Notice2021-13784
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Retirement of FINRA's Order Audit Trail System
Primary source
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Published
June 29, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 122 (Tuesday, June 29, 2021)</title>
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[Federal Register Volume 86, Number 122 (Tuesday, June 29, 2021)]
[Notices]
[Pages 34293-34298]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13784]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92239; File No. SR-FINRA-2021-017]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to the Retirement of FINRA's Order Audit
Trail System
June 23, 2021.
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 17, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. FINRA has
filed the proposal under paragraph (f)(6) of Rule 19b-4 under the
Act,\3\ which renders the proposal effective upon receipt of this
filing by the Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is filing a proposed rule change setting forth the basis for
its determination that the accuracy and reliability of the Consolidated
Audit Trail (``CAT'') meet the standards approved by the Commission in
SR-FINRA-2020-024 for purposes of eliminating the Order Audit Trail
System (``OATS'') rules in the FINRA Rule 7400 Series and FINRA Rule
4554 (Alternative Trading Systems--Recording and Reporting Requirements
of Order and Execution Information for NMS Stocks) (collectively
referred to herein as the ``OATS Rules''). The proposed rule change
also updates cross-references within FINRA rules to reflect the
elimination of the OATS Rules.
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On August 14, 2020, FINRA filed with the Commission a proposed rule
change to delete the OATS Rules once members are effectively reporting
to the CAT (the ``OATS Retirement Filing'').\4\ On October 29, 2020,
FINRA filed Amendment No. 1 to the proposed rule change (``Amendment
No. 1'') and a response to the comments that were submitted on the
original filing (``Response to Comments'').\5\ On November 30, 2020,
the Commission approved the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.\6\
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\4\ See Securities Exchange Act Release No. 89679 (August 26,
2020), 85 FR 54461 (September 1, 2020) (Notice of Filing of File No.
SR-FINRA-2020-024).
\5\ See Letter from Lisa C. Horrigan, Associate General Counsel,
FINRA, to Vanessa Countryman, Secretary, Commission, dated October
29, 2020.
\6\ See Securities Exchange Act Release No. 90535 (November 30,
2020), 85 FR 78395 (December 4, 2020) (Notice of Filing of Amendment
No. 1 and Order Granting Accelerated Approval of SR-FINRA-2020-024).
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In the OATS Retirement Filing, FINRA proposed to eliminate the OATS
Rules once members are effectively reporting to the CAT and the CAT's
accuracy and reliability meet certain standards. Specifically, FINRA
proposed that before OATS could be retired, the CAT generally must
achieve a sustained error rate for Industry Member \7\ reporting in
five categories for a period of at least 180 days of 5% or lower on a
pre-correction basis, and 2% or lower on a post-correction basis
(measured at T+5). In addition to the maximum error rates and matching
thresholds, FINRA's use of CAT Data must confirm that (i) there are no
material issues that have not been corrected, (ii) the CAT includes all
data necessary to allow FINRA to continue to meet its surveillance
obligations, and (iii) the Plan Processor is sufficiently meeting its
obligations under the CAT NMS Plan relating to the reporting and
linkage of Phase 2a Industry Member Data.
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\7\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the CAT Compliance Rule
Series or in the National Market System Plan Governing the
Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'') that
FINRA and the national securities exchanges (collectively, the
``Participants'') filed with the Commission, pursuant to Section 11A
of the Exchange Act and Rule 608 of Regulation NMS thereunder. See
Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR
84696 (November 23, 2016) (``Approval Order'').
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In the OATS Retirement Filing, FINRA explained that its review of
CAT Data and error rates would be based on data and linkages in the
initial phase of reporting (or ``Phase 2a''), which replicate the data
in OATS today and thus are most relevant for OATS retirement purposes.
Phase 2a Data includes all events and scenarios covered by OATS and
applies only to equities. FINRA will not consider options order events
or Phase 2c data and validations, which are not in OATS today, for
purposes of OATS retirement.
As described below, FINRA has determined that the CAT meets the
accuracy and reliability standards approved by the Commission in the
OATS Retirement Filing.
