Notice2022-14982
Order Granting Temporary Conditional Exemptive Relief, Pursuant to Section 36 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 608(e) of Regulation NMS Under the Exchange Act, From Certain Requirements of the National Market System Plan Governing the Consolidated Audit Trail
Primary source
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Published
July 14, 2022
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 87 Issue 134 (Thursday, July 14, 2022)</title>
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[Federal Register Volume 87, Number 134 (Thursday, July 14, 2022)]
[Notices]
[Pages 42247-42257]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-14982]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95234]
Order Granting Temporary Conditional Exemptive Relief, Pursuant
to Section 36 of the Securities Exchange Act of 1934 (``Exchange Act'')
and Rule 608(e) of Regulation NMS Under the Exchange Act, From Certain
Requirements of the National Market System Plan Governing the
Consolidated Audit Trail
July 8, 2022.
I. Introduction
In July 2012, the Securities and Exchange Commission (the
``Commission'' or the ``SEC'') adopted Rule 613 of Regulation NMS,
which required national securities exchanges and national securities
associations (the ``Participants'') \1\ to jointly develop and submit
to the Commission a national market system plan to create, implement,
and maintain a consolidated audit trail (the ``CAT'').\2\ The goal of
Rule 613 was to create a modernized audit trail system that would
provide regulators with timely access to a comprehensive set of trading
data, thus enabling regulators to more efficiently and effectively
analyze and reconstruct market events, monitor market behavior, conduct
market analysis to support regulatory decisions, and perform
surveillance, investigation, and enforcement activities. On November
15, 2016, the Commission approved the national market system plan
required by Rule 613 (the ``CAT NMS Plan'').\3\
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\1\ The Participants include BOX Exchange LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc.,
Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange,
Inc., Financial Industry Regulatory Authority, Inc., Investors'
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami
International Securities Exchange LLC, MIAX Emerald, LLC, MIAX
PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC,
Nasdaq MRX, LLC, Nasdaq PHLX LLC, The Nasdaq Stock Market LLC, New
York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., and NYSE National, Inc.
\2\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (Aug. 1, 2012) (``Rule 613 Adopting Release'').
\3\ Securities Exchange Act Release No. 78318 (Nov. 15, 2016),
81 FR 84696, (Nov. 23, 2016) (``CAT NMS Plan Approval Order''). The
CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See
CAT NMS Plan Approval Order, at 84943-85034. The CAT NMS Plan
functions as the limited liability company agreement of the jointly
owned limited liability company formed under Delaware state law
through which the Participants conduct the activities of the CAT
(the ``Company''). Each Participant is a member of the Company and
jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on Aug. 29, 2019, which they designated as effective on filing.
Under the amendment, the limited liability company agreement of a
new limited liability company named Consolidated Audit Trail, LLC
serves as the CAT NMS Plan, replacing in its entirety the CAT NMS
Plan. See Securities Exchange Act Release No. 87149 (Sept. 27,
2019), 84 FR 52905 (Oct. 3, 2019).
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The Commission recognizes that the Participants have expended, and
continue to expend, substantial resources and effort towards the
development and implementation of the CAT. To provide the Participants
with more time to meet certain requirements of the CAT NMS Plan and
thereby allow the Participants to prioritize and focus resources on
meeting other implementation goals, the Commission issued two exemptive
orders on December 16, 2020 (collectively, the ``prior Orders''). In
the first order, in response to a request from the Participants, the
Commission granted temporary conditional relief from certain
performance requirements related to the online targeted query tool
(``OTQT'').\4\ The second order granted temporary conditional relief
from the following requirements: (1) requirements for lifecycle
linkages timeframes; (2) requirements for re-processing of corrected
data received after T+5; (3) linkage requirements for Securities
Information Processor data (``SIP Data''); (4) reporting requirements
for port-level settings; (5) requirements for lifecycle linkages
between customer orders and ``representative'' orders; and (6)
requirements for Participant reporting of rejected orders.\5\ Although
the Participants did not request the relief granted in the Second
Order, the Commission believed that granting such relief was necessary
in order to ``provide Participants the time to develop the necessary
technological, system or procedural changes to meet the CAT NMS Plan
requirements'' at stake.\6\
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\4\ See Securities Exchange Act Release No. 90689 (Dec. 16,
2020), 85 FR 83667 (Dec. 22, 2020) (the ``First Order''); see also
Letter from Michael Simon, CAT NMS Plan Operating Committee Chair,
to Vanessa Countryman, Secretary, Commission, dated Dec. 1, 2020,
available at <ls-thn-eq><a href="https://catnmsplan.com/sites/default/files/2020-12/12.01.20-CAT-Exemption-Request-OTQT.pdf">https://catnmsplan.com/sites/default/files/2020-12/12.01.20-CAT-Exemption-Request-OTQT.pdf</a> (``Participant
Letter'').
