[Federal Register Volume 85, Number 124 (Friday, June 26, 2020)]
[Notices]
[Pages 38447-38460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13767]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89120; File No. SR-LTSE-2020-09]
Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the LTSE Rule 11.600 Series (Consolidated Audit Trail
Compliance Rule)
June 22, 2020.
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 June 22, 2020, Long-Term Stock Exchange, Inc. (``LTSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. 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
LTSE proposes a rule change to amend the Rule 11.600 Series, the
Exchange's compliance rule (``Compliance Rule'') regarding the National
Market System Plan Governing the Consolidated Audit Trail (the ``CAT
NMS Plan'' or ``Plan'') \3\ to be consistent with certain exemptions
from the CAT NMS Plan as well as to facilitate the retirement of
certain existing regulatory systems.
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\3\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the Compliance Rule.
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The text of the proposed rule change is available at the Exchange's
website at https://longtermstockexchange.com/, at the principal office
of the Exchange, and
[[Page 38448]]
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement on the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement on the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to amend the Rule
11.600 Series, the Compliance Rule regarding the CAT NMS Plan, to be
consistent with certain exemptions from the CAT NMS Plan as well as to
facilitate the retirement of certain existing regulatory systems. As
described more fully below, the proposed rule change would make the
following changes to the Compliance Rule:
Add additional data elements to the consolidated audit
trail (``CAT'') reporting requirements for Industry Members to
facilitate the retirement of the Financial Industry Regulatory
Authority, Inc.'s (``FINRA'') Order Audit Trail System (``OATS'');
Add additional data elements related to OTC Equity
Securities that FINRA currently receives from alternative trading
systems (``ATSs'') that trade OTC Equity Securities for regulatory
oversight purposes to the CAT reporting requirements for Industry
Members;
Implement a phased approach for Industry Member reporting
to the CAT (``Phased Reporting'');
To the extent that any Industry Member's order handling or
execution systems utilize time stamps in increments finer than
milliseconds, revise the timestamp granularity requirement to require
such Industry Member to record and report Industry Member Data to the
Central Repository with time stamps in such finer increment up to
nanoseconds;
Require Introducing Industry Members (as defined below) to
comply with the requirements of the CAT NMS Plan applicable to Small
Industry Members;
Revise the CAT reporting requirements so Industry Members
would not be required to report to the Central Repository dates of
birth, ``individual tax payer identification number (``ITIN'')/social
security number (``SSN'')'' (collectively, referred to as ``SSNs'') or
account numbers; and
Revise the CAT reporting requirements regarding cancelled
trades and SRO-Assigned Market Participant Identifiers of clearing
brokers, if applicable, in connection with order executions, as such
information will be available from FINRA's trade reports submitted to
the CAT.
i. CAT-OATS Data Gaps
The Participants have worked to identify gaps between data reported
to existing systems and data to be reported to the CAT 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.'' \4\ As a result of this process,
the Participants identified several data elements that must be included
in the CAT reporting requirements before existing systems can be
retired. In particular, the Participants identified certain data
elements that are required by OATS, but not currently enumerated in the
CAT NMS Plan. Accordingly, the Exchange proposes to amend its
Compliance Rule to include these OATS data elements in the CAT. Each of
such OATS data elements are discussed below. With the addition of these
OATS data elements to the CAT, the CAT will have the data elements
necessary to retire OATS.
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\4\ Letter from Participants to Brent J. Fields, Secretary, SEC,
re: File Number 4-698; Notice of Filing of the National Market
System Plan Governing the Consolidated Audit Trail (September 23,
2016) at 21 (``Participants' Response to Comments'') (available at
https://www.sec.gov/comments/4-698/4698-32.pdf).
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A. Information Barrier Identification
The FINRA OATS rules require OATS Reporting Members \5\ to record
the identification of information barriers for certain order events,
including when an order is received or originated, transmitted to a
department within the OATS Reporting Member, and when it is modified.
The Participants propose to amend the Compliance Rule to incorporate
these requirements into the CAT.
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\5\ An OATS ``Reporting Member'' is defined in FINRA Rule
7410(o).
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Specifically, FINRA Rule 7440(b)(20) requires a FINRA OATS
Reporting Member to record the following when an order is received or
originated: ``If the member is relying on the exception provided in
Rule 5320.02 with respect to the order, the unique identification of
any appropriate information barriers in place at the department within
the member where the order was received or originated.'' \6\ The
Compliance Rule does not require Industry Members to report such
information barrier information. To address this OATS-CAT data gap, the
Exchange proposes to add new paragraph (a)(1)(A)(vii) to Rule 11.630,
which would require Industry Members to record and report to the
Central Repository, for original receipt or origination of an order,
``the unique identification of any appropriate information barriers in
place at the department within the Industry Member where the order was
received or originated.''
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\6\ FINRA Rule 5320 prohibits trading ahead of customer orders.
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In addition, FINRA Rule 7440(c)(1) states that ``[w]hen a Reporting
Member transmits an order to a department within the member, the
Reporting Member shall record: . . . (H) if the member is relying on
the exception provided in Rule 5320.02 with respect to the order, the
unique identification of any appropriate information barriers in place
at the department within the member to which the order was
transmitted.'' The Compliance Rule does not require Industry Members to
report such information barrier information. To address this OATS-CAT
data gap, the Exchange proposes to revise paragraph (a)(1)(B)(vi) of
Rule 11.630 to require, for the routing of an order, if routed
internally at the Industry Member, ``the unique identification of any
appropriate information barriers in place at the department within the
Industry Member to which the order was transmitted.''
FINRA Rule 7440(c)(2)(B) and 7440(c)(4)(B) require an OATS
Reporting Member that receives an order transmitted from another member
to report the unique identification of any appropriate information
barriers in place at the department within the member to which the
order was transmitted. The Compliance Rule not require Industry Members
to report such information barrier information. To address this OATS-
CAT data gap, the Exchange proposes to add new paragraph (a)(1)(C)(vii)
to Rule 11.630, which would require Industry Members to record and
report to the Central Repository, for the receipt of an order that has
been routed, ``the unique identification of any appropriate information
barriers in place at the
[[Page 38449]]
department within the Industry Member which received the order.''
FINRA Rule 7440(d)(1) requires an OATS Reporting Member that
modifies or receives a modification to the terms of an order to report
the unique identification of any appropriate information barriers in
place at the department within the member to which the modification was
originated or received. The Compliance Rule does not require Industry
Members to report such information barrier information. To address this
OATS-CAT data gap, the Exchange proposes to add new paragraph
(a)(1)(D)(vii) to Rule 11.630, which would require Industry Members to
record and report to the Central Repository, if the order is modified
or cancelled, ``the unique identification of any appropriate
information barriers in place at the department within the Industry
Member which received or originated the modification.''
B. Reporting Requirements for ATSs
Under FINRA Rule 4554, ATSs that receive orders in NMS stocks are
required to report certain order information to OATS, which FINRA uses
to reconstruct ATS order books and perform order-based surveillance,
including layering, spoofing, and mid-point pricing manipulation
surveillance.\7\ The Participants believe that Industry Members
operating ATSs--whether such ATS trades NMS stocks or OTC Equity
Securities--should likewise be required to report this information to
the CAT. Because ATSs that trade NMS stocks are already recording this
information and reporting it to OATS, the Participants believe that
reporting the same information to the CAT should impose little burden
on these ATSs. Moreover, including this information in the CAT is also
necessary for FINRA to be able to retire the OATS system. The
Participants similarly believe that obtaining the same information from
ATSs that trade OTC Equity Securities will be important for purposes of
reconstructing ATS order books and surveillance. Accordingly, the
Exchange proposes to add to the data reporting requirements in the
Compliance Rule the reporting requirements for ATSs in FINRA Rule
4554,\8\ but to expand such requirements so that they are applicable to
all ATSs rather than solely to ATSs that trade NMS stocks.
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\7\ See FINRA Regulatory Notice 16-28 (August 2016).
\8\ FINRA Rule 4554 was approved by the SEC on May 10, 2016,
while the CAT NMS Plan was pending with the Commission. See
Securities Exchange Act Release No. 77798 (May 10, 2016), 81 FR
30395 (May 16, 2016) (Order Approving SR-FINRA-2016-010). As noted
in the Participants' Response to Comments, throughout the process of
developing the Plan, the Participants worked to keep the gap
analyses for OATS, electronic blue sheets, and the CAT up-to-date,
which included adding data fields related to the tick size pilot and
ATS order book amendments to the OATS rules. See Participants'
Response to Comments at 21. However, due to the timing of the
expiration of the tick size pilot, the Participants decided not to
include those data elements into the CAT NMS Plan.
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(i) New Definition
The Exchange proposes to add a definition of ``ATS'' to new
paragraph (d) of Rule 11.610 to facilitate the addition to the CAT of
the reporting requirements for ATSs set forth in FINRA Rule 4554. The
Exchange proposes to define an ``ATS'' to mean ``an alternative trading
system, as defined in Rule 300(a)(1) of Regulation ATS under the
Exchange Act.''
(ii) ATS Order Type
FINRA Rule 4554(b)(5) requires the following information to be
recorded and reported to FINRA by ATSs when reporting receipt of an
order to OATS:
A unique identifier for each order type offered by the ATS. An
ATS must provide FINRA with (i) a list of all of its order types 20
days before such order types become effective and (ii) any changes
to its order types 20 days before such changes become effective. An
identifier shall not be required for market and limit orders that
have no other special handling instructions.
The Compliance Rule does not require Industry Members to report
such order type information to the Central Repository. To address this
OATS-CAT data gap, the Exchange proposes to incorporate these
requirements into four new provisions to the Compliance Rule:
Paragraphs (a)(1)(A)(xi)(1), (a)(1)(C)(x)(1), (a)(1)(D)(ix)(1) and
(a)(2)(D) of Rule 11.630.
Proposed paragraph (a)(1)(A)(xi)(1) of Rule 11.630 would require an
Industry Member that operates an ATS to record and report to the
Central Repository for the original receipt or origination of an order
``the ATS's unique identifier for the order type of the order.''
Proposed paragraph (a)(1)(C)(x)(1) of Rule 11.630 would require an
Industry Member that operates an ATS to record and report to the
Central Repository for the receipt of an order that has been routed
``the ATS's unique identifier for the order type of the order.''