(A) Maximum Error Rates
As discussed in the OATS Retirement Filing, FINRA believes that
relevant error rates are the primary, but not the sole, metric by which
to determine the CAT's accuracy and reliability and will serve as the
baseline requirement needed before OATS can be retired. FINRA proposed
that, before OATS could be retired, the CAT would generally need to
achieve a sustained error rate for Industry Member reporting in five
categories for a period of at least 180 days of 5% or lower, measured
on a pre-correction or as-submitted basis, and 2% or lower on a post-
correction basis (measured at T+5).\8\ FINRA proposed to average the
error rates across the period, rather than require a 5% pre-correction
and 2% post-correction maximum each day for 180
[[Page 34294]]
consecutive days. FINRA also proposed to measure the error rates in the
aggregate, rather than on a firm-by-firm basis. Finally, FINRA proposed
to measure the error rates separately for each of the five categories,
rather than evaluate all categories in the aggregate. As noted above,
FINRA's assessment of the error rates for Industry Member reporting is
based solely on Phase 2a CAT reporting for equity events since options
orders are not included in OATS today.
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\8\ As clarified in the OATS Retirement Filing, although FINRA
does not believe that post-correction errors need to be de minimis
before OATS can be retired, FINRA was not suggesting, with the
proposal, that 2% would meet the ultimate objective of de minimis
error rates for CAT. See CAT NMS Plan, Appendix C, note 102 (error
rates after reprocessing of error corrections are ultimately
expected to be de minimis for the CAT).
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FINRA measured the error rates in each of the five categories
discussed below during the period from October 26, 2020 through April
26, 2021 (the ``applicable period''). FINRA commenced this period on
October 26, 2020, which was the date that Industry Members were
required to begin correcting all errors for inter-firm linkages and
exchange/TRF/ORF match validations. As discussed in the Response to
Comments, although the production environment for inter-firm linkage
and exchange/TRF/ORF match validations was open for testing as of
September 28, 2020, FINRA does not believe it would be appropriate for
the 180-day period to commence prior to the October 26, 2020 compliance
date.\9\
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\9\ See FINRA's Response to Comments, supra note 5.
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Rejection Rates and Data Validations. As described in the OATS
Retirement Filing, the Plan Processor must perform certain basic data
validations,\10\ and if a record does not pass these basic data
validations, it must be rejected and returned to the CAT Reporter to be
corrected and resubmitted. FINRA proposed that over the 180-day period,
aggregate rejection rates must be no more than 5% pre-correction or 2%
post-correction across all Industry Member Reporters. FINRA has
determined that, over the applicable period, aggregate rejection rates
across all Industry Member Reporters were 0.03% pre-correction and
0.01% post-correction.
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\10\ Appendix D of the CAT NMS Plan, Section 7.2, for example,
requires that certain file validations (e.g., file transmission and
receipt are in the correct formats, confirmation of a valid SRO-
Assigned Market Participant Identifier, etc.), and syntax and
context checks (e.g., format checks, data type checks, consistency
checks, etc.) be performed on all submitted records.
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Intra-Firm Linkages. As described in the OATS Retirement Filing,
the Plan Processor must be able to link all related order events from
all CAT Reporters involved in the lifecycle of an order. At a minimum,
this requirement includes the creation of an order lifecycle between
all order events handled within an individual CAT Reporter, including
orders routed to internal desks or departments with different functions
(e.g., an internal ATS). FINRA proposed that aggregate intra-firm
linkage rates across all Industry Member Reporters must be at least 95%
pre-correction and 98% post-correction. FINRA has determined that, over
the applicable period, aggregate intra-firm linkage rates across all
Industry Member Reporters were 99.97% pre-correction and 99.99% post-
correction.
Inter-Firm Linkages. As described in the OATS Retirement Filing,
the Plan Processor must be able to create the lifecycle between orders
routed between broker-dealers. FINRA proposed that at least a 95% pre-
correction and 98% post-correction aggregate match rate be achieved for
orders routed between two Industry Member Reporters. FINRA has
determined that during the applicable period there was a 99.08% pre-
correction and 99.84% post-correction aggregate match rate for orders
routed between two Industry Member Reporters.
Order Linkage Rates. As described in the OATS Retirement Filing, in
addition to creating linkages within and between broker-dealers, the
Plan Processor must be able to create lifecycles to link various pieces
of related orders. For example, the Plan requires linkages of order
information to create an order lifecycle from origination or receipt to
cancellation or execution. This category essentially combines all of
the order-related linkages to capture an overall snapshot of order
linkages in the CAT.\11\ FINRA proposed that there be at least a 95%
pre-correction and 98% post-correction rate for order linkages that are
required in Phase 2a. FINRA has determined that during the applicable
period there was a 99.66% pre-correction and 99.93% post-correction
rate for order linkages required in Phase 2a.\12\
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\11\ See FINRA's Response to Comments, supra note 5.
