Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change To Eliminate Requirements That Will Be Duplicative of CAT, 25863-25870 [2017-11506]
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Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
general, to protect investors and the
public interest.
Pursuant to the proposal, FINRA
would make available to subscribers an
optional End-of-Day TRACE Transaction
File that would include all transaction
data disseminated that day as part of
Real-Time TRACE transaction data for
TRACE-Eligible Securities. FINRA
believes that the proposed End-of-Day
TRACE Transaction File provides a
simpler alternative to the Real-Time
TRACE transaction data product, which
provides transparency information on
the price and size of transactions in
TRACE-Eligible Securities, and may be
useful to interested parties that do not
require intra-day, real-time transaction
data on TRACE-Eligible Securities.
Thus, FINRA believes that the proposed
rule change is in the public interest and
consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change would result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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Economic Impact Analysis
FINRA’s existing Real-Time TRACE
data product provides transaction data
for the following Data Sets: Corporate
Bond Data Set, Agency Data Set, SP Data
Set, and Rule 144A Data Set. As detailed
above, FINRA is proposing to create an
End-of-Day TRACE Transaction File that
would include all transaction data
disseminated that day as part of RealTime TRACE transaction data, and
would be separately available for each
data set for which Real-Time TRACE
transaction data is available. The
proposal to create an End-of-Day TRACE
Transaction File would not impose any
additional reporting requirements or
costs on firms, and the purchase of
TRACE data products would continue to
be optional for market participants and
others and, as a result, would have no
direct impact on firms.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
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longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2017–015 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Robert W. Errett, Deputy Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2017–015. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
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submissions should refer to File
Number SR–FINRA–2017–015 and
should be submitted on or before June
26, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–11500 Filed 6–2–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80811; File No. SR–Phlx–
2017–43]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing of
Proposed Rule Change To Eliminate
Requirements That Will Be Duplicative
of CAT
May 30, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 26,
2017, NASDAQ PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Rule 3400 series relating to the Order
Audit Trail System, Rule 785 relating to
Electronic Blue Sheets, Rule 1022
relating to account identification, and
Rule 1063 and Option Floor Procedure
Advices and Order and Decorum
Regulations C–2 relating to the
Consolidated Options Audit Trail
System to reflect changes to these rules
once members are effectively reporting
to the Consolidated Audit Trail (‘‘CAT’’)
and the CAT’s accuracy and reliability
meets certain standards as described
below.
The text of the proposed rule
change is available on the Exchange’s
Web site at https://
nasdaqphlx.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
7 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Rule 3400 series relating to the Order
Audit Trail System (‘‘OATS’’), Rule 785
relating to Electronic Blue Sheets
(‘‘EBS’’), Rule 1022 relating to account
identification, and Rule 1063 Option
Floor Procedure Advices and Order and
Decorum Regulations C–2 relating to the
Consolidated Options Audit Trail
System (‘‘COATS’’) to reflect changes to
these rules once members are effectively
reporting to the CAT, and the CAT’s
accuracy and reliability meets certain
standards as described below.3
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Background
Bats BYX Exchange, Inc.; Bats BZX
Exchange, Inc.; Bats EDGA Exchange,
Inc.; Bats EDGX Exchange, Inc.; BOX
Options Exchange LLC; C2 Options
Exchange, Incorporated; Chicago Board
Options Exchange, Incorporated;
Chicago Stock Exchange, Inc.; FINRA;
International Securities Exchange, LLC;
Investors’ Exchange LLC; ISE Gemini,
LLC; ISE Mercury, LLC; Miami
International Securities Exchange LLC;
MIAX PEARL, LLC; NASDAQ BX, Inc.;
NASDAQ PHLX LLC; The NASDAQ
Stock Market LLC; National Stock
Exchange, Inc.; New York Stock
Exchange LLC; NYSE MKT LLC; and
NYSE Arca, Inc. (collectively, the
‘‘Participants’’) filed with the
Commission, pursuant to Section 11A of
the Exchange Act 4 and Rule 608 of
Regulation NMS thereunder,5 the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
3 The Exchange initially filed the proposed rule
change on May 15, 2017 (SR–Phlx–2017–38). On
May 26, 2017, the Exchange withdrew that filing
and submitted this filing.
4 15 U.S.C. 78k–1.
5 17 CFR 242.608.
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NMS Plan’’ or ‘‘Plan’’).6 The
Participants filed the Plan to comply
with Rule 613 of Regulation NMS under
the Exchange Act.7 The Plan was
published for comment in the Federal
Register on May 17, 2016,8 and
approved by the Commission, as
modified, on November 15, 2016.9 On
March 15, 2017, the Commission
approved the new Phlx Rule 900A
Series to implement provisions of the
CAT NMS Plan that are applicable to
Phlx members.10
The CAT NMS Plan is designed to
create, implement, and maintain a
consolidated audit trail that will capture
in a single consolidated data source
customer and order event information
for orders in NMS Securities and OTC
Equity Securities, across all markets,
from the time of order inception through
routing, cancellation, modification, or
execution. Among other things, Section
C.9. of Appendix C to the Plan, as
modified by the Commission, requires
each Participant to ‘‘file with the SEC
the relevant rule change filing to
eliminate or modify its duplicative rules
within six (6) months of the SEC’s
approval of the CAT NMS Plan.’’ 11 The
Plan notes that ‘‘the elimination of such
rules and the retirement of such systems
[will] be effective at such time as CAT
Data meets minimum standards of
accuracy and reliability.’’ 12 Finally, the
Plan requires the rule filing to discuss
the following:
(i) Specific accuracy and reliability
standards that will determine when
duplicative systems will be retired,
6 See Letter from the Participants to Brent J.
Fields, Secretary, Commission, dated September 30,
2014; and Letter from Participants to Brent J. Fields,
Secretary, Commission, dated February 27, 2015.
On December 24, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter
from Participants to Brent J. Fields, Secretary,
Commission, dated December 23, 2015.
ISE Gemini, LLC, ISE Mercury, LLC and
International Securities Exchange, LLC have been
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities
Exchange Act Release No. 80248 (March 15, 2017),
82 FR 14547 (March 21, 2017); Securities Exchange
Act Release No. 80326 (March 29, 2017), 82 FR
16460 (April 4, 2017); and Securities Exchange Act
Release No. 80325 (March 29, 2017), 82 FR 16445
(April 4, 2017).
National Stock Exchange, Inc. has been renamed
NYSE National, Inc. See Securities Exchange Act
Release No. 79902 (Jan. 30, 2017), 82 FR 9258
(February 3, 2017).
7 17 CFR 242.613.
8 Securities Exchange Act Release No. 77724
(April 27, 2016), 81 FR 30614 (May 17, 2016).
9 Securities Exchange Act Release No. 79318
(November 15, 2016), 81 FR 84696 (November 23,
2016) (‘‘Approval Order’’).
10 See Securities Exchange Act Release No. 80256
(March 15, 2017), 82 FR 14526 (March 21, 2017)
(SR–Phlx–2017–07).
11 CAT NMS Plan, Appendix C, Section C.9.
12 See id.
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including, but not limited to, whether
the attainment of a certain Error Rate
should determine when a system
duplicative of the CAT can be retired;
(ii) whether the availability of certain
data from Small Industry Members two
years after the Effective Date would
facilitate a more expeditious retirement
of duplicative systems; and
(iii) whether individual Industry
Members can be exempted from
reporting to duplicative systems once
their CAT reporting meets specified
accuracy and reliability standards,
including, but not limited to, ways in
which establishing cross-system
regulatory functionality or integrating
data from existing systems and the CAT
would facilitate such Individual
Industry Member exemptions.13
Changes to OATS
In response to these requirements,
Phlx is proposing to delete the Rule
3400 Series (the ‘‘OATS Rules’’) from
the Phlx rulebook once the CAT
achieves the specific accuracy and
reliability standards described below,
and Phlx has determined that its usage
of the CAT Data has not revealed
material issues that have not been
corrected, confirmed that the CAT
includes all data necessary to allow
Phlx to continue to meet its surveillance
obligations,14 and confirmed that the
Plan Processor is sufficiently meeting all
of its obligations under the CAT NMS
Plan.15
Specific Accuracy and Reliability
Standards
The first issue the Plan requires the
proposed rule change to discuss is
‘‘specific accuracy and reliability
13 See
id.
noted in the Participants’ September 23,
2016 response to comment letters on the Plan, the
Participants ‘‘worked to keep [the CAT] gap
analyses up-to-date by including newly-added data
fields in these duplicative systems, such as the new
OATS data fields related to the tick size pilot and
ATS order book changes, in the gap analyses.’’ See
Letter from Participants to Brent J. Fields, Secretary,
Commission, dated September 23, 2016, at 21. The
Participants noted that they ‘‘will work with the
Plan Processor and the industry to develop detailed
Technical Specifications to ensure that by the time
Industry Members are required to report to the CAT,
the CAT will include all data elements necessary
to facilitate the rapid retirement of duplicative
systems.’’ Id.
15 Phlx notes that the OATS Rules were originally
proposed to fulfill one of the undertakings
contained in an order issued by the Commission
relating to the settlement of an enforcement action
against the National Association of Securities
Dealers, Inc. for failure to adequately enforce its
rules. See Securities Exchange Act Release No.
39729 (March 6, 1998), 63 FR 12559 (March 13,
1998). In approving the OATS Rules, the
Commission concluded that OATS satisfied the
conditions of the SEC’s order and was consistent
with the Exchange Act. See id. at 12566–67.
14 As
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standards that will determine when
duplicative systems will be retired,
including, but not limited to, whether
the attainment of a certain Error Rate
should determine when a system
duplicative of the CAT can be
retired.’’ 16 Phlx believes that relevant
error rates are the primary, but not the
sole, metric by which to determine the
CAT’s accuracy and reliability and will
serve as the baseline requirement
needed before OATS can be retired and
requests for trading information can be
amended to account for information
being available in the CAT.
As discussed in Section A.3.(b) of
Appendix C to the CAT NMS Plan, the
Participants established an initial Error
Rate, as defined in the Plan, of 5% on
initially submitted data (i.e., data as
submitted by a CAT Reporter before any
required corrections are performed). The
Participants noted in the Plan that their
expectation was that ‘‘error rates after
reprocessing of error corrections will be
de minimis.’’ 17 The Participants based
this Error Rate on their consideration of
‘‘current and historical OATS Error
Rates, the magnitude of new reporting
requirements on the CAT Reporters and
the fact that many CAT Reporters may
have never been obligated to report data
to an audit trail.’’ 18
Phlx agrees with the Participants’
conclusion that a 5% pre-correction
threshold ‘‘strikes the balance of
adapting to a new reporting regime,
while ensuring that the data provided to
regulators will be capable of being used
to conduct surveillance and market
reconstruction, as well as having a
sufficient level of accuracy to facilitate
the retirement of existing regulatory
reports and systems where possible.’’ 19
However, Phlx believes that, when
assessing the accuracy and reliability of
the data for the purposes of retiring
OATS, the error thresholds should be
measured in more granular ways and
should also include minimum error
rates of post-correction data, which
represents the data most likely to be
used by Phlx to conduct surveillance.