Proposed paragraph (a)(1)(D)(ix)(1) of Rule 11.630 would require an
Industry Member that operates an ATS to record and report to the
Central Repository if the order is modified or cancelled ``the ATS's
unique identifier for the order type of the order.'' Furthermore, as
with the requirements in FINRA Rule 4554(b)(5), proposed paragraph
(a)(2)(D) of Rule 11.630 would state that:
An Industry Member that operates an ATS must provide to the
Central Repository: (1) A list of all of its order types twenty (20)
days before such order types become effective; and (2) any changes
to its order types twenty (20) days before such changes become
effective. An identifier shall not be required for market and limit
orders that have no other special handling instructions.
(iii) National Best Bid and Offer
FINRA Rules 4554(b)(6) and (7) require the following information to
be recorded and reported to FINRA by ATSs when reporting receipt of an
order to OATS:
(6) The NBBO (or relevant reference price) in effect at the time
of order receipt and the timestamp of when the ATS recorded the
effective NBBO (or relevant reference price); and
(7) Identification of the market data feed used by the ATS to
record the NBBO (or other reference price) for purposes of
subparagraph (6). If for any reason, the ATS uses an alternative
feed than what was reported on its ATS data submission, the ATS must
notify FINRA of the fact that an alternative source was used,
identify the alternative source, and specify the date(s), time(s)
and securities for which the alternative source was used.
Similarly, FINRA Rule 4554(c) requires the following information to
be recorded and reported to FINRA by ATSs when reporting the execution
of an order to OATS:
(1) The NBBO (or relevant reference price) in effect at the time
of order execution;
(2) The timestamp of when the ATS recorded the effective NBBO
(or relevant reference price); and
(3) Identification of the market data feed used by the ATS to
record the NBBO (or other reference price) for purposes of
subparagraph (1). If for any reason, the ATS uses an alternative
feed than what was reported on its ATS data submission, the ATS must
notify FINRA of the fact that an alternative source was used,
identify the alternative source, and specify the date(s), time(s)
and securities for which the alternative source was used.
The Compliance Rule does not require Industry Members to report
such NBBO information to the Central Repository. To address this OATS-
CAT data gap, the Exchange proposes to incorporate these requirements
into four new provisions to the Compliance Rule: (a)(1)(A)(xi)(2)-(3),
(a)(1)(C)(x)(2)-(3), (a)(1)(D)(ix)(2)-(3) and (a)(1)(E)(viii)(1)-(2) of
Rule 11.630.
Specifically, proposed paragraph (a)(1)(A)(xi)(2)-(3) of Rule
11.630 would require an Industry Member that operates an ATS to record
and report to the Central Repository the following
[[Page 38450]]
information when reporting the original receipt or origination of
order:
(2) The National Best Bid and National Best Offer (or relevant
reference price) at the time of order receipt or origination, and
the date and time at which the ATS recorded such National Best Bid
and National Best Offer (or relevant reference price);
(3) the identification of the market data feed used by the ATS
to record the National Best Bid and National Best Offer (or relevant
reference price) for purposes of subparagraph (xi)(2). If for any
reason the ATS uses an alternative market data feed than what was
reported on its ATS data submission, the ATS must provide notice to
the Central Repository of the fact that an alternative source was
used, identify the alternative source, and specify the date(s),
time(s) and securities for which the alternative source was used.
Similarly, proposed paragraphs (a)(1)(C)(x)(2)-(3),
(a)(1)(D)(ix)(2)-(3) and (a)(1)(E)(viii)(1)-(2) of Rule 11.630 would
require an Industry Member that operates an ATS to record and report to
the Central Repository the same information when reporting receipt of
an order that has been routed, when reporting if the order is modified
or cancelled, and when an order has been executed, respectively.
(iv) Sequence Numbers
FINRA Rule 4554(d) states that ``[f]or all OATS-reportable event
types, all ATSs must record and report to FINRA the sequence number
assigned to the order event by the ATS's matching engine.'' The
Compliance Rule does not require Industry Members to report ATS
sequence numbers to the Central Repository. To address this OATS-CAT
data gap, the Exchange proposes to incorporate this requirement
regarding ATS sequence numbers into each of the Reportable Events for
the CAT. Specifically, the Exchange proposes to add proposed paragraph
(a)(1)(A)(xi)(4) to Rule 11.630, which would require an Industry Member
that operates an ATS to record and report to the Central Repository
``the sequence number assigned to the receipt or origination of the
order by the ATS's matching engine.'' The Exchange proposes to add
proposed paragraph (a)(1)(B)(viii) to Rule 11.630, which would require
an Industry Member that operates an ATS to record and report to the
Central Repository ``the sequence number assigned to the routing of the
order by the ATS's matching engine.'' The Exchange also proposes to add
proposed paragraph (a)(1)(C)(x)(4) to Rule 11.630, which would require
an Industry Member that operates an ATS to record and report to the
Central Repository ``the sequence number assigned to the receipt of the
order by the ATS's matching engine.'' In addition, the Exchange
proposes to add proposed paragraph (a)(1)(D)(ix)(4) to Rule 11.630,
which would require an Industry Member that operates an ATS to record
and report to the Central Repository ``the sequence number assigned to
the modification or cancellation of the order by the ATS's matching
engine.'' Finally, the Exchange proposes to add proposed paragraph
(a)(1)(E)(viii)(3) to Rule 11.630, which would require an Industry
Member that operates an ATS to record and report to the Central
Repository ``the sequence number assigned to the execution of the order
by the ATS's matching engine.''
(v) Modification or Cancellation of Orders by ATSs
FINRA Rule 4554(f) states that ``[f]or an ATS that displays
subscriber orders, each time the ATS's matching engine re-prices a
displayed order or changes the display quantity of a displayed order,
the ATS must report to OATS the time of such modification,'' and ``the
applicable new display price or size.'' The Exchange proposes adding a
comparable requirement into new paragraph (a)(1)(D)(ix)(5) to Rule
11.630. Specifically, proposed new paragraph (a)(1)(D)(ix)(5) of Rule
11.630 would require an Industry Member that operates an ATS to report
to the Central Repository, if the order is modified or cancelled,
``each time the ATS's matching engine re-prices an order or changes the
quantity of an order,'' the ATS must report to the Central Repository
``the time of such modification, and the applicable new price or
size.'' Proposed paragraph (a)(1)(D)(ix)(5) of Rule 11.630 would apply
to all ATSs, not just ATSs that display orders.
(vi) Display of Subscriber Orders
FINRA Rule 4554(b)(1) requires the following information to be
recorded and reported to FINRA by ATSs when reporting receipt of an
order to OATS:
Whether the ATS displays subscriber orders outside the ATS
(other than to alternative trading system employees). If an ATS does
display subscriber orders outside the ATS (other than to alternative
trading system employees), indicate whether the order is displayed
to subscribers only or through publicly disseminated quotation
data);
The Compliance Rule does not require Industry Members to report to
the CAT such information about the displaying of subscriber orders. The
Exchange proposes to add comparable requirements into proposed
paragraphs (a)(1)(A)(xi)(5) and (a)(1)(C)(x)(5) of Rule 11.630.
Specifically, proposed paragraph (a)(1)(A)(xi)(5) would require an
Industry Member that operates an ATS to report to the Central
Repository, for the original receipt or origination of an order,
whether the ATS displays subscriber orders outside the ATS
(other than to alternative trading system employees). If an ATS does
display subscriber orders outside the ATS (other than to alternative
trading system employees), indicate whether the order is displayed
to subscribers only or through publicly disseminated quotation data.
Similarly, proposed paragraph (a)(1)(C)(x)(5) of Rule 11.630 would
require an Industry Member that operates an ATS to record and report to
the Central Repository the same information when reporting receipt of
an order that has been routed.
C. Customer Instruction Flag
FINRA Rule 7440(b)(14) requires a FINRA OATS Reporting Member to
record the following when an order is received or originated: ``Any
request by a customer that a limit order not be displayed, or that a
block size limit order be displayed, pursuant to applicable rules.''
The Compliance Rule does not require Industry Members to report to the
CAT such a customer instruction flag. To address this OATS-CAT data
gap, the Exchange proposes to add paragraph (a)(1)(A)(viii) to Rule
11.630, which would require Industry Members to record and report to
the Central Repository, for original receipt or origination of an
order, ``any request by a Customer that a limit order not be displayed,
or that a block size limit order be displayed, pursuant to applicable
rules.'' The Exchange also proposes to add paragraph (a)(1)(C)(ix) to
Rule 11.630, which would require Industry Members to record and report
to the Central Repository, for the receipt of an order that has been
routed, ``any request by a Customer that a limit order not be
displayed, or that a block size limit order be displayed, pursuant to
applicable rules.''
FINRA Rule 7440(d)(1) requires an OATS Reporting Member that
modifies or receives a modification of an order to report the customer
instruction flag. The Compliance Rule does not require Industry Members
to report such a customer instruction flag. To address this OATS-CAT
data gap, the Exchange proposes to add paragraph (a)(1)(D)(viii) to
Rule 11.630, which would require Industry Members to record and report
to the Central Repository, if the order is modified or cancelled, ``any
request by a Customer that a limit order not be displayed, or that a
block size limit
[[Page 38451]]
order be displayed, pursuant to applicable rules.''
D. Department Type
FINRA Rules 7440(b)(4) and (5) require an OATS Reporting Member
that receives or originates an order to record the following
information: ``The identification of any department or the
identification number of any terminal where an order is received
directly from a customer'' and ``where the order is originated by a
Reporting Member, the identification of the department of the member
that originates the order.'' The Compliance Rule does not require
Industry Members to report to the CAT information regarding the
department or terminal where the order is received or originated. To
address this OATS-CAT data gap, the Exchange proposes to add paragraph
(a)(1)(A)(ix) to Rule 11.630, which would require Industry Members to
record and report to the Central Repository upon the original receipt
or origination of an order ``the nature of the department or desk that
originated the order, or received the order from a Customer.''
Similarly, per FINRA Rules 7440(c)(2)(B) and (4)(B), when an OATS
Reporting Member receives an order that has been transmitted by another
Member, the receiving OATS Reporting Member is required to record the
information required in 7440(b)(4) and (5) described above as
applicable. The Compliance Rule does not require Industry Members to
report to the CAT information regarding the department that received an
order. To address this OATS-CAT data gap, the Exchange propose to add
paragraph (a)(1)(C)(viii) to Rule 11.630, which would require Industry
Members to record and report to the Central Repository upon the receipt
of an order that has been routed ``the nature of the department or desk
that received the order.''