\12\ FINRA notes that in Phase 2a, linkage is required between
the representative street side order and the order being represented
when the representative order was originated specifically to
represent a single order (received either from a customer or another
broker-dealer) and there is: (1) An existing direct electronic link
in the firm's system between the order being represented and the
representative order, and (2) any resulting executions are
immediately and automatically applied to the represented order in
the firm's system. As set forth in the OATS Retirement Filing, while
such linkages are not required in OATS, FINRA believes that it is
appropriate to evaluate them for purposes of retiring OATS because
they represent a significant enhancement to the data currently
available in OATS and will enhance the quality of the equity audit
trail. However, FINRA also explained in the Response to Comments
that if all other proposed criteria have been met, FINRA would not
anticipate delaying OATS retirement based on Phase 2a representative
order linkage error rates alone.
In evaluating whether the standards for OATS retirement have
been met, FINRA has determined that the error rates for the Phase 2a
representative order linkages did not have a significant negative
impact on the overall error rates for order linkages. Accordingly,
FINRA did not need to separately evaluate or exclude Phase 2a
representative order linkage rates in measuring the error rates over
the applicable period. For example, if the intra-firm linkage error
rate had been above 5% over the applicable period, FINRA would have
evaluated whether the error rate was the result of unlinked
representative orders to create an apples-to-apples comparison to
OATS.
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Exchange and TRF/ORF Match Rates. As described in the OATS
Retirement Filing, an order lifecycle must be created to link orders
routed from broker-dealers to exchanges and executed orders and trade
reports. FINRA proposed at least a 95% pre-correction and 98% post-
correction aggregate match rate across all equity exchanges \13\ for
orders routed from Industry Members to an exchange and, for over-the-
counter executions, the same match rate for orders linked to trade
reports. FINRA has determined that, during the applicable period, there
was a 99.51% pre-correction and 99.87% post-correction aggregate match
rate across all equity exchanges for orders routed from Industry
Members to an exchange and, for over-the-counter executions, there was
a 99.34% pre-correction and 99.53% post-correction rate for orders
linked to trade reports submitted to the FINRA Trade Reporting
Facilities and OTC Reporting Facility.
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\13\ See Amendment No. 1.
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As set forth above, the error rates for Industry Member reporting
over the applicable period were well below the maximum rates
established in the OATS Retirement Filing. FINRA also notes that the
overall post-correction error rate for Phase 2a Industry Member
reporting of 1.01% is comparable to the current overall OATS post-
correction error rate, which generally is at or slightly below 1%.
Therefore, FINRA has determined that, based on the error rates for
Industry Member reporting, the CAT Data meets the accuracy and
reliability baseline standards required for OATS retirement.
(B) FINRA's Use of CAT Data
In the OATS Retirement Filing, FINRA stated that while error rates
are a key standardized measure in determining whether OATS retirement
is appropriate, FINRA's use of the data in the CAT also must confirm
that (i) there are no material issues that have not been corrected
(e.g., delays in the processing of data, issues with query functions,
etc.), (ii) the CAT includes all data necessary to allow FINRA to
[[Page 34295]]
continue to meet its surveillance obligations, and (iii) the Plan
Processor is sufficiently meeting its obligations under the CAT NMS
Plan relating to the reporting and linkage of Phase 2a Data.
FINRA has been planning for OATS retirement for several years and
the necessary development work has been underway for some time. FINRA
also has been analyzing and testing production CAT Data for purposes of
transitioning its automated equity surveillance patterns since the
commencement of Phase 2a Industry Member reporting in June 2020 and
through subsequent CAT milestone releases. For example, in addition to
quantitative reviews, such as the error rate statistics discussed
above, FINRA has conducted a series of qualitative reviews of Industry
Member CAT Data. Such reviews include, among other things, comparing
the count and distribution of Industry Member event reporting through
CAT versus OATS (e.g., new order and execution events, and data
elements such as buy/sell/sell short codes), and reviewing results of
examinations, alert reviews, and investigations relating to the
timeliness and accuracy of Industry Member reporting. Based on such
qualitative data reviews, FINRA has concluded that Industry Member CAT
Data, in the aggregate, is a sufficient replacement for OATS for
purposes of FINRA's surveillance program.
