited public comment on our proposals as discussed above.
We did not receive any public comment on our proposal to require submission of the NOP any time prior to registering on the QualityNet Web site. However, due to logistical and operational constraints, participants in the Hospital OQR Program must still first login to QualityNet in order to access the NOP form; therefore, we are unable to implement this proposal. As a result, we are not finalizing our proposals to extend the NOP submission deadline and to make conforming revisions at 42 CFR 419.46(a). We intend to revisit this issue in future rulemaking, because we believe that extending the NOP submission deadline will better enable hospitals to meet the Hospital OQR Program participation requirements.
In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75110 through 75111) and the CY 2016 OPPS/ASC final rule with comment period (80 FR 70519 through 70520), we specified our data submission deadlines. We also codified our submission requirements at 42 CFR 419.46(c).
We refer readers to the CY 2016 OPPS/ASC final rule with comment period (80 FR 70519 through 70520), where we finalized our proposal to shift the quarters upon which the Hospital OQR Program payment determinations are based, beginning with the CY 2018 payment determination. The finalized deadlines for the CY 2020 payment determination and subsequent years are illustrated in the tables below.
For the CY 2020 payment determination and subsequent years, we proposed to revise the data submission requirements for hospitals that did not participate in the previous year's Hospital OQR Program. Specifically, we proposed to revise the first quarter for which newly participating hospitals are required to submit data (see details below). We did not propose any changes to the previously finalized data submission deadlines for each quarter.
In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68482), we finalized the following data submission requirements for hospitals that did not participate in the previous year's Hospital OQR Program:
• If a hospital has a Medicare acceptance date before January 1 of the year prior to the affected annual payment update, the hospital must submit data beginning with encounters occurring during the first calendar quarter of the year prior to the affected annual payment update;
• If a hospital has a Medicare acceptance date on or after January 1 of the year prior to the affected annual payment update, the hospital must submit data for encounters beginning with the first full quarter following submission of the completed Hospital OQR Program Notice of Participation Form; and
• Hospitals with a Medicare acceptance date before or after January 1 of the year prior to an affected annual payment update must follow data submission deadlines as posted on the QualityNet Web site.
These policies are also codified at 42 CFR 419.46(c)(3). In the CY 2018 OPPS/ASC proposed rule (82 FR 33680), we proposed to: (1) Align the timeline specifying the initial quarter for which hospitals must submit data for all hospitals that did not participate in the previous year's Hospital OQR Program, rather than specifying different timelines for hospitals with Medicare acceptance dates before versus after January 1 of the year prior to an affected annual payment update; and (2) make conforming revisions at 42 CFR 419.46(c)(3). Specifically, we proposed that any hospital that did not participate in the previous year's Hospital OQR Program must submit data beginning with encounters occurring during the first calendar quarter of the year prior to the affected annual payment update. We note that hospitals must still follow data submission deadlines corresponding to the quarter for which they are reporting data as posted on the QualityNet Web site.
We invited public comment on our proposals to align the initial data submission timeline for all hospitals that did not participate in the previous year's Hospital OQR Program and to make conforming revisions at 42 CFR 419.46(c)(3).
We did not receive any public comment on our proposals. Therefore, we are finalizing our proposals to align the initial data submission timeline for all hospitals that did not participate in the previous year's Hospital OQR Program and to make conforming revisions at 42 CFR 419.46(c)(3), as proposed.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68481 through 68484) for a discussion of the form, manner, and timing for data submission requirements of chart-abstracted measures for the CY 2014 payment determination and subsequent years.
We did not propose any changes to our policies regarding the submission of chart abstracted measure data where patient-level data are submitted directly to CMS.
We note that, in section XIII.B.4.c. of this final rule with comment period, we are finalizing the removal of OP-21: Median Time to Pain Management for Long Bone Fracture, OP-1: Median Time to Fibrinolysis, OP-4: Aspirin at Arrival, and OP-20: Door to Diagnostic Evaluation by a Qualified Medical
• OP-2: Fibrinolytic Therapy Received Within 30 Minutes of ED Arrival (NQF #0288);
• OP-3: Median Time to Transfer to Another Facility for Acute Coronary Intervention (NQF #0290);
• OP-5: Median Time to ECG (NQF #0289);
• OP-18: Median Time from ED Arrival to ED Departure for Discharged ED Patients (NQF #0496);
• OP-23: Head CT Scan Results for Acute Ischemic Stroke or Hemorrhagic Stroke Patients who Received Head CT Scan Interpretation Within 45 Minutes of ED Arrival (NQF #0661).
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75111 through 75112) for a discussion of the general claims-based measure data submission requirements for the CY 2015 payment determination and subsequent years. We did not propose any changes to our claims-based measures submission policies for the CY 2020 payment determination and subsequent years.
There are a total of nine claims-based measures for the CY 2020 payment determination and subsequent years:
• OP-8: MRI Lumbar Spine for Low Back Pain (NQF #0514);
• OP-9: Mammography Follow-Up Rates;
• OP-10: Abdomen CT—Use of Contrast Material;
• OP-11: Thorax CT—Use of Contrast Material (NQF #0513);
• OP-13: Cardiac Imaging for Preoperative Risk Assessment for Non-Cardiac, Low Risk Surgery (NQF #0669);
• OP-14: Simultaneous Use of Brain Computed Tomography (CT) and Sinus Computed Tomography (CT);
• OP-32: Facility 7-Day Risk-Standardized Hospital Visit Rate after Outpatient Colonoscopy (NQF #2539);
• OP-35: Admissions and Emergency Department Visits for Patients Receiving Outpatient Chemotherapy; and
• OP-36: Hospital Visits after Hospital Outpatient Surgery (NQF #2687).
We refer readers to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79792 through 79794) for a discussion of the previously finalized requirements related to survey administration and vendors for the OAS CAHPS Survey-based measures. However, we refer readers to section XIII.B.5. of this final rule with comment period, where we are finalizing our proposal to delay implementation of the OP-37a-e OAS CAHPS Survey-based measures beginning with the CY 2020 payment determination (2018 data collection) until further action in future rulemaking.
As noted in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79815), some commenters suggested shortening sections of the survey, such as the “About You” section. We continue to evaluate the utility of individual questions as we collect new data from the survey's voluntary national implementation, and will consider different options for shortening the OAS CAHPS Survey without the loss of important data in the future. Specifically, we continue to consider the removal of two demographic questions—the “gender” and “age” questions—from the OAS CAHPS Survey in a future update.
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75112 through 75115) and the CY 2016 OPPS/ASC final rule with comment period (80 FR 70521) and the CMS QualityNet Web site (
We note that, in section XIII.B.4.c. of this final rule with comment period, we are finalizing the removal of OP-25: Safe Surgery Checklist Use and OP-26: Hospital Outpatient Volume on Selected Outpatient Surgical Procedures beginning with the CY 2020 payment determination and for subsequent years. Therefore, the following web-based quality measures previously finalized and retained in the Hospital OQR Program will require data to be submitted via a web-based tool (CMS' QualityNet Web site or CDC's NHSN Web site) for the CY 2020 payment determination and subsequent years:
• OP-12: The Ability for Providers with HIT to Receive Laboratory Data Electronically Directly into their ONC-Certified EHR System as Discrete Searchable Data (via CMS' QualityNet Web site);
• OP-17: Tracking Clinical Results between Visits (NQF #0491) (via CMS' QualityNet Web site);
• OP-22: Left Without Being Seen (NQF #0499) (via CMS' QualityNet Web site);
• OP-27: Influenza Vaccination Coverage among Healthcare Personnel (via the CDC NHSN Web site) (NQF #0431);
• OP-29: Appropriate Follow-up Interval for Normal Colonoscopy in Average Risk Patients (NQF #0658) (via CMS' QualityNet Web site);
• OP-30: Colonoscopy Interval for Patients with a History of Adenomatous Polyps—Avoidance of Inappropriate Use (NQF #0659) (via CMS' QualityNet Web site);
• OP-31: Cataracts: Improvement in Patient's Visual Function within 90 Days Following Cataract Surgery (NQF #1536) (via CMS' QualityNet Web site); and
• OP-33: External Beam Radiotherapy (EBRT) for Bone Metastases (NQF #1822) (via CMS' QualityNet Web site).
We refer readers to the CY 2011 OPPS/ASC final rule with comment
We did not propose any changes to our population and sampling requirements.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68484 through 68487) and the CY 2015 OPPS/ASC final rule with comment period (79 FR 66964 through 66965) for a discussion of finalized policies regarding our validation requirements. We also refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68486 through 68487) for a discussion of finalized policies regarding our medical record validation procedure requirements. We codified these policies at 42 CFR 419.46(e). For the CY 2018 payment determination and subsequent years, validation is based on four quarters of data (validation quarter 1 (January 1-March 31), validation quarter 2 (April 1-June 30), validation quarter 3 (July 1-September 30), and validation quarter 4 (October 1-December 31)) (80 FR 70524).
In the CY 2018 OPPS/ASC proposed rule (82 FR 33682), we: (1) Clarified the hospital selection process previously finalized for validation; (2) proposed to codify the procedures for targeting hospitals at 42 CFR 419.46(e); and (3) proposed to formalize and update our educational review process. These are discussed in more detail below.
In the CY 2012 OPPS/ASC final rule with comment period (76 FR 74485), we finalized a validation selection process in which we select a random sample of 450 hospitals for validation purposes, and select an additional 50 hospitals based on the following specific criteria:
• Hospital fails the validation requirement that applies to the previous year's payment determination; or
• Hospital has an outlier value for a measure based on the data it submits. We defined an “outlier value” for purposes of this targeting as a measure value that appears to deviate markedly from the measure values for other hospitals. Specifically, we would select hospitals for validation if their measure value for a measure is greater than 5 standard deviations from the mean, placing the expected occurrence of such a value outside of this range at 1 in 1,744,278.
We note that the criteria for targeting 50 outlier hospitals, described above, does not specify whether high or low performing hospitals will be targeted. Therefore, we clarified that hospitals with outlier values indicating specifically poor scores on a measure (for example, a long median time to fibrinolysis) will be targeted for validation. In other words, an “outlier value” is a measure value that is greater than 5 standard deviations from the mean of the measure values for other hospitals, and indicates a poor score.
We note that the previously finalized procedures for targeting hospitals for validation, described in section XIII.D.7.a. of this final rule with comment period, and finalized in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74485), are not yet codified at 42 CFR 419.46. We proposed to codify the previously finalized procedures for targeting hospitals and well as the procedures regarding outlier hospitals as discussed and clarified above at 42 CFR 419.46(e)(3).
We invited public comment on our proposal to codify our validation targeting criteria as discussed above.
We did not receive any public comments on this proposal. Therefore, we are finalizing our proposal to codify the previously finalized procedures for targeting hospitals and well as the procedures regarding outlier hospitals as discussed and clarified above at 42 CFR 419.46(e)(3), as proposed.
We have described our processes for educational review on the QualityNet Web site.
Under the current informal process, if results of an educational review indicate that CDAC or CMS has incorrectly scored a hospital after validation, those results are not changed, but are taken into consideration if the hospital submits a reconsideration request. Stakeholder feedback, provided via email, has indicated that while the educational review process is helpful to participating hospitals, it is limited in its impact, given that a hospital's validation result is not corrected even after an educational review determines that CMS reached an incorrect conclusion regarding a hospital's validation score for a given quarter. Based on this feedback, we proposed to formalize and update the Hospital OQR Program's chart-abstracted measure validation educational review process. Our goal is to reduce the number of reconsideration requests by identifying and correcting errors before the final yearly validation score is derived. By identifying and correcting any mistakes early on, this process could help decrease the burden during the annual reconsideration process, both for hospitals and CMS.
Therefore, in an effort to streamline this process, we proposed to: (1) Formalize this process; and (2) specify that if the results of an educational review indicate that we incorrectly scored a hospital's medical records
As stated above, our informal processes for educational review have been described on the QualityNet Web site.
We proposed to formalize this educational review process, as described above, for the CY 2020 payment determination and subsequent years—in other words, starting for validations of CY 2018 data affecting the CY 2020 payment determination and subsequent years.
We invited public comment on our proposal to formalize the chart-abstracted measures validation educational review process for the CY 2020 payment determination and subsequent years as described above.
We did not receive any public comments on our proposal. Therefore, we are finalizing the proposal to formalize the chart-abstracted measures validation educational review process for the CY 2020 payment determination and subsequent years, as proposed.
We previously finalized, in the CY 2011 OPPS/ASC final rule with comment period (75 FR 72105 to 72106), that we calculate validation scores under the Hospital OQR Program using the upper bound of a one-tailed confidence interval (CI) with a 75 percent threshold level with a binomial approach. Using that approach, at the end of each calendar year, CMS computes a CI using the results of all four quarters to determine the final validation score.
To determine whether a quarterly validation score was correct, in the CY 2018 OPPS/ASC proposed rule (82 FR 33683), we proposed to use a similar process as one previously finalized for reconsideration requests. Specifically, we proposed that during an educational review request, evaluating a validation score would consist of and be limited to reviewing data elements that were labeled as mismatched (between the originally calculated measure score and the measure score calculated in validation) in the original validation results. We would also take into consideration written justifications provided by hospitals in the Educational Review request. For more information about the previously finalized reconsideration request procedures, we refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68487 through 68489), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75118 through 75119), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70524), and the CY 2017 OPPS/ASC final rule with comment period (81 FR 79795).
For the CY 2020 payment determination and subsequent years, we further proposed that if an educational review requested for any of the first 3 quarters of validation yields incorrect CMS validation results for chart-abstracted measures, according to the review process described above, we would use the corrected quarterly score, as recalculated during the educational review process, to compute the final CI at the end of the calendar year.
The corrected scores would be applicable to the corresponding quarter, for the first 3 quarters of validation, for which a request was submitted. Under this proposal, after evaluating the validation score during the educational review process, if results show that there was indeed an error in the originally calculated score, we would take steps to correct it. However, so as not to dissuade participation in the educational review process, corrected scores identified through the educational review would only be used to recalculate the CI if they indicate that the hospital performed more favorably than previously determined. If the hospital performed less favorably, their score would not be updated to reflect the less favorable score.
We note that under this proposal, the quarterly validation reports issued to hospitals would not be updated to reflect the corrected score due to the burden associated with reissuing corrected reports. However, the corrected score would be communicated to the hospital via secure file format as discussed above.
We invited public comment on our proposal, as discussed above for the CY 2020 payment determination and subsequent years, to use corrected quarterly scores, as recalculated during the educational review process
After consideration of the public comments received, we are finalizing our proposal to use corrected quarterly scores, as recalculated during the educational review process described in section XIII.D.7.c.(2)(a) of this final rule with comment period above, to compute the final confidence interval for the first 3 quarters of validation for the CY 2020 payment determination and subsequent years, as proposed.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68489), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75119 through 75120), the CY 2015 OPPS/ASC final rule with comment period (79 FR 66966), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70524), and 42 CFR 419.46(d) for a complete discussion of our extraordinary circumstances extension or exception process under the Hospital OQR Program.
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79795), we finalized an update to our extraordinary circumstances exemption (ECE) policy to extend the ECE request deadline for both chart-abstracted and web-based measures from 45 days following an event causing hardship to 90 days following an event causing hardship, effective with ECEs requested on or after January 1, 2017.
We note that many of our quality reporting and value-based purchasing programs share a common process for requesting an exception from program reporting due to an extraordinary circumstance not within a provider's control. The Hospital IQR, Hospital OQR, IPFQR, ASCQR, and PCHQR Programs, as well as the Hospital Acquired Condition Reduction Program and the Hospital Readmissions Reduction Program, share similar processes for ECE requests. We refer readers to policies for the Hospital IQR Program (76 FR 51651 through 51652, 78 FR 50836 through 50837, 79 FR 50277, 81 FR 57181 through 57182, and 42 CFR 412.140(c)(2)), the IPFQR Program (77 FR 53659 through 53660 and 79 FR 45978), the ASCQR Program (77 FR 53642 through 53643 and 78 FR 75140 through 75141), the PCHQR Program (78 FR 50848), the HAC Reduction Program (80 FR 49579 through 49581), and the Hospital Readmissions Reduction Program (80 FR 49542 through 49543) for program specific information about extraordinary circumstances exceptions requests. As noted below, some of these policies were updated in the FY 2018 IPPS/LTCH PPS final rule.
In reviewing the policies for these programs, we recognized that there are five areas in which these programs have variances regarding ECE requests. These are: (1) Allowing the facilities or hospitals to submit a form signed by the facility's or hospital's CEO versus CEO or designated personnel; (2) requiring the form be submitted within 30 days following the date that the extraordinary circumstance occurred versus within 90 days following the date the extraordinary circumstance occurred; (3) inconsistency regarding specification of a timeline for us to provide our formal response notifying the facility or hospital of our decision; (4) inconsistency regarding specification of our authority to grant ECEs due to CMS data system issues; and (5) referring to the program as “extraordinary extensions/exemptions” versus as “extraordinary circumstances exceptions.” We believe addressing these five areas, as appropriate, can improve administrative efficiencies for affected facilities or hospitals.
We note that, in the FY 2018 IPPS/LTCH PPS final rule, we examined our policies in these areas for the Hospital Readmissions Reduction Program, the HAC Reduction Program, the Hospital IQR Program, the PCHQR Program and the IPFQR Program (82 FR 38240, 38277, 38410, 38425 and 38473 through 38474, respectively) and finalized proposals to address differences in these areas for those programs. In section XIV.D.6. of this final rule with comment period, we are also finalizing revisions to our ECE policies for the ASCQR Program.
With the exception of the specification of a timeline for us to provide our formal response and the terminology used to describe these processes (items 3 and 5 above), the Hospital OQR Program is aligned with the existing and proposed policies for the other quality reporting programs discussed above. As a result, we proposed to rename the process as the extraordinary circumstances exceptions (ECE) policy and make conforming changes to 42 CFR 419.46(d).
We have observed that while all quality programs listed above have developed similar policies to provide exceptions from program requirements to facilities that have experienced extraordinary circumstances, such as natural disasters, these programs refer to these policies using inconsistent terminology. Some programs refer to these policies as “extraordinary circumstances extensions/exemptions” while others refer to the set of policies as “extraordinary circumstances exceptions.” Several programs (specifically, the Hospital VBP Program, HAC Reduction Program, and the Hospital Readmissions Reduction Program) are not able to grant extensions to required data reporting timelines due to their reliance on data external to their program and, thus, the term, “extraordinary circumstances extensions/exemptions” is not applicable to all programs. However, all of the described programs are able to offer exceptions from their reporting requirements.
As stated above, in order to align this policy across CMS quality programs, we proposed to: (1) Change the name of this policy from “extraordinary circumstances extensions or exemptions” to “extraordinary circumstances exceptions” for the Hospital OQR Program, beginning January 1, 2018; and (2) revise 42 CFR
We invited public comment on these proposals as discussed above.
After consideration of the public comment we received, we are finalizing the proposal to rename the process as the extraordinary circumstances exceptions (ECE) policy and make conforming changes to 42 CFR 419.46(d), as proposed.
We also note that we believe it is important for facilities to receive timely feedback regarding the status of ECE requests. We strive to complete our review of each ECE request as quickly as possible. However, we recognize that the number of requests we receive, and the complexity of the information provided impacts the actual timeframe to make ECE determinations. To improve transparency of our process, we believe it is appropriate to specify that we will strive to complete our review of each request within 90 days of receipt.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68487 through 68489), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75118 through 75119), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70524), and the CY 2017 OPPS/ASC final rule with comment period (81 FR 79795) for a discussion of our reconsideration and appeals procedures. We codified the process by which participating hospitals may submit requests for reconsideration at 42 CFR 419.46(f). We also codified language at § 419.46(f)(3) regarding appeals with the Provider Reimbursement Review Board.
We did not propose any changes to our reconsideration and appeals procedure.
Section 1833(t)(17) of the Act, which applies to subsection (d) hospitals (as defined under section 1886(d)(1)(B) of the Act), states that hospitals that fail to report data required to be submitted on measures selected by the Secretary, in the form and manner, and at a time, specified by the Secretary will incur a 2.0 percentage point reduction to their Outpatient Department (OPD) fee schedule increase factor; that is, the annual payment update factor. Section 1833(t)(17)(A)(ii) of the Act specifies that any reduction applies only to the payment year involved and will not be taken into account in computing the applicable OPD fee schedule increase factor for a subsequent year.
The application of a reduced OPD fee schedule increase factor results in reduced national unadjusted payment rates that apply to certain outpatient items and services provided by hospitals that are required to report outpatient quality data in order to receive the full payment update factor and that fail to meet the Hospital OQR Program requirements. Hospitals that meet the reporting requirements receive the full OPPS payment update without the reduction. For a more detailed discussion of how this payment reduction was initially implemented, we refer readers to the CY 2009 OPPS/ASC final rule with comment period (73 FR 68769 through 68772).