E. Account Holder Type
FINRA Rule 7440(b)(18) requires an OATS Reporting Member that
receives or originates an order to record the following information:
``The type of account, i.e., retail, wholesale, employee, proprietary,
or any other type of account designated by FINRA, for which the order
is submitted.'' The Compliance Rule does not require Industry Members
to report to the CAT information regarding the type of account holder
for which the order is submitted. To address this OATS-CAT data gap,
the Exchange proposes to add paragraph (a)(1)(A)(x) to Rule 11.630,
which would require Industry Members to record and report to the
Central Repository upon the original receipt or origination of an order
``the type of account holder for which the order is submitted.''
ii. OTC Equity Securities
The Participants have identified several data elements related to
OTC Equity Securities that FINRA currently receives from ATSs that
trade OTC Equity Securities for regulatory oversight purposes, but are
not currently included in CAT Data. In particular, the Participants
identified three data elements that need to be added to the CAT: (1)
Bids and offers for OTC Equity Securities; (2) a flag indicating
whether a quote in OTC Equity Securities is solicited or unsolicited;
and (3) unpriced bids and offers in OTC Equity Securities. The
Participants believe that such data will continue to be important for
regulators to oversee the OTC Equity Securities market when using the
CAT. Moreover, the Participants do not believe that the proposed
requirement would burden ATSs because they currently report this
information to FINRA and thus the reporting requirement would merely
shift from FINRA to the CAT. Accordingly, as discussed below, the
Exchange proposes to amend its Compliance Rule to include these data
elements.
A. Bids and Offers for OTC Equity Securities
In performing its current regulatory oversight, FINRA receives a
data feed of the best bids and offers in OTC Equity Securities from
ATSs that trade OTC Equity Securities. These best bid and offer data
feeds for OTC Equity Securities are similar to the best bid and offer
SIP Data required to be collected by the Central Repository with regard
to NMS Securities.\9\ Accordingly, the Exchange proposes to add
paragraph (f)(1) to Rule 11.630 to require the reporting of the best
bid and offer data feeds for OTC Equity Securities to the CAT.
Specifically, proposed paragraph (f)(1) of Rule 11.630 would require
each Industry Member that operates an ATS that trades OTC Equity
Securities to provide to the Central Repository ``the best bid and best
offer for each OTC Equity Security traded on such ATS.''
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\9\ Section 6.5(a)(ii) of the CAT NMS Plan.
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B. Unsolicited Bid or Offer Flag
FINRA also receives from ATSs that trade OTC Equity Securities an
indication whether each bid or offer in OTC Equity Securities on such
ATS was solicited or unsolicited. Therefore, the Exchange proposes to
add paragraph (f)(2) to Rule 11.630 to require the reporting to the CAT
of an indication as to whether a bid or offer was solicited or
unsolicited. Specifically, proposed paragraph (f)(2) of Rule 11.630
would require each Industry Member that operates an ATS that trades OTC
Equity Securities to provide to the Central Repository ``an indication
of whether each bid and offer for OTC Equity Securities was solicited
or unsolicited.''
C. Unpriced Bids and Offers
FINRA receives from ATSs that trade OTC Equity Securities certain
unpriced bids and offers for each OTC Equity Security traded on the
ATS. Therefore, the Exchange proposes to add paragraph (f)(3) to Rule
11.630, which would require each Industry Member that operates an ATS
that trades OTC Equity Securities to provide to the Central Repository
``the unpriced bids and offers for each OTC Equity Security traded on
such ATS.''
iii. Revised Industry Member Reporting Timeline
On February 19, 2020, the Participants filed with the Commission a
request for exemptive relief from certain provisions of the CAT NMS
Plan to allow for the implementation of phased reporting to the CAT by
Industry Members (``Phased Reporting'').\10\ Specifically, in their
exemptive request, the Participants requested that the SEC exempt each
Participant from the requirement in Section 6.7(a)(v) of the CAT NMS
Plan for each Participant, through its Compliance Rule, to require its
Industry Members other than Small Industry Members (``Large Industry
Members'') to report to the Central Repository Industry Member Data
within two years of the Effective Date (that is, by November 15, 2018).
In addition, the Participants requested that the SEC exempt each
Participant from the requirement in Section 6.7(a)(vi) of the CAT NMS
Plan for each Participant, through its Compliance Rule, to require its
Small Industry Members \11\ to report to the Central Repository
Industry Member Data within three years of the Effective Date (that is,
by November 15, 2019). Correspondingly, the Participants requested that
the SEC provide an exemption from the requirement in Section 6.4 of the
CAT NMS Plan that ``[t]he requirements for Industry Members under this
Section 6.4 shall become effective on the second
[[Page 38452]]
anniversary of the Effective Date in the case of Industry Members other
than Small Industry Members, or the third anniversary of the Effective
Date in the case of Small Industry Members.'' On April 20, 2020, the
SEC granted the Participants exemptive relief to implement Phased
Reporting, subject to certain timeline changes and conditions.\12\
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\10\ See Letter to Vanessa Countryman, Secretary, SEC, from
Michael Simon, CAT NMS Plan Operating Committee Chair, re: Request
for Exemption from Provisions of the National Market System Plan
Governing the Consolidated Audit Trail related to Industry Member
Reporting Dates (Feb. 19, 2020).
\11\ See Section 1.1 of the CAT NMS Plan.
\12\ See Securities Exchange Act Release No. 88702 (April 20,
2020), 85 FR 23075 (April 24, 2020). As discussed in the SEC's
exemptive order, the Commission granted the Participants conditional
exemptive relief from the CAT NMS Plan so that the Compliance Rules
may require Phase 2a reporting to commence on June 22, 2020, rather
than the April 20, 2020 date set forth in the exemptive request, and
Phase 2b reporting to commence on July 20, 2020, rather than the May
18, 2020 date set forth in the exemptive request. As a condition to
the exemptive relief, Industry Members who elect to report to the
CAT prior to such dates will be permitted to report to the CAT as
early as April 20, 2020 for Phase 2a reporting and as early as May
18, 2020 for Phase 2b reporting.
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As a condition to the exemption, each Participant would implement
Phased Reporting through its Compliance Rule by requiring:
(1) its Large Industry Members and its Small Industry Members
that are required to record or report information to OATS pursuant
to applicable SRO rules (``Small Industry OATS Reporters'') to
commence reporting to the Central Repository Phase 2a Industry
Member Data by June 22, 2020, and its Small Industry Non-OATS
Reporters to commence reporting to the Central Repository Phase 2a
Industry Member Data by December 13, 2021;
(2) its Large Industry Members to commence reporting to the
Central Repository Phase 2b Industry Member Data by July 20, 2020,
and its Small Industry Members to commence reporting to the Central
Repository Phase 2b Industry Member Data by December 13, 2021;
(3) its Large Industry Members to commence reporting to the
Central Repository Phase 2c Industry Member Data by April 26, 2021,
and its Small Industry Members to commence reporting to the Central
Repository Phase 2c Industry Member Data by December 13, 2021;
(4) its Large Industry Members and Small Industry Members to
commence reporting to the Central Repository Phase 2d Industry
Member Data by December 13, 2021; and
(5) its Large Industry Members and Small Industry Members to
commence reporting to the Central Repository Phase 2e Industry
Member Data by July 11, 2022.
The full scope of CAT Data required under the CAT NMS Plan will be
required to be reported when all five phases of the Phased Reporting
have been implemented, subject to any applicable exemptive relief or
amendments related to the CAT NMS Plan.
As a further condition to the exemption, each Participant proposes
to implement the testing timelines described in Section F below through
its Compliance Rule by requiring the following:
(1) Industry Member file submission and data integrity testing
for Phases 2a and 2b begins in December 2019.
(2) Industry Member testing of the Reporter Portal, including
data integrity error correction tools and data submissions, begins
in February 2020.
(3) The Industry Member test environment will be open with
intra-firm linkage validations to Industry Members for both Phases
2a and 2b in April 2020.
(4) The Industry Member test environment will be open to
Industry Members with inter-firm linkage validations for both Phases
2a and 2b in July 2020.
(5) The Industry Member test environment will be open to
Industry Members with Phase 2c functionality (full representative
order linkages) in January 2021.
(6) The Industry Member test environment will be open to
Industry Members with Phase 2d functionality (manual options orders,
complex options orders, and options allocations) in June 2021.
(7) Participant exchanges that support options market making
quoting will begin accepting Quote Sent Time on quotes from Industry
Members no later than April 2020.
(8) The Industry Member test environment (customer and account
information) will be open to Industry Members in January 2022.
As a result, the Exchange proposes to amend its Compliance Rule to
be consistent with the exemptive relief to implement Phased Reporting
as described below.
A. Phase 2a
In the first phase of Phased Reporting, referred to as Phase 2a,
Large Industry Members and Small Industry OATS Reporters would be
required to report to the Central Repository ``Phase 2a Industry Member
Data'' by June 22, 2020.\13\ To implement the Phased Reporting for
Phase 2a, the Exchange proposes to add paragraph (t)(1) of Rule 11.610
(previously paragraph (s)) and amend paragraphs (c)(1) and (2) of Rule
11.695.
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\13\ Small Industry Members that are not required to record and
report information to FINRA's OATS pursuant to applicable SRO rules
(``Small Industry Non-OATS Reporters'') would be required to report
to the Central Repository ``Phase 2a Industry Member Data'' by
December 13, 2021, which is approximately seventeen months after
Large Industry Members and Small Industry OATS Reporters begin
reporting.
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(i) Scope of Reporting in Phase 2a
To implement the Phased Reporting with respect to Phase 2a, the
Exchange proposes to add a definition of ``Phase 2a Industry Member
Data'' as paragraph (t)(1) of Rule 11.610. Specifically, the Exchange
proposes to define the term ``Phase 2a Industry Member Data'' as
``Industry Member Data required to be reported to the Central
Repository commencing in Phase 2a.'' Phase 2a Industry Member Data
would include Industry Member Data solely related to Eligible
Securities that are equities. While the following summarizes categories
of Industry Member Data required for Phase 2a, the Industry Member
Technical Specifications provide detailed guidance regarding the
reporting for Phase 2a.\14\
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\14\ The items required to be reported commencing in Phase 2a do
not include the items required to be reported in Phase 2c or Phase
2d, as discussed below.