Although Phlx is proposing to measure
the appropriate error rates in the
aggregate, rather than firm-by-firm, Phlx
believes that the error rates for equity
securities should be measured
separately from options since options
orders are not currently reported
regularly or included in OATS.
To ensure the CAT’s accuracy and
reliability, Phlx is proposing that, before
16 See
id. [sic]
CAT NMS Plan, Appendix C, Section
A.3(b), at n.102.
18 Id.
19 Id.
17 See
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OATS could be retired, the CAT would
generally need to achieve a sustained
error rate for Industry Member reporting
in each of the categories below for a
period of at least 180 days of 5% or
lower, measured on a pre-correction or
as-submitted basis and 2% or lower on
a post-correction basis (measured at
T+5).20 Phlx is proposing to measure the
5% pre-correction and 2% postcorrection thresholds by averaging the
error rate across the period, not require
a 5% pre-correction and 2% postcorrection maximum each day for 180
consecutive days. Phlx believes that
measuring each of the thresholds over
the course of 180 days will ensure that
the CAT consistently meets minimum
accuracy and reliability thresholds for
Industry Member reporting while also
ensuring that single-day measurements
do not unduly affect the overall
measurements.
Phlx is proposing to use error rates in
each the following categories, measured
separately for options and for equities,
to assess whether the threshold pre- and
post-correction error rates are being met:
• Rejection Rates and Data
Validations. Data validations for the
CAT, while not expected to be designed
the same as OATS, must be functionally
equivalent to OATS in accordance with
the CAT NMS Plan (i.e., the same types
of basic data validations must be
performed by the Plan Processor to
comply with the CAT NMS Plan
requirements). Appendix D of the Plan,
for example, requires that certain file
validations 21 and syntax and context
checks be performed on all submitted
records.22 If a record does not pass these
basic data validations, it must be
rejected and returned to the CAT
20 The Plan requires that the Plan Processor must
ensure that regulators have access to corrected and
linked order and Customer data by 8:00 a.m.
Eastern Time on T+5. See CAT NMS Plan,
Appendix C, Section A.2(a).
21 See CAT NMS Plan, Appendix D, Section 7.2.
The Plan requires the Plan Processor to confirm that
file transmission and receipt are in the correct
formats, including validation of header and trailers
on the submitted report, confirmation of a valid
Exhange [sic]-Assigned Market Participant
Identifier, and verification of the number of records
in the file. Id.
22 See id. The Plan notes that syntax and context
checks would include format checks (i.e., that data
is entered in the specified format); data type checks
(i.e., that the data type of each attribute conforms
to the specifications); consistency checks (i.e., that
all attributes for a record of a specified type are
consistent); range/logic checks (i.e., that each
attribute for every record has a value within
specified limits and the values provided are
associated with the event type they represent); data
validity checks (i.e., that each attribute for every
record has an acceptable value); completeness
checks (i.e., that each mandatory attribute for every
record is not null); and timeliness checks (i.e., that
the records were submitted within the submission
timelines). Id.
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Reporter to be corrected and
resubmitted.23 The specific validations
can be determined only after the Plan
Processor has finalized the Industry
Member Technical Specifications;
however, the Plan also requires the Plan
Processor to provide daily statistics on
rejection rates after the data has been
processed, including the number of files
rejected and accepted, the number of
order events accepted and rejected, and
the number of each type of report
rejected.24 Phlx is proposing that, over
the 180-day period, aggregate rejection
rates (measured separately for equities
and options) must be no more than 5%
pre-correction or 2% post-correction
across all CAT Reporters.
• Intra-Firm Linkages. The Plan
requires that ‘‘the Plan Processor must
be able to link all related order events
from all CAT Reporters involved in the
lifecycle of an order.’’ 25 At a minimum,
this requirement includes the creation
of an order lifecycle between ‘‘[a]ll order
events handled within an individual
CAT Reporter, including orders routed
to internal desks or departments with
different functions (e.g., an internal
ATS).’’ 26 Phlx is proposing that
aggregate intra-firm linkage rates across
all Industry Member Reporters must be
at least 95% pre-correction and 98%
post-correction.
• Inter-Firm Linkages. The order
linkage requirements in the Plan also
require that the Plan Processor be able
to create the lifecycle between orders
routed between broker-dealers.27 Phlx is
proposing that at least a 95% precorrection and 98% post-correction
aggregate match rate be achieved for
orders routed between two Industry
Member Reporters.28
• Order Linkage Rates. In addition to
creating linkages within and between
broker-dealers, the Plan also includes
requirements that the Plan Processor be
able to create lifecycles to link various
pieces of related orders.29 For example,
the Plan requires linkages between
customer orders and ‘‘representative’’
orders created in firm accounts for the
purpose of facilitating a customer order,
various legs of option/equity complex
orders, riskless principal orders, and
orders worked through average price
accounts.30 Phlx is proposing that there
23 See
id.
id.
25 CAT NMS Plan, Appendix D, Section 3.
26 Id.
27 Id.
28 This assumes linkage statistics will include
both unlinked route reports and new orders where
no related route report could be found.
29 See CAT NMS Plan, Appendix D, Section 3.
30 See id.
24 See
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be at least a 95% pre-correction and
98% post-correction linkage rate for
multi-legged orders (e.g., related equity/
options orders, VWAP orders, riskless
principal transactions).
• Exchange and TRF/ORF Match
Rates. The Plan requires that an order
lifecycle be created to link ‘‘[o]rders
routed from broker-dealers to
exchanges’’ and ‘‘[e]xecuted orders and
trade reports.’’ 31 Phlx is proposing at
least a 95% pre-correction and 98%
post-correction aggregate match rate to
each equity exchange for orders routed
from Industry Members to an exchange
and, for over-the-counter executions, the
same match rate for orders linked to
trade reports.
In addition to these minimum error
rates and matching thresholds that
generally must be met before OATS can
be retired, Phlx believes that during the
minimum 180-day period during which
the thresholds are calculated, Phlx’s use
of the data in the CAT must confirm that
(i) usage over that time period has not
revealed material issues that have not
been corrected, (ii) the CAT includes all
data necessary to allow Phlx to continue
to meet its surveillance obligations, and
(iii) the Plan Processor is sufficiently
meeting all of its obligations under the
CAT NMS Plan. Phlx believes this time
period to use the CAT Data is necessary
to reveal any errors that may manifest
themselves only after surveillance
patterns and other queries have been
run and to confirm that the Plan
Processor is meeting its obligations and
performing its functions adequately.
Small Industry Member Data
Availability
The second issue the Plan requires the
proposed rule change to address is
‘‘whether the availability of certain data
from Small Industry Members two years
after the Effective Date would facilitate
a more expeditious retirement of
duplicative systems.’’
Phlx believes that there is no effective
way to retire OATS until all current
OATS reporters are reporting to the
CAT. Although Technical Specifications
for Industry Members are not yet
available, PHLX believes it would be
inefficient, less reliable, and more costly
to attempt to marry the OATS and CAT
databases for a temporary period to
allow some Phlx members to report to
CAT while others continue to report to
OATS. Consequently, Phlx has
concluded at this time that having data
from those Small Industry Members
currently reporting to OATS available
two years after the Effective Date would
substantially facilitate a more
31 Id.
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expeditious retirement of OATS. For
this reason, Phlx supports an
amendment to the Plan that would
require current OATS Reporters that are
‘‘Small Industry Members’’ to report two
years after the Effective Date (instead of
three). Phlx intends to work with the
other Participants to submit a proposed
amendment to the Plan to require Small
Industry Members that are OATS
Reporters to report two years after the
Effective Date.
Phlx has identified approximately 300
member firms that currently report to
OATS and meet the definition of ‘‘Small
Industry Member;’’ however, only ten of
these firms submit information to OATS
on their own behalf, and eight of the ten
firms report very few orders to OATS.32
The vast majority of these 300 firms use
third parties to fulfill their reporting
obligations, and many of these third
parties will begin reporting to CAT in
November 2018. Consequently, Phlx
believes that the burden on current
OATS Reporters that are ‘‘Small
Industry Members’’ would not be
significant if those firms are required to
report to CAT beginning in November
2018 rather than November 2019. The
burdens, however, are significantly
greater for those firms that are not
reporting to OATS currently; therefore,
Phlx does not believe it would be
necessary or appropriate to accelerate
CAT reporting for ‘‘Small Industry
Members’’ that are not currently
reporting to OATS, and PHLX would
not support an amendment to the Plan
to accelerate CAT reporting for ‘‘Small
Industry Members’’ that are not
currently OATS Reporters.
Individual Industry Member
Exemptions
The final issue the Plan requires the
proposed rule change to address is
‘‘whether individual Industry Members
can be exempted from reporting to
duplicative systems once their CAT
reporting meets specified accuracy and
reliability standards, including, but not
limited to, ways in which establishing
cross-system regulatory functionality or
integrating data from existing systems
and the CAT would facilitate such
Individual Industry Member
exemptions.’’
As described above, Phlx believes that
a single cut-over from OATS to CAT is
highly preferable to a firm-by-firm
approach and is not proposing to
exempt members from the OATS
requirements on a firm-by-firm basis.
32 For example, in one recent month, eight of the
ten firms submitted fewer than 100 reports during
the month, with four firms submitting fewer than
50.
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The primary benefit to a firm-by-firm
exemptive approach would be to reduce
the amount of time an individual firm
is required to report to a legacy system
(e.g., OATS) if it is also accurately and
reliably reporting to the CAT. Phlx
believes that the overall accuracy and
reliability thresholds for the CAT
described above would need to be met
under any conditions before firms could
stop reporting to OATS. Moreover, as
discussed above, Phlx supports
amending the Plan to accelerate the
reporting requirements for Small
Industry Members that are OATS
Reporters to report on the same
timeframe as all other OATS Reporters.
If such an amendment were approved
by the Commission, there would be no
need to exempt members from OATS
requirements on a firm-by-firm basis.