The national unadjusted payment rates for many services paid under the OPPS equal the product of the OPPS conversion factor and the scaled relative payment weight for the APC to which the service is assigned. The OPPS conversion factor, which is updated annually by the OPD fee schedule increase factor, is used to calculate the OPPS payment rate for services with the following status indicators (listed in Addendum B to the final rule, which is available via the Internet on the CMS Web site): “J1”, “J2”, “P”, “Q1”, “Q2”, “Q3”, “R”, “S”, “T”, “V”, or “U”. In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79796), we clarified that the reporting ratio does not apply to codes with status indicator “Q4” because services and procedures coded with status indicator “Q4” are either packaged or paid through the Clinical Laboratory Fee Schedule and are never paid separately through the OPPS. Payment for all services assigned to these status indicators will be subject to the reduction of the national unadjusted payment rates for hospitals that fail to meet Hospital OQR Program requirements, with the exception of services assigned to New Technology APCs with assigned status indicator “S” or “`T”. We refer readers to the CY 2009 OPPS/ASC final rule with comment period (73 FR 68770 through 68771) for a discussion of this policy.
The OPD fee schedule increase factor is an input into the OPPS conversion factor, which is used to calculate OPPS payment rates. To reduce the OPD fee schedule increase factor for hospitals that fail to meet reporting requirements, we calculate two conversion factors—a full market basket conversion factor (that is, the full conversion factor), and a reduced market basket conversion factor (that is, the reduced conversion factor). We then calculate a reduction ratio by dividing the reduced conversion factor by the full conversion factor. We refer to this reduction ratio as the “reporting ratio” to indicate that it applies to payment for hospitals that fail to meet their reporting requirements. Applying this reporting ratio to the OPPS payment amounts results in reduced national unadjusted payment rates that are mathematically equivalent to the reduced national unadjusted payment rates that would result if we multiplied the scaled OPPS relative payment weights by the reduced conversion factor. For example, to determine the reduced national unadjusted payment rates that applied to hospitals that failed to meet their quality reporting requirements for the CY 2010 OPPS, we multiplied the final full national unadjusted payment rate found in Addendum B of the CY 2010 OPPS/ASC final rule with comment period by the CY 2010 OPPS final reporting ratio of 0.980 (74 FR 60642).
In the CY 2009 OPPS/ASC final rule with comment period (73 FR 68771 through 68772), we established a policy that the Medicare beneficiary's minimum unadjusted copayment and national unadjusted copayment for a service to which a reduced national unadjusted payment rate applies would each equal the product of the reporting ratio and the national unadjusted copayment or the minimum unadjusted copayment, as applicable, for the service. Under this policy, we apply the reporting ratio to both the minimum unadjusted copayment and national unadjusted copayment for services provided by hospitals that receive the payment reduction for failure to meet the Hospital OQR Program reporting requirements. This application of the reporting ratio to the national unadjusted and minimum unadjusted copayments is calculated according to
In the CY 2009 OPPS/ASC final rule with comment period (73 FR 68772), we established the policy that all other applicable adjustments to the OPPS national unadjusted payment rates apply when the OPD fee schedule increase factor is reduced for hospitals that fail to meet the requirements of the Hospital OQR Program. For example, the following standard adjustments apply to the reduced national unadjusted payment rates: the wage index adjustment; the multiple procedure adjustment; the interrupted procedure adjustment; the rural sole community hospital adjustment; and the adjustment for devices furnished with full or partial credit or without cost. Similarly, OPPS outlier payments made for high cost and complex procedures will continue to be made when outlier criteria are met. For hospitals that fail to meet the quality data reporting requirements, the hospitals' costs are compared to the reduced payments for purposes of outlier eligibility and payment calculation. We established this policy in the OPPS beginning in the CY 2010 OPPS/ASC final rule with comment period (74 FR 60642). For a complete discussion of the OPPS outlier calculation and eligibility criteria, we refer readers to section II.G. of this final rule with comment period.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33684 through 33685), we proposed to continue our established policy of applying the reduction of the OPD fee schedule increase factor through the use of a reporting ratio for those hospitals that fail to meet the Hospital OQR Program requirements for the full CY 2018 annual payment update factor. For the CY 2018 OPPS, the proposed reporting ratio was 0.980, calculated by dividing the proposed reduced conversion factor of 74.953 by the proposed full conversion factor of 76.483. We proposed to continue to apply the reporting ratio to all services calculated using the OPPS conversion factor. For the CY 2018 OPPS, we proposed to apply the reporting ratio, when applicable, to all HCPCS codes to which we have proposed status indicator assignments of “J1”, “J2”, “P”, “Q1”, “Q2”, “Q3”, “R”, “S”, “T”, “V”, and “U” (other than new technology APCs to which we have proposed status indicator assignment of “S” and “T”). We proposed to continue to exclude services paid under New Technology APCs. We proposed to continue to apply the reporting ratio to the national unadjusted payment rates and the minimum unadjusted and national unadjusted copayment rates of all applicable services for those hospitals that fail to meet the Hospital OQR Program reporting requirements. We also proposed to continue to apply all other applicable standard adjustments to the OPPS national unadjusted payment rates for hospitals that fail to meet the requirements of the Hospital OQR Program. Similarly, we proposed to continue to calculate OPPS outlier eligibility and outlier payment based on the reduced payment rates for those hospitals that fail to meet the reporting requirements.
We invited public comments on these proposals but no comments were received. For the CY 2018 OPPS, the final reporting ratio is 0.980, calculated by dividing the final reduced conversion factor of 77.064 by the final full conversion factor of 78.636. We are finalizing the rest of our proposal without modification.
We refer readers to section XIII.A.1. of this final rule with comment period for a general overview of our quality reporting programs.
We refer readers to section XIV.K.1. of the CY 2012 OPPS/ASC final rule with comment period (76 FR 74492 through 74494) for a detailed discussion of the statutory history of the ASCQR Program.
We seek to promote higher quality and more efficient health care for beneficiaries. This effort is supported by the adoption of widely-agreed-upon quality measures. We have worked with relevant stakeholders to define measures of quality in almost every healthcare setting and currently measure some aspect of care for almost all Medicare beneficiaries. These measures assess structural aspects of care, clinical processes, patient experiences with care, and outcomes. We have implemented quality measure reporting programs for multiple settings of care. To measure the quality of ASC services, we implemented the ASCQR Program. We refer readers to section XV.A.3. of the CY 2014 OPPS/ASC final rule with comment period (78 FR 75122), section XIV. of the CY 2015 OPPS/ASC final rule with comment period (79 FR 66966 through 66987), section XIV. of the CY 2016 OPPS/ASC final rule with comment period (80 FR 70526 through 70538) and section XIV. of the CY 2017 OPPS/ASC final rule with comment period (81 FR 79797 through 79826) for an overview of the regulatory history of the ASCQR Program.
We refer readers to the CY 2013 OPPS/ASC final rule with comment period (77 FR 68493 through 68494) for a detailed discussion of the priorities we consider for ASCQR Program quality measure selection. We did not propose any changes to this policy.
We understand that social risk factors such as income, education, race and ethnicity, employment, disability, community resources, and social support (certain factors of which are also sometimes referred to as socioeconomic status (SES) factors or socio-demographic status (SDS) factors) play a major role in health. One of our core objectives is to improve beneficiary outcomes including reducing health disparities, and we want to ensure that all beneficiaries, including those with social risk factors, receive high quality care. In addition, we seek to ensure that the quality of care furnished by providers and suppliers is assessed as fairly as possible under our programs while ensuring that beneficiaries have adequate access to excellent care.
We have been reviewing reports prepared by the Office of the Assistant Secretary for Planning and Evaluation (ASPE)
As noted in the FY 2017 IPPS/LTCH PPS final rule, the NQF has undertaken a 2-year trial period in which new measures, measures undergoing maintenance review, and measures endorsed with the condition that they enter the trial period can be assessed to determine whether risk adjustment for selected social risk factors is appropriate for these measures. This trial entailed temporarily allowing inclusion of social risk factors in the risk-adjustment approach for some performance measures. Since publication of the proposed rule, we have learned that the National Quality Forum (NQF) has concluded their initial trial on risk adjustment for quality measures.
As we continue to consider the analyses and recommendations from these reports and the results of the NQF trial on risk adjustment for quality measures, we are continuing to work with stakeholders in this process. As we have previously communicated, we are concerned about holding providers to different standards for the outcomes of their patients with social risk factors because we do not want to mask potential disparities or minimize incentives to improve the outcomes for disadvantaged populations. Keeping this concern in mind, in the proposed rule we sought public comment on whether we should account for social risk factors in the ASCQR Program, and if so, what method or combination of methods would be most appropriate for accounting for social risk factors. Examples of methods include: Confidential reporting to providers of measure rates stratified by social risk factors; public reporting of stratified measure rates; and potential risk adjustment of a particular measure as appropriate based on data and evidence.
In addition, we requested public comment on which social risk factors might be most appropriate for reporting stratified measure scores and/or potential risk adjustment of a particular measure. Examples of social risk factors include, but are not limited to, dual eligibility/low-income subsidy, race and ethnicity, and geographic area of residence. We sought comments on which of these factors, including current data sources where this information would be available, could be used alone or in combination, and whether other data should be collected to better capture the effects of social risk. We will take commenters' input into consideration as we continue to assess the appropriateness and feasibility of accounting for social risk factors in the ASCQR Program. We note that any such changes would be proposed through future notice and comment rulemaking.
We look forward to working with stakeholders as we consider the issue of accounting for social risk factors and reducing health disparities in CMS programs. Of note, implementing any of the above methods would be taken into consideration in the context of how this and other CMS programs operate (for example, data submission methods, availability of data, statistical considerations relating to reliability of data calculations, among others), so we also welcome comment on operational considerations. CMS is committed to ensuring that its beneficiaries have access to and receive excellent care, and that the quality of care furnished by providers and suppliers is assessed fairly in CMS programs.
We received extensive comments in response to our request for public comment on whether we should account for social risk factors in the ASCQR Program, and if so, what method or combination of methods would be most appropriate for accounting for social risk factors.
One commenter recommended that CMS apply risk adjustment by stratifying providers into groups by proportion of at-risk patients, noting that this approach does not require measure-level research. Another commenter recommended that CMS determine whether or not social risk factor disparities exist in the ASC setting prior to committing to adjusting any measures for these factors, and that CMS rely on data elements existing in CMS databases. A few commenters recommended that CMS provide ASCs with both risk-adjusted and unadjusted data in order to allow for transparency.
One commenter noted that better data sources for socioeconomic status are needed, including patient-level and community-level data sources, and that measure-specific risk adjustment methodologies are appropriate. Finally, one commenter noted that risk adjustment should balance fair measurement with ensuring that disparities are not masked.
We thank all of the commenters for their input and will consider all suggestions as we continue to assess the issue of accounting for social risk factors within individual measures, the ASCQR Program as a whole, and across CMS quality programs.
We previously adopted a policy that quality measures adopted for an ASCQR Program measure set for a previous payment determination year be retained in the ASCQR Program for measure sets for subsequent payment determination years, except when they are removed, suspended, or replaced as indicated (76 FR 74494 and 74504; 77 FR 68494 through 68495; 78 FR 75122; and 79 FR 66967 through 66969). We did not propose any changes to this policy.
We refer readers to the CY 2015 OPPS/ASC final rule with comment period (79 FR 66967 through 66969) and 42 CFR 416.320 for a detailed discussion of the process for removing adopted measures from the ASCQR Program. We did not propose any changes to this process.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33687), we proposed to remove a total of three measures for the CY 2019 payment determination and subsequent years: (1) ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing; (2) ASC-6: Safe Surgery Checklist Use; and (3) ASC-7: ASC Facility Volume Data on Selected Procedures. These proposals are discussed in more detail below.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74499 through 74501) where we adopted ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing measure (formerly NQF #0264) beginning with the CY 2014 payment determination and finalized the measure's data collection and data submission timelines (76 FR 74515 through 74516). This measure assesses whether intravenous antibiotics given for prevention of surgical site infection were administered on time per clinical guidelines.
Based on our analysis of ASCQR Program measure data for CY 2014 through 2016 encounters, ASC performance on this measure is so high and unvarying that meaningful distinctions in improvement cannot be made; as a result, we believe this measure meets removal criterion number one under the ASCQR Program's finalized measure removal criteria. The ASCQR Program previously finalized two criteria for determining when a measure is “topped out:” (1) When there is statistically indistinguishable performance at the 75th and 90th percentiles of national facility performance; and (2) when the measure's truncated coefficient of variation (COV) is less than or equal to 0.10 (79 FR 66968 through 66969). These analyses are captured in the table below.
As displayed in the table above, there is no distinguishable difference in ASC performance between the 75th and 90th percentiles under the ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing measure, and the truncated coefficient of variation has been below 0.10 since 2014. Therefore, the ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing measure meets both “topped out” measure criteria for the ASCQR Program.
Furthermore, we note that the NQF endorsement was removed on February 13, 2015; in its discussion of whether to
We invited public comment on our proposal to remove the ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing measure for the CY 2019 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing the proposal to remove the ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing measure for the CY 2019 payment determination and subsequent years, as proposed.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74505 through 74507 and 74509), where we adopted the ASC-6: Safe Surgery Checklist Use measure beginning with the CY 2015 payment determination. This structural measure of facility process assesses whether an ASC employed a safe surgery checklist that covered each of the three critical perioperative periods (prior to administering anesthesia, prior to skin incision, and prior to patient leaving the operating room) for the entire data collection period.
Based on our analysis of ASCQR Program measure data for CYs 2014 to 2016 encounters, the ASC-6: Safe Surgery Checklist Use measure meets our first criterion for measure removal that measure performance is so high and unvarying that meaningful distinctions and improvements in performance can no longer be made. The ASCQR Program previously finalized two criteria for determining when a measure is “topped out:” (1) When there is statistically indistinguishable performance at the 75th and 90th percentiles of national facility performance; and (2) when the measure's truncated coefficient of variation is less than or equal to 0.10 (79 FR 66968 through 66969). These analyses are captured in the table below.
Based
Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33688), we proposed to remove ASC-6: Safe Surgery Checklist Use from the ASCQR Program measure set beginning with the CY 2019 payment determination. We also refer readers to section XIII.B.4.c.(6) of this final rule with comment period, where the Hospital OQR Program is removing a similar measure.
We invited public comment on our proposal to remove the ASC-6: Safe Surgery Checklist Use measure for the CY 2019 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing the proposal to remove ASC-6: Safe Surgery Checklist Use from the ASCQR Program measure set beginning with the CY 2019 payment determination, as proposed. We also refer readers to section XIII.B.4.c.(6) of this final rule where we are finalizing removal of a similar measure from the Hospital OQR Program.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74507 through 74509), where we adopted the ASC-7: ASC Facility Volume Data on Selected Procedures measure beginning with the CY 2015 payment determination. This structural measure of facility capacity collects surgical procedure volume data on six categories of procedures frequently performed in the ASC setting (76 FR 74507).
We adopted the ASC-7: ASC Facility Volume Data on Selected Procedures measure based on evidence that volume of surgical procedures, particularly of high-risk surgical procedures, is related to better patient outcomes, including decreased medical errors and mortality (76 FR 74507). We further stated our belief that publicly reporting volume data would provide patients with beneficial performance information to use in selecting a care provider. However, over time, we have adopted, and intend to continue to adopt, more measures assessing ASCs' performance on specific procedure types, like ASC-14. As stated below, we believe measures on specific procedure types will provide patients with more valuable ASC performance data. These types of measures are also more strongly associated with desired patient outcomes for the particular topic. For example, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79801 through 79803), we adopted ASC-14: Unplanned Anterior Vitrectomy, a measure assessing patient outcomes following ophthalmologic procedures, and proposed to adopt a second ophthalmology-specific measure, ASC-16: Toxic Anterior Segment Syndrome, in the CY 2018 proposed rule (82 FR 33689 through 33691). We believe these procedure-type-specific measures provide patients with more valuable ASC performance data than the ASC-7: ASC Facility Volume Data on Selected Procedures measure in selecting an ASC for their care. For this reason, we believe the ASC-7: ASC Facility Volume Data on Selected Procedures measure meets our second criterion for removal from the program; specifically, that there are other measures available that are more strongly associated with desired patient outcomes for the particular topic. In addition, removal of this measure would alleviate the maintenance costs and administrative burden to ASCs associated with retaining the measure. As such, we believe the burdens of this measure outweigh the benefits of keeping the measure in the ASCQR Program. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33688), we proposed to remove ASC-7: ASC Facility Volume Data on Selected Procedures from the ASCQR Program beginning with the CY 2019 payment determination. We refer readers to section XIII.B.4.c.(2) of this final rule with comment period where we are removing a similar measure from the Hospital OQR Program.
We invited public comment on our proposal to remove the ASC-7: ASC Facility Volume Data on Selected Procedures measure for the CY 2019 payment determination and subsequent years as discussed above.
After consideration of the public comments we received, we are finalizing our proposal to remove ASC-7: ASC Facility Volume Data on Selected Procedures from the ASCQR Program beginning with the CY 2019 payment determination, as proposed.
We refer readers to the CY 2017 OPPS/ASC final rule with comment period where we adopted ASC-15a-e (81 FR 79803 through 79817), and finalized data collection and data submission timelines (81 FR 79822 through 79824). These measures assess patients' experience with care following a procedure or surgery in an ASC by rating patient experience as a means for empowering patients and improving the quality of their care.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33688), we proposed to delay implementation of the Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based Measures (ASC-15a-e) beginning with the CY 2020 payment determination (CY 2018 data collection) until further action in future rulemaking. Since our adoption of these measures, we have come to believe that we need to collect more operational and implementation data. Specifically, we want to ensure that the survey measures appropriately account for patient response rates, both aggregate and by survey administration method; reaffirm the reliability of national implementation of OAS CAHPS Survey data; and appropriately account for the burden associated with administering the survey in the outpatient setting of care. We note that commenters expressed concern over the burden associated with the survey in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79810). We believe that the voluntary national implementation of the survey, which began in January 2016, would provide valuable information moving forward. We plan to conduct analyses of the national implementation data to undertake any necessary modifications to the survey tool and/or CMS systems. We believe it is important to allow time for any modifications before requiring the survey under the ASCQR Program. However, we continue to believe that these measures address an area of care that is not adequately addressed in our current measure set and will be useful to assess aspects of care where the patient is the best or only source of information.
Further, we continue to believe these measures will enable objective and meaningful comparisons between ASCs. Therefore, we proposed to delay implementation of ASC-15a-e beginning with the CY 2020 payment determination (CY 2018 data collection) until further action in future rulemaking. We also refer readers to section XIII.B.5. of this final rule with comment period where we are finalizing a similar policy in the Hospital OQR Program.
We invited public comment on our proposal to delay the OAS CAHPS Survey-based measures beginning with the CY 2020 payment determination as discussed above.
After consideration of the public comments we received, we are finalizing the proposal to delay implementation of the Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based Measures (ASC-15a-e) beginning with the CY 2020 payment determination (CY 2018 data collection) until further action in future rulemaking, as proposed. We refer readers to section XIII.B.5. of this final rule with comment where we are also finalizing delay of the OAS CAHPS Survey-based measures in the Hospital OQR Program.
For the CY 2020 payment determination and subsequent years, we have previously finalized the following measure set. We note that this chart still includes the ASC-5, ASC-6, and ASC-7 measures, which are being finalized for removal beginning with the CY 2019 payment determination as discussed above, as well as the ASC-15a-e measures, which are being finalized for delay beginning with the CY 2020 payment determination and until further action as discussed above:
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75124) for a detailed discussion of our approach to measure selection for the ASCQR Program. In the CY 2018 OPPS/ASC proposed rule (82 FR 33689 through 33698), we proposed to adopt a total of three new measures for the ASCQR Program: one measure collected via a CMS web-based tool for the CY 2021 payment determination and subsequent years (ASC-16: Toxic Anterior Segment Syndrome), and two measures collected via claims for the CY 2022 payment determination and subsequent years (ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures; and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures). These measures are discussed in detail below.
Toxic Anterior Segment Syndrome (TASS), an acute, noninfectious inflammation of the anterior segment of the eye, is a complication of anterior segment eye surgery that typically develops within 24 hours after surgery.
TASS is of interest to the ASCQR Program because cataract surgery is an anterior segment surgery commonly performed at ASCs. In addition, the TASS measure addresses the MAP-identified priority measure area of procedure complications for the ASCQR Program.
We believe it is important to monitor the rate of TASS in the ASC setting because ophthalmologic procedures such as anterior segment surgery are commonly performed in this setting of care. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33690), we proposed to adopt the ASC-16: Toxic Anterior Segment Syndrome measure, which is based on aggregate measure data collected by the ASC and submitted via a CMS online data submission tool (QualityNet), in the ASCQR Program for the CY 2021 payment determination and subsequent years. We expect the measure would promote improvement in patient care over time, because measurement coupled with transparency in publicly reporting of measure information would make patient outcomes following anterior segment procedures more visible to ASCs and patients and incentivize ASCs to incorporate quality improvement activities to reduce the incidence of TASS where necessary.