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Phase 2a Industry Member Data would include all events and
scenarios covered by OATS. FINRA Rule 7440 describes the OATS
requirements for recording information, which includes information
related to the receipt or origination of orders, order transmittal, and
order modifications, cancellations and executions. Large Industry
Members and Small Industry OATS Reporters would be required to submit
data to the CAT for these same events and scenarios during Phase 2a.
The inclusion of all OATS events and scenarios in the CAT is intended
to facilitate the retirement of OATS.
Phase 2a Industry Member Data also would include Reportable Events
for:
Proprietary orders, including market maker orders, for
Eligible Securities that are equities;
electronic quotes in listed equity Eligible Securities
(i.e., NMS stocks) sent to a national securities exchange or FINRA's
Alternative Display Facility (``ADF'');
electronic quotes in unlisted Eligible Securities (i.e.,
OTC Equity Securities) received by an Industry Member operating an
interdealer quotation system (``IDQS''); and
electronic quotes in unlisted Eligible Securities sent to
an IDQS or other quotation system not operated by a Participant or
Industry Member.
Phase 2a Industry Member Data would include Firm Designated IDs.
During Phase 2a, Industry Members would be required to report Firm
Designated IDs to the CAT, as required by paragraphs (a)(1)(A)(i), and
(a)(2)(C) of Rule 11.630. Paragraph (a)(1)(A)(i) of Rule 11.630
requires Industry Members to submit the Firm Designated ID for the
original receipt or origination of an order. Paragraph (a)(2)(C) of
Rule 11.630 requires Industry Members to record and report to the
Central Repository, for original receipt and origination of an order,
the Firm Designated ID if the order is executed, in whole or in part.
[[Page 38453]]
In Phase 2a, Industry Members would be required to report all
street side representative orders, including both agency and
proprietary orders and mark such orders as representative orders,
except in certain limited exceptions as described in the Industry
Member Technical Specifications. A representative order is an order
originated in a firm owned or controlled account, including principal,
agency average price and omnibus accounts, by an Industry Member for
the purpose of working one or more customer or client orders.
In Phase 2a, Industry Members would be required to report the link
between the street side representative order and the order being
represented when: (1) The representative order was originated
specifically to represent a single order received either from a
customer or another broker-dealer; and (2) there is (a) an existing
direct electronic link in the Industry Member's system between the
order being represented and the representative order and (b) any
resulting executions are immediately and automatically applied to the
represented order in the Industry Member's system.
Phase 2a Industry Member Data also would include the manual and
Electronic Capture Time for Manual Order Events. Specifically, for each
Reportable Event in Rule 11.630, Industry Members would be required to
provide a timestamp pursuant to Rule 11.660. Rule 11.660(b)(1) states
that
Each Industry Member may record and report Manual Order Events to
the Central Repository in increments up to and including one second,
provided that each Industry Member shall record and report the time
when a Manual Order Event has been captured electronically in an
order handling and execution system of such Industry Member
(``Electronic Capture Time'') in milliseconds[.]
Accordingly, for Phase 2a, Industry Members would be required to
provide both the manual and Electronic Capture Time for Manual Order
Events.\15\
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\15\ Industry Members would be required to provide an Electronic
Capture Time following the manual capture time only for new orders
that are Manual Order Events and, in certain instances, routes that
are Manual Order Events. The Electronic Capture Time would not be
required for other Manual Order Events.
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Industry Members would be required to report special handling
instructions for the original receipt or origination of an order during
Phase 2a. In addition, during Phase 2a, Industry Members will be
required to report, when routing an order, whether the order was routed
as an intermarket sweep order (``ISO''). Industry Members would be
required to report special handling instructions on routes other than
ISOs in Phase 2c, rather than Phase 2a.
In Phase 2a, Industry Members would not be required to report
modifications of a previously routed order in certain limited
instances. Specifically, if a trader or trading software modifies a
previously routed order, the routing firm is not required to report the
modification of an order route if the destination to which the order
was routed is a CAT Reporter that is required to report the
corresponding order activity. If, however, the order was modified by a
Customer or other non-CAT Reporter, and subsequently the routing
Industry Members sends a modification to the destination to which the
order was originally routed, then the routing Industry Member must
report the modification of the order route.\16\ In addition, in Phase
2a, Industry Members would not be required to report a cancellation of
an order received from a Customer after the order has been executed.
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\16\ This approach is comparable to the approach set forth in
OATS Compliance FAQ 35.
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(ii) Timing of Phase 2a Reporting
Pursuant to paragraph (c)(1) of Rule 11.695, Large Industry Members
are required to begin reporting to the CAT by November 15, 2018. To
implement the Phased Reporting for Phase 2a for Large Industry Members,
the Exchange proposes to delete the November 15, 2018 date and to
supplement paragraph (c)(1) of Rule 11.695 with new paragraph (c)(1)(A)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member (other than a Small Industry Member) shall record and
report the Industry Member Data to the Central Repository, as follows:
(A) Phase 2a Industry Member Data by June 22, 2020.''
Pursuant to paragraph (c)(2) of Rule 11.695, Small Industry Members
are required to begin reporting to the CAT by November 15, 2019. To
implement the Phased Reporting for Phase 2a for Small Industry Members,
the Exchange proposes to delete the November 15, 2019 date and to
supplement paragraph (c)(2) of Rule 11.695 with new paragraphs
(c)(2)(A) and (B) of Rule 11.695. Proposed paragraph (c)(2)(A) of Rule
11.695 would state that
Each Industry Member that is a Small Industry Member shall record
and report the Industry Member Data to the Central Repository, as
follows: (A) Small Industry Members that are required to record or
report information to FINRA's Order Audit Trail System pursuant to
applicable SRO rules (``Small Industry OATS Reporter'') to report to
the Central Repository Phase 2a Industry Member Data by June 22,
2020.
Proposed paragraph (c)(2)(B) of Rule 11.695 would state that
``Small Industry Members that are not required to record or report
information to FINRA's Order Audit Trail System pursuant to applicable
SRO rules (``Small Industry Non-OATS Reporter'') to report to the
Central Repository Phase 2a Industry Member Data by December 13,
2021.''
B. Phase 2b
In the second phase of the Phased Reporting, referred to as Phase
2b, Large Industry Members would be required to report to the Central
Repository ``Phase 2b Industry Member Data'' by July 20, 2020. Small
Industry Members would be required to report to the Central Repository
``Phase 2b Industry Member Data'' by December 13, 2021, which is
approximately seventeen months after Large Industry Members begin
reporting such data to the Central Repository. To implement the Phased
Reporting for Phase 2b, the Exchange proposes to add paragraph (t)(2)
to Rule 11.610 and amend paragraphs (c)(1) and (2) of Rule 11.695.
(i) Scope of Phase 2b Reporting
To implement the Phased Reporting with respect to Phase 2b, the
Exchange proposes to add a definition of ``Phase 2b Industry Member
Data'' as paragraph (t)(2) to Rule 11.610. Specifically, the Exchange
proposes to define the term ``Phase 2b Industry Member Data'' as
``Industry Member Data required to be reported to the Central
Repository commencing in Phase 2b.'' Phase 2b Industry Member Data is
described in detail in the Industry Member Technical Specifications for
Phase 2b. While the following summarizes the categories of Industry
Member Data required for Phase 2b, the Industry Member Technical
Specifications provide detailed guidance regarding the reporting for
Phase 2b.
Phase 2b Industry Member Data would include Industry Member Data
related to Eligible Securities that are options and related to simple
electronic option orders, excluding electronic paired option
orders.\17\ A simple electronic option order is an order to buy or sell
a single option that is not related to or dependent on any other
transaction for pricing and timing of execution that is either received
or routed electronically by an Industry Member. Electronic receipt of
an order is defined as the initial receipt of an
[[Page 38454]]
order by an Industry Member in electronic form in standard format
directly into an order handling or execution system. Electronic routing
of an order is the routing of an order via electronic medium in
standard format from one Industry Member's order handling or execution
system to an exchange or another Industry Member. An electronic paired
option order is an electronic option order that contains both the buy
and sell side that is routed to another Industry Member or exchange for
crossing and/or price improvement as a single transaction on an
exchange. Responses to auctions of simple orders and paired simple
orders are also reportable in Phase 2b.
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\17\ The items required to be reported in Phase 2b do not
include the items required to be reported in Phase 2d, as discussed
below in Section A.4.
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Furthermore, combined orders in options would be treated in Phase
2b in the same way as equity representative orders are treated in Phase
2a. A combined order would mean, as permitted by Exchange rules, a
single, simple order in Listed Options created by combining individual,
simple orders in Listed Options from a customer with the same exchange
origin code before routing to an exchange. During Phase 2b, the single
combined order sent to an exchange must be reported and marked as a
combined order, but the linkage to the underlying orders is not
required to be reported until Phase 2d.
(ii) Timing of Phase 2b Reporting
Pursuant to paragraph (c)(1) of Rule 11.695, Large Industry Members
are required to begin reporting to the CAT by November 15, 2018. To
implement the Phased Reporting for Phase 2b for Large Industry Members,
the Exchange proposes to delete the November 15, 2018 date and to
supplement paragraph (c)(1) of Rule 11.695 with new paragraph (c)(1)(B)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member (other than a Small Industry Member) shall record and
report the Industry Member Data to the Central Repository, as follows:
. . . (B) Phase 2b Industry Member Data by July 20, 2020.''
Pursuant to paragraph (c)(2) of Rule 11.695, Small Industry Members
are required to begin reporting to the CAT by November 15, 2019. To
implement the Phased Reporting for Phase 2b for Small Industry Members,
the Exchange proposes to delete the November 15, 2019 date and to
supplement paragraph (c)(2) of Rule 11.695 with new paragraph (c)(2)(C)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member that is a Small Industry Member shall record and report
the Industry Member Data to the Central Repository, as follows: . . .
(C) Small Industry Members to report to the Central Repository Phase 2b
Industry Member Data . . . by December 13, 2021.''
C. Phase 2c
In the third phase of the Phased Reporting, referred to as Phase
2c, Large Industry Members would be required to report to the Central
Repository ``Phase 2c Industry Member Data'' by April 26, 2021. Small
Industry Members would be required to report to the Central Repository
``Phase 2c Industry Member Data'' by December 13, 2021, which is
approximately seven months after Large Industry Members begin reporting
such data to the Central Repository. To implement the Phased Reporting
for Phase 2c, the Exchange proposes to add paragraph (t)(3) to Rule
11.610 and amend paragraphs (c)(1) and (2) of Rule 11.695.