Changes to EBS and Account
Identification Rules
Rule 785 is Phlx’s rule regarding the
automated submission of specific
trading data to Phlx upon request using
the Electronic Blue Sheet (‘‘EBS’’)
system. Rule 785 requires members to
submit certain trade information as
prescribed by the Exchange, including,
for proprietary transactions, the clearing
house number or alpha symbol of the
member submitting the data, the
identifying symbol assigned to the
security, and the date the transaction
was executed.
Rule 1022 imposes certain account
identification requirements on
Specialists and Registered Options
Traders. Specifically, Rule 1022 requires
those market participants to file with
the Exchange upon request and keep
current a list identifying all accounts for
stock, Exchange-Traded Fund Shares,
option and related securities or foreign
currencies, physical commodities,
physical commodity options,
commodity futures contracts, options on
commodity futures contracts, any other
derivatives based on such commodity
and other related trading in which the
Specialist or Registered Options Trader
may, directly or indirectly, engage in
trading activities or over which they
exercise investment discretion. That
Rule prohibits a Specialist or Registered
Options Trader from engaging in trading
in any of these instruments in an
account that has not been reported to
the Exchange pursuant to this rule.
Once broker-dealer reporting to the
CAT has begun, the CAT will contain
the data the Participants would
otherwise have requested via the EBS
system for purposes of NMS Securities
and OTC Equity Securities.
Consequently, Phlx will not need to use
the EBS system or request information
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pursuant to these rules for NMS
Securities or OTC Equity Securities for
time periods after CAT reporting has
begun if the appropriate accuracy and
reliability thresholds are achieved,
including an acceptable accuracy rate
for customer and account information.
However, these rules cannot be
completely eliminated immediately
upon the CAT achieving the appropriate
thresholds because Exchange staff may
still need to request information
pursuant to these rules for trading
activity occurring before a member was
reporting to the CAT.33 In addition,
these rules apply to information
regarding transactions involving
securities that will not be reportable to
the CAT, such as fixed-income
securities; thus, these rules must remain
in effect with respect to those
transactions indefinitely or until those
transactions are captured in the CAT.
The proposed rule change proposes to
add new Supplementary Material to
Rule 785 and Rule 1022 to clarify how
Phlx will request data under these rules
after members are reporting to the CAT.
Specifically, the proposed
Supplementary Material to these rules
will note that the Exchange will request
information under these rules only if the
information is not available in the CAT
because, for example, the transactions in
question occurred before the firm was
reporting information to the CAT or
involved securities that are not
reportable to the CAT. In essence, under
the new Supplementary Material, the
Exchange will make requests under
these rules if and only if the information
is not otherwise available through the
CAT.
The CAT NMS Plan states, however,
that the elimination of rules that are
duplicative of the requirements of the
CAT and the retirement of the related
systems should be effective at such time
as CAT Data meets minimum standards
of accuracy and reliability.34
Accordingly, as discussed in more detail
below, Phlx believes that the EBS data
may be replaced by CAT Data at a date
after all Industry Members are reporting
to the CAT when the proposed error rate
thresholds have been met, and Phlx has
determined that its usage of the CAT
Data has not revealed material issues
that have not been corrected, confirmed
that the CAT includes all data necessary
to allow Phlx to continue to meet its
33 Firms are required to maintain the trade
information for pre-CAT transactions in equities
and options pursuant to applicable rules, such as
books and records retention requirements, for the
relevant time period, which is generally three or six
years depending upon the record. See 17 CFR
240.17a–3(a), 240.17a–4.
34 Id. [sic]
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surveillance obligations, and confirmed
that the Plan Processor is sufficiently
meeting all of its obligations under the
CAT NMS Plan.
Phlx believes CAT Data should not be
used in place of EBS data until all
Participants and Industry Members are
reporting data to CAT. In this way, Phlx
will continue to have access to the
necessary data to perform its regulatory
duties.
The CAT NMS Plan requires that a
rule filing to eliminate a duplicative
rule address whether ‘‘the availability of
certain data from Small Industry
Members two years after the Effective
Date would facilitate a more expeditious
retirement of duplicative systems.’’ 35
Phlx believes that the submission of
data to the CAT by Small Industry
Members a year earlier than is required
in the CAT NMS Plan, at the same time
as the other Industry Members, would
expedite the replacement of EBS data
with CAT Data, as Phlx believes that the
CAT would then have all necessary data
from the Industry Members for Phlx to
perform the regulatory surveillance that
currently is performed via EBS. For this
reason, Phlx supports amending the
CAT NMS Plan to require Small
Industry Members to report data to the
CAT two years after the Effective Date
(instead of three), and intends to work
with other Participants toward that end.
The CAT NMS Plan requires that this
rule filing address ‘‘whether individual
Industry Members can be exempted
from reporting to duplicative systems
once their CAT reporting meets
specified accuracy and reliability
standards, including, but not limited to,
ways in which establishing cross-system
regulatory functionality or integrating
data from existing systems and the CAT
would facilitate such Individual
Industry Member exemptions.’’ 36 Phlx
believes that a single cut-over from EBS
to CAT is highly preferable to a firm-byfirm approach and is not proposing to
exempt members from the EBS
requirements on a firm-by-firm basis.
Phlx believes that providing such
individual exemptions to Industry
Members would be inefficient, more
costly, and less reliable than the single
cut-over. Providing individual
exemptions would require the
exchanges to create, for a brief
temporary period, a cross-system
regulatory function and to integrate data
from EBS and the CAT to avoid creating
any regulatory gaps as a result of such
exemptions. Such a function would be
costly to create and would give rise to
a greater likelihood of data errors or
35 Id.
36 Id.
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other issues. Given the limited time in
which such exemptions would be
necessary, Phlx does not believe that
such exemptions would be an
appropriate use of limited resources.
Moreover, the primary benefit to a firmby-firm exemptive approach would be
to reduce the amount of time an
individual firm is required to comply
with EBS if it is also accurately and
reliably reporting to the CAT. Phlx
believes that the overall accuracy and
reliability thresholds for the CAT
described above would need to be met
under any conditions before firms could
stop reporting to EBS, and as discussed
above, by accelerating Small Industry
Members to report on the same
timeframe as all other Industry
Members, there is no need to exempt
members from EBS requirements on a
firm-by-firm basis.
The CAT NMS Plan also requires that
a rule filing to eliminate a duplicative
rule to provide ‘‘specific accuracy and
reliability standards that will determine
when duplicative systems will be
retired, including, but not limited to,
whether the attainment of a certain
Error Rate should determine when a
system duplicative of the CAT can be
retired.’’ 37 Phlx believes that it is
critical that the CAT Data be sufficiently
accurate and reliable for Phlx to perform
the regulatory functions that it now
performs via EBS. Accordingly, Phlx
believes that the CAT Data should meet
specific quantitative error rates, as well
as certain qualitative requirements.
Phlx believes that, before CAT Data
may be used in place of EBS data, the
CAT would need to achieve a sustained
error rate for a period of at least 180
days of 5% or lower measured on a precorrection or as-submitted basis, and
2% or lower on a post-correction basis
(measured at T+5).38 Phlx proposes to
measure the 5% pre-correction and 2%
post-correction thresholds by averaging
the error rate across the period, not
require a 5% pre-correction and 2%
post-correction maximum each day for
180 consecutive days. Phlx believes that
measuring each of the thresholds over
the course of 180 days will ensure that
the CAT consistently meets minimum
accuracy and reliability thresholds
while also ensuring that single-day
measurements do not unduly affect the
overall measurements. Phlx proposes to
measure the appropriate error rates in
the aggregate, rather than firm-by-firm.
The 2% and 5% error rates are in line
37 Id.
38 The Plan requires that the Plan Processor must
ensure that regulators have access to corrected and
linked order and Customer data by 8:00 a.m.
Eastern Time on T+5. See CAT NMS Plan, at C–15.
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with the proposed retirement threshold
for other systems, such as OATS and
COATS.
In addition to these minimum error
rates before using CAT Data instead of
EBS data, Phlx believes that during the
minimum 180-day period during which
the thresholds are calculated, Phlx’s use
of the data in the CAT must confirm that
(i) usage over that time period has not
revealed material issues that have not
been corrected, (ii) the CAT includes all
data necessary to allow Phlx to continue
to meet its surveillance obligations, and
(iii) the Plan Processor is sufficiently
meeting all of its obligations under the
CAT NMS Plan. Phlx believes this time
period to use the CAT Data is necessary
to reveal any errors that may manifest
themselves only after surveillance
patterns and other queries have been
run and to confirm that the Plan
Processor is meeting its obligations and
performing its functions adequately.
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Changes to COATS
The options exchanges utilize COATS
to collect and review data regarding
options orders, quotes and transactions.
The Participants have provided COATS
technical specifications to the Plan
Processor for the CAT for use in
developing the Technical Specifications
for the CAT, and the Participants are
working with the Plan Processor to
include the necessary COATS data
elements in the CAT Technical
Specifications. Accordingly, although
the Technical Specifications for the
CAT have not yet been finalized, Phlx
and the other options exchanges
propose to eliminate COATS in
accordance with the proposed timeline
discussed below.
Phlx adopted Rule 1063 to implement
certain reporting requirements related to
COATS, and therefore proposes to
eliminate the information reporting
requirements of that rule and replacing
those requirements with a requirement
that members report information
pursuant to this rule as required by
Phlx’s CAT Compliance Rule, Rule
900A.39 Phlx also proposes to make a
39 COATS was developed to comply with an order
of the Commission requiring the then-options
exchanges to ‘‘design and implement’’ a
consolidated audit trail to ‘‘enable the options
exchanges to reconstruct markets promptly,
effectively surveil them and enforce order handling,
firm quote, trade reporting and other rules.’’ See
Section IV.B.e.(v) of the Commission’s Order
Instituting Public Administrative Proceedings
Pursuant to Sections 19(h)(1) of the Securities
Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions (the ‘‘Order’’). See
Securities Exchange Act Release No. 43268
(September 11, 2000) and Administrative
Proceeding File No. 3–10282. As noted, the Plan is
designed to create, implement and maintain a CAT
that would capture customer and order event
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corresponding change to Option Floor
Procedure Advices and Order and
Decorum Regulations C–2.
Rule 1063(e) describes the operations
and requirements of the Floor Broker
Management System, which is designed
to create an electronic audit trail for
equity, equity index and U.S. dollarsettled foreign currency options orders
represented by Floor Brokers on the
Exchange’s Options Floor. Among other
things, Rule 1063(e) requires a Floor
Broker or that Floor Broker’s employees,
contemporaneously upon receipt of an
order and prior to the representation of
such an order in the trading crowd, to
record order information including (i)
the order type (i.e., customer, firm,
broker-dealer, professional) and order
receipt time; (ii) the option symbol; (iii)
buy, sell, cross or cancel; (iv) call, put,
complex (i.e., spread, straddle), or
contingency order; and (v) number of
contracts.