Section 1890A of the Act requires the Secretary to establish a prerulemaking process with respect to the selection of certain categories of quality and efficiency measures. Under section 1890A(a)(2) of the Act, the Secretary must make available to the public by December 1 of each year a list of quality and efficiency measures that the Secretary is considering for the Medicare program. The ASC-16 measure was included on the 2015 MUC list
Sections 1833(i)(7)(B) and 1833(t)(17)(C)(i) of the Act, when read together, require the Secretary, except as the Secretary may otherwise provide, to develop measures appropriate for the measurement of the quality of care furnished by ASCs that reflect consensus among affected parties and, to the extent feasible and practicable, that include measures set forth by one or more national consensus building entities. However, we note that section 1833(i)(7)(B) of the Act does not require that each measure we adopt for the ASCQR Program be endorsed by a national consensus building entity, or by the NQF specifically. Further, under section 1833(i)(7)(B) of the Act, section 1833(t)(17)(C)(i) of the Act applies to the ASCQR Program, except as the Secretary may otherwise provide. Under this provision, the Secretary has further authority to adopt non-endorsed measures. As stated in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74465 and 74505), we believe that consensus among affected parties can be reflected through means other than NQF endorsement, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment. We believe this measure meets these statutory requirements.
The proposed ASC-16: Toxic Anterior Segment Syndrome measure is not NQF-endorsed. However, this measure is maintained by the ASC Quality Collaboration,
This measure is based on aggregate measure data collected via chart-abstraction by the ASC and submitted via a CMS online data submission tool (that is, QualityNet).
We proposed that the data collection period for the proposed ASC-16 measure would be the calendar year two years prior to the applicable payment determination year. For example, for the CY 2021 payment determination, the data collection period would be CY 2019. We also proposed that ASCs submit these data to CMS during the time period of January 1 to May 15 in the year prior to the affected payment determination year. For example, for the CY 2021 payment determination, the submission period would be January 1, 2020 to May 15, 2020. We refer readers to section XIV.D.3.b. of this final rule with comment period for a more detailed discussion of the requirements for data submitted via a CMS online data submission tool.
The outcome measured in the proposed ASC-16: Toxic Anterior Segment Syndrome measure is the number of ophthalmic anterior segment surgery patients diagnosed with TASS within 2 days of surgery. The numerator for this measure is all anterior segment surgery patients diagnosed with TASS within 2 days of surgery. The denominator for this measure is all anterior segment surgery patients. The specifications for this measure for the ASC setting can be found at:
The measure includes all patients, regardless of age, undergoing anterior segment surgery at an ASC. Additional methodology and measure development details are available at:
The proposed ASC-16: Toxic Anterior Segment Syndrome measure is not risk-adjusted; risk adjustment for patient characteristics is not appropriate for this measure.
We invited public comment on our proposal to adopt the ASC-16: Toxic Anterior Segment Syndrome measure for the CY 2021 payment determination and subsequent years as discussed above.
Regarding concerns about the low volume of procedures, although data show that TASS occurs in clusters, these clusters do indeed include low numbers, ranging from just a few cases to up to 20 cases during a year's time.
After consideration of the public comments we received, we are not finalizing the proposal to adopt the ASC-16: Toxic Anterior Segment Syndrome measure for the CY 2021 payment determination and subsequent years for reasons discussed in our responses above.
The measure set for the ASCQR Program CY 2021 payment determination and subsequent years is as listed below. We note that the measures we are finalizing for removal in this final rule with comment period are not included in this chart.
Reporting the quality of care provided at ASCs is a key priority in the context of growth in the number of ASCs and the number of procedures performed in this setting. More than 60 percent of all medical or surgical procedures performed in 2006 were performed at ASCs; this represents a three-fold increase from the late 1990s.
We believe measuring and reporting seven-day unplanned hospital visits following orthopedic ASC procedures will incentivize ASCs to improve care and care transitions. Patients that have hospital visits that occur at or after discharge from the ASC and may not be readily visible to clinicians because such patients often present to alternative facilities, such as emergency departments where patient information is not linked back to the ASC. Furthermore, many of the reasons for hospital visits following surgery at an ASC are preventable; patients often present to the hospital for complications of medical care, including infection, post-operative bleeding, urinary retention, nausea and vomiting, and pain. One study found that of 10,032 patients who underwent orthopedic surgery in an ASC between 1993 and 2012, 121 (1.2 percent) needed attention in the emergency department in the first 24 hours after discharge due to pain or bleeding, while others were admitted later for issues related to pain and swelling.
Based on the increasing prevalence of orthopedic surgery in the ASC setting, we believe it is important to minimize adverse patient outcomes associated with these orthopedic ASC surgeries. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33692), we proposed to adopt the ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure into the ASCQR Program for the CY 2022 payment determination and subsequent years. We expect the measure would promote improvement in patient care over time, because measurement coupled with transparency in publicly reporting measure information would make the rate of unplanned hospital visits (emergency department visits, observation stays, and unplanned inpatient admissions) following orthopedic surgery at ASCs more visible to both ASCs and patients and would incentivize ASCs to incorporate quality improvement activities to reduce these unplanned hospital visits. The measure also addresses the CMS National Quality Strategy domains of making care safer by reducing harm caused in the delivery of care and promoting effective
Section 1890A of the Act requires the Secretary to establish a prerulemaking process with respect to the selection of certain categories of quality and efficiency measures. Under section 1890A(a)(2) of the Act, the Secretary must make available to the public by December 1 of each year a list of quality and efficiency measures that the Secretary is considering for the Medicare program. The ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure was included on a publicly available document entitled “List of Measures under Consideration for December 1, 2016.”
Since the MAP's review and recommendation of `Refine and Resubmit' in 2016, we have completed testing for this measure and continued to refine this proposed measure in response to the MAP's recommendations. Results of continued development activities, including stakeholder feedback from the public comment period and pilot test findings will be presented to the MAP during the MAP feedback loop meeting in fall 2017. The proposed measure is consistent with the information submitted to the MAP, and the original MAP submission and our continued refinements support its scientific acceptability for use in quality reporting programs. Facility-level testing showed variation in unplanned hospital visits among ASCs after adjusting for case-mix differences, which suggests variation in quality of care and opportunities for quality improvement; and reliability testing showed fair measure score reliability.
Sections 1833(i)(7)(B) and 1833(t)(17)(C)(i) of the Act, when read together, require the Secretary, except as the Secretary may otherwise provide, to develop measures appropriate for the measurement of the quality of care furnished by ASCs that reflect consensus among affected parties and, to the extent feasible and practicable, that include measures set forth by one or more national consensus building entities. However, we note that section 1833(i)(7)(B) of the Act does not require that each measure we adopt for the ASCQR Program be endorsed by a national consensus building entity, or by the NQF specifically. Further, under section 1833(i)(7)(B) of the Act, section 1833(t)(17)(C)(i) of the Act applies to the ASCQR Program, except as the Secretary may otherwise provide. Under this provision, the Secretary has further authority to adopt non-NQF-endorsed measures. As stated in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74465 and 74505), we believe that consensus among affected parties can be reflected through means other than NQF endorsement, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment. We believe this proposed measure meets these statutory requirements.
The proposed ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure is not currently NQF-endorsed. However, we intend to submit this measure for review and endorsement by NQF once an appropriate NQF project has a call for measures. We believe that this measure is appropriate for the measurement of quality care furnished by ASCs, because surgeries are becoming increasingly common in ASCs and, as discussed above, can signify unanticipated admissions after care provided in ASCs. Such visits are an unexpected and potentially preventable outcome for patients with a low anticipated perioperative risk. We also believe this proposed measure reflects consensus among affected parties, because it was developed with stakeholder input from a Technical Expert Panel convened by a CMS contractor as well as from the measure development public comment period.
This measure is claims-based and uses Part A and Part B Medicare administrative claims and Medicare enrollment data to calculate the measure.
We proposed that the data collection period for the proposed ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure would be the two calendar years ending two years prior to the applicable payment determination year. For example, for the CY 2022 payment determination, the data collection period would be CY 2019 to 2020. Because the measure data are collected via claims, ASCs will not need to submit any additional data directly to CMS. We refer readers to section XIV.D.4. of this final rule with comment period for a more detailed discussion of
The measure outcome is all-cause, unplanned hospital visits within seven days of an orthopedic procedure performed at an ASC. For the purposes of this measure, “hospital visits” include emergency department visits, observation stays, and unplanned inpatient admissions. When there are two or more qualifying surgical procedures within a 7-day period, the measure considers all procedures as index procedures; however, the timeframe for outcome assessment is defined as the interval between procedures (including the day of the next procedure) and then 7 days after the last procedure.
The facility-level score is a risk-standardized hospital visit rate, calculated by multiplying the ratio of the predicted to the expected number of post-surgical hospital visits among the given ASC's patients by the national observed hospital visit rate for all ASCs. For each ASC, the numerator of the ratio is the number of hospital visits predicted for the ASC's patients accounting for its observed rate, the number of the orthopedic surgeries performed at the ASC, the case-mix, and the surgical complexity mix. The denominator of the ratio is the expected number of hospital visits given the ASC's case-mix and surgical complexity mix. A ratio of less than one indicates the ASC facility's patients were estimated as having fewer post-surgical visits than expected compared to ASCs with similar surgical complexity and patients; and a ratio of greater than one indicates the ASC facility's patients were estimated as having more visits than expected. The national observed hospital visit rate is the national unadjusted proportion of patients who had a hospital visit following an orthopedic ASC surgery. For more information on measure calculations, we refer readers to:
The patient cohort for the proposed ASC-17 measure includes all Medicare beneficiaries ages 65 and older undergoing outpatient orthopedic surgery at an ASC who have 12 prior months of Medicare fee-for-service Parts A and B enrollment. The target group of procedures includes those that: (1) Are routinely performed at ASCs; (2) involve some increased risk of post-surgery hospital visits; and (3) are routinely performed by orthopedists.
Procedures included in the measure cohort are on Medicare's list of covered ambulatory surgical center (ASC) procedures.
In addition, to focus the measure only on the subset of surgeries on Medicare's list of covered ASC procedures that impose a meaningful risk of post-orthopedic ASC surgery hospital visits, the measure includes only “major” and “minor” procedures, as indicated by the Medicare Physician Fee Schedule global surgery indicator (GSI) values of 090 and 010, respectively. This list of GSI values is publicly available at:
The measure excludes patients who survived at least 7 days following orthopedic surgery at an ASC, but were not continuously enrolled in Medicare fee-for-service Parts A and B in the 7 days after surgery. These patients are excluded to ensure all patients captured under this measure have full data available for outcome assessment. There are no additional inclusion or exclusion criteria for the proposed ASC-17 measure. Additional methodology and measure development details are available at:
The statistical risk-adjustment model includes 29 clinically relevant risk-adjustment variables that are strongly associated with risk of hospital visits within seven days following ASC orthopedic surgery. The measure risk adjusts for age, 27 comorbidities, and a variable for work Relative Value Units (RVUs) to adjust for surgical complexity.
As stated above, facility-level testing showed variation in unplanned hospital visits among ASCs after adjusting for case-mix differences, which suggests variation in quality of care and opportunities for quality improvement.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33694), we stated that if this proposed measure is finalized as proposed, we intend to conduct a dry run before the official data collection period or any public reporting. A dry run is a period of confidential reporting and feedback during which ASCs may review their dry-run measure results, and in addition, further familiarize themselves with the measure methodology and ask questions. For the dry-run, we intend to use the most current 2-year set of complete claims (usually 12 months prior to the start date) available at the time of dry run. For example, if the dry run began in June 2018, the most current 2-year set of data available would likely be July 2015 to June 2017. Because we use paid, final action Medicare claims, ASCs would not need to submit any additional data for the dry run. The dry run would generate confidential feedback reports for ASCs, including patient-level data indicating whether the patient had a hospital visit and, if so, the type of visit (emergency department visit, observation stay, or unplanned inpatient admission), the admitting facility, and the principal discharge diagnosis. Further, the dry run would enable ASCs to see their risk-standardized hospital visit rate prior to the measure being implemented. General information about the dry run as well as confidential facility-specific reports would be made available for ASCs to review on their accounts at:
These confidential dry run results are not publicly reported and do not affect payment. We expect the dry run to take approximately one month to conduct, during which facilities would be provided the confidential report and the opportunity to review their performance and provide feedback to us. However, after the dry run, measure results would have a payment impact and be publicly reported beginning with the CY 2022 payment determination and for subsequent years as proposed. Although not previously stated in the CY 2018 OPPS/ASC proposed rule (82 FR 33694), we note that the primary purpose of the records maintained in the National Claims History system of records (SOR) is for evaluating and studying the operation and effectiveness of the Medicare program, which aligns with the purposes of the ASCQR Program and a permissible use of beneficiary information. In addition, under 45 CFR 164.506(c)(4) of the HIPAA Privacy Rule, we may disclose protected health information to another covered entity, such as the ASCs, provided that both the ASC and CMS have or had a relationship with each individual who is the subject of the PHI being requested, the PHI pertains to such relationship, and the disclosure is for the purposes of conducting quality assessment and improvement activities listed in paragraph (1) or (2) of the definition of “health care operations” at 45 CFR 164.501. We believe that this provision is extensive enough to cover the uses that we would expect an ASC to make of the PHI.
We invited public comment on our proposal to adopt the ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure beginning with the CY 2022 payment determination as discussed above.
We strive to adopt NQF-endorsed measures when possible. Although ASC-17 is not currently NQF-endorsed, our research and analysis conducted during development demonstrate that the measure is accurate, valid, and actionable. We refer readers to the technical report for more information about the measure and testing results:
In addition, in December 2016, the MAP Hospital Workgroup reviewed and classified the measure as “Refine and Resubmit Prior to Rulemaking.”
The measure was purposely designed to evaluate all-cause hospital visits to broadly capture serious adverse events experienced by patients after undergoing orthopedic ASC procedures, rather than a narrow set of identifiable complications, for many reasons. The outcome of all-cause hospital visits is consistent with a patient-centric view of care that is designed to prompt ASC providers to minimize the risk and reduce the need for a broad range of outcomes after undergoing orthopedic ASC procedures, including the risk of dehydration, nausea and vomiting, dizziness, and urinary retention. Measuring only hospital visits that are overtly related to a procedure, such as visits for pain and bleeding, would limit the measure's intended broad impact on quality improvement efforts.
Furthermore, the rate of hospital visits is not expected to be zero, since some patients will have visits for reasons unrelated to the procedure. In designing the measure, we narrowed the measure to include surgical procedure that: (1) Are routinely performed at ASCs; (2) involve increased risk of post-surgery hospital visits; and (3) are routinely performed by orthopedists. In addition, the measure is risk adjusted for patient demographics, clinical characteristics, and surgical procedural complexity, so that facilities that experience more unrelated visits due to a generally higher-risk patient mix will not be disadvantaged. We refer readers to the methods section in the measure specifications for more information about the risk-adjustment methodology.
In addition, we only measure the rate of
Furthermore, we disagree with the commenter's suggestion that we remove ED visits and observation stays from the measure outcome, because these are unplanned visits for patients undergoing low- to moderate-risk outpatient procedures. From a patient perspective, we believe that ED visits and observation stays are an undesirable outcome. We believe a quality measure assessing hospital visits following ASC surgery will serve to improve transparency, inform patients and providers, and foster quality improvement, because providers at ASCs are often unaware of patients' subsequent acute care visits given that patients tend to present to the emergency department or to hospitals unaffiliated with the ASC. Moreover, the measure outcome of hospital visits within 7 days after a procedure aligns with the NQF-endorsed measure Facility 7-Day Risk-Standardized Hospital Visit Rate after Outpatient Colonoscopy Measure (NQF #2539).
Regarding the commenter's concerns about the attribution of outcomes and whether hospital visits within 7 days of ASC procedure is a sign of poor quality, we believe that the measure captures the full range of potentially serious adverse events related to orthopedic procedures performed as ASCs. We limited the outcome timeframe for hospital visits (ED visits, observation stays, and unplanned admissions) to 7 days because existing literature suggests that the vast majority of adverse events after an orthopedic procedure occur within the first 7 days following the procedure and because the highest rates of hospital visits were observed in claims data within 7 days following the procedure.
We appreciate the commenter's careful review of the top hospital visit diagnoses within seven days of orthopedic procedures. We welcome specific examples of potentially planned admissions following outpatient orthopedic procedures.
Further, we believe that measures of hospital events following specific types of surgical procedures fully based on Medicare FFS claims recently adopted (for example, ASC-12: Facility 7-Day Risk Standardized Hospital Visit Rate after Outpatient Colonoscopy Measure) and including those newly finalized in this final rule with comment period (that is, ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures) will better inform Medicare beneficiaries and other consumers about post-procedure complication rates. Existing ASC quality measures tend to focus on very rare, patient safety-related events. For example, ASC-3 counts cases in which a wrong site, wrong side, wrong patient, wrong procedure, or wrong implant event occurred (76 FR 74499).
While we appreciate the commenter's feedback that some ASCs were already aware of most of the visits in the claims detail report and did not review the reports unless the facilities were categorized as underperforming, that is not always the case. Providers at ASCs are often unaware of patients' subsequent acute care visits given that separate providers (for example, emergency department physicians) tend to provide post-surgical care when it is required.
Although the majority of ASCs would be expected to have risk-standardized rates that would be classified as “no different than the national rate” on
In addition, analyses of ASCs categorized into quartiles based on proportions of Medicaid dual-eligible patients, of African-American patients, and of low-SES patients (as identified by the AHRQ SES index),
Furthermore, we appreciate the commenter's concern about including condition category (CC) 82 on the list of condition categories that are not risk-adjusted for if they occur only at the time of the procedure.
We note that while ASCs will not be required to submit additional data for measure calculation, because this is a claims-based measure, we strongly encourage ASCs to review measure scores to improve quality of care and patient outcomes. The detailed feedback reports, which provide information on every procedure performed during the performance period and the details of the hospital visits within seven days of the orthopedic procedure, will enable ASCs to understand the post-surgical hospital visit patterns. We believe this will help to facilitate ASCs to tailor clinical and educational interventions with the goal of reducing or eliminating the risk of hospital visits for complication of an orthopedic surgery. We also believe that the measure will facilitate improvements via public reporting by informing the general public and ASCs even if particular ASCs are not active in the measure.
Regarding the comment about lack of discriminatory power, we agree that the many small-volume ASCs will limit the ability to make distinctions in performance between facilities. ASCs with few cases in a given year limit our ability to capture variation in ASC-level measure scores because our modeling methodology is conservative and will estimate measure scores toward the national mean for facilities with small volumes. Specifically, ASCs with relatively few cases in the performance period may have a true rate that is worse/better than the national average. However, the model estimates their rate as close to the mean because their low volume does not provide enough information to accurately estimate a value near their true rate. As a result, the model may capture less variation than truly exists due to low case sizes. To improve the measure's ability to detect quality differences, we crafted our proposal to use 2 years of data for public reporting to expand the number of cases available for estimating rates across all facilities and to increase both the reliability of the measure score and the ability to discriminate performance across facilities. Furthermore, ASC facilities that have too few cases to reliably estimate a measure score (moderate reliability as discussed in the prior paragraph) would be treated in the same way as other facilities with too few cases and would not have their scores posted on
As proposed, we will not publicly report data for this measure until the CY 2022 payment determination and subsequent years. We do not believe publicly reporting data from the dry run is appropriate as we might still be working out unanticipated nuances; the data is preliminary and is therefore subject to change based on feedback provided by ASCs.
After consideration of the public comments we received, we are finalizing the proposal to adopt the ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures measure in the ASCQR Program for the CY 2022 payment determination and subsequent years, as proposed.
As the number of urology procedures performed in ASCs increases, it is of increasing importance to report the quality of care provided to patients undergoing these procedures. One study found that urology procedures accounted for 4.8 percent of unanticipated admissions, and that urology surgery patients were almost twice as likely as orthopedics, plastic surgery, or neurosurgery to be admitted following surgery.
Because urology surgery performed at an ASC is a significant predictive factor for unanticipated admissions compared to other procedures,
We believe it is important to minimize adverse patient outcomes associated with urology ASC surgeries. Therefore, in the CY 2018 OPPS/ASC proposed rule (82 FR 33695), we proposed to adopt the ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure in the ASCQR Program for the CY 2022 payment determination and subsequent years. We expect the measure would promote improvement in patient care over time, because measurement coupled with transparency in publicly reporting measure information would make the rate of unplanned hospital visits (emergency department visits, observation stays, and unplanned inpatient admissions) following urology procedures at ASCs more visible to both ASCs and patients, and would incentivize ASCs to incorporate quality improvement activities to reduce these unplanned hospital visits. The measure also addresses the CMS National Quality Strategy domains of making care safer by reducing harm caused in the delivery of care and promoting effective communication and coordination of care.
Section 1890A of the Act requires the Secretary to establish a prerulemaking process with respect to the selection of certain categories of quality and efficiency measures. Under section 1890A(a)(2) of the Act, the Secretary must make available to the public by December 1 of each year a list of quality and efficiency measures that the Secretary is considering for the Medicare program. The ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure was included on a publicly available document entitled “List of Measures under Consideration for December 1, 2016.”