Today, FINRA's surveillance patterns rely on the cross-market data
model (``CMDM''), which comprises linked OATS data, equity exchange
data feeds from each of the exchanges with which FINRA has entered into
a regulatory service agreement (``RSA''), and transactions reported to
FINRA's equity trade reporting facilities. The CMDM will be retired and
replaced by a newly created surveillance data mart, the Pattern
Optimized Datamart (``POD''), which incorporates both equities and
options data. At that point, FINRA's patterns will rely on CAT Data in
POD, i.e., Plan Participant and Industry Member data reported in CAT
format and linked by CAT.\14\ FINRA notes that the Plan Participants
transitioned to reporting via the CAT technical specification as of
April 26, 2021, and full Plan Participant equities reporting and
linkage validations in accordance with the CAT specification commenced
on June 1, 2021.\15\ Successful completion of the transition to the CAT
specification for Plan Participants is a prerequisite for FINRA to
retire the CMDM and leverage CAT Data and linkages in POD for its
surveillance patterns. As of the date of this filing, FINRA has
completed all planned activities on schedule, including substantially
completing the process of integrating CAT Data into POD and
successfully running large amounts of production CAT Data for the month
of May through POD.\16\ FINRA anticipates completing additional
activities before the proposed OATS retirement date of September 1,
2021, including, e.g., planned user acceptance testing.\17\
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\14\ FINRA's Response to Comments noted this dependency, stating
that the process of transitioning FINRA's surveillance patterns to
CAT Data necessarily includes, among other things, ingestion of all
Industry Member and Plan Participant data and linkages in CAT
format. See Response to Comments, supra note 5, at 4. The Response
to Comments further noted that the Plan Participants would be
reporting to CAT via another mechanism until April 2021.
\15\ For example, according to the CAT Reporting Technical
Specification for Plan Participants (version 4.0.0-r4 dated April
20, 2021), additional linkage error feedback for off-exchange trade
reports was effective as of June 1, 2021. The Technical
Specifications can be found on the CAT NMS Plan website at
<a href="http://www.catnmsplan.com/sites/default/files/2021-04/04.20.2021-CAT-Reporting-Technical-Specifications-for-Participants-4.0.0-r4.pdf">www.catnmsplan.com/sites/default/files/2021-04/04.20.2021-CAT-Reporting-Technical-Specifications-for-Participants-4.0.0-r4.pdf</a>.
\16\ FINRA notes that additional POD releases are scheduled;
however, these releases introduce minor enhancements to POD, as
opposed to significant changes that would impact the way data is
ingested or processed in POD.
\17\ FINRA notes that user acceptance testing is the final stage
of any software development life cycle and enables actual users to
test the system to confirm that it is able to carry out the required
tasks it was designed to address in real-world situations.
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FINRA has performed broad analysis of its equity surveillance
patterns and has determined that all of the data required to support
the transition is available in CAT. By mapping OATS data to Industry
Member CAT Data in POD, FINRA has confirmed that CAT Data has
equivalent analogs to all data elements in OATS. In that regard, FINRA
notes that, as a Plan Participant, FINRA has been involved in CAT
development efforts to ensure that the scope and features of Industry
Member data and processed output are sufficient for FINRA's
surveillance program. These efforts include, for example, developing
and updating the Industry Member Technical Specifications and Reporting
Scenarios, conducting OATS-CAT gap analyses and validating that all
such gaps have been properly addressed, and performing OATS-to-CAT
field-level mappings.
With respect to Plan Participant data, FINRA notes that the test
environment for Plan Participant reporting in accordance with the CAT
specification opened on February 15, 2021.\18\ Plan Participant equity
reporting in accordance with the CAT specification in the test
environment had a very high compliance rate for data ingestion and
validation, and compliance in the production environment is comparable.
In addition, starting on April 26, 2021, CAT began linking copies of
Industry Member and Plan Participant data reported via the CAT
specification in a test environment, and at that point, FINRA began its
evaluation of the quality of these linkages. Based on this review and
evaluation, FINRA believes that the linkages between Plan Participant
data and Industry Member data in CAT are comparable to the linkages
between RSA exchange data and OATS data in the CMDM today.\19\ FINRA
CAT and the Plan Participants have now met the necessary criteria for a
full cutover from the RSA specification to the CAT specification,
including, e.g., achieving comparable data ingestion validation and
inter-venue linkage rates (within a variance of under one percent)
between RSA and CAT specification submissions. Accordingly, the
Operating Committee approved the cutover from the RSA specification to
the CAT specification as the official source of Plan Participant data
as of June 1, 2021, and today, all Industry Member and Plan Participant
equities data reported via the CAT specification is linked in the CAT
production environment.