Option Floor Procedure Advices and
Order and Decorum Regulations C–2
repeats these requirements, and imposes
a schedule of fines for violating these
requirements.
The CAT NMS Plan states that the
elimination of rules that are duplicative
of the requirements of the CAT and the
retirement of the related systems should
be effective at such time as CAT Data
meets minimum standards of accuracy
and reliability.40 As discussed in more
detail below, Phlx and the other options
exchanges believe that COATS may be
retired at a date after all Industry
Members are reporting to the CAT when
the proposed error rate thresholds have
been met, and Phlx has determined that
its usage of the CAT Data has not
revealed material issues that have not
been corrected, confirmed that the CAT
includes all data necessary to allow
Phlx to continue to meet its surveillance
obligations, and confirmed that the Plan
Processor is sufficiently meeting all of
its obligations under the CAT NMS
Plan.
Phlx believes COATS should not be
retired until all Participants and
Industry Members that report data to
COATS are reporting comparable data to
information for orders in NMS Securities and OTC
Equity Securities, across all markets, from the time
of order inception through routing, cancellation,
modification, or execution in a single consolidated
data source. Phlx has already adopted rules to
enforce compliance by its Industry Members, as
applicable, with the provisions of the Plan. Once
the CAT is fully operational, it will be appropriate
to delete Phlx’s rules implemented to comply with
the Order as duplicative of the CAT. Accordingly,
Phlx believes that it would continue to be in
compliance with the requirements of the Order
once the CAT is fully operational and the COATS
rules are deleted.
40 Id. [sic]
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the CAT. In this way, Phlx will continue
to have access to the necessary data to
perform its regulatory duties.
The CAT NMS Plan requires that a
rule filing to eliminate a duplicative
rule address whether ‘‘the availability of
certain data from Small Industry
Members two years after the Effective
Date would facilitate a more expeditious
retirement of duplicative systems.’’ 41
The Exchange believes COATS should
not be retired until all Participants and
Industry Members that report data to
COATS are reporting comparable data to
the CAT. While the early submission of
options data to the CAT by Small
Industry Members could expedite the
retirement of COATS, the Exchange
believes that it premature to consider
such a change and that additional
analysis would be necessary to
determine whether such early reporting
by Small Industry Members would be
feasible.
The CAT NMS Plan requires that this
rule filing address ‘‘whether individual
Industry Members can be exempted
from reporting to duplicative systems
once their CAT reporting meets
specified accuracy and reliability
standards, including, but not limited to,
ways in which establishing cross-system
regulatory functionality or integrating
data from existing systems and the CAT
would facilitate such Individual
Industry Member exemptions.’’ 42 Phlx
believes that a single cut-over from
COATS to CAT is highly preferable to
a firm-by-firm approach and is not
proposing to exempt members from the
COATS requirements on a firm-by-firm
basis. Phlx and the other options
exchanges believe that providing such
individual exemptions to Industry
Members would be inefficient, more
costly, and less reliable than the single
cut-over. Providing individual
exemptions would require the options
exchanges to create, for a brief
temporary period, a cross-system
regulatory function and to integrate data
from COATS and the CAT to avoid
creating any regulatory gaps as a result
of such exemptions. Such a function
would be costly to create and would
give rise to a greater likelihood of data
errors or other issues. Given the limited
time in which such exemptions would
be necessary, Phlx and the other options
exchanges do not believe that such
exemptions would be an appropriate
use of limited resources.
The CAT NMS Plan also requires that
a rule filing to eliminate a duplicative
rule to provide ‘‘specific accuracy and
reliability standards that will determine
41 Id.
42 Id.
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when duplicative systems will be
retired, including, but not limited to,
whether the attainment of a certain
Error Rate should determine when a
system duplicative of the CAT can be
retired.’’ 43 Phlx believes that it is
critical that the CAT Data be sufficiently
accurate and reliable for the Exchange to
perform the regulatory functions that it
now performs via COATS. Accordingly,
Phlx believes that the CAT Data should
meet specific quantitative error rates, as
well as certain qualitative requirements.
Phlx and the other options exchanges
believe that, before COATS may be
retired, the CAT would need to achieve
a sustained error rate for a period of at
least 180 days of 5% or lower measured
on a pre-correction or as-submitted
basis, and 2% or lower on a postcorrection basis (measured at T+5).44
Phlx proposes to measure the 5% precorrection and 2% post-correction
thresholds by averaging the error rate
across the period, not require a 5% precorrection and 2% post-correction
maximum each day for 180 consecutive
days. Phlx believes that measuring each
of the thresholds over the course of 180
days will ensure that the CAT
consistently meets minimum accuracy
and reliability thresholds while also
ensuring that single-day measurements
do not unduly affect the overall
measurements. Phlx proposes to
measure the appropriate error rates in
the aggregate, rather than firm-by-firm.
In addition, Phlx proposes to measure
the error rates for options only, not
equity securities, as only options are
subject to COATS. The 2% and 5% error
rates are in line with the proposed
retirement threshold for OATS.
In addition to these minimum error
rates before COATS can be retired, Phlx
believes that during the minimum 180day period during which the thresholds
are calculated, Phlx’s use of the data in
the CAT must confirm that (i) usage
over that time period has not revealed
material issues that have not been
corrected, (ii) the CAT includes all data
necessary to allow Phlx to continue to
meet its surveillance obligations, and
(iii) the Plan Processor is sufficiently
meeting all of its obligations under the
CAT NMS Plan. Phlx believes this time
period to use the CAT Data is necessary
to reveal any errors that may manifest
themselves only after surveillance
patterns and other queries have been
run and to confirm that the Plan
43 Id.
44 The Plan requires that the Plan Processor must
ensure that regulators have access to corrected and
linked order and Customer data by 8:00 a.m.
Eastern Time on T+5. See CAT NMS Plan, at C–15.
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Processor is meeting its obligations and
performing its functions adequately.
If the Commission approves the
proposed rule change, Phlx will
announce the implementation date of
the proposed rule change in a
Regulatory Notice that will be published
once Phlx concludes the thresholds for
accuracy and reliability described above
have been met and that the Plan
Processor is sufficiently meeting all of
its obligations under the CAT NMS
Plan.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,45 in general, and furthers the
objectives of Section 6(b)(5) of the Act,46
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
Phlx believes that the proposed rule
change fulfills the obligation in the CAT
NMS Plan for Phlx to submit a proposed
rule change to eliminate or modify
duplicative rules. In approving the Plan,
the SEC noted that the Plan ‘‘is
necessary and appropriate in the public
interest, for the protection of investors
and the maintenance of fair and orderly
markets, to remove impediments to, and
perfect the mechanism of a national
market system, or is otherwise in
furtherance of the purposes of the
Act.’’ 47 As this proposal implements the
Plan, Phlx believes that this proposal
furthers the objectives of the Plan, as
identified by the SEC, and is therefore
consistent with the Exchange Act.
Moreover, the purpose of the
proposed rule change is to eliminate
rules that require the submission of
duplicative data to the exchange. The
elimination of such duplicative
requirements will reduce unnecessary
costs and other compliance burdens for
Phlx and its members, and therefore,
will enhance the efficiency of the
securities markets. Furthermore, Phlx
believes that the approach set forth in
the proposed rule change strikes the
appropriate balance between ensuring
that Phlx is able to continue to fulfill its
statutory obligation to protect investors
and the public interest by ensuring its
surveillance of market activity remains
accurate and effective while also
establishing a reasonable timeframe for
elimination or modification of its rules
45 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
47 Approval Order at 84697.
46 15
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25869
that will be rendered duplicative after
implementation of the CAT.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Section 6(b)(8) of the Exchange Act 48
requires that the Exchange’s rules not
impose any burden on competition that
is not necessary or appropriate. Phlx
does not believe that the proposed rule
change will result in any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. Phlx
notes that the proposed rule change
implements the requirements of the
CAT NMS Plan approved by the
Commission regarding the elimination
of rules and systems that are duplicative
the CAT, and is designed to assist Phlx
in meeting its regulatory obligations
pursuant to the Plan. Similarly, all
exchanges and FINRA are proposing the
elimination of their rules related to
OATS, EBS and COATS to implement
the requirements of the CAT NMS Plan.
Therefore, this is not a competitive rule
filing and, therefore, it does not raise
competition issues between and among
the self-regulatory organizations and/or
their members.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Although written comments on the
proposed rule change were not solicited,
two commenters, the Financial
Information Forum (‘‘FIF’’) and the
Securities Industry and Financial
Markets Association (‘‘SIFMA’’),
submitted letters to the Participants
regarding the retirement of systems
related to the CAT.49 In its comment
letter, with regard to the retirement of
duplicative systems more generally, FIF
recommends that the Participants
continue the effort to incorporate
current reporting obligations into the
CAT in order to replace existing
reportable systems with the CAT. In
addition, FIF further recommends that,
once a CAT Reporter achieves
satisfactory reporting data quality, the
CAT Reporter should be exempt from
reporting to any duplicative reporting
systems. FIF believes that these
recommendations ‘‘would serve both an
underlying regulatory objective of more
48 15
U.S.C. 78f(b)(8).
from William H. Hebert, FIF, to
Participants re: Milestone for Participants’ rule
change filings to eliminate/modify duplicative
rules, dated April 12, 2017 (‘‘FIF Letter’’); Letter
from Kenneth E. Bentsen, Jr., SIFMA, to
Participants re: Selection of Thesys as CAT
Processor, dated April 4, 2017 (‘‘SIFMA Letter’’), at
2.
49 Letter
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immediate and accurate access to data
as well as an industry objective of
reduced costs and burdens of regulatory
oversight.’’ 50 In its comments about
EBS specifically, FIF states that the
retirement of the EBS requirements
should be a high priority, and that the
CAT should be designed to include the
requisite data elements to permit the
rapid retirement of the EBS system.51
Similarly, SIFMA states that ‘‘the
establishment of the CAT must be
accompanied by the prompt elimination
of duplicative systems,’’ and
‘‘recommend[ed] that the initial
technical specifications be designed to
facilitate the immediate retirement of
. . . duplicative reporting systems.’’ 52
As discussed above, Phlx agrees with
the commenters that the OATS, EBS and
COATS reporting requirements should
be replaced by the CAT reporting
requirements as soon as accurate and
reliable CAT Data is available. To this
end, Phlx anticipates that the CAT will
be designed to collect the data necessary
to permit the retirement of OATS, EBS
and COATS. As discussed above, Phlx
disagrees with the recommendation to
provide individual exemptions to those
CAT Reporters who obtain satisfactory
data reporting quality; however, Phlx
supports amendments to the CAT NMS
Plan that would accelerate reporting for
Small Industry Members that are
currently reporting to OATS to facilitate
the retirement of that system.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
50 FIF
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2017–43 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR-Phlx-2017–43. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2017–43, and should be submitted on or
before June 26, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.53
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–11506 Filed 6–2–17; 8:45 am]
BILLING CODE 8011–01–P
Letter at 2.