Since the MAP's review and recommendation of `Refine and Resubmit' in 2016, we have completed testing for this measure and continued to refine this proposed measure in response to the MAP's recommendations. Results of continued development activities, including stakeholder feedback from the public comment period and pilot test findings will be presented to the MAP during the MAP feedback loop meeting in fall 2017. The proposed measure is consistent with the information submitted to the MAP, and the original MAP submission and our continued refinements support its scientific acceptability for use in quality reporting programs. Facility-level testing showed significant variation in unplanned hospital visits among ASCs after adjusting for case-mix differences, which suggests variation in quality of care. Our testing found moderate measure score reliability
Sections 1833(i)(7)(B) and 1833(t)(17)(C)(i) of the Act, when read together, require the Secretary, except as the Secretary may otherwise provide, to develop measures appropriate for the measurement of the quality of care furnished by ASCs that reflect consensus among affected parties and, to the extent feasible and practicable, that include measures set forth by one or more national consensus building entities. However, we note that section 1833(i)(7)(B) of the Act does not require that each measure we adopt for the ASCQR Program be endorsed by a national consensus building entity, or by the NQF specifically. Further, under section 1833(i)(7)(B) of the Act, section 1833(t)(17)(C)(i) of the Act applies to the ASCQR Program, except as the Secretary may otherwise provide. Under this provision, the Secretary has further authority to adopt non-endorsed measures. As stated in the CY 2012 OPPS/ASC final rule with comment period (76 FR 74465 and 74505), we believe that consensus among affected parties can be reflected through means other than NQF endorsement, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment. We believe this proposed measure meets these statutory requirements.
The proposed ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure is not currently NQF-endorsed. However, we intend to submit this measure for review and endorsement by the NQF once an appropriate measure endorsement project has a call for measures. We believe that this measure is appropriate for the measurement of quality care furnished by ASCs because urology procedures are becoming increasingly common in ASCs and, as discussed above, can signify unanticipated admissions after care provided in ASCs. Such visits are an unexpected and potentially preventable outcome for patients with a low anticipated perioperative risk. We also believe this measure depicts consensus among affected parties, as it was developed with stakeholder input from both a Technical Expert Panel convened by a contractor as well as the measure development public comment period.
This measure is claims-based and uses Part A and Part B Medicare administrative claims and Medicare enrollment data to calculate the measure.
We proposed that the data collection period for the proposed ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure would be the 2 calendar years ending 2 years prior to the applicable payment determination year. For example, for the CY 2022 payment determination, the data collection period would be CY 2019 to 2020. Because these measure data are collected via claims, ASCs will not need to submit any additional data directly to CMS. We refer readers to section XIV.D.4. of this final rule with comment period for a more detailed discussion of the requirements for data submitted via claims.
The measure outcome is all-cause, unplanned hospital visit occurring within seven days of the urology procedure performed at an ASC. For the purpose of this measure, “hospital visits” include emergency department visits, observation stays, and unplanned inpatient admissions. When there are two or more qualifying surgical procedures within a 7-day period, the measure considers all procedures as index procedures. However, the timeframe for outcome assessment is defined as the interval between procedures (including the day of the next procedure) and then 7 days after the last procedure.
The facility-level score is a risk-standardized hospital visit rate, calculated by multiplying the ratio of the predicted to the expected number of postsurgical hospital visits among the given ASC's patients by the national observed hospital visit rate for all ASCs. For each ASC, the numerator of the ratio is the number of hospital visits predicted for the ASC's patients accounting for its observed rate, the number of the urology procedures performed at the ASCs, the case-mix, and the surgical complexity mix. The denominator of the ratio is the expected number of hospital visits given the ASC's case-mix and surgical complexity mix. A ratio of less than one indicates the ASC facility's patients were estimated as having fewer post-surgical visits than expected compared to ASCs with similar surgical complexity and patients; and a ratio of greater than one indicates the ASC facility's patients were estimated as having more visits than expected. The national observed hospital visit rate is the national unadjusted proportion of patients who had a hospital visit following a urology ASC surgery. For more information on measure calculations, we refer readers to:
The patient cohort for the proposed ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure includes all Medicare beneficiaries ages 65 and older undergoing outpatient urology procedures at an ASC who have 12 prior months of Medicare fee-for-service Parts A and B enrollment. The target group of procedures are those that: (1) Are routinely performed at ASCs; (2) involve increased risk of post-surgery hospital visits; and (3) are routinely performed by urologists.
Procedures included in the measure cohort are on Medicare's list of covered ambulatory surgical center (ASC) procedures.
The measure excludes patients who survived at least 7 days following a urology procedure at an ASC, but were not continuously enrolled in Medicare fee-for-service Parts A and B in the 7 days after surgery. These patients are excluded to ensure all patients captured under this measure have full data available for outcome assessment. There are no additional inclusion or exclusion criteria for the proposed ASC-18 measure. Additional methodology and measure development details are available at:
The statistical risk-adjustment model includes nine clinically relevant risk-adjustment variables that are strongly associated with risk of hospital visits within seven days following ASC urology surgery. The measure risk adjusts for age, six comorbidities, number of qualifying procedures, and work Relative Value Units (RVUs) to adjust for surgical complexity.
As stated above, facility-level testing showed variation in unplanned hospital visits among ASCs after adjusting for case-mix differences, which suggests variation in quality of care and opportunities for quality improvement.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33694), we noted that if this proposed measure is finalized, but before the official data collection period or public reporting for the proposed ASC-18 measure, we intend to conduct a dry run. A dry run is a period of confidential feedback during which ASCs may review their dry-run measure results, and in addition, further familiarize themselves with the measure methodology, and ask questions. For the dry-run, we intend to use the most current 2-year set of complete claims (usually 12 months prior to the start date) available at the time of dry run. For example, if the dry run began in June 2018, the most current 2-year set of data available would likely be July 2015 to June 2017. Because we use paid, final action Medicare claims, ASCs would not need to submit any additional data for the dry run. The dry run would generate confidential feedback reports for ASCs, including patient-level data indicating whether the patient had a hospital visit and, if so, the type of visit (emergency department visit, observation stay, or unplanned inpatient admission), the admitting facility, and the principal discharge diagnosis. Further, the dry run would enable ASCs to see their risk-standardized hospital visit rate prior to the measure being implemented. General information about the dry run as well as confidential facility-specific reports would be made available for ASCs to review on their accounts at:
The confidential dry run results are not publicly reported and do not affect payment. We expect the dry run to take
We invited public comment on our proposal to adopt the ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure beginning with the CY 2022 payment determination as discussed above.
We strive to adopt NQF-endorsed measures when possible. Although ASC-18 is not currently NQF-endorsed, our research and analysis conducted during development demonstrate that the measure is accurate, valid, and actionable. We refer readers to the technical report for more information about the measure and testing results:
In addition, in December 2016, the MAP Hospital Workgroup reviewed and classified the measure as “Refine and Resubmit Prior to Rulemaking.”
In addition, we only measure the rate of
Regarding the commenter's concerns about the attribution of outcomes, and whether hospital visit within 7 days of ASC procedure is a sign of poor quality, we believe that the measure captures the full range of potentially serious adverse events related to urologic procedures performed at ASCs. We designed the outcome timeframe to encompass the first 7 days for capture of hospital visits (ED visits, observation stays, and unplanned admissions), because existing literature suggests that the vast majority of adverse events after an urology procedure occur within the first 7 days following the procedure
In response to a commenter's suggestion that we develop a numerator exclusion for unrelated hospital visits, this measure was intentionally designed to broadly evaluate all-cause hospital visits to capture serious adverse events experience by patients after undergoing urologic ASC procedures, rather than a narrow set of identifiable complications, for many reasons. The outcome of all-cause hospital visits is consistent with a patient-centric view of care that is designed to prompt ASC providers to minimize the risk and reduce the need for a broad range of outcomes after undergoing urologic ASC procedures, including the risk of dehydration, nausea and vomiting, dizziness, and urinary retention. Measuring only hospital visits that are overtly related to a procedure, such as visits for pain and bleeding, would limit the measure's intended broad impact on quality improvement efforts. These are common problems that may or may not be related to a recent ASC procedure. Thus, the measure is structured so that facilities that most effectively minimize patient risk of these outcomes will perform better on the measure.
We appreciate the commenter's careful review of the top hospital visit diagnoses within seven days of urology procedures. We welcome specific examples of potentially planned admissions following outpatient urologic procedures.
Further, we believe that measures of hospital events following specific types of surgical procedures fully based on Medicare FFS claims recently adopted (for example, ASC-12: Facility 7-Day Risk Standardized Hospital Visit Rate after Outpatient Colonoscopy Measure) and including those newly finalized in this final rule that is, ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures) will better inform Medicare beneficiaries and other consumers about post-procedure complication rates. Existing ASC quality measures tend to focus on very rare, patient safety-related events. For example, ASC-3 counts cases in which a wrong site, wrong side, wrong patient, wrong procedure, or wrong implant event occurred (76 FR 74499).
While we appreciate the commenter's feedback that some ASCs were already aware of most of the visits in the claims detail report and did not review the reports unless the facilities were categorized as underperforming, that is not always the case. Providers at ASCs are more often unaware of patients' subsequent acute care visits given that separate providers (for example, emergency department physicians) tend to provide post-urological care when it is required.
Although the majority of ASCs would be expected to have risk-standardized rates that would be classified as “no different than the national rate” on
Furthermore, we appreciate the commenter's concern about including condition category (CC) 82 on the list of condition categories that are not risk-adjusted for if they occur only at the time of the procedure.
Regarding the comment about lack of discriminatory power, we agree that the many small-volume ASCs will limit the ability to make distinctions in performance between facilities. ASCs with few cases in a given year limit our ability to capture variation in ASC-level measure scores because our modeling methodology is conservative and will estimate measure scores toward the national mean for facilities with small volumes. Specifically, hospitals with relatively few cases in the performance period may have a true rate that is worse/better than the national average. However, the model estimates their rate as close to the mean because their low volume does not provide enough information to accurately estimate a value near their true rate. As a result, the model may capture less variation than truly exits due to low case sizes. To improve the measure's ability to detect quality differences, we crafted our proposal to use 2 years of data for public reporting to expand the number of cases available for estimating rates across all facilities and to increase both the reliability of the measure score and the ability to discriminate performance across facilities. Furthermore, ASC facilities that have too few cases to reliably estimate a measure score (moderate reliability as discussed in the prior paragraph) would be treated in the same way as other facilities with too few cases and would not have their scores posted on
As proposed we will not publicly report data for this measure until the CY 2022 payment determination and subsequent years. We do not believe publicly reporting data from the dry run is appropriate as we might still be working out unanticipated nuances; the data is preliminary and is therefore subject to change based on feedback provided by ASCs.
After consideration of the public comments we received, we are finalizing the proposal to adopt the ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures measure in the ASCQR Program for the
The measure set for the ASCQR Program CY 2022 payment determination and subsequent years is listed below.
In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68493 through 68494), we set forth our considerations in the selection of ASCQR Program quality measures. We seek to develop a comprehensive set of quality measures to be available for widespread use for making informed decisions and quality improvement in the ASC setting (77 FR 68496). We also seek to align these quality measures with the National Quality Strategy (NQS), the CMS Strategic Plan (which includes the CMS Quality Strategy), and our other quality reporting and value-based purchasing (VBP) programs, as appropriate. Accordingly, as we stated in the CY 2015 OPPS/ASC final rule with comment period (79 FR 66979), in considering future ASCQR Program measures, we are focusing on the following NQS and CMS Quality Strategy measure domains: Make care safer by reducing harm caused in the delivery of care; strengthen person and family engagement as partners in their care; promote effective communication and coordination of care; promote effective prevention and treatment of chronic disease; work with communities to promote best practices of healthy living; and make care affordable.
We invited public comment on one measure developed by the CDC for potential inclusion in the ASCQR Program in future rulemaking, the Ambulatory Breast Procedure Surgical Site Infection (SSI) Outcome measure (NQF #3025). This potential measure is discussed in more detail below.
Healthcare-associated infections (HAIs) are a major cause of morbidity and mortality in healthcare settings in the United States, with the most recent prevalence surveys of HAIs estimating that approximately four percent of inpatients in acute care settings have developed at least one HAI, translating to 721,800 infections in 648,000 patients in 2011.
Numerous individual studies and systematic reviews provide strong evidence that measurement and feedback of surgical site infections leads to lower SSI rates in the long term.
This issue is of interest to the ASCQR Program because breast procedures are becoming increasingly common at ASCs.
The Ambulatory Breast Procedure Surgical Site Infection (SSI) Outcome measure was included on the 2016 MUC list
The Ambulatory Breast Procedure Surgical Site Infection Outcome measure is used to assess the risk-adjusted Standardized Infection Ratio (SIR) for all SSIs following breast procedures conducted at ASCs among adult patients and reported to the CDC's National Healthcare Safety Network. The measure compares the reported number of SSIs observed at an ASC with a predicted value based on nationally aggregated data. The numerator for this measure is all SSIs during the 30-day and 90-day postoperative periods following breast procedures in ASCs. The term SSI as used in this measure is defined in accordance with the CDC NHSN's surveillance protocol as an infection, following a breast procedure, of either the skin, subcutaneous tissue and breast parenchyma at the incision site (superficial incisional SSI), deep soft tissues of the incision site (deep incisional SSI), or any part of the body deeper than the fascial/muscle layers that is opened or manipulated during the operative procedure (organ/space SSI).
We invited public comment on the possible inclusion of this measure in the ASCQR Program measure set in the future.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74513 through 74514), where we finalized our proposal to follow the same process for updating the ASCQR Program measures that we adopted for the Hospital OQR Program measures, including the subregulatory process for making updates to the adopted measures. In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68496 through 68497), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75131), and the CY 2015 OPPS/ASC final rule with comment period (79 FR 66981), we provided additional clarification regarding the ASCQR Program policy in the context of the previously finalized Hospital OQR Program policy, including the processes for addressing
In the CY 2012 OPPS/ASC final rule with comment period (76 FR 74514 through 74515), we finalized a policy to make data that an ASC submitted for the ASCQR Program publicly available on a CMS Web site after providing an ASC an opportunity to review the data to be made public. In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70531 through 70533), we finalized our policy to publicly display data by the National Provider Identifier (NPI) when the data are submitted by the NPI and to publicly display data by the CCN when the data are submitted by the CCN. In addition, we codified our policies regarding the public reporting of ASCQR Program data at 42 CFR 416.315 (80 FR 70533). In the CY 2017 OPPS/ASC final rule with comment period, we formalized our current public display practices regarding timing of public display and the preview period by finalizing our proposals to publicly display data on the
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75132 through 75133) for a detailed discussion of the QualityNet security administrator requirements, including setting up a QualityNet account, and the associated timelines, for the CY 2014 payment determination and subsequent years. In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70533), we codified the administrative requirements regarding maintenance of a QualityNet account and security administrator for the ASCQR Program at 42 CFR 416.310(c)(1)(i). We refer readers to section XIV.D.3.b.1. of this final rule with comment period where we are finalizing our proposals to expand submission via the CMS online tool to also allow for batch data submission and make corresponding changes to the 42 CFR 416.310(c)(1)(i).
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75133 through 75135) for a complete discussion of the participation status requirements for the CY 2014 payment determination and subsequent years. In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70533 and 70534), we codified these requirements regarding participation status for the ASCQR Program at 42 CFR 416.305. We did not propose any changes to these policies.
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75135) for a complete summary of the data processing and collection periods for the claims-based measures using QDCs for the CY 2014 payment determination and subsequent years. In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70534), we codified the requirements regarding data processing and collection periods for claims-based measures using QDCs for the ASCQR Program at 42 CFR 416.310(a)(1) and (2). We did not propose any changes to these requirements.
We note that, in section XIV.B.3.b.(1) of this final rule with comment period, we are finalizing a proposal to remove one claims-based measure using QDCs, ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing, beginning with the CY 2019 payment determination. The following previously finalized claims-based measures using QDCs will be collected for the CY 2020 payment determination and subsequent years:
• ASC-1: Patient Burn;
• ASC-2: Patient Fall;
• ASC-3: Wrong Site, Wrong Side, Wrong Patient, Wrong Procedure, Wrong Implant; and
• ASC-4: Hospital Transfer/Admission.
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75135 through 75137), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70534 through 70535) as well as 42 CFR 416.310(a)(3) and 42 CFR 416.305(c) for our policies about minimum threshold, minimum case volume, and data completeness for claims-based measures using QDCs. We did not propose any changes to these policies.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74505 through 74509); CY 2014 OPPS/ASC final rule with comment period (78 FR 75137 through 75140); CY 2015 OPPS/ASC final rule with comment period (79 FR 66983 through 66986); CY 2016 OPPS/ASC final rule with comment period (80 FR 70535 through 70536); CY 2017 OPPS/ASC final rule with comment period (81 FR 79820 through 79822); and 42 CFR 416.310(c) for our previously finalized policies for data submitted via an online data submission tool. For more information on data submission using QualityNet, we refer readers to:
We refer readers to CY 2014 OPPS/ASC final rule with comment period (78 FR 75139 through 75140) and CY 2015 OPPS/ASC final rule with comment period (79 FR 66985 through 66986) for our requirements regarding data submitted via a non-CMS online data submission tool (CDC NHSN Web site). We codified our existing policies regarding the data collection time periods for measures involving online data submission and the deadline for data submission via a non-CMS online data submission tool at 42 CFR 416.310(c)(2). Currently, we only have one measure (ASC-8: Influenza Vaccination Coverage among Healthcare Personnel) that is submitted via a non-CMS online data submission tool.
We did not propose any changes to the reporting requirements for this measure.
We refer readers to the CY 2014 OPPS/ASC final rule with comment period (78 FR 75137 through 75139), CY 2016 OPPS/ASC final rule with comment period (80 FR 70535 through 70536), CY 2017 OPPS/ASC final rule with comment period (81 FR 79821 through 79822), and 42 CFR 416.310(c)(1) for our requirements regarding data submitted via a CMS online data submission tool. We are currently using the QualityNet Web site as our CMS online data submission tool:
We did not propose any changes to our policies regarding data submitted via a CMS online data submission tool when data is entered for individual facilities. Currently, for individual facility data entry, users must have a QualityNet account and use one Hospital Quality Reporting (HQR) External File per facility that is uploaded into the QualityNet secure portal. However, using one HQR External File that only allows data entry for one facility can be burdensome for entities responsible for submitting such data for multiple facilities, such as multi-facility ASCs. Therefore, in an effort to streamline the process, we proposed to expand the CMS online tool to also allow for batch submission beginning with data submitted during CY 2018 for the CY 2020 payment determination and subsequent years.
Batch submission is submission of data for multiple facilities simultaneously using a single, electronic file containing data from multiple facilities submitted via one agent QualityNet account. Under the batch submission process, ASC agents (for example, a corporate representative for a corporate entity consisting of multiple ASC facilities with separate NPIs) would be assigned a vendor ID and an ASC's representative would submit the Security Administrator (SA) form with the assigned vendor ID for the agent to establish their own QualityNet account. Once approved, the agent may submit data for any ASC associated with that ID, individually or in a batch, and access data reports for the same ASCs. Agents would only have access to data reports for facilities that have authorized them to have access. For batch submission, agents would be provided the HQR external file layout with which to upload their associated ASCs' data under the agents' QualityNet account. In order to submit batch data, agents would need to meet all QualityNet account requirements, such as establishing a QualityNet account and maintaining a QualityNet security administrator. Additional details regarding logistics of batch data submission would be included in future guidance in the Specifications Manual.
In addition, we proposed to make corresponding changes to 42 CFR 416.310(c)(1)(i) to reflect this proposal and replace the term “ASCs” with the phrase “ASCs, and any agents submitting data on an ASC's behalf.”
We invited public comment on our proposals, as discussed above, to: (1) Expand the CMS online tool to also allow for batch submission of measure data beginning with data submitted during CY 2018, and (2) make corresponding changes to modify 42 CFR 416.310(c)(1)(i) to reflect the aforementioned proposal.
After consideration of the public comments we received, we are finalizing our proposals to: (1) Expand the CMS online tool to also allow for batch submission of measure data beginning with data submitted during CY 2018, and (2) make corresponding changes to modify 42 CFR 416.310(c)(1)(i).
In sections XIV.B.3.b.(2) and XIV.B.3.b.(3) of this final rule with comment period, respectively, we are finalizing proposals to remove two measures collected via a CMS online data submission tool—ASC-6: Safe Survey Checklist Use and ASC-7: ASC Facility Volume Data on Selected Surgical Procedures—beginning with the CY 2019 payment determination. The following previously finalized measures will require data to be submitted via a CMS online data submission tool for the CY 2020 payment determination and subsequent years:
•
•
•
We are not finalizing our proposal to adopt one new measure collected via a CMS online data submission tool, ASC-16: Toxic Anterior Segment Syndrome, beginning with the CY 2021 payment determination, as described in section XIV.B.6.a. of this final rule with comment period.
We refer readers to the CY 2015 OPPS/ASC final rule with comment
We note that one previously finalized measure, ASC-12: Facility 7-Day Risk-Standardized Hospital Visit Rate after Outpatient Colonoscopy, will be collected via claims for the CY 2020 payment determination and subsequent years (79 FR 66970 through 66978). In addition, in sections XIV.B.6.b. and c., respectively, of this final rule with comment period, we are finalizing our proposals to adopt two new claims-based measures—ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures, and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures—beginning with the CY 2022 payment determination.