(i) Scope of Phase 2c Reporting
To implement the Phased Reporting with respect to Phase 2c, the
Exchange proposes to add a definition of ``Phase 2c Industry Member
Data'' as paragraph (t)(3) to Rule 11.610. Specifically, the Exchange
proposes to define the term ``Phase 2c Industry Member Data'' as
``Industry Member Data required to be reported to the Central
Repository commencing in Phase 2c.'' Phase 2c Industry Member Data''
would be Industry Member Data related to Eligible Securities that are
equities other than Phase 2a Industry Member Data, Phase 2d Industry
Member Data or Phase 2e Industry Member Data. Phase 2c Industry Member
Data is described in detail in the Industry Member Technical
Specifications for Phase 2c. While the following summarizes the
categories of Industry Member Data required for Phase 2c, the Industry
Member Technical Specifications provide detailed guidance regarding the
reporting for Phase 2c.
Phase 2c Industry Member Data would include Industry Member Data
that is related to Eligible Securities that are equities and that is
related to: (1) Allocation Reports as required to be recorded and
reported to the Central Repository pursuant to Section 6.4(d)(ii)(A)(1)
of the CAT NMS Plan; (2) quotes in unlisted Eligible Securities sent to
an IDQS operated by a CAT Reporter (reportable by the Industry Member
sending the quotes) (except for quotes reportable in Phase 2d, as
discussed below); (3) electronic quotes in listed equity Eligible
Securities (i.e., NMS stocks) that are not sent to a national
securities exchange or FINRA's Alternative Display Facility; (4)
reporting changes to client instructions regarding modifications to
algorithms; (5) marking as a representative order any order originated
to work a customer order in price guarantee scenarios, such as a
guaranteed VWAP; (6) flagging rejected external routes to indicate a
route was not accepted by the receiving destination; (7) linkage of
duplicate electronic messages related to a Manual Order Event between
the electronic event and the original manual route; (8) special
handling instructions on order route reports (other than the ISO, which
is required to be reported in Phase 2a); (9) quote identifier on trade
events; (10) reporting of large trader identifiers \18\ (``LTID'') (if
applicable) for accounts with Reportable Events that are reportable to
CAT as of and including Phase 2c; (11) reporting of date account opened
or Account Effective Date \19\ (as applicable) for accounts and flag
indicating the Firm Designated ID type as account or relationship; (12)
order effective time for orders that are received by an Industry Member
and do not become effective until a later time; (13) the modification
or cancellation of an internal route of an order; and (14) linkages to
the customer order(s) being represented for all representative order
scenarios, including agency average price trades, net trades,
aggregated orders, and disconnected Order Management System (``OMS'')--
Execution Management System (``EMS'') scenarios, as required in the
Industry Member Technical Specifications.\20\
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\18\ See definition of ``Customer Account Information'' in
Section 1.1 of the CAT NMS Plan. See also Rule 13h-1 under the
Exchange Act.
\19\ See definition of ``Customer Account Information'' and
``Account Effective Date'' in Section 1.1 of the CAT NMS Plan. Note
that the Exchange also proposes to amend the dates in the
definitions of ``Account Effective Date'' and ``Customer Account
Information'' to reflect the Phased Reporting. Specifically, the
Exchange proposes to amend paragraph (m)(2) of Rule 11.610 to
replace the references to November 15, 2018 and 2019 with references
to the commencement of Phase 2c and Phase 2d. The Exchange also
proposes to amend paragraphs (a)(1)(A), (a)(1)(B) and (a)(2)-(5) of
Rule 11.610 regarding the definition of ``Account Effective Date''
with similar changes to the dates set forth therein.
\20\ In Phase 2c, for any scenarios that involve orders
originated in different systems that are not directly linked, such
as a customer order originated in an OMS and represented by a
principal order originated in an EMS that is not linked to the OMS,
marking and linkages must be reported as required in the Industry
Member Technical Specifications.
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Phase 2c Industry Member Data also includes electronic quotes that
are provided by or received in a CAT Reporter's order/quote handling or
execution systems in Eligible Securities that are equities and are
provided by an Industry Member to other market participants off a
national securities exchange under the following conditions: (1) An
equity bid or offer is
[[Page 38455]]
displayed publicly or has been communicated (a) for listed securities
to the Alternative Display Facility (ADF) operated by FINRA; or (b) for
unlisted equity securities to an ``inter-dealer quotation system'' as
defined in FINRA Rule 6420(c); or (2) an equity bid or offer which is
accessible electronically by customers or other market participants and
is immediately actionable for execution or routing; i.e., no further
manual or electronic action is required by the responder providing the
quote in order to execute or cause a trade to be executed). With
respect to OTC Equity Securities, OTC Equity Securities quotes sent by
an Industry Member to an IDQS operated by an Industry Member CAT
Reporter (other than such an IDQS that does not match and execute
orders) are reportable by the Industry Member sending them in Phase 2c.
Accordingly, any response to a request for quote or other form of
solicitation response provided in standard electronic format (e.g.,
FIX) that meets this quote definition (i.e., an equity bid or offer
which is accessible electronically by customers or other market
participants and is immediately actionable for execution or routing)
would be reportable in Phase 2c.
(ii) Timing of Phase 2c Reporting
Pursuant to paragraph (c)(1) of Rule 11.695, Large Industry Members
are required to begin reporting to the CAT by November 15, 2018. To
implement the Phased Reporting for Phase 2c for Large Industry Members,
the Exchange proposes to delete the November 15, 2018 date and to
supplement paragraph (c)(1) of Rule 11.695 with new paragraph (c)(1)(C)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member (other than a Small Industry Member) shall record and
report the Industry Member Data to the Central Repository, as follows:
. . . (C) Phase 2c Industry Member Data by April 26, 2021.''
Pursuant to paragraph (c)(2) of Rule 11.695, Small Industry Members
are required to begin reporting to the CAT by November 15, 2019. To
implement the Phased Reporting for Phase 2c for Small Industry Members,
the Exchange proposes to delete the November 15, 2019 date and to
supplement paragraph (c)(2) of Rule 11.695 with new paragraph (c)(2)(C)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member that is a Small Industry Member shall record and report
the Industry Member Data to the Central Repository, as follows: . . .
(C) Small Industry Members to report to the Central Repository . . .
Phase 2c Industry Member Data . . . by December 13, 2021.''
D. Phase 2d
In the fourth phase of the Phased Reporting, referred to as Phase
2d, Large Industry Members and Small Industry Members would be required
to report to the Central Repository ``Phase 2d Industry Member Data''
by December 13, 2021. To implement the Phased Reporting for Phase 2d,
the Exchange proposes to add paragraph (t)(4) to Rule 11.610 and amend
paragraphs (c)(1) and (2) of Rule 11.695.
(i) Scope of Phase 2d Reporting
To implement the Phased Reporting with respect to Phase 2d, the
Exchange proposes to add a definition of ``Phase 2d Industry Member
Data'' as paragraph (t)(4) to Rule 11.610. Specifically, the Exchange
proposes to define the term ``Phase 2d Industry Member Data'' as
``Industry Member Data required to be reported to the Central
Repository commencing in Phase 2d.'' \21\
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\21\ The Participants have determined that reporting information
regarding the modification or cancellation of a route is necessary
to create the full lifecycle of an order. Accordingly, the
Participants require the reporting of information related to the
modification or cancellation of a route similar to the data required
for the routing of an order and modification and cancellation of an
order pursuant to Sections 6.3(d)(ii) and (iv) of the CAT NMS Plan.
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``Phase 2d Industry Member Data'' is Industry Member Data that is
related to Eligible Securities that are options other than Phase 2b
Industry Member Data, Industry Member Data that is related to Eligible
Securities that are equities other than Phase 2a Industry Member Data
or Phase 2c Industry Member Data, and Industry Member Data other than
Phase 2e Industry Member Data. Phase 2d Industry Member Data is
described in detail in the Industry Member Technical Specifications for
Phase 2d. While the following summarizes the categories of Industry
Member Data required for Phase 2d, the Industry Member Technical
Specifications provide detailed guidance regarding the reporting for
Phase 2d.
Phase 2d Industry Member Data includes with respect to the Eligible
Securities that are options: (1) Simple manual orders; (2) electronic
and manual paired orders; (3) all complex orders with linkages to all
CAT-reportable legs; (4) LTIDs (if applicable) for accounts with
Reportable Events for Phase 2d; (5) date account opened or Account
Effective Date (as applicable) for accounts with an LTID and flag
indicating the Firm Designated ID type as account or relationship for
such accounts; \22\ (6) Allocation Reports as required to be recorded
and reported to the Central Repository pursuant to Section
6.4(d)(ii)(A)(1) of the CAT NMS Plan; (7) the modification or
cancellation of an internal route of an order; and (8) linkage between
a combined order and the original customer orders.
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\22\ As noted above, the Exchange also proposes to amend the
dates in the definitions of ``Account Effective Date'' and
``Customer Account Information'' to reflect the Phased Reporting.
Specifically, the Exchange proposes to amend paragraph (m)(2) of
Rule 11.610 to replace the references to November 15, 2018 and 2019
with references to the commencement of Phase 2c and Phase 2d. The
Exchange also proposes to amend paragraphs (a)(1)(A), (a)(1)(B) and
(a)(2)-(5) of Rule 11.610 regarding the definition of ``Account
Effective Date'' with similar changes to the dates set forth
therein.
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Phase 2d Industry Member Data also would include electronic quotes
that are provided by or received in a CAT Reporter's order/quote
handling or execution systems in Eligible Securities that are options
and are provided by an Industry Member to other market participants off
a national securities exchange under the following conditions: a listed
option bid or offer which is accessible electronically by customers or
other market participants and is immediately actionable (i.e., no
further action is required by the responder providing the quote in
order to execute or cause a trade to be executed). Accordingly, any
response to a request for quote or other form of solicitation response
provided in standard electronic format (e.g., FIX) that meets this
definition would be reportable in Phase 2d for options.