51 Id.
52 SIFMA
Letter at 2.
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SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32666; 812–14703]
Dreyfus ETF Trust
May 30, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application for an order
under section 6(c) of the Investment
Company Act of 1940 (the ‘‘Act’’) for an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 22(e) of the Act and
rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act. The requested order would
permit (a) index-based series of certain
open-end management investment
companies (‘‘Funds’’) to issue shares
redeemable in large aggregations only
(‘‘Creation Units’’); (b) secondary market
transactions in Fund shares to occur at
negotiated market prices rather than at
net asset value (‘‘NAV’’); (c) certain
Funds to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of shares for
redemption; (d) certain affiliated
persons of a Fund to deposit securities
into, and receive securities from, the
Fund in connection with the purchase
and redemption of Creation Units; (e)
certain registered management
investment companies and unit
investment trusts outside of the same
group of investment companies as the
Funds (‘‘Funds of Funds’’) to acquire
shares of the Funds; and (f) certain
Funds (‘‘Feeder Funds’’) to create and
redeem Creation Units in-kind in a
master-feeder structure.
APPLICANTS: Dreyfus ETF Trust (the
‘‘Trust’’), a Massachusetts business trust
registered under the Act as an open-end
management investment company, The
Dreyfus Corporation (the ‘‘Initial
Adviser’’), a New York corporation
registered as an investment adviser
under the Investment Advisers Act of
1940 (the ‘‘Advisers Act’’) and Mellon
Capital Management Corporation, a
Delaware corporation registered with
the Commission as an investment
adviser under the Advisers Act.
FILING DATES: The application was filed
on September 28, 2016, and amended
on February 21, 2017.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
will be issued unless the Commission
E:\FR\FM\05JNN1.SGM
05JNN1
]]>Agencies
[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Notices]
[Pages 25863-25870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11506]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80811; File No. SR-Phlx-2017-43]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Proposed Rule Change To Eliminate Requirements That Will Be
Duplicative of CAT
May 30, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 26, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Rule 3400 series relating to the
Order Audit Trail System, Rule 785 relating to Electronic Blue Sheets,
Rule 1022 relating to account identification, and Rule 1063 and Option
Floor Procedure Advices and Order and Decorum Regulations C-2 relating
to the Consolidated Options Audit Trail System to reflect changes to
these rules once members are effectively reporting to the Consolidated
Audit Trail (``CAT'') and the CAT's accuracy and reliability meets
certain standards as described below.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
[[Page 25864]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Rule 3400 series relating to the
Order Audit Trail System (``OATS''), Rule 785 relating to Electronic
Blue Sheets (``EBS''), Rule 1022 relating to account identification,
and Rule 1063 Option Floor Procedure Advices and Order and Decorum
Regulations C-2 relating to the Consolidated Options Audit Trail System
(``COATS'') to reflect changes to these rules once members are
effectively reporting to the CAT, and the CAT's accuracy and
reliability meets certain standards as described below.\3\
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\3\ The Exchange initially filed the proposed rule change on May
15, 2017 (SR-Phlx-2017-38). On May 26, 2017, the Exchange withdrew
that filing and submitted this filing.
---------------------------------------------------------------------------
Background
Bats BYX Exchange, Inc.; Bats BZX Exchange, Inc.; Bats EDGA
Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2
Options Exchange, Incorporated; Chicago Board Options Exchange,
Incorporated; Chicago Stock Exchange, Inc.; FINRA; International
Securities Exchange, LLC; Investors' Exchange LLC; ISE Gemini, LLC; ISE
Mercury, LLC; Miami International Securities Exchange LLC; MIAX PEARL,
LLC; NASDAQ BX, Inc.; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC;
National Stock Exchange, Inc.; New York Stock Exchange LLC; NYSE MKT
LLC; and NYSE Arca, Inc. (collectively, the ``Participants'') filed
with the Commission, pursuant to Section 11A of the Exchange Act \4\
and Rule 608 of Regulation NMS thereunder,\5\ the National Market
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS
Plan'' or ``Plan'').\6\ The Participants filed the Plan to comply with
Rule 613 of Regulation NMS under the Exchange Act.\7\ The Plan was
published for comment in the Federal Register on May 17, 2016,\8\ and
approved by the Commission, as modified, on November 15, 2016.\9\ On
March 15, 2017, the Commission approved the new Phlx Rule 900A Series
to implement provisions of the CAT NMS Plan that are applicable to Phlx
members.\10\
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\4\ 15 U.S.C. 78k-1.
\5\ 17 CFR 242.608.
\6\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated September 30, 2014; and Letter from
Participants to Brent J. Fields, Secretary, Commission, dated
February 27, 2015. On December 24, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter from Participants to
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
ISE Gemini, LLC, ISE Mercury, LLC and International Securities
Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities Exchange Act
Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017);
Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR
16460 (April 4, 2017); and Securities Exchange Act Release No. 80325
(March 29, 2017), 82 FR 16445 (April 4, 2017).
National Stock Exchange, Inc. has been renamed NYSE National,
Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017),
82 FR 9258 (February 3, 2017).
\7\ 17 CFR 242.613.
\8\ Securities Exchange Act Release No. 77724 (April 27, 2016),
81 FR 30614 (May 17, 2016).
\9\ Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
\10\ See Securities Exchange Act Release No. 80256 (March 15,
2017), 82 FR 14526 (March 21, 2017) (SR-Phlx-2017-07).
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The CAT NMS Plan is designed to create, implement, and maintain a
consolidated audit trail that will capture in a single consolidated
data source customer and order event information for orders in NMS
Securities and OTC Equity Securities, across all markets, from the time
of order inception through routing, cancellation, modification, or
execution. Among other things, Section C.9. of Appendix C to the Plan,
as modified by the Commission, requires each Participant to ``file with
the SEC the relevant rule change filing to eliminate or modify its
duplicative rules within six (6) months of the SEC's approval of the
CAT NMS Plan.'' \11\ The Plan notes that ``the elimination of such
rules and the retirement of such systems [will] be effective at such
time as CAT Data meets minimum standards of accuracy and reliability.''
\12\ Finally, the Plan requires the rule filing to discuss the
following:
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\11\ CAT NMS Plan, Appendix C, Section C.9.
\12\ See id.
---------------------------------------------------------------------------
(i) Specific accuracy and reliability standards that will determine
when duplicative systems will be retired, including, but not limited
to, whether the attainment of a certain Error Rate should determine
when a system duplicative of the CAT can be retired;
(ii) whether the availability of certain data from Small Industry
Members two years after the Effective Date would facilitate a more
expeditious retirement of duplicative systems; and
(iii) whether individual Industry Members can be exempted from
reporting to duplicative systems once their CAT reporting meets
specified accuracy and reliability standards, including, but not
limited to, ways in which establishing cross-system regulatory
functionality or integrating data from existing systems and the CAT
would facilitate such Individual Industry Member exemptions.\13\
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\13\ See id.
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Changes to OATS
In response to these requirements, Phlx is proposing to delete the
Rule 3400 Series (the ``OATS Rules'') from the Phlx rulebook once the
CAT achieves the specific accuracy and reliability standards described
below, and Phlx has determined that its usage of the CAT Data has not
revealed material issues that have not been corrected, confirmed that
the CAT includes all data necessary to allow Phlx to continue to meet
its surveillance obligations,\14\ and confirmed that the Plan Processor
is sufficiently meeting all of its obligations under the CAT NMS
Plan.\15\
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\14\ As noted in the Participants' September 23, 2016 response
to comment letters on the Plan, the Participants ``worked to keep
[the CAT] gap analyses up-to-date by including newly-added data
fields in these duplicative systems, such as the new OATS data
fields related to the tick size pilot and ATS order book changes, in
the gap analyses.'' See Letter from Participants to Brent J. Fields,
Secretary, Commission, dated September 23, 2016, at 21. The
Participants noted that they ``will work with the Plan Processor and
the industry to develop detailed Technical Specifications to ensure
that by the time Industry Members are required to report to the CAT,
the CAT will include all data elements necessary to facilitate the
rapid retirement of duplicative systems.'' Id.
\15\ Phlx notes that the OATS Rules were originally proposed to
fulfill one of the undertakings contained in an order issued by the
Commission relating to the settlement of an enforcement action
against the National Association of Securities Dealers, Inc. for
failure to adequately enforce its rules. See Securities Exchange Act
Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998). In
approving the OATS Rules, the Commission concluded that OATS
satisfied the conditions of the SEC's order and was consistent with
the Exchange Act. See id. at 12566-67.
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Specific Accuracy and Reliability Standards
The first issue the Plan requires the proposed rule change to
discuss is ``specific accuracy and reliability
[[Page 25865]]
standards that will determine when duplicative systems will be retired,
including, but not limited to, whether the attainment of a certain
Error Rate should determine when a system duplicative of the CAT can be
retired.'' \16\ Phlx believes that relevant error rates are the
primary, but not the sole, metric by which to determine the CAT's
accuracy and reliability and will serve as the baseline requirement
needed before OATS can be retired and requests for trading information
can be amended to account for information being available in the CAT.
---------------------------------------------------------------------------
\16\ See id. [sic]
---------------------------------------------------------------------------
As discussed in Section A.3.(b) of Appendix C to the CAT NMS Plan,
the Participants established an initial Error Rate, as defined in the
Plan, of 5% on initially submitted data (i.e., data as submitted by a
CAT Reporter before any required corrections are performed). The
Participants noted in the Plan that their expectation was that ``error
rates after reprocessing of error corrections will be de minimis.''
\17\ The Participants based this Error Rate on their consideration of
``current and historical OATS Error Rates, the magnitude of new
reporting requirements on the CAT Reporters and the fact that many CAT
Reporters may have never been obligated to report data to an audit
trail.'' \18\
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\17\ See CAT NMS Plan, Appendix C, Section A.3(b), at n.102.
\18\ Id.