We refer readers to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79822 through 79824) for our previously finalized policies regarding survey administration and vendor requirements for the CY 2020 payment determination and subsequent years. In addition, we codified these policies at 42 CFR 416.310(e). However, in section XIV.B.4. of this final rule with comment period, we are finalizing a proposal to delay implementation of the ASC-15a-e: OAS CAHPS Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data submission) until further action in future rulemaking and refer readers to that section for more details.
As noted in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79815), some commenters suggested shortening sections of the survey, such as the “About You” section. We continue to evaluate the utility of individual questions as we collect new data from the survey's voluntary national implementation, and will consider different options for shortening the OAS CAHPS Survey without the loss of important data in the future. Specifically, we continue to consider the removal of two demographic questions—the “gender” and “age” questions—from the OAS CAHPS Survey in a future update.
We refer readers to the FY 2013 IPPS/LTCH PPS final rule (77 FR 53642 through 53643), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75140 through 75141), the CY 2017 OPPS/ASC final rule with comment period (81 FR 79824 through 79825), and 42 CFR 416.310(d) for the ASCQR Program's policies for extraordinary circumstance extensions or exemptions (ECE) requests.
Many of our quality reporting and value-based purchasing programs share a common process for requesting an exception from program reporting due to an extraordinary circumstance not within a provider's control. We refer readers to the Hospital IQR Program (76 FR 51615 through 51652, 78 FR 50836 through 50837, 79 FR 50277, 81 FR 57181 through 57182, and 42 CFR 412.140(c)(2)), the Hospital OQR Program (77 FR 68489, 78 FR 75119 through 75120, 79 FR 66966, and 80 FR 70524), the IPFQR Program (77 FR 53659 through 53660 and 79 FR 45978), and the PCHQR Program (78 FR 50848), as well as the HAC Reduction Program (80 FR 49542 through 49543) and the Hospital Readmissions Reduction Program (80 FR 49542 through 49543), for program-specific information about extraordinary circumstances exemption requests. As noted below, some of these policies were updated in the FY 2018 IPPS/LTCH PPS final rule.
In reviewing the policies for these programs, we recognized that there are five areas in which these programs have variances regarding ECE requests. These are: (1) Allowing the facilities or hospitals to submit a form signed by the facility's or hospital's CEO versus CEO or designated personnel; (2) requiring the form be submitted within 30 days following the date that the extraordinary circumstance occurred versus within 90 days following the date the extraordinary circumstance occurred; (3) inconsistency regarding specification of a timeline for us to provide our formal response notifying the facility or hospital of our decision; (4) inconsistency regarding specification of our authority to grant ECEs due to CMS data system issues; and (5) referring to the program as “extraordinary extensions/exemptions” versus as “extraordinary circumstances exceptions.” We believe addressing these five areas, as appropriate, can improve administrative efficiencies for affected facilities or hospitals. We note that, in the FY 2018 IPPS/LTCH PPS final rule, we examined our policies in these areas for the Hospital Readmissions Reduction Program, the HAC Reduction Program, the Hospital IQR Program, the PCHQR Program and the IPFQR Program (82 FR 38240, 38277, 38410, 38425 and 38473 through 38474, respectively) and finalized proposals to address differences in these areas for those programs. In section XIII.D.8. of this final rule with comment period, we are also finalizing revisions to our ECE policies for the Hospital OQR Program.
With the exception of the terminology used to describe these processes (item 5 above), the ASCQR Program is aligned with other quality reporting programs. As a result, in the CY 2018 OPPS/ASC proposed rule (82 FR 33702), we proposed to rename the process as the extraordinary circumstances exceptions (ECE) policy and make conforming changes to 42 CFR 416.310(d). These are discussed below.
We have observed that while all quality programs listed above have developed similar policies to provide exceptions from program requirements to facilities that have experienced extraordinary circumstances, such as natural disasters, these programs refer to these policies using inconsistent terminology. Some programs refer to these policies as “extraordinary circumstances extensions/exemptions” while others refer to the set of policies as “extraordinary circumstances exceptions.” Several programs (specifically, the Hospital VBP Program, the HAC Reduction Program, and the Hospital Readmissions Reduction Program) are not able to grant extensions to required data reporting timelines due to their reliance on data external to their program, and thus the term, “extraordinary circumstances extensions/exemptions” is not
We invited public comment on these proposals as discussed above.
After consideration of the public comments we received, we are finalizing the proposals to rename the process as the extraordinary circumstances exceptions (ECE) policy and make conforming changes to 42 CFR 416.310(d).
We also note that we believe it is important for facilities to receive timely feedback regarding the status of ECE requests. We strive to complete our review of each ECE request as quickly as possible. However, we recognize that the number of requests we receive, and the complexity of the information provided impacts the actual timeframe to make ECE determinations. To improve transparency of our process, we believe it is appropriate to clarify that we will strive to complete our review of each request within 90 days of receipt.
We refer readers to the FY 2013 IPPS/LTCH PPS final rule (77 FR 53643 through 53644), the CY 2014 OPPS/ASC final rule with comment period (78 FR 75141), the CY 2016 OPPS/ASC final rule with comment period (80 FR 70537), and 42 CFR 416.330 for the ASCQR Program's reconsideration policy. We did not propose any changes to this policy.
We refer readers to section XVI.D.1. of the CY 2013 OPPS/ASC final rule with comment period (77 FR 68499) for a detailed discussion of the statutory background regarding payment reductions for ASCs that fail to meet the ASCQR Program requirements.
The national unadjusted payment rates for many services paid under the ASC payment system equal the product of the ASC conversion factor and the scaled relative payment weight for the APC to which the service is assigned. Currently, the ASC conversion factor is equal to the conversion factor calculated for the previous year updated by the multifactor productivity (MFP)-adjusted CPI-U update factor, which is the adjustment set forth in section 1833(i)(2)(D)(v) of the Act. The MFP-adjusted CPI-U update factor is the Consumer Price Index for all urban consumers (CPI-U), which currently is the annual update for the ASC payment system, minus the MFP adjustment. As discussed in the CY 2011 MPFS final rule with comment period (75 FR 73397), if the CPI-U is a negative number, the CPI-U would be held to zero. Under the ASCQR Program in accordance with section 1833(i)(7)(A) of the Act and as discussed in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68499), any annual increase shall be reduced by 2.0 percentage points for ASCs that fail to meet the reporting requirements of the ASCQR Program. This reduction applied beginning with the CY 2014 payment rates (77 FR 68500). For a complete discussion of the calculation of the ASC conversion factor, we refer readers to section XII.G. of this final rule with comment period.
In the CY 2013 OPPS/ASC final rule with comment period (77 FR 68499 through 68500), in order to implement the requirement to reduce the annual update for ASCs that fail to meet the ASCQR Program requirements, we finalized our proposal that we would calculate two conversion factors: A full update conversion factor and an ASCQR Program reduced update conversion factor. We finalized our proposal to calculate the reduced national unadjusted payment rates using the ASCQR Program reduced update conversion factor that would apply to ASCs that fail to meet their quality reporting requirements for that calendar year payment determination. We finalized our proposal that application of the 2.0 percentage point reduction to the annual update may result in the update to the ASC payment system being less than zero prior to the application of the MFP adjustment.
The ASC conversion factor is used to calculate the ASC payment rate for services with the following payment indicators (listed in Addenda AA and BB to the proposed rule, which are available via the Internet on the CMS Web site): “A2”, “G2”, “P2”, “R2” and “Z2”, as well as the service portion of device-intensive procedures identified by “J8” (77 FR 68500). We finalized our proposal that payment for all services assigned the payment indicators listed above would be subject to the reduction of the national unadjusted payment rates for applicable ASCs using the ASCQR Program reduced update conversion factor (77 FR 68500).
The conversion factor is not used to calculate the ASC payment rates for separately payable services that are assigned status indicators other than payment indicators “A2”, “G2”, “J8”, “P2”, “R2” and “Z2.” These services include separately payable drugs and biologicals, pass-through devices that are contractor-priced, brachytherapy sources that are paid based on the OPPS payment rates, and certain office-based procedures, certain radiology services and diagnostic tests where payment is based on the MPFS nonfacility PE RVU-based amount, and a few other specific services that receive cost-based payment (77 FR 68500). As a result, we also finalized our proposal that the ASC payment rates for these services would not be reduced for failure to meet the ASCQR Program requirements because the payment rates for these services are not calculated using the ASC conversion factor and, therefore, not affected by reductions to the annual update (77 FR 68500).
Office-based surgical procedures (performed more than 50 percent of the time in physicians' offices) and separately paid radiology services (excluding covered ancillary radiology services involving certain nuclear medicine procedures or involving the use of contrast agents) are paid at the lesser of the MPFS nonfacility PE RVU-based amounts or the amount calculated under the standard ASC ratesetting methodology. Similarly, in section XII.D.2.b. of the CY 2015 OPPS/ASC final rule with comment period (79 FR 66933 through 66934), we finalized our proposal that payment for the new category of covered ancillary services (that is, certain diagnostic test codes within the medical range of CPT codes for which separate payment is allowed under the OPPS and when they are integral to covered ASC surgical procedures) will be at the lower of the MPFS nonfacility PE RVU-based (or technical component) amount or the rate calculated according to the standard
For ASCs that receive the reduced ASC payment for failure to meet the ASCQR Program requirements, we believe that it is both equitable and appropriate that a reduction in the payment for a service should result in proportionately reduced coinsurance liability for beneficiaries (77 FR 68500). Therefore, in the CY 2013 OPPS/ASC final rule with comment period (77 FR 68500), we finalized our proposal that the Medicare beneficiary's national unadjusted coinsurance for a service to which a reduced national unadjusted payment rate applies will be based on the reduced national unadjusted payment rate.
In that final rule with comment period, we finalized our proposal that all other applicable adjustments to the ASC national unadjusted payment rates would apply in those cases when the annual update is reduced for ASCs that fail to meet the requirements of the ASCQR Program (77 FR 68500). For example, the following standard adjustments would apply to the reduced national unadjusted payment rates: The wage index adjustment; the multiple procedure adjustment; the interrupted procedure adjustment; and the adjustment for devices furnished with full or partial credit or without cost (77 FR 68500). We believe that these adjustments continue to be equally applicable to payment for ASCs that do not meet the ASCQR Program requirements (77 FR 68500).
In the CY 2015, CY 2016 and CY 2017 OPPS/ASC final rules with comment period (79 FR 66981 through 66982; 80 FR 70537 through 70538; and 81 FR 79825 through 79826, respectively), we did not make any other changes to these policies.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33702 through 33703), we did not propose any changes to these policies for CY 2018.
The Addenda to the OPPS/ASC proposed rules and the final rules with comment period are published and available only via the Internet on the CMS Web site. To view the Addenda to this final rule with comment period pertaining to CY 2018 payments under the OPPS, we refer readers to the CMS Web site at:
Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the
• The need for the information collection and its usefulness in carrying out the proper functions of our agency.
• The accuracy of our estimate of the information collection burden.
• The quality, utility, and clarity of the information to be collected.
• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.
In the CY 2018 OPPS/ASC proposed rule (82 FR 33705 through 33710), we solicited public comment on each of these issues for the following sections of this document that contain information collection requirements (ICRs).
The Hospital OQR Program is generally aligned with the CMS quality reporting program for hospital inpatient services known as the Hospital IQR Program (82 FR 20031 through 20075). We refer readers to the CY 2011 through CY 2017 OPPS/ASC final rules with comment periods (75 FR 72111 through 72114; 76 FR 74549 through 74554; 77 FR 68527 through 68532; 78 FR 75170 through 75172; 79 FR 67012 through 67015; 80 FR 70580 through 70582; and 81 FR 79862 through 79863, respectively) for detailed discussions of Hospital OQR Program information collection requirements we have previously finalized. The information collection requirements associated with the Hospital OQR Program are currently approved under OMB control number 0938-1109.
In section XIII.B.4.c. of this final rule with comment period, we are finalizing the removal of six measures. Specifically, beginning with the CY 2020 payment determination, we are finalizing, as proposed, to remove: (1) OP-21: Median Time to Pain Management for Long Bone Fracture; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. Also, while we proposed to remove: (1) OP-1: Median Time to Fibrinolysis, (2) OP-4: Aspirin at Arrival, (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional, and (4) OP-25: Safe Surgery Checklist beginning with the CY 2021 payment determination, we are finalizing removal of these measures with modification so that removal begins with the CY 2020 payment determination, one year earlier than proposed. To summarize, the following measures will be removed for the CY 2020 payment determination: (1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; (4) OP-21: Median Time to Pain Management for Long Bone Fracture; (5) OP-25: Safe Surgery Checklist; and (6) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. We expect these finalized proposals will reduce the burden of reporting for the Hospital OQR Program, as discussed in more detail below. We note that we discuss only the changes in burden resulting from the provisions in this final rule with comment period.
In section XIII.B.10.b. of this final rule with comment period, we are finalizing our proposal, with modification, to publicly report OP-18c using data
In section XIII.B.5. of this final rule with comment period, we are finalizing our proposal to delay the OP-37a-e: Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection period) until further notice in future rulemaking.
In addition, in this final rule with comment period, beginning with the CY 2020 payment determination, we are finalizing our proposals: (1) To codify at § 419.46(e) our previously finalized process for targeting hospitals for validation of chart-abstracted measures (section XIII.D.7.b. of this final rule with comment period); (2) to formalize the educational review process and use it to correct incorrect validation results for chart-abstracted measures (section XIII.D.7.c. of this final rule with comment period); (3) to align the first quarter for which hospitals must submit data for all hospitals that did not participate in the previous year's Hospital OQR Program, and make corresponding revisions at 42 CFR 419.46(c)(3) (section XIII.D.1. of this final rule with comment period); and (4) to align the naming of the Extraordinary Circumstances Exceptions (ECE) policy and make conforming changes to the CFR (section XIII.D.8.a. of this final rule with comment period). We are not finalizing our proposal to change the NOP submission deadlines such that hospitals are required to submit the NOP any time prior to registering on the QualityNet Web site and to make conforming revisions at 42 CFR 419.46(a) (section XIII.C.2.b. of this final rule with comment period). We do not believe that these changes will affect our burden estimates, as further discussed below.
In previous rules (80 FR 70581), we estimated that a hospital pays an individual approximately $30 per hour to abstract and submit clinical data. We previously did not specify whether our wage estimate of $30 included overhead and fringe benefit costs. However, although we did not specify that this estimate included fringe benefit costs, in previous rules (80 FR 70581), we used $30 to calculate the total cost to hospitals to pay for staff that abstract and submit clinical data. In CY 2018 OPPS/ASC proposed rule (82 FR 33705), we proposed a new cost to hospitals and specified that this cost included both wage and overhead and fringe benefit costs. Specifically, we proposed to estimate that reporting data for the Hospital OQR Program can be accomplished by staff with a median hourly wage of $18.29 per hour.
We also proposed to calculate the cost of overhead, including fringe benefits, at 100 percent of the mean hourly wage. This is necessarily a rough adjustment, both because fringe benefits and overhead costs vary significantly from employer to employer and because methods of estimating these costs vary widely from study to study. Nonetheless, we believe that doubling the hourly wage rate ($18.29 × 2 = $36.58) to estimate total cost is a reasonably accurate estimation method. Accordingly, we calculate cost burden to hospitals using a wage plus benefits estimate of $36.58 throughout the discussion below for the Hospital OQR Program.
We invited public comment on these proposals.
After consideration of the public comment we received, we are finalizing our estimates, as presented in the proposed rule to: (1) Estimate that reporting data for the Hospital OQR Program can be accomplished by staff with a median hourly wage of $18.29 per hour, and (2) calculate the cost of overhead, including fringe benefits, at 100 percent of the mean hourly wage. These result in a wage plus benefits estimate of $36.58 for the Hospital OQR Program.
As described in section XIII.B.5. of this final rule with comment period, we are finalizing our proposal to delay OP-37a-e: Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection period). As we stated in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79863), the information collection requirements associated with the five OAS CAHPS Survey-based measures (OP-37a, OP-37b, OP-37c, OP-37d, and OP-37e) are currently approved under OMB Control Number 0938-1240. For this reason, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79863), we did not provide an independent estimate of the burden associated with OAS CAHPS Survey based measures for the Hospital
In section XIII.B.10.b. of this final rule with comment period, we are finalizing, with modifications, our proposal to publicly report 18c: Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Psychiatric/Mental Health Patients beginning with patient encounters from the third quarter of 2017. As noted in that section, the data required for public reporting of OP-18c are already collected as part of the existing Hospital OQR Program requirements. Accordingly, we did not estimate changes to burden due to this proposal, and we do not expect the modifications we are finalizing to affect burden.
In section XIII.B.4.c. of this final rule with comment period, we are finalizing the removal of six measures from the Hospital OQR Program. Specifically, beginning with the CY 2020 payment determination, we are finalizing, as proposed, to remove: (1) OP-21: Median Time to Pain Management for Long Bone Fracture; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. Also, while we proposed to remove: (1) OP-1: Median Time to Fibrinolysis, (2) OP-4: Aspirin at Arrival, (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional, and (4) OP-25: Safe Surgery Checklist beginning with the CY 2021 payment determination, we are finalizing removal of these measures with modification so that removal begins with the CY 2020 payment determination, one year earlier than proposed. In summary, we are finalizing removal of six measures beginning with the CY 2020 payment determination. We note that we have modified our estimates from the proposed rule (82 FR 33673) in order to streamline our discussion in light of the modification.
Specifically, we are finalizing the removal of four chart-abstracted measures ((1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; and (4) OP-21: Median Time to Pain Management for Long Bone Fracture) and two web-based measures ((1) OP-25: Safe Surgery Checklist Use; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures). In total, we expect these finalized proposals will reduce burden by 457,490 hours and $16.7 million for the CY 2020 payment determination. These estimates are described in detail below.
We calculated the burden reduction associated with the removal of chart-abstracted measures by considering the time per case to report chart-abstracted measures (submitted using a web-based tool) as well as the number of cases per hospital and the number of participating hospitals. In the CY 2016 OPPS/ASC final rule with comment period (80 FR 70582), we estimated the burden to collect chart-abstracted data for a single web-based measure, including OP-21, to be 2.92 minutes. In this final rule with comment period, we estimate that 3,300 outpatient hospitals report data under the Hospital OQR Program. Based on the most recent data from CY 2015 reporting, we also estimate that 947 cases are reported per hospital for each chart-abstracted measure. We note that although OP-1: Median Time to Fibrinolysis is a chart-abstracted measure, we do not expect removing this measure will reduce burden, as the data collected for this measure is required to calculate another program measure in the AMI measure set (OP-2: Fibrinolytic Therapy Received Within 30 Minutes of ED Arrival) and, therefore, will continue to be collected as an underlying part of OP-2 even though we are finalizing the proposal to remove OP-1. Accordingly, there is no change in burden associated with the finalized removal of this measure included in our calculations below.
Accordingly, we estimate a total burden reduction of 138.3 hours per outpatient hospital due to the removal of chart-abstracted measures (2.92 minutes per measure/60 minutes per hour × 3 measure × 947 cases per hospital). In total, across 3,300 outpatient hospitals, we estimate a burden reduction of 456,390 hours (138.3 hours per hospital × 3,300 hospitals) and $16,694,746 (456,390 total hours × $36.58 per hour) for the CY 2020 payment determination due to the finalized removal of (1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; and (4) OP-21: Median Time to Pain Management for Long Bone Fracture.
We calculated the burden reduction associated with the finalized removal of two web-based measures (OP-25: Safe Surgery Checklist Use and OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures) by considering the time per measure to report web-based measures as well as the number of participating hospitals. As we previously stated in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70582), we estimate that hospitals spend approximately 10 minutes per measure to report web-based measures and that 3,300 outpatient hospitals report data under the Hospital OQR Program. Accordingly, for the CY 2020 payment determination, we estimate a total burden reduction of 1,100 hours across 3,300 outpatient hospitals due to the removal of two web-based measures (10 minutes per measure/60 minutes per hour × 2 measures × 3,300 hospitals). We further estimate a cost reduction of $40,238 due to this finalized proposal (1,100 total hours × $36.58 per hour).
In total, we expect these finalized proposals will reduce burden by 457,490 hours (456,390 + 1,100) and $16,734,984 ($16,694,746 + $40,238) for the CY 2020 payment determination.
We previously estimated the burden associated with validation of chart-abstracted measures in the CY 2013 and CY 2014 OPPS/ASC final rules with comment period (77 FR 68531 and 78 FR 75172, respectively). In section XIII.D.7.a. of this final rule with comment period, we are providing clarification on our procedures for validation of chart-abstracted measures to note that the 50 poorest performing outlier hospitals will be targeted for validation. We do not expect this clarification to affect burden because it does not alter the number of hospitals selected for validation or the requirements for those hospitals that are selected.
In addition, in section XIII.D.7.c. of this final rule with comment period, we are finalizing our proposal to formalize the process of allowing hospitals to use an educational review process to correct incorrect validation results for the first three quarters of validation for chart-abstracted measures. We also are finalizing our proposal to update the process to specify that if the results of an educational review indicate that we
As we stated in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75171), we believe there is a burden associated with successful participation in the Hospital OQR Program, where successful participation results in a full annual payment update (APU) for a particular payment determination. This burden includes, but is not limited to, maintaining familiarity with the Hospital OQR Program requirements, which includes checking feedback reports to indicate a facility's current status or performance (78 FR 75171). The overall administrative burden was estimated at 42 hours per hospital (78 FR 75171). As stated above, we do not believe this burden will change with the finalization of our policy to update the educational review process to include corrections because no additional activity on the part of hospitals is required.