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\18\ See, e.g., CAT Q1 2021 Quarterly Progress Report dated
April 30, 2021, available at <a href="http://www.catnmsplan.com/sites/default/files/2021-05/CAT-Q1-2021-QPR.pdf">www.catnmsplan.com/sites/default/files/2021-05/CAT-Q1-2021-QPR.pdf</a>.
\19\ FINRA notes that the CAT uses the same code in both the
test and production environments. Thus, FINRA believes that linkages
in the test environment are reliable indicators of linkages in the
production environment.
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FINRA continues to evaluate CAT Data quality, and in particular,
linkages between Industy Member and Plan Participant data, and to test
its surveillance patterns to run on CAT Data in POD. In that regard,
FINRA notes that it has followed established and time-tested processes
and protocols throughout the development process to ensure that its
patterns will perform as expected and produce the necessary output
using CAT Data following the retirement of OATS. For example, FINRA's
Software Development Lifecycle (``SDLC'') procedures govern systems
design, changes, testing and controls. The SDLC procedures are an
essential component of FINRA's operations and have been developed to
serve FINRA's unique regulatory needs and structure. Additionally,
consistent with SEC Regulation SCI, FINRA procedures include a plan of
coordination and communication with regulatory staff. By relying on
these established processes and protocols, FINRA has confidence that
the CAT Data and linkages are reliable and
[[Page 34296]]
sufficient to run FINRA's surveillance patterns.
As an added measure, FINRA ran a sample of its pattern portfolio
using both OATS and production CAT Data for a short period following
implementation of additional Plan Participant linkage validations and
compared the pattern outputs. Specifically, FINRA ran several
surveillance patterns and processes against legacy-sourced data (OATS/
RSA) and against CAT-sourced data. The patterns processed end-to-end
with significant alignment and no unexplained anomalous results. Any
differences in output between a pattern run with legacy data versus CAT
Data were appropriate, given differences in pattern logic as well as
enhanced data available through CAT, e.g., representative order
linkages. FINRA believes that this sample has provided sufficient
evidence that FINRA will be able to integrate all surveillance patterns
to run on CAT Data. Based on these results, as well as the results of
its quantitative and qualitative reviews of CAT Data and successful
efforts integrating CAT Data into POD, FINRA believes that the complete
portfolio of equity surveillance patterns will be capable of consuming
CAT Data and achieving comparable (or better) output results.
Thus, FINRA proposes to retire OATS in accordance with the schedule
set forth herein. FINRA will run its surveillance patterns for review
periods through the end of the second quarter of 2021 using OATS data
and begin using--and be fully reliant on--CAT Data for its surveillance
patterns for review periods beginning in the third quarter of 2021.
Following the retirement of OATS, FINRA expects to maintain the current
established cadence of its monthly, quarterly and semi-annual
surveillance patterns. In addition, FINRA's analytics platforms will
have access to CAT Data as soon as such data is made available to
regulators. Thus, outside of regularly scheduled surveillance pattern
runs, FINRA can perform expedited analytics, as required by market
events.
FINRA is finalizing the development and certification of its
surveillance patterns to run on CAT Data on a rolling basis and, in
accordance with its existing SDLC procedures, will run a month's worth
of data and compare the output before certifying each pattern. For
those equity patterns that will be subject to certification after OATS
retirement, FINRA anticipates that there would be sufficient time to
identify and remediate any issues prior to running the patterns in
accordance with the current established cadence. FINRA does not
anticipate significant issues arising from additional scheduled POD
releases or in the final stages of its pattern development and
certification efforts. FINRA bases this belief on years of experience
with other large technology rollouts that have been executed in
accordance with FINRA's SDLC procedures. In such instances, recourse to
the legacy system was neither available nor required.