---------------------------------------------------------------------------
Phlx agrees with the Participants' conclusion that a 5% pre-
correction threshold ``strikes the balance of adapting to a new
reporting regime, while ensuring that the data provided to regulators
will be capable of being used to conduct surveillance and market
reconstruction, as well as having a sufficient level of accuracy to
facilitate the retirement of existing regulatory reports and systems
where possible.'' \19\ However, Phlx believes that, when assessing the
accuracy and reliability of the data for the purposes of retiring OATS,
the error thresholds should be measured in more granular ways and
should also include minimum error rates of post-correction data, which
represents the data most likely to be used by Phlx to conduct
surveillance. Although Phlx is proposing to measure the appropriate
error rates in the aggregate, rather than firm-by-firm, Phlx believes
that the error rates for equity securities should be measured
separately from options since options orders are not currently reported
regularly or included in OATS.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
To ensure the CAT's accuracy and reliability, Phlx is proposing
that, before OATS could be retired, the CAT would generally need to
achieve a sustained error rate for Industry Member reporting in each of
the categories below for a period of at least 180 days of 5% or lower,
measured on a pre-correction or as-submitted basis and 2% or lower on a
post-correction basis (measured at T+5).\20\ Phlx is proposing to
measure the 5% pre-correction and 2% post-correction thresholds by
averaging the error rate across the period, not require a 5% pre-
correction and 2% post-correction maximum each day for 180 consecutive
days. Phlx believes that measuring each of the thresholds over the
course of 180 days will ensure that the CAT consistently meets minimum
accuracy and reliability thresholds for Industry Member reporting while
also ensuring that single-day measurements do not unduly affect the
overall measurements.
---------------------------------------------------------------------------
\20\ The Plan requires that the Plan Processor must ensure that
regulators have access to corrected and linked order and Customer
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, Appendix C,
Section A.2(a).
---------------------------------------------------------------------------
Phlx is proposing to use error rates in each the following
categories, measured separately for options and for equities, to assess
whether the threshold pre- and post-correction error rates are being
met:
Rejection Rates and Data Validations. Data validations for
the CAT, while not expected to be designed the same as OATS, must be
functionally equivalent to OATS in accordance with the CAT NMS Plan
(i.e., the same types of basic data validations must be performed by
the Plan Processor to comply with the CAT NMS Plan requirements).
Appendix D of the Plan, for example, requires that certain file
validations \21\ and syntax and context checks be performed on all
submitted records.\22\ If a record does not pass these basic data
validations, it must be rejected and returned to the CAT Reporter to be
corrected and resubmitted.\23\ The specific validations can be
determined only after the Plan Processor has finalized the Industry
Member Technical Specifications; however, the Plan also requires the
Plan Processor to provide daily statistics on rejection rates after the
data has been processed, including the number of files rejected and
accepted, the number of order events accepted and rejected, and the
number of each type of report rejected.\24\ Phlx is proposing that,
over the 180-day period, aggregate rejection rates (measured separately
for equities and options) must be no more than 5% pre-correction or 2%
post-correction across all CAT Reporters.
---------------------------------------------------------------------------
\21\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan
requires the Plan Processor to confirm that file transmission and
receipt are in the correct formats, including validation of header
and trailers on the submitted report, confirmation of a valid
Exhange [sic]-Assigned Market Participant Identifier, and
verification of the number of records in the file. Id.
\22\ See id. The Plan notes that syntax and context checks would
include format checks (i.e., that data is entered in the specified
format); data type checks (i.e., that the data type of each
attribute conforms to the specifications); consistency checks (i.e.,
that all attributes for a record of a specified type are
consistent); range/logic checks (i.e., that each attribute for every
record has a value within specified limits and the values provided
are associated with the event type they represent); data validity
checks (i.e., that each attribute for every record has an acceptable
value); completeness checks (i.e., that each mandatory attribute for
every record is not null); and timeliness checks (i.e., that the
records were submitted within the submission timelines). Id.
\23\ See id.
\24\ See id.
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Intra-Firm Linkages. The Plan requires that ``the Plan
Processor must be able to link all related order events from all CAT
Reporters involved in the lifecycle of an order.'' \25\ At a minimum,
this requirement includes the creation of an order lifecycle between
``[a]ll order events handled within an individual CAT Reporter,
including orders routed to internal desks or departments with different
functions (e.g., an internal ATS).'' \26\ Phlx is proposing that
aggregate intra-firm linkage rates across all Industry Member Reporters
must be at least 95% pre-correction and 98% post-correction.
---------------------------------------------------------------------------
\25\ CAT NMS Plan, Appendix D, Section 3.
\26\ Id.
---------------------------------------------------------------------------
Inter-Firm Linkages. The order linkage requirements in the
Plan also require that the Plan Processor be able to create the
lifecycle between orders routed between broker-dealers.\27\ Phlx is
proposing that at least a 95% pre-correction and 98% post-correction
aggregate match rate be achieved for orders routed between two Industry
Member Reporters.\28\
---------------------------------------------------------------------------
\27\ Id.
\28\ This assumes linkage statistics will include both unlinked
route reports and new orders where no related route report could be
found.
---------------------------------------------------------------------------
Order Linkage Rates. In addition to creating linkages
within and between broker-dealers, the Plan also includes requirements
that the Plan Processor be able to create lifecycles to link various
pieces of related orders.\29\ For example, the Plan requires linkages
between customer orders and ``representative'' orders created in firm
accounts for the purpose of facilitating a customer order, various legs
of option/equity complex orders, riskless principal orders, and orders
worked through average price accounts.\30\ Phlx is proposing that there
[[Page 25866]]
be at least a 95% pre-correction and 98% post-correction linkage rate
for multi-legged orders (e.g., related equity/options orders, VWAP
orders, riskless principal transactions).
---------------------------------------------------------------------------
\29\ See CAT NMS Plan, Appendix D, Section 3.
\30\ See id.
---------------------------------------------------------------------------
Exchange and TRF/ORF Match Rates. The Plan requires that
an order lifecycle be created to link ``[o]rders routed from broker-
dealers to exchanges'' and ``[e]xecuted orders and trade reports.''
\31\ Phlx is proposing at least a 95% pre-correction and 98% post-
correction aggregate match rate to each equity exchange for orders
routed from Industry Members to an exchange and, for over-the-counter
executions, the same match rate for orders linked to trade reports.
---------------------------------------------------------------------------
\31\ Id.
---------------------------------------------------------------------------
In addition to these minimum error rates and matching thresholds
that generally must be met before OATS can be retired, Phlx believes
that during the minimum 180-day period during which the thresholds are
calculated, Phlx's use of the data in the CAT must confirm that (i)
usage over that time period has not revealed material issues that have
not been corrected, (ii) the CAT includes all data necessary to allow
Phlx to continue to meet its surveillance obligations, and (iii) the
Plan Processor is sufficiently meeting all of its obligations under the
CAT NMS Plan. Phlx believes this time period to use the CAT Data is
necessary to reveal any errors that may manifest themselves only after
surveillance patterns and other queries have been run and to confirm
that the Plan Processor is meeting its obligations and performing its
functions adequately.
Small Industry Member Data Availability
The second issue the Plan requires the proposed rule change to
address is ``whether the availability of certain data from Small
Industry Members two years after the Effective Date would facilitate a
more expeditious retirement of duplicative systems.''
Phlx believes that there is no effective way to retire OATS until
all current OATS reporters are reporting to the CAT. Although Technical
Specifications for Industry Members are not yet available, PHLX
believes it would be inefficient, less reliable, and more costly to
attempt to marry the OATS and CAT databases for a temporary period to
allow some Phlx members to report to CAT while others continue to
report to OATS. Consequently, Phlx has concluded at this time that
having data from those Small Industry Members currently reporting to
OATS available two years after the Effective Date would substantially
facilitate a more expeditious retirement of OATS. For this reason, Phlx
supports an amendment to the Plan that would require current OATS
Reporters that are ``Small Industry Members'' to report two years after
the Effective Date (instead of three). Phlx intends to work with the
other Participants to submit a proposed amendment to the Plan to
require Small Industry Members that are OATS Reporters to report two
years after the Effective Date.
Phlx has identified approximately 300 member firms that currently
report to OATS and meet the definition of ``Small Industry Member;''
however, only ten of these firms submit information to OATS on their
own behalf, and eight of the ten firms report very few orders to
OATS.\32\ The vast majority of these 300 firms use third parties to
fulfill their reporting obligations, and many of these third parties
will begin reporting to CAT in November 2018. Consequently, Phlx
believes that the burden on current OATS Reporters that are ``Small
Industry Members'' would not be significant if those firms are required
to report to CAT beginning in November 2018 rather than November 2019.
The burdens, however, are significantly greater for those firms that
are not reporting to OATS currently; therefore, Phlx does not believe
it would be necessary or appropriate to accelerate CAT reporting for
``Small Industry Members'' that are not currently reporting to OATS,
and PHLX would not support an amendment to the Plan to accelerate CAT
reporting for ``Small Industry Members'' that are not currently OATS
Reporters.
---------------------------------------------------------------------------
\32\ For example, in one recent month, eight of the ten firms
submitted fewer than 100 reports during the month, with four firms
submitting fewer than 50.
---------------------------------------------------------------------------
Individual Industry Member Exemptions
The final issue the Plan requires the proposed rule change to
address is ``whether individual Industry Members can be exempted from
reporting to duplicative systems once their CAT reporting meets
specified accuracy and reliability standards, including, but not
limited to, ways in which establishing cross-system regulatory
functionality or integrating data from existing systems and the CAT
would facilitate such Individual Industry Member exemptions.''
As described above, Phlx believes that a single cut-over from OATS
to CAT is highly preferable to a firm-by-firm approach and is not
proposing to exempt members from the OATS requirements on a firm-by-
firm basis. The primary benefit to a firm-by-firm exemptive approach
would be to reduce the amount of time an individual firm is required to
report to a legacy system (e.g., OATS) if it is also accurately and
reliably reporting to the CAT. Phlx believes that the overall accuracy
and reliability thresholds for the CAT described above would need to be
met under any conditions before firms could stop reporting to OATS.
Moreover, as discussed above, Phlx supports amending the Plan to
accelerate the reporting requirements for Small Industry Members that
are OATS Reporters to report on the same timeframe as all other OATS
Reporters. If such an amendment were approved by the Commission, there
would be no need to exempt members from OATS requirements on a firm-by-
firm basis.