Phase 2d Industry Member Data also would include with respect to
Eligible Securities that are options or equities (1) receipt time of
cancellation and modification instructions through Order Cancel Request
and Order Modification Request events; (2) modifications of previously
routed orders in certain instances; and (3) OTC Equity Securities
quotes sent by an Industry Member to an IDQS operated by an Industry
Member CAT Reporter that does not match and execute orders. In
addition, subject to any exemptive or other relief, Phase 2d Industry
Member Data will include verbal or manual quotes on an exchange floor
or in the over-the-counter market, where verbal quotes and manual
quotes are defined as bids or offers in Eligible Securities provided
verbally or that are provided or received other than via a CAT
Reporter's order handling and execution system (e.g., quotations
provided via email or instant messaging).
[[Page 38456]]
(ii) Timing of Phase 2d Reporting
Pursuant to paragraph (c)(1) of Rule 11.695, Large Industry Members
are required to begin reporting to the CAT by November 15, 2018. To
implement the Phased Reporting for Phase 2d for Large Industry Members,
the Exchange proposes to delete the November 15, 2018 date and to
supplement paragraph (c)(1) of Rule 11.695 with new paragraph (c)(1)(D)
of Rule 11.695, which would state, in relevant part, that ``[e]ach
Industry Member (other than a Small Industry Member) shall record and
report the Industry Member Data to the Central Repository, as follows:
. . . (D) Phase 2d Industry Member Data by December 13, 2021.''
Pursuant to paragraph (c)(2) of Rule 11.695, Small Industry Members
are required to begin reporting to the CAT by November 15, 2019. To
implement the Phased Reporting for Phase 2d for Small Industry Members,
the Exchange proposes to delete the November 15, 2019 date and to
supplement paragraph (c)(2) of Rule 11.695 with new paragraph (c)(2)(C)
of Rule 11.695, which would state, in relevant part, that ``Each
Industry Member that is a Small Industry Member shall record and report
the Industry Member Data to the Central Repository, as follows: . . .
(C) Small Industry Members to report to the Central Repository . . .
Phase 2d Industry Member Data by December 13, 2021.''
E. Phase 2e
In the fifth phase of Phased Reporting, referred to as Phase 2e,
both Large Industry Members and Small Industry Members would be
required to report to the Central Repository ``Phase 2e Industry Member
Data'' by July 11, 2022. To implement the Phased Reporting for Phase
2e, the Exchange proposes to add paragraph (t)(5) to Rule 11.610 and
amend paragraphs (c)(1) and (2) of Rule 11.695.
(i) Scope of Phase 2e Reporting
To implement the Phased Reporting with respect to Phase 2e, the
Exchange proposes to add a definition of ``Phase 2e Industry Member
Data'' as paragraph (t)(5) of Rule 11.610. Specifically, the Exchange
proposes to define the term ``Phase 2e Industry Member Data'' as
``Industry Member Data required to be reported to the Central
Repository commencing in Phase 2e. The full scope of Industry Member
Data required by the CAT NMS Plan will be required to be reported to
the CAT when Phase 2e has been implemented, subject to any applicable
exemptive relief or amendments to the CAT NMS Plan.'' LTIDs and Account
Effective Date are both required to be reported in Phases 2c and 2d in
certain circumstances, as discussed above. The terms ``Customer Account
Information'' and ``Customer Identifying Information'' are defined in
Rule 11.610 of the Compliance Rule.\23\ The Industry Member Technical
Specifications provide detailed guidance regarding the reporting for
Phase 2e.
---------------------------------------------------------------------------
\23\ The term ``Customer Account Information'' includes account
numbers, and the term ``Customer Identifying Information'' includes,
with respect to individuals, dates of birth and SSNs. See Rule
11.610. The Participants have received exemptive relief from the
requirements for the Participants to require their members to
provide dates of birth, account numbers and social security numbers
for individuals to the CAT. See Securities Exchange Act Release No.
88393 (March 17, 2020), 85 FR 16152 (March 20, 2020). See also
Letter to Vanessa Countryman, Secretary, SEC, from Michael Simon,
CAT NMS Plan Operating Committee Chair, re: Request for Exemptive
Relief from Certain Provisions of the CAT NMS Plan related to Social
Security Numbers, Dates of Birth and Account Numbers (Jan. 29,
2020). Given the relief has been granted, Phase 2e Industry Member
Data will not include account numbers, dates of birth and SSNs for
individuals.
---------------------------------------------------------------------------
(ii) Timing of Phase 2e Reporting
Pursuant to paragraph (c)(1) of Rule 11.695, Large Industry Members
are required to begin reporting to the CAT by November 15, 2018. To
implement the Phased Reporting for Phase 2e for Large Industry Members,
the Exchange proposes to delete the November 15, 2018 date and to
supplement paragraph (c)(1) of Rule 11.695 with new paragraph (c)(1)(E)
of Rule 11.695, which would state, in relevant part, that ``[e]ach
Industry Member (other than a Small Industry Member) shall record and
report the Industry Member Data to the Central Repository, as follows:
. . . (E) Phase 2e Industry Member Data by July 11, 2022.''
Pursuant to paragraph (c)(2) of Rule 11.695, Small Industry Members
are required to begin reporting to the CAT by November 15, 2019. To
implement the Phased Reporting for Phase 2e for Small Industry Members,
the Exchange proposes to delete the November 15, 2019 date and to
supplement paragraph (c)(2) of Rule 11.695 with new paragraph (c)(2)(D)
of Rule 11.695, which would state, in relevant part, that ``[e]ach
Industry Member that is a Small Industry Member shall record and report
the Industry Member Data to the Central Repository, as follows: . . .
(E) Small Industry Members to report to the Central Repository Phase 2e
Industry Member Data by July 11, 2022.''
F. Industry Member Testing Requirements
Rule 11.680(a) sets forth various compliance dates for the testing
and development for connectivity, acceptance and the submission order
data. In light of the intent to shift to Phased Reporting in place of
the two specified dates for the commencement of reporting for Large and
Small Industry Members, the Exchange correspondingly proposes to
replace the Industry Member development testing milestones in Rule
11.680(a) with the testing milestones set forth in the exemptive
relief. Specifically, the Exchange proposes to replace Rule 11.680(a)
with the following:
(1) Industry Member file submission and data integrity testing
for Phases 2a and 2b shall begin in December 2019.
(2) Industry Member testing of the Reporter Portal, including
data integrity error correction tools and data submissions, shall
begin in February 2020.
(3) The Industry Member test environment shall open with intra-
firm linkage validations to Industry Members for both Phases 2a and
2b in April 2020.
(4) The Industry Member test environment shall open to Industry
Members with inter-firm linkage validations for both Phases 2a and
2b in July 2020.
(5) The Industry Member test environment shall open to Industry
Members with Phase 2c functionality (full representative order
linkages) in January 2021.
(6) The Industry Member test environment shall open to Industry
Members with Phase 2d functionality (manual options orders, complex
options orders, and options allocations) in June 2021.
(7) Participant exchanges that support options market making
quoting shall begin accepting Quote Sent Time on quotes from
Industry Members no later than April 2020.
(8) The Industry Member test environment (customer and account
information) will be open to Industry Members in January 2022.
iv. Granularity of Timestamps
On February 3, 2020, the Participants filed with the Commission a
request for exemptive relief from the requirement in Section 6.8(b) of
the CAT NMS Plan for each Participant, through its Compliance Rule, to
require that, to the extent that its Industry Members utilize
timestamps in increments finer than nanoseconds in their order handling
or execution systems, such Industry Members utilize such finer
increment when reporting CAT Data to the Central Repository.\24\ On
April 8, 2020, the
[[Page 38457]]
Participants received the exemptive relief.\25\ As a condition to this
exemption, the Participants, through their Compliance Rules, will
require Industry Members that capture timestamps in increments more
granular than nanoseconds to truncate the timestamps, after the
nanosecond level for submission to CAT, not round up or down in such
circumstances. The timestamp granularity exemption remains in effect
for five years, until April 8, 2025. After five years, the exemption
would no longer be in effect unless the period the exemption is in
effect is extended by the SEC.
---------------------------------------------------------------------------
\24\ See Letter to Vanessa Countryman, Secretary, SEC, from
Michael Simon, CAT NMS Plan Operating Committee Chair, re: Request
for Exemption from Certain Provisions of the National Market System
Plan Governing the Consolidated Audit Trail related to Granularity
of Timestamps and Relationship Identifiers (Feb. 3, 2020).
\25\ See Securities Exchange Act Release No. 88608 (April 8,
2020), 85 FR 20743 (April 14, 2020).
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to amend its Compliance Rule to
reflect the exemptive relief. Specifically, the Exchange proposes to
amend paragraph (a)(2) of Rule 11.660. Rule 11.660(a)(2) states that
Subject to paragraph (b), to the extent that any Industry
Member's order handling or execution systems utilize time stamps in
increments finer than milliseconds, such Industry Member shall
record and report Industry Member Data to the Central Repository
with time stamps in such finer increment.
The Exchange proposes to amend this provision to read as follows to
reflect the exemptive relief:
Subject to paragraph (b), to the extent that any Industry Member's
order handling or execution systems utilize time stamps in
increments finer than milliseconds, such Industry Member shall
record and report Industry Member Data to the Central Repository
with time stamps in such finer increment up to nanoseconds;
provided, that Industry Members that capture timestamps in
increments more granular than nanoseconds must truncate the
timestamps after the nanosecond level for submission to CAT, rather
than rounding such timestamps up or down, until April 8, 2025.
v. Introducing Industry Members
On February 3, 2020, the Participants requested that the Commission
exempt broker-dealers that do not qualify as Small Industry Members
solely because they satisfy Rule 0-10(i)(2) under the Exchange Act and,
as a result, are deemed affiliated with an entity that is not a small
business or small organization (``Introducing Industry Member'') from
the requirements in the CAT NMS Plan applicable to Industry Members
other than Small Industry Members (``Large Industry Members'').\26\
Instead, such Introducing Industry Members would comply with the
requirements in the CAT NMS Plan applicable to Small Industry Members.
On April 20, 2020, the SEC granted the Participants exemptive relief
with regard to Introducing Industry Members.\27\
---------------------------------------------------------------------------
\26\ See Letter to Vanessa Countryman, Secretary, SEC, from
Michael Simon, CAT NMS Plan Operating Committee Chair, re: Request
for Exemption from Certain Provisions of the National Market System
Plan Governing the Consolidated Audit Trail related to Small
Industry Members (Feb. 3, 2020).