On an ongoing basis following the retirement of OATS, FINRA will
conduct regular reviews to ensure confidence in the completeness and
accuracy of Industry Member reporting, along with the ability to
remediate any issues in a timely manner. Among other things, FINRA has
a robust mechanism for detecting data issues, determining which issues
are material for purposes of its surveillance program, and requesting
resubmission and/or reprocessing of data, as necessary. FINRA also (1)
performs a suite of data quality checks against data sourced from CAT
to POD and against data processed by POD for use in surveillance
patterns; (2) oversees a robust surveillance and examination compliance
program that evaluates Industry Member reporting timeliness, data
quality, and other issues and trends; (3) reviews CAT compliance
program alerts using a rapid remediation process and formal reviews, as
necessary; and (4) reviews Industry Member self-reporting and error
correction trends. FINRA believes that these practices are sufficient
for identification and timely resolution of Industry Member reporting
and data issues after OATS has been retired.
Specifically with regard to the additional standards approved in
the OATS Retirement Filing, through its use of CAT Data to date, as
described above, FINRA believes that these standards have been
satisfied. With respect to the first factor, FINRA does not believe
that there are any material issues that have not been corrected (or
could not be corrected in the course of operation of CAT, as approved
by the Operating Committee) \20\ that would impact FINRA's ability to
incorporate and use CAT Data in FINRA's surveillance program. For
example, the Plan requires that raw unprocessed data that has been
ingested by the Plan Processor must be available to Participant
regulatory staff and the SEC prior to 12:00 p.m. Eastern Time on T+1,
and access to all iterations of processed data must be available to
Participant regulatory staff and the SEC between 12:00 p.m. Eastern
Time on T+1 and T+5.\21\ The Plan Processor also must ensure that
regulators have access to corrected and linked order data by 8:00 a.m.
Eastern Time on T+5.\22\ Additionally, after ingestion by the Central
Repository, the raw unprocessed data must be transformed into a format
appropriate for data querying and regulatory output.\23\ The user-
defined direct queries and bulk extracts must provide authorized users
with the ability to retrieve CAT Data via a query tool or language that
allows users to query all available attributes and data sources.\24\
FINRA's use of the CAT Data has not uncovered any processing delays or
other material issues impacting the availability of, and FINRA's access
to, the data.
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\20\ FINRA notes that FINRA CAT tracks known issues relating to
Industry Member and Plan Participant reporting. See, e.g.,
<a href="http://catnmsplan.com/CAT-Transaction-Known-Issues-List">catnmsplan.com/CAT-Transaction-Known-Issues-List</a>. FINRA regularly
reviews and analyzes FINRA CAT's list of current and resolved issues
and does not believe that any of these issues would impact its
ability to incorporate and use CAT Data in its surveillance program.
\21\ See CAT NMS Plan, Appendix D, Section 6.2.
\22\ See CAT NMS Plan, Appendix C, Section A.2(a).
\23\ See CAT NMS Plan, Appendix C, Section A.1(b).
\24\ See CAT NMS Plan, Section 6.10(c).
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With respect to the second factor, FINRA believes that the CAT
includes all data necessary for FINRA to meet its surveillance
obligations after the retirement of OATS. FINRA must ensure that the
CAT, as the single source of order and trade data, can enable FINRA to
conduct accurate and effective market surveillance in accordance with
its regulatory obligations.\25\ As noted above, Phase 2a Data includes
all events and scenarios covered by OATS and is the most relevant for
OATS retirement purposes. 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 Members that currently are reporting to OATS
were
[[Page 34297]]
required to submit data to the CAT for these same events and scenarios
commencing in Phase 2a. FINRA's testing, analysis and use of the CAT
Data (including integration into POD), as described above, has
confirmed that the CAT includes all data necessary for FINRA to meet
its surveillance obligations and that CAT is a reliable substitute for
OATS. In addition, based on its qualitative data reviews, FINRA has
concluded that Industry Member CAT Data, in the aggregate, is a
sufficient replacement for OATS for purposes of FINRA's surveillance
program.
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\25\ As discussed in the OATS Retirement Filing, OATS was
originally proposed to fulfill one of the undertakings contained in
an order issued by the Commission relating to the settlement of an
enforcement action against FINRA (f/k/a National Association of
Securities Dealers, Inc. (``NASD'')) for failure to adequately
enforce its rules. See Securities Exchange Act Release No. 39729
(March 6, 1998), 63 FR 12559 (March 13, 1998) (Order Approving File
No SR-NASD-97-56) (``OATS Approval Order''); see also Securities
Exchange Act Release No. 37538 (August 8, 1996); Administrative
Proceeding File No. 3-9056 (``SEC Order''). In the OATS Approval
Order, the Commission concluded that OATS satisfied the conditions
of the SEC Order and was consistent with the Exchange Act. See 63 FR
12559, 12566-67. FINRA believes that it will continue to be in
compliance with the requirements of the SEC Order once the OATS
Rules are deleted.