We previously estimated the burden associated with Hospital OQR Program participation and requirements in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75171). In section XIII.C.2. of this final rule with comment period, we are not finalizing our proposal to revise the NOP submission deadlines such that hospitals are required to submit the NOP any time prior to registering on the QualityNet Web site. We estimated that this proposal would have a negligible effect on the time and cost of completing the participation requirements. As a result, our decision not to finalize the proposal to revise the NOP submission deadline does not impact our burden estimates.
In section XIII.D.1 of this final rule with comment period, we are finalizing our proposals to align the timeline specifying the initial quarter for which hospitals must submit data for all hospitals that did not participate in the previous year's Hospital OQR Program, rather than specifying different timelines for hospitals with Medicare acceptance dates before versus after January 1 of the year prior to an affected annual payment update. Although this finalized proposal alters the timeline for hospitals to begin submitting data for the Hospital OQR Program, it does not alter program requirements. As a result, we do not anticipate that this proposal will affect burden.
We previously estimated the burden associated with general and administrative Hospital OQR Program requirements in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75171). In section XIII.D.8. of this final rule with comment period, we discuss our finalized alignment of the naming of this exception policy and finalized proposal to update 42 CFR 419.46(d) to reflect our current ECE policies. We also are clarifying the timing of our response to ECE requests. Because we do not seek any new or additional information in our finalized ECE proposals, we believe the updates will have no effect on burden for hospitals.
We refer readers to the CY 2012 OPPS/ASC final rule with comment period (76 FR 74554), the FY 2013 IPPS/LTCH PPS final rule (77 FR 53672), and the CY 2013, CY 2014, CY 2015, CY 2016, and CY 2017 OPPS/ASC final rules with comment periods (77 FR 68532 through 68533; 78 FR 75172 through 75174; 79 FR 67015 through 67016; 80 FR 70582 through 70584; and 81 FR 79863 through 79865, respectively) for detailed discussions of the ASCQR Program information collection requirements we have previously finalized. The information collection requirements associated with the ASCQR Program are currently approved under OMB control number 0938-1270. Below we discuss only the changes in burden that will result from the newly finalized provisions in this final rule with comment period.
In section XIV.B.3.b. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2019 payment determination, to remove three measures (ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing, ASC-6: Safe Surgery Checklist Use, and ASC-7: Ambulatory Surgical Center Facility Volume Data on Selected Ambulatory Surgical Center Surgical Procedures) from the ASCQR Program measure set. In section XIV.B.6.a. of this final rule with comment period, we are not finalizing our proposal, beginning with the CY 2021 payment determination, to adopt one new measure, ASC-16: Toxic Anterior Segment Syndrome. In section XIV.B.6.b. and c. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2022 payment determination, to adopt two new measures collected via claims (ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures). We expect these finalized proposals will reduce the overall burden of reporting data for the ASCQR Program, as discussed below.
In this final rule with comment period, we also are finalizing our proposals: (1) To delay ASC-15a-e: OAS CAHPS survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection) (section XIV.B.4. of this final rule with comment period); (2) to expand the CMS online tool to also allow for batch submission beginning with data submitted during CY 2018 and to make corresponding revisions to the CFR (section XIV.D.3.b. of this final rule with comment period); and, (3) to align the naming of the Extraordinary Circumstances Exceptions (ECE) policy beginning with CY 2018 and to make conforming changes to the CFR (section XIV.D.6.b. of this final rule with comment period). As discussed below, we do not expect these finalized proposals to affect our burden estimates.
To better align this program with our other quality reporting and value-based purchasing programs, we are finalizing our proposal to update our burden calculation methodology to standardize elements within our burden calculation. Specifically, we are finalizing our proposal to utilize an updated standard hourly labor cost for data reporting activities.
In the CY 2017 OPPS/ASC final rule with comment period (81 FR 79863
The BLS recently released updated wage estimates for Medical Records and Health Information Technicians. These updates increased the median hourly wage from $16.42 per hour to $18.29 per hour.
We invited public comment on this proposal. We did not receive any public comments and are finalizing our proposal to apply an updated hourly labor cost of $36.58 ($18.29 base salary + $18.29 fringe and overhead) to our burden calculations for chart abstraction.
In section XIV.B.4. of this final rule with comment period, we are finalizing our proposal to delay ASC-15a-e: OAS CAHPS Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection) until further notice in future rulemaking. As described in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79864), the information collection requirements associated with the five OAS CAHPS Survey based measures (ASC-15a, ASC-15b, ASC-15c, ASC-15d, and ASC-15e) are currently approved under OMB Control Number 0938-1240. For this reason, we did not provide an independent estimate of the burden associated with OAS CAHPS Survey administration for the ASCQR Program in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79864). Similarly, our finalized proposal to delay reporting on these measures does not affect our current burden estimates.
In section XIV.D.3. of this final rule with comment period, we are finalizing our proposals to expand the CMS online tool to also allow for batch submission beginning with data submitted during the CY 2018 reporting period and to make corresponding revisions to the CFR. We expect this finalized proposal to increase the efficiency of data submission via the CMS online tool. However, the finalized proposal does not change our data reporting requirements, and therefore, we do not expect a change in the burden experienced by ASCs.
In section XIV.D.6. of this final rule with comment period, we are finalizing our proposals to align the naming of the Extraordinary Circumstances Exceptions (ECE) policy beginning with CY 2018 and to make conforming changes to the CFR. We are also clarifying the timing of our response to ECE requests. Because we do not seek any new or additional information in our ECE finalized proposals, we believe the updates will have no effect on burden for hospitals.
In section XIV.B.3.b. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2019 payment determination, to remove three measures from the ASCQR Program. These measures include one claims-based measure (ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing) and two collected via a CMS online data submission tool (ASC-6: Safe Surgery Checklist Use and ASC-7: Ambulatory Surgical Center Facility Volume Data on Selected Ambulatory Surgical Center Surgical Procedures).
Data for ASC-5 is submitted via CMS claims using Quality Data Codes, which impose only a nominal burden on providers because these claims are already submitted for the purposes of payment. Therefore, we estimate a nominal reduction in burden associated with our finalized proposal to remove the ASC-5 measure from the ASCQR Program measure set beginning with the CY 2019 payment determination.
We believe 3,937 ASCs will experience a reduction in burden associated with our finalized proposals to remove ASC-6 and ASC-7 from the ASCQR Program measure set. In the CY 2014 OPPS/ASC final rule with comment period (78 FR 75173), we finalized our estimates that each participating ASC will spend 10 minutes per measure per year to collect and submit the required data for the ASC-6 and ASC-7 measures, making the total estimated annual burden associated with each of these measures 657 hours (3,937 ASCs × 0.167 hours per ASC) and $24,033 (657 hours × $36.58 per hour). Therefore, we estimate a total reduction in burden of 1,314 (657 hours × 2 measures) hours and $48,066 (1,314 hours × $36.58 per hour) for all ASCs as a result of our finalized proposals to remove ASC-6 and ASC-7 from the ASCQR Program measure set. The reduction in burden associated with these requirements is available for review and comment under OMB Control Number 0938-1270.
In section XIV.B.6.a. of this final rule with comment period, we are not finalizing our proposal to adopt one new measure collected via a CMS online data submission tool, ASC-16: Toxic Anterior Segment Syndrome, beginning with the CY 2021 payment determination. Therefore, the initially estimated burden from the CY 2018 OPPS/ASC proposed rule (82 FR 33709) does not apply.
In section XIV.B.6.b. and c. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2022 payment determination, to adopt two measures collected via claims: (1) ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures; and (2) ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures. Data used to calculate scores for these measures is collected via Part A and Part B Medicare administrative claims and Medicare
Because of the large number of public comments we normally receive on
We have examined the impacts of this final rule with comment period, as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), the Congressional Review Act (5 U.S.C. 804(2)), and Executive Order 13771 on Reducing Regulation and Controlling Regulatory Costs (January 30, 2017). This section of this final rule with comment period contains the impact and other economic analyses for the provisions that we are making for CY 2018.
Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This final rule with comment period has been designated as an economically significant rule under section 3(f)(1) of Executive Order 12866 and a major rule under the Congressional Review Act. Accordingly, this final rule with comment period has been reviewed by the Office of Management and Budget. We have prepared a regulatory impact analysis that, to the best of our ability, presents the costs and benefits of this final rule with comment period. In the CY 2018 OPPS/ASC proposed rule (82 FR 33710), we solicited public comments on the regulatory impact analysis in the proposed rule, and we are addressing any public comments we received in this final rule with comment period as appropriate.
This final rule with comment period is necessary to make updates to the Medicare hospital OPPS rates. It is necessary to make changes to the payment policies and rates for outpatient services furnished by hospitals and CMHCs in CY 2018. We are required under section 1833(t)(3)(C)(ii) of the Act to update annually the OPPS conversion factor used to determine the payment rates for APCs. We also are required under section 1833(t)(9)(A) of the Act to review, not less often than annually, and revise the groups, the relative payment weights, and the wage and other adjustments described in section 1833(t)(2) of the Act. We must review the clinical integrity of payment groups and relative payment weights at least annually. We are revising the APC relative payment weights using claims data for services furnished on and after January 1, 2016, through and including December 31, 2016, and processed through June 30, 2017, and updated cost report information.
This final rule with comment period also is necessary to make updates to the ASC payment rates for CY 2018, enabling CMS to make changes to payment policies and payment rates for covered surgical procedures and covered ancillary services that are performed in an ASC in CY 2018. Because ASC payment rates are based on the OPPS relative payment weights for the majority of the procedures performed in ASCs, the ASC payment rates are updated annually to reflect annual changes to the OPPS relative payment weights. In addition, we are required under section 1833(i)(1) of the Act to review and update the list of surgical procedures that can be performed in an ASC not less frequently than every 2 years.
We estimate that the total increase in Federal government expenditures under the OPPS for CY 2018, compared to CY 2017, due only to the changes to OPPS finalized in this final rule with comment period, will be approximately $690 million. Taking into account our estimated changes in enrollment, utilization, and case-mix for CY 2018, we estimate that the OPPS expenditures, including beneficiary cost-sharing, for CY 2018 will be approximately $69.9 billion; approximately $5.8 billion higher than estimated OPPS expenditures in CY 2017. Because this final rule with comment period is economically significant as measured by the threshold of an additional $100 million in expenditures in 1 year, we have prepared this regulatory impact analysis that, to the best of our ability, presents its costs and benefits. Table 88 displays the distributional impact of the CY 2018 changes in OPPS payment to various groups of hospitals and for CMHCs.
We estimate that the update to the conversion factor and other adjustments (not including the effects of outlier payments, the pass-through estimates, and the application of the frontier State wage adjustment for CY 2017) will increase total OPPS payments by 1.3 percent in CY 2018. The changes to the APC relative payment weights, the changes to the wage indexes, the continuation of a payment adjustment for rural SCHs, including EACHs, and the payment adjustment for cancer hospitals will not increase OPPS payments because these changes to the OPPS are budget neutral. However, these updates will change the distribution of payments within the budget neutral system. We estimate that the total change in payments between CY 2017 and CY 2018, considering all payments, changes in estimated total outlier payments, pass-through payments, and the application of the frontier State wage adjustment outside of budget neutrality, in addition to the application of the OPD fee schedule increase factor after all adjustments required by sections 1833(t)(3)(F), 1833(t)(3)(G), and 1833(t)(17) of the Act, will increase total estimated OPPS payments by 1.4 percent.
We estimate the total increase (from changes to the ASC provisions in this final rule with comment period as well as from enrollment, utilization, and case-mix changes) in Medicare expenditures under the ASC payment system for CY 2018 compared to CY 2017 to be approximately $130 million. Because the provisions for the ASC payment system are part of a final rule that is economically significant as measured by the $100 million threshold, we have prepared a regulatory impact analysis of the changes to the ASC payment system that, to the best of our
If regulations impose administrative costs on private entities, such as the time needed to read and interpret this final rule with comment period, we should estimate the cost associated with regulatory review. Due to the uncertainty involved with accurately quantifying the number of entities that will review the rule, we assume that the total number of unique commenters on this year's proposed rule will be the number of reviewers of this final rule with comment period. We acknowledge that this assumption may understate or overstate the costs of reviewing this rule. It is possible that not all commenters reviewed this year's proposed rule in detail, and it is also possible that some reviewers chose not to comment on the proposed rule. For these reasons, we believe that the number of past commenters would be a fair estimate of the number of reviewers of this final rule with comment period. In the CY 2018 OPPS/ASC proposed rule (82 FR 33711), we welcomed any comments on the approach in estimating the number of entities that will review the proposed rule. However, we did not receive any comments on our approach.
We also recognize that different types of entities are in many cases affected by mutually exclusive sections of this final rule with comment period, and therefore for the purposes of our estimate, we assume that each reviewer reads approximately 50 percent of the rule. In the CY 2018 OPPS/ASC proposed rule, we also sought public comments on this assumption, but we did not receive any comments.
Using the wage information from the BLS for medical and health service managers (Code 11-9111), we estimate that the cost of reviewing this rule is $105.16 per hour, including overhead and fringe benefits (
The distributional impacts presented here are the projected effects of the CY 2018 policy changes on various hospital groups. We post on the CMS Web site our hospital-specific estimated payments for CY 2018 with the other supporting documentation for this final rule with comment period. To view the hospital-specific estimates, we refer readers to the CMS Web site at:
We estimate the effects of the individual policy changes by estimating payments per service, while holding all other payment policies constant. We use the best data available, but do not attempt to predict behavioral responses to our policy changes. In addition, we have not made adjustments for future changes in variables such as service volume, service-mix, or number of encounters.
In the CY 2018 OPPS/ASC proposed rule, we solicited public comment and information about the anticipated effects of the proposed changes included in the proposed rule on providers and our methodology for estimating them. Any public comments that we receive are addressed in the applicable sections of this final rule with comment period that discuss the specific policies.
In section V.B.7. of this final rule with comment period, we discuss our finalized policies to reduce the payment for nonpass-through, separately payable drugs purchased by certain 340B-participating hospitals through the 340B Program. Rural SCHs, children's hospitals, and PPS-exempt cancer hospitals are excepted from this payment policy in CY 2018. Specifically, in this final rule with comment period, for CY 2018, for hospitals paid under the OPPS (other than those that are excepted for CY 2018), we are paying for separately payable drugs and biologicals that are obtained with a 340B discount, excluding those on pass-through payment status and vaccines, at ASP minus 22.5 percent instead of ASP+6 percent. For context, based on CY 2016 claims data, the total OPPS Part B drug payment is approximately $10.2 billion.
We recognize that it may be difficult to determine precisely what the impact on Medicare spending will be because OPPS claims data do not currently indicate if the drug being provided was purchased with a 340B discount. Furthermore, a list of outpatient drugs covered under the 340B program is not publicly available. Accordingly, for purposes of estimating the impact for this final rule with comment period, as we did in the CY 2018 OPPS/ASC proposed rule, we assumed that all applicable drugs purchased by hospitals eligible to participate in the 340B Program were purchased at a discounted price under the 340B program. While we recognize that certain newly covered entities do not have access to 340B drug pricing for designated orphan drugs, we believe that our CY 2018 policy to except newly covered entity types such as rural SCHs, PPS-exempt cancer hospitals, and children's hospitals, largely mitigates the 340B drug spend attributable to orphan drugs and therefore does not dramatically affect our final estimate. In addition, for this final rule with comment period, we utilized the HRSA covered entity database to identify 340B participating hospitals and cross-checked these providers with the CY 2018 OPPS facility impact public use file to determine which 340B hospitals are paid under the OPPS. The HRSA covered entity database is available via the Internet at
While we acknowledge that there are some limitations in Medicare's ability to prospectively calculate a precise estimate for purposes of this final rule with comment period, we note that each hospital has the ability to calculate how this policy will change its Medicare payments for separately payable drugs in CY 2018. Specifically, each hospital that is not participating in the 340B program or that is excepted from the policy to pay for drugs acquired under the 340B Program at ASP minus 22.5 percent in CY 2018 will know that its Medicare payments for drugs will be unaffected by this finalized policy; whereas each hospital participating in the 340B Program has access to 340B ceiling prices (and subceiling prices if it participates in the Prime Vendor Program), knows the volume of 340B drugs that it has historically billed to Medicare, and can generally project the specific covered 340B drugs (and volume thereof) for which it expects to bill Medicare in CY 2018. Accordingly, a hospital participating in the 340B Program is able to estimate the difference in payment that it will receive if Medicare pays ASP minus 22.5 percent instead of ASP+6 percent for 340B drugs.
Using the list of participating 340B providers (derived from the HRSA database) and updated CY 2016 claims data available for this final rule with comment period for the applicable separately payable drugs and biologicals, excluding those on pass-through payment status and vaccines, billed by hospitals eligible to participate in the 340B Program, except for those hospital types that are excepted from this policy in CY 2018, we estimate that OPPS payments for separately payable drugs, including beneficiary copayments, will decrease by approximately $1.6 billion under this finalized policy, which reflects an additional estimated reduction of $700 million over the proposed rule estimate of $900 million. If PPS-exempt cancer hospitals, children's hospitals, and rural SCHs had
Because data on drugs that are purchased with a 340B discount are not publicly available, we do not believe it is possible to more accurately estimate the amount of the aggregate payment reduction and the offsetting amount of the adjustment that is necessary to ensure budget neutrality through higher payment rates for other services. Furthermore, there are potential offsetting factors, including possible changes in provider behavior and overall market changes that would likely lower the impact of the payment reduction. As a result, we may need to make an adjustment in future years to revise the conversion factor once we have received more accurate data on drugs purchased with a 340B discount within the OPPS, similar to the adjustment we made for clinical diagnostic laboratory test packaging policy in the CY 2016 OPPS/ASC final rule with comment period (80 FR 70352 through 70357).
In this final rule, we project that reducing payment for 340B drugs to ASP minus 22.5 percent will increase OPPS payment rates for non-drug items and services by approximately 3.2 percent in CY 2018. The estimated impacts of this policy are displayed in Table 88 below. We note that the payment rates included in Addendum A and Addendum B of this final rule with comment period do not reflect the reduced payments for drugs purchased under the 340B Program; however, they do include the increase to payments rates for non-drug items and services due to the corresponding increase in the conversion factor. In the proposed rule (82 FR 33712), we reminded commenters that this estimate could change in the final rule based on a number of factors, including other policies that are adopted in the final rule and the availability of updated data and/or method of assessing the impact in the final rule. We sought public comment on our estimate and stated that we were especially interested in whether commenters believe there are other publicly available data sources or proxies that can be used for determining which drugs billed by hospitals paid under the OPPS were acquired under the 340B Program.
We proposed that the reduced payments for separately payable drugs and biologicals purchased under the 340B Program would be included in the budget neutrality adjustments, under the requirements in section 1833(t)(9)(B) of the Act, and that the budget neutral weight scalar would not be applied in determining payments for these separately paid drugs and biologicals purchased under the 340B Program.
In addition, we solicited public comment on whether we should apply all or part of the savings generated by this payment reduction to increase payments for specific services paid under the OPPS, or under Part B generally, in CY 2018, rather than simply increasing the conversion factor. In particular, we sought public comment on whether and how the offsetting increase could be targeted to hospitals that treat a large share of indigent patients, especially those patients who are uninsured. Finally, we sought public comment on whether the redistribution of savings associated with the proposal would result in unnecessary increases in the volume of covered services paid under the OPPS that should be adjusted in accordance with section 1833(t)(2)(F) of the Act.
MedPAC reiterated its March 2016 recommendation that that payments be distributed in proportion to the amount of uncompensated care that hospitals provide, “to make sure that dollars in the uncompensated care pool actually go to the hospitals providing the most uncompensated care.” MedPAC commented that the 340B Program is not well targeted to hospitals that provide high levels of uncompensated care and noted that 40 percent of 340B hospitals provide less than the median level of uncompensated care. MedPAC stated that it believed that legislation would be needed to direct the savings to the uncompensated care pool because current law would require that the savings be retained within the OPPS to
In summary, to maintain budget neutrality within the OPPS, the estimated $1.6 billion in reduced drug payments from adoption of this final 340B payment methodology will be redistributed in an equal offsetting
Table 88 below shows the estimated impact of this final rule with comment period on hospitals. Historically, the first line of the impact table, which estimates the change in payments to all facilities, has always included cancer and children's hospitals, which are held harmless to their pre-BBA amount. We also include CMHCs in the first line that includes all providers. We now include a second line for all hospitals, excluding permanently held harmless hospitals and CMHCs.
We present separate impacts for CMHCs in Table 88, and we discuss them separately below, because CMHCs are paid only for partial hospitalization services under the OPPS and are a different provider type from hospitals. In CY 2018, we are paying CMHCs for partial hospitalization services under APC 5853 (Partial Hospitalization for CMHCs), and we are paying hospitals for partial hospitalization services under APC 5863 (Partial Hospitalization for Hospital-Based PHPs).