\27\ See Securities Exchange Act Release No. 88703 (April 20,
2020), 85 FR 23115 (April 24, 2020).
---------------------------------------------------------------------------
As a result, the Exchange proposes to amend its Compliance Rule to
adopt a definition of ``Introducing Industry Member'' and to revise
Rule 11.695 to require Introducing Industry Members to comply with the
requirements of the CAT NMS Plan applicable to Small Industry Members.
Specifically, the Exchange proposes to define ``Introducing Industry
Member'' in proposed paragraph (v) to Rule 11.610, as ``a broker-dealer
that does not qualify as a Small Industry Member solely because such
broker-dealer satisfies Rule 0-10(i)(2) under the Exchange Act in that
it introduces transactions on a fully disclosed basis to clearing firms
that are not small businesses or small organizations.'' The Exchange
also proposes to add a new paragraph (3) to Rule 11.695(c) to state
that ``Introducing Industry Members must comply with the requirements
of the CAT NMS Plan applicable to Small Industry Members.'' With these
changes, Introducing Industry Members would be required to comply with
the requirements in the CAT NMS Plan applicable to Small Industry
Members, rather than the requirements in the CAT NMS Plan applicable to
Large Industry Members.
vi. CCID/PII
On January 29, 2020, the Participants filed with the Commission a
request for exemptive relief from certain requirements related to
reporting SSNs, dates of birth and account numbers to the CAT.\28\ The
Commission, Participants and others indicated security concerns with
maintaining such sensitive Customer information in the CAT. On March
17, 2020, the Participants received the exemptive relief, subject to
certain conditions.\29\ Assuming the Participants comply with the
conditions set forth in the PII Exemption Order, Industry Members would
not be required to report SSNs, dates of birth and account numbers to
the CAT NMS Plan.
---------------------------------------------------------------------------
\28\ See Letter to Vanessa Countryman, Secretary, SEC, from
Michael Simon, CAT NMS Plan Operating Committee Chair, re: Request
for Exemptive Relief from Certain Provisions of the CAT NMS Plan
related to Social Security Numbers, Dates of Birth and Account
Numbers (Jan. 29, 2020).
\29\ See Securities Exchange Act Release No. 88393 (March 17,
2020), 85 FR 16152 (March 20, 2020) (Order Granting Conditional
Exemptive Relief, Pursuant to Section 36 and Rule 608(e) of the
Securities Exchange Act of 1934, from Section 6.4(d)(ii)(C) and
Appendix D Sections 4.1.6, 6.2, 8.1.1, 8.2, 9.1, 9.2, 9.4, 10.1, and
10.3 of the National Market System Plan Governing the Consolidated
Audit Trail) (``PII Exemption Order''). The PII Exemption Order
lists several conditions that must be met by the Exchange. If the
Exchange does not satisfy the conditions, the PII Exemption Order
would not apply to the Exchange.
---------------------------------------------------------------------------
As described in the request for exemptive relief, the Participants
requested exemptive relief to allow for an alternative approach to
generating a CAT Customer ID (``CCID'') without requiring Industry
Members to report SSNs to the CAT (the ``CCID Alternative''). In lieu
of retaining such SSNs in the CAT, the Participants would use the CCID
Alternative, a strategy developed by the Chief Information Security
Officer for the CAT and the Chief Information Security Officers from
each of the Participants, in consultation with security experts from
member firms of Securities Industry and Financial Markets Association.
The CCID Alternative facilitates the ability of the Plan Processor to
generate a CCID without requiring the Plan Processor to receive SSNs or
store SSNs within the CAT. Under the CCID Alternative, the Plan
Processor would generate a unique CCID using a two-phase transformation
process that avoids having SSNs reported to or stored in the CAT. In
the first transformation phase, a CAT Reporter would transform the SSN
to an interim value (the ``transformed value''). This transformed
value, and not the SSN, would be submitted to a separate system within
the CAT (``CCID Subsystem''). The CCID Subsystem would then perform a
second transformation to create the globally unique CCID for each
Customer that is unknown to, and not shared with, the original CAT
Reporter. The CCID would then be sent to the customer and account
information system of the CAT, where it would be linked with the other
customer and account information. The CCID may then be used by the
Participants' regulatory staff and the SEC in queries and analysis of
CAT Data. To implement the CCID Alternative, the Participants requested
exemptive relief from the requirement in Section 6.4(d)(ii)(C) of the
CAT NMS Plan to require, through their Compliance Rules, Industry
Members to record and report SSNs to the Central Repository for the
original receipt of an order. As set forth in one condition of the PII
Exemption Order, Industry Members would be required to transform an SSN
to an interim value, and report the transformed value to the CAT.
[[Page 38458]]
The Participants also requested exemptive relief to allow for an
alternative approach which would exempt the reporting of dates of birth
and account numbers \30\ to the CAT (``Modified PII Approach''), and
instead would require Industry Members to report the year of birth and
the Firm Designated ID for each trading account associated with the
Customers. To implement the Modified PII Approach, the Participants
requested exemptive relief from the requirement in Section
6.4(d)(ii)(C) of the CAT NMS Plan to require, through their Compliance
Rules, Industry Members to record and report to the Central Repository
for the original receipt of an order dates of birth and account numbers
for Customers. As conditions to the exemption, Industry Members would
be required to report the year of birth of an individual to the Central
Repository, and to report the Firm Designated ID to the Central
Repository.
---------------------------------------------------------------------------
\30\ With respect to this aspect of the requested relief, the
PII Exemption Order provided relief with regard to the reporting of
all account numbers, not just account numbers for individuals as
requested by the Participants.
---------------------------------------------------------------------------
To implement the request for exemptive relief and to eliminate the
requirement to report SSNs, date of birth and account numbers to the
CAT, the Exchange proposes to amend its Compliance Rule to reflect the
exemptive relief. Rule 11.630(a)(2)(C) \31\ states that
---------------------------------------------------------------------------
\31\ Due to a clerical error, LTSE Rule 11.630(a)(2)(C) is
designated as Rule 11.630(a)(2)(B)(ii). This has been corrected in
the proposed rule change to provide format consistency with the
rules of the other Plan Participants.
[s]ubject to paragraph (3) below, each Industry Member shall record
and report to the Central Repository the following, as applicable
(``Received Industry Member Data'' and collectively with the
information referred to in Rule 11.630(a)(1) ``Industry Member
Data'')) in the manner prescribed by the Operating Committee
pursuant to the CAT NMS Plan: . . . (C) for original receipt or
origination of an order, the Firm Designated ID for the relevant
Customer, and in accordance with Rule 11.640, Customer Account
Information and Customer Identifying Information for the relevant
---------------------------------------------------------------------------
Customer.
Similarly, Rule 11.640 requires the reporting of Customer Account
Information and Customer Identifying Information to the Central
Repository. Currently, Rule 11.610(m) defines ``Customer Identifying
Information'' to include, with respect to individuals, ``date of
birth'' and ``individual tax payer identification number (``ITIN'')/
social security number (``SSN'').'' Accordingly, the Exchange proposes
to replace ``date of birth'' in the definition of ``Customer
Identifying Information'' in Rule 11.610(m) (now renumbered Rule
11.610(n)) with ``year of birth'' and to delete ``individual tax payer
identification number (``ITIN'')/social security number (``SSN'')''
from Rule 11.610(m) (now renumbered Rule 11.610(n)). In addition,
currently, Rule 11.610(l) defines ``Customer Account Information'' to
include account numbers. The Exchange proposes to delete ``account
number'' from the definition of ``Customer Account Information'' in
Rule 11.610(l) (now renumbered Rule 11.610(m)).
The Exchange also proposes to add a definition of the term
``Transformed Value for individual tax payer identification number
(``ITIN'')/social security number (``SSN'')'' to Rule 11.610.
Specifically, the Exchange proposes to add paragraph (pp) to Rule
11.610 to define ``Transformed Value for individual tax payer
identification number (``ITIN'')/social security number (``SSN'')'' to
mean ``the interim value created by an Industry Member based on a
Customer ITIN/SSN.''
The Exchange proposes to revise Rule 11.630(a)(2)(C) to include the
Transformed Value for individual tax payer identification number
(``ITIN'')/social security number (``SSN''). Specifically, the Exchange
proposes to revise Rule 11.630(a)(2)(C) to state:
[s]ubject to paragraph (3) below, each Industry Member shall record
and report to the Central Repository the following, as applicable
(``Received Industry Member Data'' and collectively with the
information referred to in Rule 11.630(a)(1) ``Industry Member
Data'')) in the manner prescribed by the Operating Committee
pursuant to the CAT NMS Plan: . . . (C) for original receipt or
origination of an order, the Firm Designated ID for the relevant
Customer, Transformed Value for individual tax payer identification
number (``ITIN'')/social security number (``SSN''), and in
accordance with Rule 11.640, Customer Account Information and
Customer Identifying Information for the relevant Customer.
The Exchange also proposes to include the Transformed Value for
individual tax payer identification number (``ITIN'')/social security
number (``SSN'') in the Customer information reporting required under
Rule 11.640. Specifically, the Exchange proposes to revise Rule
11.640(a) to require each Industry Member to submit to the Central
Repository the Transformed Value for individual tax payer
identification number (``ITIN'')/social security number (``SSN''), for
each of its Customers with an Active Account prior to such Industry
Member's commencement of reporting to the Central Repository and in
accordance with the deadlines set forth in Rule 11.680. The Exchange
also proposes to revise Rule 11.640(b) to require each Industry Member
to submit to the Central Repository any updates, additions or other
changes to the Transformed Value for individual tax payer
identification number (``ITIN'')/social security number (``SSN'') for
each of its Customers with an Active Account on a daily basis. In
addition, the Exchange proposes to revise Rule 11.640(c) to require, on
a periodic basis as designated by the Plan Processor and approved by
the Operating Committee, each Industry Member to submit to the Central
Repository a complete set of the Transformed Value for individual tax
payer identification number (``ITIN'')/social security number (``SSN'')
for each of its Customers with an Active Account. The Exchange also
proposes to revise Rule 11.640(d) to require, for each Industry Member
for which errors in the Transformed Value for individual tax payer
identification number (``ITIN'')/social security number (``SSN'') for
each of its Customers with an Active Account submitted to the Central
Repository have been identified by the Plan Processor or otherwise,
such Industry Member to submit corrected data to the Central Repository
by 5:00 p.m. Eastern Time on T+3.