Changes to EBS and Account Identification Rules
Rule 785 is Phlx's rule regarding the automated submission of
specific trading data to Phlx upon request using the Electronic Blue
Sheet (``EBS'') system. Rule 785 requires members to submit certain
trade information as prescribed by the Exchange, including, for
proprietary transactions, the clearing house number or alpha symbol of
the member submitting the data, the identifying symbol assigned to the
security, and the date the transaction was executed.
Rule 1022 imposes certain account identification requirements on
Specialists and Registered Options Traders. Specifically, Rule 1022
requires those market participants to file with the Exchange upon
request and keep current a list identifying all accounts for stock,
Exchange-Traded Fund Shares, option and related securities or foreign
currencies, physical commodities, physical commodity options, commodity
futures contracts, options on commodity futures contracts, any other
derivatives based on such commodity and other related trading in which
the Specialist or Registered Options Trader may, directly or
indirectly, engage in trading activities or over which they exercise
investment discretion. That Rule prohibits a Specialist or Registered
Options Trader from engaging in trading in any of these instruments in
an account that has not been reported to the Exchange pursuant to this
rule.
Once broker-dealer reporting to the CAT has begun, the CAT will
contain the data the Participants would otherwise have requested via
the EBS system for purposes of NMS Securities and OTC Equity
Securities. Consequently, Phlx will not need to use the EBS system or
request information
[[Page 25867]]
pursuant to these rules for NMS Securities or OTC Equity Securities for
time periods after CAT reporting has begun if the appropriate accuracy
and reliability thresholds are achieved, including an acceptable
accuracy rate for customer and account information. However, these
rules cannot be completely eliminated immediately upon the CAT
achieving the appropriate thresholds because Exchange staff may still
need to request information pursuant to these rules for trading
activity occurring before a member was reporting to the CAT.\33\ In
addition, these rules apply to information regarding transactions
involving securities that will not be reportable to the CAT, such as
fixed-income securities; thus, these rules must remain in effect with
respect to those transactions indefinitely or until those transactions
are captured in the CAT.
---------------------------------------------------------------------------
\33\ Firms are required to maintain the trade information for
pre-CAT transactions in equities and options pursuant to applicable
rules, such as books and records retention requirements, for the
relevant time period, which is generally three or six years
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
---------------------------------------------------------------------------
The proposed rule change proposes to add new Supplementary Material
to Rule 785 and Rule 1022 to clarify how Phlx will request data under
these rules after members are reporting to the CAT. Specifically, the
proposed Supplementary Material to these rules will note that the
Exchange will request information under these rules only if the
information is not available in the CAT because, for example, the
transactions in question occurred before the firm was reporting
information to the CAT or involved securities that are not reportable
to the CAT. In essence, under the new Supplementary Material, the
Exchange will make requests under these rules if and only if the
information is not otherwise available through the CAT.
The CAT NMS Plan states, however, that the elimination of rules
that are duplicative of the requirements of the CAT and the retirement
of the related systems should be effective at such time as CAT Data
meets minimum standards of accuracy and reliability.\34\ Accordingly,
as discussed in more detail below, Phlx believes that the EBS data may
be replaced by CAT Data at a date after all Industry Members are
reporting to the CAT when the proposed error rate thresholds have been
met, and Phlx has determined that its usage of the CAT Data has not
revealed material issues that have not been corrected, confirmed that
the CAT includes all data necessary to allow Phlx to continue to meet
its surveillance obligations, and confirmed that the Plan Processor is
sufficiently meeting all of its obligations under the CAT NMS Plan.
---------------------------------------------------------------------------
\34\ Id. [sic]
---------------------------------------------------------------------------
Phlx believes CAT Data should not be used in place of EBS data
until all Participants and Industry Members are reporting data to CAT.
In this way, Phlx will continue to have access to the necessary data to
perform its regulatory duties.
The CAT NMS Plan requires that a rule filing to eliminate a
duplicative rule address whether ``the availability of certain data
from Small Industry Members two years after the Effective Date would
facilitate a more expeditious retirement of duplicative systems.'' \35\
Phlx believes that the submission of data to the CAT by Small Industry
Members a year earlier than is required in the CAT NMS Plan, at the
same time as the other Industry Members, would expedite the replacement
of EBS data with CAT Data, as Phlx believes that the CAT would then
have all necessary data from the Industry Members for Phlx to perform
the regulatory surveillance that currently is performed via EBS. For
this reason, Phlx supports amending the CAT NMS Plan to require Small
Industry Members to report data to the CAT two years after the
Effective Date (instead of three), and intends to work with other
Participants toward that end.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
The CAT NMS Plan requires that this rule filing address ``whether
individual Industry Members can be exempted from reporting to
duplicative systems once their CAT reporting meets specified accuracy
and reliability standards, including, but not limited to, ways in which
establishing cross-system regulatory functionality or integrating data
from existing systems and the CAT would facilitate such Individual
Industry Member exemptions.'' \36\ Phlx believes that a single cut-over
from EBS to CAT is highly preferable to a firm-by-firm approach and is
not proposing to exempt members from the EBS requirements on a firm-by-
firm basis. Phlx believes that providing such individual exemptions to
Industry Members would be inefficient, more costly, and less reliable
than the single cut-over. Providing individual exemptions would require
the exchanges to create, for a brief temporary period, a cross-system
regulatory function and to integrate data from EBS and the CAT to avoid
creating any regulatory gaps as a result of such exemptions. Such a
function would be costly to create and would give rise to a greater
likelihood of data errors or other issues. Given the limited time in
which such exemptions would be necessary, Phlx does not believe that
such exemptions would be an appropriate use of limited resources.
Moreover, the primary benefit to a firm-by-firm exemptive approach
would be to reduce the amount of time an individual firm is required to
comply with EBS if it is also accurately and reliably reporting to the
CAT. Phlx believes that the overall accuracy and reliability thresholds
for the CAT described above would need to be met under any conditions
before firms could stop reporting to EBS, and as discussed above, by
accelerating Small Industry Members to report on the same timeframe as
all other Industry Members, there is no need to exempt members from EBS
requirements on a firm-by-firm basis.
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\36\ Id.
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The CAT NMS Plan also requires that a rule filing to eliminate a
duplicative rule to provide ``specific accuracy and reliability
standards that will determine when duplicative systems will be retired,
including, but not limited to, whether the attainment of a certain
Error Rate should determine when a system duplicative of the CAT can be
retired.'' \37\ Phlx believes that it is critical that the CAT Data be
sufficiently accurate and reliable for Phlx to perform the regulatory
functions that it now performs via EBS. Accordingly, Phlx believes that
the CAT Data should meet specific quantitative error rates, as well as
certain qualitative requirements.
---------------------------------------------------------------------------
\37\ Id.
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Phlx believes that, before CAT Data may be used in place of EBS
data, the CAT would need to achieve a sustained error rate for a period
of at least 180 days of 5% or lower measured on a pre-correction or as-
submitted basis, and 2% or lower on a post-correction basis (measured
at T+5).\38\ Phlx proposes to measure the 5% pre-correction and 2%
post-correction thresholds by averaging the error rate across the
period, not require a 5% pre-correction and 2% post-correction maximum
each day for 180 consecutive days. Phlx believes that measuring each of
the thresholds over the course of 180 days will ensure that the CAT
consistently meets minimum accuracy and reliability thresholds while
also ensuring that single-day measurements do not unduly affect the
overall measurements. Phlx proposes to measure the appropriate error
rates in the aggregate, rather than firm-by-firm. The 2% and 5% error
rates are in line
[[Page 25868]]
with the proposed retirement threshold for other systems, such as OATS
and COATS.
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\38\ The Plan requires that the Plan Processor must ensure that
regulators have access to corrected and linked order and Customer
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------
In addition to these minimum error rates before using CAT Data
instead of EBS data, Phlx believes that during the minimum 180-day
period during which the thresholds are calculated, Phlx's use of the
data in the CAT must confirm that (i) usage over that time period has
not revealed material issues that have not been corrected, (ii) the CAT
includes all data necessary to allow Phlx to continue to meet its
surveillance obligations, and (iii) the Plan Processor is sufficiently
meeting all of its obligations under the CAT NMS Plan. Phlx believes
this time period to use the CAT Data is necessary to reveal any errors
that may manifest themselves only after surveillance patterns and other
queries have been run and to confirm that the Plan Processor is meeting
its obligations and performing its functions adequately.
Changes to COATS
The options exchanges utilize COATS to collect and review data
regarding options orders, quotes and transactions. The Participants
have provided COATS technical specifications to the Plan Processor for
the CAT for use in developing the Technical Specifications for the CAT,
and the Participants are working with the Plan Processor to include the
necessary COATS data elements in the CAT Technical Specifications.
Accordingly, although the Technical Specifications for the CAT have not
yet been finalized, Phlx and the other options exchanges propose to
eliminate COATS in accordance with the proposed timeline discussed
below.
Phlx adopted Rule 1063 to implement certain reporting requirements
related to COATS, and therefore proposes to eliminate the information
reporting requirements of that rule and replacing those requirements
with a requirement that members report information pursuant to this
rule as required by Phlx's CAT Compliance Rule, Rule 900A.\39\ Phlx
also proposes to make a corresponding change to Option Floor Procedure
Advices and Order and Decorum Regulations C-2.
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\39\ COATS was developed to comply with an order of the
Commission requiring the then-options exchanges to ``design and
implement'' a consolidated audit trail to ``enable the options
exchanges to reconstruct markets promptly, effectively surveil them
and enforce order handling, firm quote, trade reporting and other
rules.'' See Section IV.B.e.(v) of the Commission's Order
Instituting Public Administrative Proceedings Pursuant to Sections
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions (the ``Order''). See Securities Exchange
Act Release No. 43268 (September 11, 2000) and Administrative
Proceeding File No. 3-10282. As noted, the Plan is designed to
create, implement and maintain a CAT that would capture customer and
order event information for orders in NMS Securities and OTC Equity
Securities, across all markets, from the time of order inception
through routing, cancellation, modification, or execution in a
single consolidated data source. Phlx has already adopted rules to
enforce compliance by its Industry Members, as applicable, with the
provisions of the Plan. Once the CAT is fully operational, it will
be appropriate to delete Phlx's rules implemented to comply with the
Order as duplicative of the CAT. Accordingly, Phlx believes that it
would continue to be in compliance with the requirements of the
Order once the CAT is fully operational and the COATS rules are
deleted.