The estimated increase in the total payments made under the OPPS is determined largely by the increase to the conversion factor under the statutory methodology. The distributional impacts presented do not include assumptions about changes in volume and service-mix. The conversion factor is updated annually by the OPD fee schedule increase factor as discussed in detail in section II.B. of this final rule with comment period. Section 1833(t)(3)(C)(iv) of the Act provides that the OPD fee schedule increase factor is equal to the market basket percentage increase applicable under section 1886(b)(3)(B)(iii) of the Act, which we refer to as the IPPS market basket percentage increase. The IPPS market basket percentage increase for FY 2018 is 2.7 percent (82 FR 38177). Section 1833(t)(3)(F)(i) of the Act reduces that 2.7 percent by the multifactor productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act, which is 0.6 percentage point for FY 2018 (which is also the MFP adjustment for FY 2018 in the FY 2018 IPPS/LTCH PPS final rule (82 FR 38177 through 38178)), and sections 1833(t)(3)(F)(ii) and 1833(t)(3)(G)(v) of the Act further reduce the market basket percentage increase by 0.75 percentage point, resulting in the OPD fee schedule increase factor of 1.35 percent. We are using the OPD fee schedule increase factor of 1.35 percent in the calculation of the CY 2018 OPPS conversion factor. Section 10324 of the Affordable Care Act, as amended by HCERA, further authorized additional expenditures outside budget neutrality for hospitals in certain frontier States that have a wage index less than 1.0000. The amounts attributable to this frontier State wage index adjustment are incorporated in the CY 2018 estimates in Table 88.
To illustrate the impact of the CY 2018 changes, our analysis begins with a baseline simulation model that uses the CY 2017 relative payment weights, the FY 2017 final IPPS wage indexes that include reclassifications, and the final CY 2017 conversion factor. Table 88 shows the estimated redistribution of the increase or decrease in payments for CY 2018 over CY 2017 payments to hospitals and CMHCs as a result of the following factors: the impact of the APC reconfiguration and recalibration changes between CY 2017 and CY 2018 (Column 2); the wage indexes and the provider adjustments (Column 3); the combined impact of all of the changes described in the preceding columns plus the 1.35 percent OPD fee schedule increase factor update to the conversion factor; and the estimated impact taking into account all payments for CY 2018 relative to all payments for CY 2017, including the impact of changes in estimated outlier payments, the frontier State wage adjustment, and changes to the pass-through payment estimate (Column 6).
We did not model an explicit budget neutrality adjustment for the rural adjustment for SCHs because we are maintaining the current adjustment percentage for CY 2018. Because the updates to the conversion factor (including the update of the OPD fee schedule increase factor), the estimated cost of the rural adjustment, and the estimated cost of projected pass-through payment for CY 2018 are applied uniformly across services, observed redistributions of payments in the impact table for hospitals largely depend on the mix of services furnished by a hospital (for example, how the APCs for the hospital's most frequently furnished services will change), and the impact of the wage index changes on the hospital. However, total payments made under this system and the extent to which this final rule with comment period will redistribute money during implementation also will depend on changes in volume, practice patterns, and the mix of services billed between CY 2017 and CY 2018 by various groups of hospitals, which CMS cannot forecast.
In CY 2016, we excluded all molecular pathology laboratory tests from our packaging policy, and in CY 2017, we expanded the laboratory packaging exception to apply to all advanced diagnostic laboratory tests (ADLTs) that meet the criteria of section 1834A(d)(5)(A) of the Act. For CY 2018, we sought public comments on whether laboratories (instead of hospitals) should be permitted to bill Medicare directly for molecular pathology tests and ADLTs that meet the criteria of section 1834A(d)(5)(A) of the Act (and are granted ADLT status by CMS), that are ordered less than 14 days following the date of a hospital outpatient's discharge from the hospital outpatient department.
The laboratory date of service (DOS) issue is discussed in section X.F. of this final rule with comment period. Because there are currently no laboratory tests designated as ADLTs and because the payment rate for laboratory tests excluded from our packaging policy billed by a hospital would have been the applicable rate for the laboratory test under the CLFS, any aspect of this discussion that is finalized in this final rule with comment period will not result in a net costs or savings to the program. Accordingly, section X.F. of this final rule with comment period is not included in the impact table in the regulatory impact analysis.
Overall, we estimate that the rates for CY 2018 will increase Medicare OPPS payments by an estimated 1.4 percent. Removing payments to cancer and children's hospitals because their payments are held harmless to the pre-OPPS ratio between payment and cost and removing payments to CMHCs results in an estimated 1.5 percent increase in Medicare payments to all other hospitals. These estimated payments will not significantly impact other providers.
The first line in Column 1 in Table 88 shows the total number of facilities (3,878), including designated cancer and children's hospitals and CMHCs, for which we were able to use CY 2016 hospital outpatient and CMHC claims data to model CY 2017 and CY 2018 payments, by classes of hospitals, for CMHCs and for dedicated cancer hospitals. We excluded all hospitals and CMHCs for which we could not plausibly estimate CY 2017 or CY 2018 payment and entities that are not paid under the OPPS. The latter entities include CAHs, all-inclusive hospitals, and hospitals located in Guam, the U.S.
Column 2 shows the estimated effect of APC recalibration. Column 2 also reflects any changes in multiple procedure discount patterns or conditional packaging that occur as a result of the changes in the relative magnitude of payment weights. As a result of APC recalibration, we estimate that urban hospitals will experience an increase of 0.1 percent, with the impact ranging from an increase of 0.1 percent to no change, depending on the number of beds. Rural hospitals will experience a decrease of 0.3 percent, with the impact ranging from a decrease of 0.2 percent to a decrease of 0.5 percent, depending on the number of beds. Major teaching hospitals will experience an increase of 0.1 percent.
Column 3 demonstrates the combined budget neutral impact of the APC recalibration; the updates for the wage indexes with the FY 2018 IPPS post-reclassification wage indexes; the rural adjustment; and the cancer hospital payment adjustment. We modeled the independent effect of the budget neutrality adjustments and the OPD fee schedule increase factor by using the relative payment weights and wage indexes for each year, and using a CY 2017 conversion factor that included the OPD fee schedule increase and a budget neutrality adjustment for differences in wage indexes.
Column 3 reflects the independent effects of the updated wage indexes, including the application of budget neutrality for the rural floor policy on a nationwide basis. This column excludes the effects of the frontier State wage index adjustment, which is not budget neutral and is included in Column 6. We did not model a budget neutrality adjustment for the rural adjustment for SCHs because we are continuing the rural payment adjustment of 7.1 percent to rural SCHs for CY 2018, as described in section II.E. of this final rule with comment period.
We modeled the independent effect of updating the wage indexes by varying only the wage indexes, holding APC relative payment weights, service-mix, and the rural adjustment constant and using the CY 2018 scaled weights and a CY 2017 conversion factor that included a budget neutrality adjustment for the effect of the changes to the wage indexes between CY 2017 and CY 2018. The FY 2018 wage policy results in modest redistributions.
There is a slight increase of less than 0.1 in Column 3 for the CY 2018 cancer hospital payment adjustment budget neutrality calculation because we are using a payment-to-cost ratio target for the cancer hospital payment adjustment in CY 2018 of 0.88, compared to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79869) payment-to-cost ratio target of 0.91. We note that, in accordance with section 16002 of the 21st Century Cures Act, we are applying a budget neutrality factor calculated as if the cancer hospital adjustment target payment-to-cost ratio was 0.89, not the 0.88 target payment-to-cost ratio we are applying in section II.F. of this final rule with comment period.
Column 4 demonstrates the total payment effect of the finalized reduction in payment for drugs purchased under the 340B Program from ASP+6 percent to ASP minus 22.5 percent. This column includes both the reduced payment for 340B acquired drugs and the increase to the conversion factor for budget neutrality purposes, which increases payment for all non-drug services. For rural sole community hospitals, this column shows a 2.6 percent increase, reflecting a 0.0 percent increase for drugs (because these providers are exempt from these reductions) and a 3.2 percent increase for non-drug services.
Column 5 demonstrates the combined impact of all of the changes previously described and the update to the conversion factor of 1.35 percent. Overall, these changes will increase payments to urban hospitals by 1.2 percent and to rural hospitals by 2.5 percent. Urban hospitals will receive an increase in line with the 1.3 percent overall increase for all facilities after the update is applied to the proposed budget neutrality adjustments. The increase for classes of rural hospitals is more variable with sole community hospitals receiving a 3.9 percent increase and other rural hospitals receiving an increase of 0.8 percent.
Column 6 depicts the full impact of the CY 2018 policies on each hospital group by including the effect of all of the changes for CY 2018 and comparing them to all estimated payments in CY 2017. Column 6 shows the combined budget neutral effects of Columns 2 through 4; the OPD fee schedule increase; the impact of the frontier State wage index adjustment; the impact of estimated OPPS outlier payments as discussed in section II.G. of this final rule with comment period; the change in the Hospital OQR Program payment reduction for the small number of hospitals in our impact model that failed to meet the reporting requirements (discussed in section XIII. of this final rule with comment period); and the difference in total OPPS payments dedicated to transitional pass-through payments.
Of those hospitals that failed to meet the Hospital OQR Program reporting requirements for the full CY 2017 update (and assumed, for modeling purposes, to be the same number for CY 2018), we included 33 hospitals in our model because they had both CY 2016 claims data and recent cost report data. We estimate that the cumulative effect of all of the changes for CY 2018 will increase payments to all facilities by 1.4 percent for CY 2018. We modeled the independent effect of all of the changes in Column 6 using the final relative payment weights for CY 2017 and the final relative payment weights for CY 2018. We used the final conversion factor for CY 2017 of $75.001 and the final CY 2018 conversion factor of $78.636 discussed in section II.B. of this final rule with comment period.
Column 6 contains simulated outlier payments for each year. We used the 1-year charge inflation factor used in the
Overall, we estimate that facilities will experience an increase of 1.4 percent under this final rule with comment period in CY 2018 relative to total spending in CY 2017. This projected increase (shown in Column 6) of Table 88 reflects the 1.35 percent OPD fee schedule increase factor, plus 0.2 percent for the change in the pass-through estimate between CY 2017 and CY 2018, minus a decrease of 0.11 percent for the difference in estimated outlier payments between CY 2017 (1.11 percent) and CY 2018 (1.0 percent). We estimate that the combined effect of all of the changes for CY 2018 will increase payments to urban hospitals by 1.3 percent. Overall, we estimate that rural hospitals will experience a 2.7 percent increase as a result of the combined effects of all of the changes for CY 2018.
Among hospitals by teaching status, we estimate that the impacts resulting from the combined effects of all changes will include a decrease of 0.9 percent for major teaching hospitals and an increase of 2.9 percent for nonteaching hospitals. Minor teaching hospitals will experience an estimated increase of 1.7 percent.
In our analysis, we also have categorized hospitals by type of ownership. Based on this analysis, we estimate that voluntary hospitals will experience an increase of 1.3 percent, proprietary hospitals will experience an increase of 4.5 percent, and governmental hospitals will experience no change.
The last line of Table 88 demonstrates the isolated impact on CMHCs, which furnish only partial hospitalization services under the OPPS. In CY 2017, CMHCs are paid under APC 5853 (Partial Hospitalization (3 or more services) for CMHCs). We modeled the impact of this APC policy assuming that CMHCs will continue to provide the same number of days of PHP care as seen in the CY 2016 claims data used for this final rule with comment period. We excluded days with 1 or 2 services because our policy only pays a per diem rate for partial hospitalization when 3 or more qualifying services are provided to the beneficiary. We estimate that CMHCs will experience an overall 17.2 percent increase in payments from CY 2017 (shown in Column 6). We note that this includes the trimming methodology described in section VIII.B. of this final rule with comment period.
Column 3 shows that the estimated impact of adopting the FY 2018 wage index values will result in a small increase of 0.2 percent to CMHCs. Column 5 shows that combining this OPD fee schedule increase factor, along with changes in APC policy for CY 2018 and the FY 2018 wage index updates, will result in an estimated increase of 17.8 percent. Column 6 shows that adding the changes in outlier and pass-though payments will result in a total 17.2 percent increase in payment for CMHCs. This reflects all changes to CMHCs for CY 2018.
For services for which the beneficiary pays a copayment of 20 percent of the payment rate, the beneficiary's payment will increase for services for which the OPPS payments will rise and will decrease for services for which the OPPS payments will fall. For further discussion on the calculation of the national unadjusted copayments and minimum unadjusted copayments, we refer readers to section II.I. of this final rule with comment period. In all cases, section 1833(t)(8)(C)(i) of the Act limits beneficiary liability for copayment for a procedure performed in a year to the hospital inpatient deductible for the applicable year.
We estimate that the aggregate beneficiary coinsurance percentage will be 18.5 percent for all services paid under the OPPS in CY 2018. The estimated aggregate beneficiary coinsurance reflects general system adjustments, including the CY 2018 comprehensive APC payment policy discussed in section II.A.2.e. of this final rule with comment period.
The relative payment weights and payment amounts established under the OPPS affect the payments made to ASCs as discussed in section XII. of this final rule with comment period. No types of providers or suppliers other than hospitals, CMHCs, and ASCs will be affected by the changes in this final rule with comment period.
The effect on the Medicare program is expected to be an increase of $690 million in program payments for OPPS services furnished in CY 2018. The effect on the Medicaid program is expected to be limited to copayments that Medicaid may make on behalf of Medicaid recipients who are also Medicare beneficiaries. We refer readers to our discussion of the impact on beneficiaries in section XVIII.A.4.a.(4) of this final rule with comment period.
Alternatives to the OPPS changes we are making and the reasons for our selected alternatives are discussed throughout this final rule with comment period.
We considered whether to address enforcement of the direct supervision requirement for outpatient therapeutic services in CAHs and small, rural hospitals with fewer than 100 beds by extending the notice of nonenforcement while we further develop our policies. There are grounds for applying the same supervision requirements to CAHs as to all other hospitals. One of these grounds is that hospital outpatient services are furnished “incident to” physicians' services, and we believe that the incident to rules apply equally to critical access and other types of hospitals. We also believe that Medicare should purchase the same basic level of quality and safe outpatient care for all beneficiaries, whether from a CAH, a small rural hospital, or other hospitals. At the same time, we acknowledge that in order to ensure the same level of outpatient care is furnished in CAHs and small rural hospitals as other hospitals, we need to continue the national discussion about what constitutes the appropriate supervision for a given service. We also need to acknowledge the challenges CAHs and small, rural hospitals have in recruiting and retaining physicians and qualified non-physician practitioners.
Therefore, we are extending the notice of nonenforcement for CAHs and small rural hospitals with fewer than 100 beds for CY 2018 and CY 2019, to give all parties time to submit specific services to be considered for a reduced minimum supervision standard. We believe that the policies in this final rule with comment period will address industry concerns while maintaining an adequate level of safety and quality of care in the hospital outpatient services that Medicare purchases.
We refer readers to section V.B.1.d. of this final rule with comment period for a discussion of our proposal to assign any skin substitute product that was assigned to the high cost group in CY 2017 to the high cost group in CY 2018, regardless of whether the product's mean unit cost (MUC) or the product's per day cost (PDC) exceeds or falls below the overall CY 2018 MUC or PDC threshold. We will continue to assign products that exceed either the overall CY 2018 MUC or PDC threshold to the high cost group. We also considered, but did not propose or finalize, retaining our methodology from CY 2017 and assigning skin substitutes to the high cost group based on whether an individual product's MUC or PDC exceeded the overall CY 2018 MUC or PDC threshold based on calculations done for either the proposed rule or this final rule with comment period.
Most ASC payment rates are calculated by multiplying the ASC conversion factor by the ASC relative payment weight. As discussed fully in section XII. of this final rule with comment period, we are setting the CY 2018 ASC relative payment weights by scaling the CY 2018 OPPS relative payment weights by the ASC scalar of 0.8990. The estimated effects of the updated relative payment weights on payment rates are varied and are reflected in the estimated payments displayed in Tables 89 and 90 below.
Beginning in CY 2011, section 3401 of the Affordable Care Act requires that the annual update to the ASC payment system (which currently is the CPI-U) after application of any quality reporting reduction be reduced by a productivity adjustment. The Affordable Care Act defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business multifactor productivity (MFP) (as projected by the Secretary for the 10-year period ending with the applicable fiscal year, year, cost reporting period, or other annual period). For ASCs that fail to meet their quality reporting requirements, the CY 2018 payment determinations will be based on the application of a 2.0 percentage points reduction to the annual update factor, which currently is the CPI-U. We calculated the CY 2018 ASC conversion factor by adjusting the CY 2017 ASC conversion factor by 1.0007 to account for changes in the pre-floor and pre-reclassified hospital wage indexes between CY 2017 and CY 2018 and by applying the CY 2018 MFP-adjusted CPI-U update factor of 1.2 percent (projected CPI-U update of 1.7 percent minus a projected productivity adjustment of 0.5 percentage point). The CY 2018 ASC conversion factor is $45.575.
Presented here are the projected effects of the changes for CY 2018 on Medicare payment to ASCs. A key limitation of our analysis is our inability to predict changes in ASC service-mix between CY 2016 and CY 2018 with precision. We believe that the net effect
Some ASCs are multispecialty facilities that perform a wide range of surgical procedures from excision of lesions to hernia repair to cataract extraction; others focus on a single specialty and perform only a limited range of surgical procedures, such as eye, digestive system, or orthopedic procedures. The combined effect on an individual ASC of the update to the CY 2018 payments will depend on a number of factors, including, but not limited to, the mix of services the ASC provides, the volume of specific services provided by the ASC, the percentage of its patients who are Medicare beneficiaries, and the extent to which an ASC provides different services in the coming year. The following discussion presents tables that display estimates of the impact of the CY 2018 updates to the ASC payment system on Medicare payments to ASCs, assuming the same mix of services as reflected in our CY 2016 claims data. Table 89 depicts the estimated aggregate percent change in payment by surgical specialty or ancillary items and services group by comparing estimated CY 2017 payments to estimated CY 2018 payments, and Table 90 shows a comparison of estimated CY 2017 payments to estimated CY 2018 payments for procedures that we estimate will receive the most Medicare payment in CY 2017.
Table 89 shows the estimated effects on aggregate Medicare payments under the ASC payment system by surgical specialty or ancillary items and services group. We have aggregated the surgical HCPCS codes by specialty group, grouped all HCPCS codes for covered ancillary items and services into a single group, and then estimated the effect on aggregated payment for surgical specialty and ancillary items and services groups. The groups are sorted for display in descending order by estimated Medicare program payment to ASCs. The following is an explanation of the information presented in Table 89.
• Column 1—Surgical Specialty or Ancillary Items and Services Group indicates the surgical specialty into which ASC procedures are grouped and the ancillary items and services group which includes all HCPCS codes for covered ancillary items and services. To group surgical procedures by surgical specialty, we used the CPT code range definitions and Level II HCPCS codes and Category III CPT codes as appropriate, to account for all surgical procedures to which the Medicare program payments are attributed.
• Column 2—Estimated CY 2017 ASC Payments were calculated using CY 2016 ASC utilization (the most recent full year of ASC utilization) and CY 2017 ASC payment rates. The surgical specialty and ancillary items and services groups are displayed in descending order based on estimated CY 2017 ASC payments.
• Column 3—Estimated CY 2018 Percent Change is the aggregate percentage increase or decrease in Medicare program payment to ASCs for each surgical specialty or ancillary items and services group that are attributable to updates to ASC payment rates for CY 2018 compared to CY 2017.
As seen in Table 89, for the six specialty groups that account for the most ASC utilization and spending, we estimate that the update to ASC payment rates for CY 2017 will result in a 1-percent increase in aggregate payment amounts for eye and ocular adnexa procedures, a 2-percent increase in aggregate payment amounts for digestive system procedures, 1-percent increase in aggregate payment amounts for nervous system procedures, a 3-percent increase in aggregate payment amounts for musculoskeletal system procedures, a 1-percent increase in aggregate payment amounts for genitourinary system procedures, and a 5-percent increase in aggregate payment amounts for integumentary system procedures.
Also displayed in Table 89 is a separate estimate of Medicare ASC payments for the group of separately payable covered ancillary items and services. The payment estimates for the covered surgical procedures include the costs of packaged ancillary items and services. We estimate that aggregate payments for these items and services will decrease by 44 percent for CY 2018.
Table 90 below shows the estimated impact of the updates to the revised ASC payment system on aggregate ASC payments for selected surgical procedures during CY 2018. The table displays 30 of the procedures receiving the greatest estimated CY 2017 aggregate Medicare payments to ASCs. The HCPCS codes are sorted in descending order by estimated CY 2017 program payment.
• Column 1—CPT/HCPCS code.
• Column 2—Short Descriptor of the HCPCS code.
• Column 3—Estimated CY 2017 ASC Payments were calculated using CY 2016 ASC utilization (the most recent full year of ASC utilization) and the CY 2017 ASC payment rates. The estimated CY 2017 payments are expressed in millions of dollars.
• Column 4—Estimated CY 2018 Percent Change reflects the percent differences between the estimated ASC payment for CY 2017 and the estimated payment for CY 2018 based on the update.