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With respect to the third factor, FINRA believes that the Plan
Processor is sufficiently meeting its obligations under the CAT NMS
Plan relating to the reporting and linkage of Phase 2a Data. As
detailed in the Implementation Plan and Quarterly Progress Reports
submitted by the Plan Participants, the Plan Processor has met its
targeted completion dates for the milestones for Phase 2a, including,
for example, production Go-Live for Equities 2a file submission and
data integrity validation (Large Industry Members and Small OATS
Reporters) on June 22, 2020; Production Go-Live for Equities 2a
Intrafirm Linkage validations on July 27, 2020; and production go-live
for firm-to-firm linkage validations for equities (Large Industry
Members and Small OATS Reporters) and exchange and TRF/ORF linkage
validations for equities (Large Industry Members and Small OATS
Reporters) on October 26, 2020.\26\
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\26\ The Implementation Plan and Quarterly Progress Reports are
available at <a href="http://www.catnmsplan.com/implementation-plan">www.catnmsplan.com/implementation-plan</a>.
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Based on the foregoing, FINRA has determined that the CAT meets the
accuracy and reliability standards approved by the Commission in the
OATS Retirement Filing for purposes of eliminating the OATS Rules.
FINRA has determined to retire OATS effective September 1, 2021. Firms
must continue to report to OATS all order events that occur on or prior
to August 31, 2021. Reports submitted to OATS for order events that
occur after August 31, 2021 will be rejected. In other words, August
31, 2021 will be the last ``OATS Business Day,'' as defined under Rule
7450(b)(3), for which OATS will accept order events and perform routine
processing (including incorporation of corrections and repairs of
rejections) occurring within the normal OATS timeframe for such
activities. OATS will continue to accept reports for order events that
occur on or prior to August 31, 2021 (including, but not limited to,
late and corrected reports for such order events) through September 16,
2021. Firms must ensure that their OATS reporting is accurate and
complete for all order events that occur on or prior to August 31,
2021. The OATS Rules will be deleted from the FINRA rulebook effective
September 1, 2021.\27\
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\27\ Pursuant to the OATS Retirement Filing, the Commission
approved the deletion of the OATS Rules and the adoption of new
introductory language in Rule 4554 and the Rule 7400 Series to help
alert members of the status of the OATS Rules. The Exhibit 5
attached to this filing is marked to show the deletion of this
introductory language (but is not marked to show the previously
approved deletion of the OATS Rules).
In addition, there are multiple rules throughout the FINRA
rulebook that cross-reference or otherwise incorporate some or all
of the OATS Rules. In this filing, FINRA also is proposing non-
substantive technical changes to delete or amend, as applicable,
such references to the OATS Rules.
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Finally, FINRA notes that as requested by the industry, FINRA has
provided transparency into the process of retiring OATS. For example,
FINRA has provided the industry with monthly status updates \28\ on (1)
the error rates in the categories discussed above, (2) FINRA's
evaluation of the non-error rate factors, (3) a general timeframe for
OATS retirement, and (4) steps for Industry Members to consider in
preparation for the retirement of OATS. Materials for these events are
available on the CAT NMS Plan website.\29\
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\28\ On March 18, 2021, FINRA conducted an industry webinar
addressing OATS retirement issues and informed the industry that
although a formal OATS retirement date had not yet been established,
it would be no earlier than the end of June 2021. Additional monthly
updates were held on April 15, 2021 and May 20, 2021.
\29\ See <a href="http://www.catnmsplan.com/events">www.catnmsplan.com/events</a>. FINRA CAT also provides
regular updates to Industry Members regarding CAT implementation and
compliance during FINRA CAT's Weekly Industry Checkpoint and Monthly
Implementation calls. The statistics provided by FINRA CAT have also
served as a good proxy for progress toward achieving the requisite
error rates for purposes of OATS retirement.
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In light of the foregoing, FINRA believes that retiring OATS as of
September 1, 2021 is appropriate, particularly given the potential
risks of continuing to run OATS and CAT in parallel for an additional
period of time. Such potential risks may include, for example, on an
industry-wide basis: (1) Processing and storage capacity issues from
operating two systems (particularly in the event of extraordinary
market volume); (2) cybersecurity risks from having data flow through
two separate systems for a longer time period; (3) systems issues from
reporting infrastructure that is near end-of-life; and (4) the expense
and burden on CAT Reporters of dual reporting, particularly in the
event of systems issues requiring correction and/or resubmission of
data and competing resource priorities between OATS and CAT reporting
and repair activities.