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Rule 1063(e) describes the operations and requirements of the Floor
Broker Management System, which is designed to create an electronic
audit trail for equity, equity index and U.S. dollar-settled foreign
currency options orders represented by Floor Brokers on the Exchange's
Options Floor. Among other things, Rule 1063(e) requires a Floor Broker
or that Floor Broker's employees, contemporaneously upon receipt of an
order and prior to the representation of such an order in the trading
crowd, to record order information including (i) the order type (i.e.,
customer, firm, broker-dealer, professional) and order receipt time;
(ii) the option symbol; (iii) buy, sell, cross or cancel; (iv) call,
put, complex (i.e., spread, straddle), or contingency order; and (v)
number of contracts.
Option Floor Procedure Advices and Order and Decorum Regulations C-
2 repeats these requirements, and imposes a schedule of fines for
violating these requirements.
The CAT NMS Plan states that the elimination of rules that are
duplicative of the requirements of the CAT and the retirement of the
related systems should be effective at such time as CAT Data meets
minimum standards of accuracy and reliability.\40\ As discussed in more
detail below, Phlx and the other options exchanges believe that COATS
may be retired at a date after all Industry Members are reporting to
the CAT when the proposed error rate thresholds have been met, and Phlx
has determined that its usage of the CAT Data has not revealed material
issues that have not been corrected, confirmed that the CAT includes
all data necessary to allow Phlx to continue to meet its surveillance
obligations, and confirmed that the Plan Processor is sufficiently
meeting all of its obligations under the CAT NMS Plan.
---------------------------------------------------------------------------
\40\ Id. [sic]
---------------------------------------------------------------------------
Phlx believes COATS should not be retired until all Participants
and Industry Members that report data to COATS are reporting comparable
data to the CAT. In this way, Phlx will continue to have access to the
necessary data to perform its regulatory duties.
The CAT NMS Plan requires that a rule filing to eliminate a
duplicative rule address whether ``the availability of certain data
from Small Industry Members two years after the Effective Date would
facilitate a more expeditious retirement of duplicative systems.'' \41\
The Exchange believes COATS should not be retired until all
Participants and Industry Members that report data to COATS are
reporting comparable data to the CAT. While the early submission of
options data to the CAT by Small Industry Members could expedite the
retirement of COATS, the Exchange believes that it premature to
consider such a change and that additional analysis would be necessary
to determine whether such early reporting by Small Industry Members
would be feasible.
---------------------------------------------------------------------------
\41\ Id.
---------------------------------------------------------------------------
The CAT NMS Plan requires that this rule filing address ``whether
individual Industry Members can be exempted from reporting to
duplicative systems once their CAT reporting meets specified accuracy
and reliability standards, including, but not limited to, ways in which
establishing cross-system regulatory functionality or integrating data
from existing systems and the CAT would facilitate such Individual
Industry Member exemptions.'' \42\ Phlx believes that a single cut-over
from COATS to CAT is highly preferable to a firm-by-firm approach and
is not proposing to exempt members from the COATS requirements on a
firm-by-firm basis. Phlx and the other options exchanges believe that
providing such individual exemptions to Industry Members would be
inefficient, more costly, and less reliable than the single cut-over.
Providing individual exemptions would require the options exchanges to
create, for a brief temporary period, a cross-system regulatory
function and to integrate data from COATS and the CAT to avoid creating
any regulatory gaps as a result of such exemptions. Such a function
would be costly to create and would give rise to a greater likelihood
of data errors or other issues. Given the limited time in which such
exemptions would be necessary, Phlx and the other options exchanges do
not believe that such exemptions would be an appropriate use of limited
resources.
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
The CAT NMS Plan also requires that a rule filing to eliminate a
duplicative rule to provide ``specific accuracy and reliability
standards that will determine
[[Page 25869]]
when duplicative systems will be retired, including, but not limited
to, whether the attainment of a certain Error Rate should determine
when a system duplicative of the CAT can be retired.'' \43\ Phlx
believes that it is critical that the CAT Data be sufficiently accurate
and reliable for the Exchange to perform the regulatory functions that
it now performs via COATS. Accordingly, Phlx believes that the CAT Data
should meet specific quantitative error rates, as well as certain
qualitative requirements.
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
Phlx and the other options exchanges believe that, before COATS may
be retired, the CAT would need to achieve a sustained error rate for a
period of at least 180 days of 5% or lower measured on a pre-correction
or as-submitted basis, and 2% or lower on a post-correction basis
(measured at T+5).\44\ Phlx proposes to measure the 5% pre-correction
and 2% post-correction thresholds by averaging the error rate across
the period, not require a 5% pre-correction and 2% post-correction
maximum each day for 180 consecutive days. Phlx believes that measuring
each of the thresholds over the course of 180 days will ensure that the
CAT consistently meets minimum accuracy and reliability thresholds
while also ensuring that single-day measurements do not unduly affect
the overall measurements. Phlx proposes to measure the appropriate
error rates in the aggregate, rather than firm-by-firm. In addition,
Phlx proposes to measure the error rates for options only, not equity
securities, as only options are subject to COATS. The 2% and 5% error
rates are in line with the proposed retirement threshold for OATS.
---------------------------------------------------------------------------
\44\ The Plan requires that the Plan Processor must ensure that
regulators have access to corrected and linked order and Customer
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------
In addition to these minimum error rates before COATS can be
retired, Phlx believes that during the minimum 180-day period during
which the thresholds are calculated, Phlx's use of the data in the CAT
must confirm that (i) usage over that time period has not revealed
material issues that have not been corrected, (ii) the CAT includes all
data necessary to allow Phlx to continue to meet its surveillance
obligations, and (iii) the Plan Processor is sufficiently meeting all
of its obligations under the CAT NMS Plan. Phlx believes this time
period to use the CAT Data is necessary to reveal any errors that may
manifest themselves only after surveillance patterns and other queries
have been run and to confirm that the Plan Processor is meeting its
obligations and performing its functions adequately.
If the Commission approves the proposed rule change, Phlx will
announce the implementation date of the proposed rule change in a
Regulatory Notice that will be published once Phlx concludes the
thresholds for accuracy and reliability described above have been met
and that the Plan Processor is sufficiently meeting all of its
obligations under the CAT NMS Plan.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\45\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\46\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78f(b).
\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Phlx believes that the proposed rule change fulfills the obligation
in the CAT NMS Plan for Phlx to submit a proposed rule change to
eliminate or modify duplicative rules. In approving the Plan, the SEC
noted that the Plan ``is necessary and appropriate in the public
interest, for the protection of investors and the maintenance of fair
and orderly markets, to remove impediments to, and perfect the
mechanism of a national market system, or is otherwise in furtherance
of the purposes of the Act.'' \47\ As this proposal implements the
Plan, Phlx believes that this proposal furthers the objectives of the
Plan, as identified by the SEC, and is therefore consistent with the
Exchange Act.
---------------------------------------------------------------------------
\47\ Approval Order at 84697.
---------------------------------------------------------------------------
Moreover, the purpose of the proposed rule change is to eliminate
rules that require the submission of duplicative data to the exchange.
The elimination of such duplicative requirements will reduce
unnecessary costs and other compliance burdens for Phlx and its
members, and therefore, will enhance the efficiency of the securities
markets. Furthermore, Phlx believes that the approach set forth in the
proposed rule change strikes the appropriate balance between ensuring
that Phlx is able to continue to fulfill its statutory obligation to
protect investors and the public interest by ensuring its surveillance
of market activity remains accurate and effective while also
establishing a reasonable timeframe for elimination or modification of
its rules that will be rendered duplicative after implementation of the
CAT.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 6(b)(8) of the Exchange Act \48\ requires that the
Exchange's rules not impose any burden on competition that is not
necessary or appropriate. Phlx does not believe that the proposed rule
change will result in any burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Exchange Act. Phlx
notes that the proposed rule change implements the requirements of the
CAT NMS Plan approved by the Commission regarding the elimination of
rules and systems that are duplicative the CAT, and is designed to
assist Phlx in meeting its regulatory obligations pursuant to the Plan.
Similarly, all exchanges and FINRA are proposing the elimination of
their rules related to OATS, EBS and COATS to implement the
requirements of the CAT NMS Plan. Therefore, this is not a competitive
rule filing and, therefore, it does not raise competition issues
between and among the self-regulatory organizations and/or their
members.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Although written comments on the proposed rule change were not
solicited, two commenters, the Financial Information Forum (``FIF'')
and the Securities Industry and Financial Markets Association
(``SIFMA''), submitted letters to the Participants regarding the
retirement of systems related to the CAT.\49\ In its comment letter,
with regard to the retirement of duplicative systems more generally,
FIF recommends that the Participants continue the effort to incorporate
current reporting obligations into the CAT in order to replace existing
reportable systems with the CAT. In addition, FIF further recommends
that, once a CAT Reporter achieves satisfactory reporting data quality,
the CAT Reporter should be exempt from reporting to any duplicative
reporting systems. FIF believes that these recommendations ``would
serve both an underlying regulatory objective of more
[[Page 25870]]
immediate and accurate access to data as well as an industry objective
of reduced costs and burdens of regulatory oversight.'' \50\ In its
comments about EBS specifically, FIF states that the retirement of the
EBS requirements should be a high priority, and that the CAT should be
designed to include the requisite data elements to permit the rapid
retirement of the EBS system.\51\ Similarly, SIFMA states that ``the
establishment of the CAT must be accompanied by the prompt elimination
of duplicative systems,'' and ``recommend[ed] that the initial
technical specifications be designed to facilitate the immediate
retirement of . . . duplicative reporting systems.'' \52\
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\49\ Letter from William H. Hebert, FIF, to Participants re:
Milestone for Participants' rule change filings to eliminate/modify
duplicative rules, dated April 12, 2017 (``FIF Letter''); Letter
from Kenneth E. Bentsen, Jr., SIFMA, to Participants re: Selection
of Thesys as CAT Processor, dated April 4, 2017 (``SIFMA Letter''),
at 2.
\50\ FIF Letter at 2.
\51\ Id.
\52\ SIFMA Letter at 2.
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As discussed above, Phlx agrees with the commenters that the OATS,
EBS and COATS reporting requirements should be replaced by the CAT
reporting requirements as soon as accurate and reliable CAT Data is
available. To this end, Phlx anticipates that the CAT will be designed
to collect the data necessary to permit the retirement of OATS, EBS and
COATS. As discussed above, Phlx disagrees with the recommendation to
provide individual exemptions to those CAT Reporters who obtain
satisfactory data reporting quality; however, Phlx supports amendments
to the CAT NMS Plan that would accelerate reporting for Small Industry
Members that are currently reporting to OATS to facilitate the
retirement of that system.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2017-43 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2017-43. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2017-43, and should be
submitted on or before June 26, 2017.
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\53\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11506 Filed 6-2-17; 8:45 am]
BILLING CODE 8011-01-P