We estimate that the CY 2018 update to the ASC payment system will be generally positive for beneficiaries with respect to the new procedures that we are adding to the ASC list of covered surgical procedures and for those that we are designating as office-based for CY 2018. First, other than certain preventive services where coinsurance and the Part B deductible is waived to comply with sections 1833(a)(1) and (b) of the Act, the ASC coinsurance rate for all procedures is 20 percent. This contrasts with procedures performed in HOPDs under the OPPS, where the beneficiary is responsible for copayments that range from 20 percent to 40 percent of the procedure payment (other than for certain preventive services). Second, in almost all cases, the ASC payment rates under the ASC payment system are lower than payment rates for the same procedures under the OPPS. Therefore, the beneficiary coinsurance amount under the ASC payment system will almost always be less than the OPPS copayment amount for the same services. (The only exceptions would be if the ASC coinsurance amount exceeds the inpatient deductible. The statute requires that copayment amounts under the OPPS not exceed the inpatient deductible.) Beneficiary coinsurance for services migrating from physicians' offices to ASCs may decrease or increase under the revised ASC payment system, depending on the particular service and the relative payment amounts under the MPFS compared to the ASC. However, for those additional procedures that we are designating as office-based in CY 2018, the beneficiary coinsurance amount under the ASC payment system generally will be no greater than the beneficiary coinsurance under the MPFS because the coinsurance under both payment systems generally is 20 percent (except for certain preventive services where the coinsurance is waived under both payment systems).
Alternatives to the ASC changes we are making and the reasons for our selected alternatives are discussed throughout this final rule with comment period.
As required by OMB Circular A-4 (available on the Office of Management and Budget Web site at:
We refer readers to the CY 2017 OPPS/ASC final rule with comment period (81 FR 79874), for the previously estimated effects of changes to the Hospital OQR Program for the CY 2018, CY 2019, and CY 2020 payment determinations. Of the 3,228 hospitals that met eligibility requirements for the CY 2017 payment determination, we determined that 87 hospitals did not meet the requirements to receive the full OPD fee schedule increase factor. Most of these hospitals (66 of the 87), chose not to participate in the Hospital OQR Program for the CY 2017 payment determination. We estimate that approximately 100 hospitals will not receive the full OPD fee schedule increase factor for the CY 2018 payment determination and subsequent years.
In section XIII.B.4.c. of this final rule with comment period, we are finalizing the removal of six measures. Specifically, beginning with the CY 2020 payment determination, we are finalizing, as proposed, to remove: (1) OP-21: Median Time to Pain Management for Long Bone Fracture; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. Also, while we proposed to remove: (1) OP-1: Median Time to Fibrinolysis, (2) OP-4: Aspirin at Arrival, (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional, and (4) OP-25: Safe Surgery Checklist beginning with the CY 2021 payment determination, we are finalizing removal of these measures with modification so that removal begins with the CY 2020 payment determination, one year earlier than proposed. To summarize, the following measures will be removed for the CY 2020 payment determination: (1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; (4) OP-21: Median Time to Pain Management for Long Bone Fracture; (5) OP-25: Safe Surgery Checklist; and (6) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. We expect these finalized proposals will reduce the burden of reporting for the Hospital OQR Program, as discussed in more detail below.
In section XIII.B.10.b. of this final rule with comment period, we are finalizing, with modifications, our proposal to publicly report OP-18c using data beginning with patient encounters during the third quarter of 2017. However, we do not expect our modifications to affect the burden estimates made in the CY 2018 OPPS/ASC proposed rule (82 FR 33705 through 33708), as discussed below.
In section XIII.B.5. of this final rule with comment period, we are finalizing our proposal to delay the OP-37a-e: Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection period) until further notice in future rulemaking.
In addition, in this final rule with comment period, beginning with the CY 2020 payment determination, we are finalizing our proposals: (1) To codify at § 419.46(e) our previously finalized process for targeting hospitals for validation of chart-abstracted measures (section XIII.D.7.b. of this final rule with comment period); (2) to formalize the educational review process and use it to correct incorrect validation results for chart-abstracted measures (section XIII.D.7.c. of this final rule with comment period); (3) to align the first quarter for which hospitals must submit data for all hospitals that did not participate in the previous year's Hospital OQR Program, and make corresponding revisions at 42 CFR 419.46(c)(3) (section XIII.D.1. of this final rule with comment period); and (4) to align the naming of the Extraordinary Circumstances Exceptions (ECE) policy and make conforming changes to the CFR (section XIII.D.8.a. of this final rule with comment period). We are not finalizing our proposals to change the NOP submission deadlines such that hospitals are required to submit the NOP any time prior to registering on the QualityNet Web site and to make conforming revisions at 42 CFR 419.46(a) (section XIII.C.2.b. of this final rule with comment period). We do not believe that these changes will affect our burden estimates, as further discussed below.
As described in section XIII.B.5. of this final rule with comment period, we are finalizing our proposal to delay OP-37a-e: Outpatient and Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection period). As stated in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79863), the information collection requirements associated with the five OAS CAHPS Survey-based measures (OP-37a, OP-37b, OP-37c, OP-37d, and OP-37e) are currently approved under OMB Control Number 0938-1240. For this reason, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79863), we did not provide an independent estimate of the burden associated with OAS CAHPS Survey based measures for the Hospital OQR Program. Similarly, our finalized proposal to delay implementation of these measures does not affect our current burden estimates.
In section XIII.B.10.b. of this final rule with comment period, we are finalizing, with modifications, our proposal to publicly report 18c: Median Time from Emergency Department Arrival to Emergency Department Departure for Discharged Emergency Department Patients—Psychiatric/Mental Health Patients beginning with patient encounters from the third quarter of 2017. As noted in that section, the data required for public reporting of OP-18c is already collected as part of the existing Hospital OQR Program requirements. Accordingly, we did not estimate changes to burden due to this proposal and we do not expect the modifications we are finalizing to affect burden.
In section XIII.B.4.c. of this final rule with comment period, we are finalizing our proposals to remove six measures from the Hospital OQR Program. Specifically, beginning with the CY 2020 payment determination, we are finalizing, as proposed, to remove: (1) OP-21: Median Time to Pain Management for Long Bone Fracture; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures. Also, while we proposed to remove: (1) OP 1: Median Time to Fibrinolysis, (2) OP-4: Aspirin at Arrival, (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional, and (4) OP-25: Safe Surgery Checklist beginning with the CY 2021 payment determination, we are finalizing removal of these measures with modification so that removal begins with the CY 2020 payment determination, one year earlier than proposed. In summary, we are finalizing removal of six measures beginning with the CY 2020 payment determination. We note that we have modified our estimates from the proposed rule (82 FR 33673) in order to streamline our discussion in light of the modification.
Specifically, we are finalizing the removal of four chart-abstracted measures ((1) OP-1: Median Time to Fibrinolysis; (2) OP-4: Aspirin at Arrival; (3) OP-20: Door to Diagnostic Evaluation by a Qualified Medical Professional; and (4) OP-21: Median Time to Pain Management for Long Bone Fracture) and two web-based measures ((1) OP-25: Safe Surgery Checklist Use; and (2) OP-26: Hospital Outpatient Volume Data on Selected Outpatient Surgical Procedures). As described in section XVI.B. of this final rule with comment period, we expect these measure removals to reduce burden by 457,490 hours and $16.7 million for the CY 2020 payment determination.
In section XIII.D.7.a. of this final rule with comment period, we provide clarification on our procedures for validation of chart-abstracted measures to note that the 50 poorest performing outlier hospitals will be targeted for validation. We do not expect this clarification to affect burden because it does not alter the number of hospitals selected for validation or the requirements for those hospitals that are selected.
In addition, in section XIII.D.7.c. of this final rule with comment period, we are finalizing our proposal to formalize the process of allowing hospitals to use an educational review process to correct incorrect validation results for the first three quarters of validation for chart-abstracted measures. We are also finalizing our proposal to update the process to specify that if the results of an educational review indicate that we incorrectly scored a hospital's medical records selected for validation, the corrected quarterly validation score will be used to compute the hospital's final validation score at the end of the calendar year. Under this finalized policy, the educational review request process remains the same for the CY 2020 payment determination and subsequent years, except that revised scores identified through an educational review will be used to correct a hospital's validation score. As a result, we do not expect this policy to affect the burden experienced by hospitals, as our changes to this policy result in a change in the way we address educational review requests and not a change to the process hospitals must follow to request an education review. As we stated in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75171), we believe there is a burden associated with successful participation in the Hospital OQR Program, where successful participation results in a full annual payment update (APU) for a particular payment determination. This burden includes, but is not limited to, maintaining familiarity with the Hospital OQR Program requirements, which includes checking feedback reports to indicate a facility's current status or performance (78 FR 75171). The overall administrative burden was estimated at 42 hours per hospital (78 FR 75171). As stated above, we do not believe this burden will change with the finalization of our policy to update the educational review process to include corrections.
In section XIII.C.2. of this final rule with comment period, we are not finalizing our proposal to revise the NOP submission deadlines such that hospitals are required to submit the NOP any time prior to registering on the QualityNet Web site. We estimated that this proposal would have a negligible effect on the time and cost of completing the participation requirements. As a result, our decision not to finalize the proposal to revise the NOP submission deadline does not affect our burden estimates.
In section XIII.D.1 of this final rule with comment period, we are finalizing our proposal to align the timeline specifying the initial quarter for which hospitals must submit data for all hospitals that did not participate in the previous year's Hospital OQR Program, rather than specifying different timelines for hospitals with Medicare acceptance dates before versus after January 1 of the year prior to an affected annual payment update. Although this finalized proposal alters the timeline for hospitals to begin submitting data for the Hospital OQR Program, it does not alter program requirements. As a result, we do not anticipate that this policy will affect burden.
We previously estimated the burden associated with general and administrative Hospital OQR Program requirements in the CY 2014 OPPS/ASC final rule with comment period (78 FR 75171). In section XIII.D.8. of this final rule with comment period, we discuss our finalized alignment of the naming of this exception policy and finalized proposal to update 42 CFR 419.46(d) to reflect our current ECE policies. We are also clarifying the timing of our response to ECE requests. Because we do not seek any new or additional information in our finalized ECE proposals, we believe the updates will have no effect on burden for hospitals.
We refer readers to section XVI.B. of this final rule with comment period (information collection requirements) for a detailed discussion of the burden of the requirements for submitting data to the Hospital OQR Program.
In section XIV. of this final rule with comment period, we discuss our proposals to adopt policies affecting the ASCQR Program. For the CY 2017 payment determination, of the 3,937 ASCs that met eligibility requirements for the ASCQR Program, 209 ASCs did not meet the requirements to receive the full annual payment update. We note that, in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79874), we used the CY 2016 payment determination numbers as a baseline, and estimated that approximately 200 ASCs will not receive the full annual payment update in CY 2018 due to failure to meet the ASCQR Program requirements (CY 2017 and CY 2018 payment determination information were not yet available).
In section XIV.B.3.b. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2019 payment determination, to remove three measures (ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing, ASC-6: Safe Surgery Checklist Use, and ASC-7: Ambulatory Surgical Center Facility Volume Data on Selected Ambulatory Surgical Center Surgical Procedures) from the ASCQR Program measure set. In section XIV.B.6.a. of this final rule with comment period, we are not finalizing our proposal, beginning with the CY 2021 payment determination, to adopt one new measure, ASC-16: Toxic Anterior Segment Syndrome. In section XIV.B.6.b. and c. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2022 payment determination, to adopt two new measures collected via claims (ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures and ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures). We expect these finalized proposals will reduce the overall burden of reporting data for the ASCQR Program, as discussed below.
In this final rule with comment period, we are also finalizing our proposals: (1) To delay ASC-15a-e: OAS CAHPS survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection) (section XIV.B.4. of this final rule with comment period); (2) to expand the CMS online tool to also allow for batch submission beginning with data submitted during CY 2018 and to make corresponding revisions to the CFR (section XIV.D.3.b. of this final rule with comment period); and, (3) to align the naming of the Extraordinary Circumstances Exceptions (ECE) policy beginning with CY 2018 and to make conforming changes to the CFR (section XIV.D.6.b. of this final rule with comment period). As discussed below, we do not expect these finalized proposals to affect our burden estimates.
In section XIV.B.4. of this final rule with comment period, we are finalizing our proposal to delay ASC-15a-e: OAS CAHPS Survey-based measures beginning with the CY 2020 payment determination (CY 2018 data collection) until further notice in future rulemaking. As described in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79864), the information collection requirements associated with the five OAS CAHPS Survey based measures (ASC-15a, ASC-15b, ASC-15c, ASC-15d, and ASC-15e) are currently approved under OMB Control Number 0938-1240. For this reason, we did not provide an independent estimate of the burden associated with OAS CAHPS Survey administration for the ASCQR Program in the CY 2017 OPPS/ASC final rule with comment period (81 FR 79864). Similarly, our finalized proposal to delay reporting on these measures does not affect our current burden estimates.
For CY 2018, we are finalizing two additional policies. First, in section XIV.D.3.b. of this final rule with comment period, we are finalizing our proposal to expand the CMS online tool to also allow for batch submission beginning with data submitted during CY 2018 and to make corresponding revisions to the CFR. Second, in section XIV.D.6. of this final rule with comment period, we discuss our intent to align the naming of this exception policy and update 42 CFR 416.310(d) to reflect our current ECE policies. We are also clarifying the timing of CMS' response to ECE requests. Because none of these policies change the reporting requirements of the ASCQR Program or require ASCs to submit any new or additional information, we believe the updates will have no effect on burden for ASCs.
In section XIV.B.3.b. of this final rule with comment period, we are finalizing our proposals to remove one claims-based measure (ASC-5: Prophylactic Intravenous (IV) Antibiotic Timing
We did not propose to add any quality measures to the ASCQR measure set for the CY 2020 payment determination, and we do not believe that the other measures we previously adopted will cause any additional ASCs to fail to meet the ASCQR Program requirements. (We refer readers to section XIV.B.5. of this final rule with comment period for a list of these measures.) Therefore, we do not believe that these policies will increase the number of ASCs that do not receive a full annual payment update for the CY 2020 payment determination.
In section XIV.B.6.a. of this final rule with comment period, we are not finalizing our proposal to adopt one new measure collected via a CMS online data submission tool, ASC-16: Toxic Anterior Segment Syndrome. Therefore, the initially estimated burden from the CY 2018 OPPS/ASC proposed rule (82 FR 33721) does not apply.
In sections XIV.B.6.b. and c. of this final rule with comment period, we are finalizing our proposals, beginning with the CY 2022 payment determination, to adopt two measures collected via claims: (1) ASC-17: Hospital Visits after Orthopedic Ambulatory Surgical Center Procedures; and (2) ASC-18: Hospital Visits after Urology Ambulatory Surgical Center Procedures. Data used to calculate scores for these measures is collected via Part A and Part B Medicare administrative claims and Medicare enrollment data, and therefore does not require ASCs to report any additional data. Because these measures do not require ASCs to submit any additional data, we do not believe there will be any additional burden associated with these proposals.
We refer readers to the information collection requirements in section XVI.C. of this final rule with comment period for a detailed discussion of the financial and hourly burden of the ASCQR Program's current and proposed requirements.
The RFA requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, we estimate that most hospitals, ASCs and CMHCs are small entities as that term is used in the RFA. For purposes of the RFA, most hospitals are considered small businesses according to the Small Business Administration's size standards with total revenues of $38.5 million or less in any single year or by the hospital's not-for-profit status. Most ASCs and most CMHCs are considered small businesses with total revenues of $15 million or less in any single year. For details, see the Small Business Administration's “Table of Small Business Size Standards” at
In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a metropolitan statistical area and has 100 or fewer beds. We estimate that this final rule with comment period will increase payments to small rural hospitals by less than 3 percent; therefore, it should not have a significant impact on approximately 626 small rural hospitals.
The analysis above, together with the remainder of this preamble, provides a regulatory flexibility analysis and a regulatory impact analysis.
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $148 million. This final rule with comment period does not mandate any requirements for State, local, or tribal governments, or for the private sector.
Executive Order 13771, titled Reducing Regulation and Controlling Regulatory Costs, was issued on January 30, 2017. Section 2(a) of Executive Order 13771 requires an agency, unless prohibited by law, to identify at least two existing regulations to be repealed when the agency publicly proposes for notice and comment, or otherwise promulgates, a new regulation. In furtherance of this requirement, section 2(c) of Executive Order 13771 requires that the new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations. OMB's guidance, issued on April 5, 2017, explains that “In general, Federal spending regulatory actions that cause only income transfers between taxpayers and program beneficiaries (
The changes we are making in this final rule with comment period will affect all classes of hospitals paid under the OPPS and will affect both CMHCs and ASCs. We estimate that most classes of hospitals paid under the OPPS will experience a modest increase or a minimal decrease in payment for services furnished under the OPPS in CY 2018. Table 88 demonstrates the estimated distributional impact of the OPPS budget neutrality requirements
The updates to the ASC payment system for CY 2018 will affect each of the approximately 5,500 ASCs currently approved for participation in the Medicare program. The effect on an individual ASC will depend on its mix of patients, the proportion of the ASC's patients who are Medicare beneficiaries, the degree to which the payments for the procedures offered by the ASC are changed under the ASC payment system, and the extent to which the ASC provides a different set of procedures in the coming year. Table 89 demonstrates the estimated distributional impact among ASC surgical specialties of the MFP-adjusted CPI-U update factor of 1.2 percent for CY 2018.
Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have examined the OPPS and ASC provisions included in this final rule with comment period in accordance with Executive Order 13132, Federalism, and have determined that they will not have a substantial direct effect on State, local or tribal governments, preempt State law, or otherwise have a Federalism implication. As reflected in Table 88 of this final rule with comment period, we estimate that OPPS payments to governmental hospitals (including State and local governmental hospitals) will experience no change under this final rule with comment period. While we do not know the number of ASCs or CMHCs with government ownership, we anticipate that it is small. The analyses we have provided in this section of this final rule with comment period, in conjunction with the remainder of this document, demonstrate that this final rule with comment period is consistent with the regulatory philosophy and principles identified in Executive Order 12866, the RFA, and section 1102(b) of the Act.
This final rule with comment period will affect payments to a substantial number of small rural hospitals and a small number of rural ASCs, as well as other classes of hospitals, CMHCs, and ASCs, and some effects may be significant.
Administrative practice and procedure, Health facilities, Health professions, Kidney disease, Medicare, Reporting and recordkeeping requirements.
Health facilities, Health professions, Medicare, Reporting and recordkeeping requirements.
Hospitals, Medicare, Reporting and recordkeeping requirements.
For reasons stated in the preamble of this document, the Centers for Medicare & Medicaid Services is amending 42 CFR chapter IV as set forth below:
Secs. 1102, 1871, and 1881(b)(1) of the Social Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1).
(b) * * *
(5) In the case of a molecular pathology test or a test designated by CMS as an ADLT under paragraph (1) of the definition of an advanced diagnostic laboratory test in § 414.502, the date of service of the test must be the date the test was performed only if—
(i) The test was performed following a hospital outpatient's discharge from the hospital outpatient department;
(ii) The specimen was collected from a hospital outpatient during an encounter (as both are defined in § 410.2 of this chapter);
(iii) It was medically appropriate to have collected the sample from the hospital outpatient during the hospital outpatient encounter;
(iv) The results of the test do not guide treatment provided during the hospital outpatient encounter; and
(v) The test was reasonable and medically necessary for the treatment of an illness.
Secs. 1102, 1138, and 1871 of the Social Security Act (42 U.S.C. 1302, 1320b-8, and 1395hh) and section 371 of the Public Health Service Act (42 U.S.C. 273).
(c) * * *
(1) * * *
(i)
(d)
(1)
(2)
Secs. 1102, 1833(t), and 1871 of the Social Security Act (42 U.S.C. 1302, 1395l(t), and 1395hh).
(b) * * *
(1) * * *
(iv) * * *
(B) * * *
(
The revisions and additions read as follow:
(c) * * *
(3) * * *
(i) Hospitals that did not participate in the previous year's Hospital OQR Program must initially submit data beginning with encounters occurring during the first calendar quarter of the year prior to the affected annual payment update.
(ii) Hospitals that did not participate in the previous year's Hospital OQR Program must follow data submission deadlines as specified in paragraph (c)(2) of this section.
(d)
(1)
(2)
(e) * * *
(3) CMS will select a random sample of 450 hospitals for validation purposes, and will select an additional 50 hospitals for validation purposes based on the following criteria:
(i) The hospital fails the validation requirement that applies to the previous year's payment determination; or
(ii) The hospital has an outlier value for a measure based on the data it submits. An “outlier value” is a measure value that is greater than 5 standard deviations from the mean of the measure values for other hospitals, and indicates a poor score.
(a)
(b)
(c)
(1) 7 percent, for such services furnished in CY 2018, 2019, 2020, 2021, or 2022.
(2) 10 percent, for such services furnished in CY 2023 or a subsequent calendar year.
(d)
Rule document 2017-23932 was originally published on pages 52356 through 52637 in the issue of Monday, November 13, 2017. In that publication, a section of the document was omitted due to a printing error. The corrected document is published here in its entirety.
(b) This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.
(c) This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.
(d) This memorandum shall be published in the
| 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 |