FINRA has filed the proposed rule change for immediate
effectiveness and has determined to retire OATS effective September 1,
2021. The implementation date of SR-FINRA-2020-024, pursuant to which
the Commission approved the deletion of the OATS Rules, and of this
proposed rule change will be September 1, 2021. FINRA will publish a
Regulatory Notice announcing this implementation date.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\30\ which requires, among
other things, that FINRA 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 15A(b)(9) of the Act,\31\ which requires
that FINRA rules not impose any burden on competition that is not
necessary or appropriate.
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\30\ 15 U.S.C. 78o-3(b)(6).
\31\ 15 U.S.C. 78o-3(b)(9).
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FINRA has determined that the CAT accuracy and reliability
standards approved by the Commission in SR-FINRA-2020-024 have been
satisfied and it is appropriate to retire OATS, which is duplicative in
light of the implementation of CAT. Based on its testing, analysis and
use of CAT Data (including integration of CAT Data into POD), as
described above, FINRA has determined that its surveillance of market
activity will remain accurate and effective and FINRA will be able to
continue to fulfill its statutory obligation to protect investors and
the public interest after the retirement of OATS. Among other things,
FINRA has performed broad analysis of its equity surveillance patterns
and has determined that all of the data required to support the
transition is available in CAT. In addition, based on its qualitative
data reviews, FINRA has concluded that Industry Member CAT Data, in the
aggregate, is a sufficient replacement for OATS for purposes of FINRA's
surveillance program. FINRA also ran a sample of its pattern portfolio
using both OATS and production CAT Data and compared the pattern
outputs. Based on these results, as well as the results of its
quantitative and qualitative reviews of CAT Data and efforts to
integrate CAT Data into POD, FINRA believes that the complete portfolio
of equity surveillance patterns will be capable of consuming CAT Data
and
[[Page 34298]]
achieving comparable (or better) output results.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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. As set forth in the OATS
Retirement Filing, FINRA undertook an economic impact assessment to
analyze the regulatory need for the proposed rule change, its potential
economic impacts, including anticipated costs and benefits, and the
alternatives considered in assessing how to best meet regulatory
objectives. The economic impact assessment discussed the potential
costs and benefits associated with OATS retirement assuming that the
accuracy and reliability standards delineated in the filing were met.
As FINRA has determined that CAT meets or exceeds these standards,
FINRA does not anticipate any additional impacts from retiring OATS.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The OATS Retirement Filing, pursuant to which FINRA proposed the
above-discussed accuracy and reliability standards the CAT would need
to achieve before FINRA could retire OATS, was published for comment on
September 1, 2020.\32\ Three comment letters were submitted in
response,\33\ and on October 29, 2020, FINRA responded to the comment
letters.\34\ The comment letters, as well as FINRA's response to
comments, are available on the Commission's website.
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\32\ See supra note 4.
\33\ See Letters from Howard Meyerson, Managing Director,
Financial Information Forum, to Vanessa Countryman, Secretary,
Commission, dated September 22, 2020; William J. Leahey, Head of
Regulatory Compliance, Refinitiv Wealth Management, to Vanessa
Countryman, Secretary, Commission, dated September 22, 2020; and
Ellen Greene, Managing Director, Securities Industry and Financial
Markets Association, to Vanessa Countryman, Secretary, Commission,
dated September 24, 2020 (``SIFMA'').
\34\ See supra note 5.
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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) of the Act \35\ and Rule 19b-
4(f)(6) thereunder.\36\
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\35\ 15 U.S.C. 78s(b)(3)(A).
\36\ 17 CFR 240.19b-4(f)(6).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e193948d84cc828e8c8c848f9592a1928482cf868e97"><span class="__cf_email__" data-cfemail="b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce">[email protected]</span></a>. Please include
File Number SR-FINRA-2021-017 on the subject line.
Paper Comments
<bullet> 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-FINRA-2021-017. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 FINRA. 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-FINRA-2021-017, and should be submitted
on or before July 20, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13784 Filed 6-28-21; 8:45 am]
BILLING CODE 8011-01-P
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