Paragraph (1)(B) of Rule 11.610(m), the definition of ``Customer
Account Information'' states that ``in those circumstances in which an
Industry Member has established a trading relationship with an
institution but has not established an account with that institution,
the Industry Member will'' . . . ``provide the relationship identifier
in lieu of the ``account number.'' As an account number will no longer
be an element in ``Customer Account Information,'' the relationship
identifier used in lieu of the account number will no longer be
required as an element of Customer Account Information. Therefore, the
Exchange proposes to delete the requirement set forth in Rule
11.610(m)(a)(B) regarding relationship identifiers from Rule 11.610(m).
With these changes, Industry Members would not be required to
report to the Central Repository dates of birth, SSNs or account
numbers pursuant to Rule 11.630(a)(2)(C). However, Industry Members
would be required to report the Transformed Value for individual tax
payer identification number (``ITIN'')/social security number (``SSN'')
and the year of birth to the Central Repository.\32\
---------------------------------------------------------------------------
\32\ The Exchange anticipates that the Compliance Rule may be
further amended when further details regarding the CCID Alternative
are finalized.
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[[Page 38459]]
vii. FINRA Facility Data Linkage
On June 5, 2020, the Participants filed with the Commission a
request for exemptive relief from certain provisions of the CAT NMS
Plan to allow for an alternative approach to the reporting of clearing
numbers and cancelled trade indicators.\33\ The SEC provided this
exemptive relief on June 11, 2020.\34\ FINRA is required to report to
the Central Repository data collected by FINRA's Trade Reporting
Facilities, FINRA's OTC Reporting Facility or FINRA's Alternative
Display Facility (collectively, ``FINRA Facility'') pursuant to
applicable SRO rules (``FINRA Facility Data''). Included in this FINRA
Facility Data is the clearing number of the clearing broker for a
reported trade as well as the cancelled trade indicator. Under this
alternative approach, the clearing number and the cancelled trade
indicator of the FINRA Facility Data that is reported to the CAT would
be linked to the related execution reports reported by Industry
Members. To implement this approach in a phased manner, the
Participants received exemptive relief from the requirement in Sections
6.4(d)(ii)(A)(2) and (B) of the CAT NMS Plan to require, through their
Compliance Rules, that Industry Members record and report to the
Central Repository: (1) If the order is executed, in whole or in part,
the SRO-Assigned Market Participant Identifier of the clearing broker,
if applicable; and (2) if the trade is cancelled, a cancelled trade
indicator, subject to certain conditions.
---------------------------------------------------------------------------
\33\ See Letter to Vanessa Countryman, Secretary, SEC, from
Michael Simon, CAT NMS Plan Operating Committee Chair, re: Request
for Exemption from Certain Provisions of the National Market System
Plan Governing the Consolidated Audit Trail related to FINRA
Facility Data Linkage (June 5, 2020).
\34\ See Securities Exchange Act Release No. 89051 (June 11,
2020) (Federal Register publication pending).
---------------------------------------------------------------------------
As a condition to this exemption, the Participants would continue
to require Industry Members to submit a trade report for a trade, and,
if the trade is cancelled, a cancellation, to a FINRA Facility pursuant
to applicable SRO rules, and to report the corresponding execution to
the Central Repository. In addition, Industry Members would be required
to report to the Central Repository the unique trade identifier
reported to a FINRA Facility with the corresponding trade report.
Furthermore, if an Industry Member does not submit a cancellation to a
FINRA Facility, or is unable to provide a link between the execution
reported to the Central Repository and the related FINRA Facility trade
report, then the Industry Member would be required to record and report
to the Central Repository a cancelled trade indicator and cancelled
trade timestamp if the trade is cancelled. Similarly, if an Industry
Member does not submit the clearing number of the clearing broker to a
FINRA Facility for a trade, or is unable to provide a link between the
execution reported to the Central Repository and the related FINRA
Facility trade report, then the Industry Member would be required to
record and report to the Central Repository the clearing number as well
as contra party information.
As a result, the Exchange proposes to amend its Compliance Rule to
reflect the exemptive relief to implement this alternative approach.
Specifically, the Exchange proposes to require Industry Members to
report to the CAT with an execution report the unique trade identifier
reported to a FINRA facility with the corresponding trade report. For
example, the unique trade identifier for the OTC Reporting Facility and
the Alternative Display Facility would be the Compliance ID, for the
FINRA/Nasdaq Trade Reporting Facility, it would be the Branch Sequence
Number, and for the FINRA/NYSE Trade Reporting Facility, it would the
FINRA Compliance Number. This unique trade identifier would be used to
link the FINRA Facility Data with the execution report in the CAT.
Specifically, the Exchange proposes to add new paragraph (a)(2)(E) to
Rule 11.630, which states that:
(E) If an Industry Member is required to submit and submits a
trade report for a trade, and, if the trade is cancelled, a
cancellation, to one of FINRA's Trade Reporting Facilities, OTC
Reporting Facility or Alternative Display Facility pursuant to
applicable SRO rules, and the Industry Member is required to report
the corresponding execution and/or cancellation to the Central
Repository:
(1) The Industry Member is required to report to the Central
Repository trade identifier reported by the Industry Member to such
FINRA facility for the trade when the Industry Member reports the
execution of an order pursuant to Rule 11.630(a)(1)(E) or
cancellation of an order pursuant to Rule 11.630(a)(1)(D) beginning
June 22, 2020 for Large Industry Members and Small Industry OATS
Reporters and beginning December 13, 2021 for Small Industry Non-
OATS Reporters, and such trade identifier must be unique beginning
October 26, 2020 for Large Industry Members and Small Industry OATS
Reporters and beginning December 13, 2021 for Small Industry Non-
OATS Reporters.
The Exchange also proposes to relieve Industry Members of the
obligation to report to the CAT data related to clearing brokers and
trade cancellations pursuant to Rules 11.630(a)(2)(A)(ii) and (B),
respectively, as this data will be reported by FINRA to the CAT, except
in certain circumstances. Accordingly, the Exchange proposes new
paragraphs (a)(2)(E)(2) and (3) to Rule 11.630, which would state:
(2) If the order is executed in whole or in part, and the
Industry Member submits the trade report to one of FINRA's Trade
Reporting Facilities, OTC Reporting Facility or Alternative Display
Facility pursuant to applicable SRO rules, the Industry Member is
not required to submit the SRO-Assigned Market Participant
Identifier of the clearing broker pursuant to Rule
11.630(a)(2)(A)(ii); provided, however, if the Industry Member does
not report the clearing number of the clearing broker to such FINRA
facility for a trade, or does not report the unique trade identifier
to the Central Repository as required by Rule 11.630(a)(2)(E)(1),
then the Industry Member would be required to record and report to
the Central Repository the clearing number of the clearing broker as
well as information about the contra party to the trade beginning
April 26, 2021 for Large Industry Members and Small Industry OATS
Reporters and beginning December 13, 2021 for Small Industry Non-
OATS Reporters; and
(3) if the trade is cancelled and the Industry Member submits
the cancellation to one of FINRA's Trade Reporting Facilities, OTC
Reporting Facility or Alternative Display Facility pursuant to
applicable SRO rules, the Industry Member is not required to submit
the cancelled trade indicator pursuant to Rule 11.630(a)(2)(B);
provided, however, if the Industry Member does not report a
cancellation for a canceled trade to such FINRA facility, or does
not report the unique trade identifier as required by
11.630(a)(2)(E)(1), then the Industry Member would be required to
record and report to the Central Repository a cancelled trade
indicator as well as a cancelled trade timestamp beginning June 22,
2020 for Large Industry Members and Small Industry OATS Reporters
and beginning December 13, 2021 for Small Industry Non-OATS
Reporters.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b)(5) of the Act,\35\ which require,
among other things, that the Exchange's rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest, and Section 6(b)(8) of the Act,\36\
which requires that the Exchange's rules not impose any burden on
competition that is not necessary or appropriate.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78f(b)(6).
\36\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Exchange believes that this proposal is consistent with the Act
because it is consistent with certain exemptions from the CAT NMS Plan,
because it facilitates the retirement of
[[Page 38460]]
certain existing regulatory systems, and is designed to assist the
Exchange and its Industry Members in meeting regulatory obligations
pursuant to the Plan. In approving the Plan, the SEC noted that the
Plan ``is necessary and appropriate in the public interest, for the
protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect the mechanism of a
national market system, or is otherwise in furtherance of the purposes
of the Act.'' \37\ To the extent that this proposal implements the
Plan, including the exemptive relief, and applies specific requirements
to Industry Members, the Exchange believes that this proposal furthers
the objectives of the Plan, as identified by the SEC, and is therefore
consistent with the Act.
---------------------------------------------------------------------------
\37\ See Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696, 84697 (November 23, 2016).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 Act. The Exchange
notes that the proposed rule changes are consistent with certain
exemptions from the CAT NMS Plan, facilitate the retirement of certain
existing regulatory systems, and are designed to assist the Exchange in
meeting its regulatory obligations pursuant to the Plan. The Exchange
also notes that the amendments to the Compliance Rules will apply
equally to all Industry Members that trade NMS Securities and OTC
Equity Securities. In addition, all national securities exchanges and
FINRA are proposing these amendments to their Compliance Rules.
Therefore, this is not a competitive rule filing, and, therefore, it
does not impose a burden on competition.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \38\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\39\
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\38\ 15 U.S.C. 78s(b)(3)(A)(iii).
\39\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and the text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \40\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\41\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative by June 22, 2020. The Commission believes that
waiver of the 30-day operative delay is consistent with the protection
of investors and the public interest because it implements exemptive
relief from the CAT NMS Plan granted by the Commission and facilitates
the start of Industry Member reporting on June 22, 2020. In addition,
as noted by the Exchange, the proposed rule change is based on a filing
recently approved by the Commission.\42\ Accordingly, the Commission
waives the 30-day operative delay and designates the proposed rule
change operative as of June 22, 2020.\43\
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\40\ 17 CFR 240.19b-4(f)(6).
\41\ 17 CFR 240.19b-4(f)(6)(iii).
\42\ See Securities Exchange Act Release No. 89108 (June 19,
2020).
\43\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-LTSE-2020-09 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-LTSE-2020-09. 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 website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-LTSE-2020-09 and should be submitted on
or before July 17, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13767 Filed 6-25-20; 8:45 am]
BILLING CODE 8011-01-P