\5\ See Securities Exchange Act Release No. 90688 (Dec. 16,
2020), 85 FR 83634 (Dec. 22, 2020) (the ``Second Order'').
\6\ Id. at 83634.
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On February 14, 2021, a subset of the Participants filed motions
requesting that the Commission stay the December 2020 orders, based on
their concern that portions of the orders ``interpret and apply the
Plan in ways that will produce unintended adverse consequences, present
implementation challenges, or both.'' \7\ Corresponding petitions for
judicial review were also filed with the D.C. Circuit by a smaller
subset of the Participants.\8\ In their motions to stay and supporting
materials, the Participants urged the Commission to consider their
``arguments and supporting evidence and to reevaluate whether the
Order[s] [were] appropriate in light of that
[[Page 42248]]
information.'' \9\ Alternatively, the Participants requested that the
Commission stay portions of the prior Orders pending resolution of the
petitions for judicial review.\10\ Since that time, the Participants
and Commission staff have been engaged in ongoing discussions with the
goal of resolving or narrowing their differences with respect to the
issues raised in the Participants' stay motions. On January 12, 2022,
the Participants requested that the Commission supplement the record to
include certain additional materials prepared in connection with those
discussions.\11\ The Commission granted this request.
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\7\ See Motion for Partial Stay of Order 34-90689, at 2 (``First
Motion''); Motion for Partial Stay of Order 34-90688, at 2 (``Second
Motion''). Financial Industry Regulatory Authority, Inc. and Long-
Term Stock Exchange, Inc. did not join these motions.
\8\ See Petition for Review, USCA Case No. 21-1065; Petition for
Review, USCA Case No. 21-1066. Financial Industry Regulatory
Authority, Inc., Investors Exchange LLC, Long-Term Stock Exchange,
Inc., MEMX LLC, Miami International Securities Exchange LLC, MIAX
Emerald, LLC, and MIAX PEARL, LLC did not join these petitions.
\9\ First Motion, supra note 7, at 2; Second Motion, supra note
7, at 2.
\10\ First Motion, supra note 7, at 2; Second Motion, supra note
7, at 2.
\11\ See Letter from K. King, Counsel for Consolidated Audit
Trail, LLC, Covington & Burling LLP, to Vanessa Countryman,
Secretary, Commission (Jan. 12, 2022).
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After careful review of the arguments and evidence proffered by the
Participants, the Commission has decided to issue a new order granting
temporary exemptive relief that will supersede the prior Orders. This
order (the ``Third Order'' or ``Order'') revises the conditions with
which the Participants must comply in order to qualify for the
exemptive relief provided herein. As of the date that this Order is
issued by the Commission, the terms of this Order will govern, and the
terms of the First Order and the Second Order will no longer be in
force.\12\
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\12\ In May 2020, the Commission adopted amendments to the CAT
NMS Plan that establish four Financial Accountability Milestones and
set target deadlines by which these milestones must be achieved.
These amendments also reduce the amount of any fees, costs, and
expenses that the Participants may recover from Industry Members if
the Participants fail to meet the target deadlines. See Securities
Exchange Act Release No. 88890 (May 15, 2020), 85 FR 31322 (May 22,
2020). The Commission believes it is most appropriate to consider
whether the Participants have met the target deadlines established
for each Financial Accountability Milestone in connection with
proposals related to the imposition of CAT fees on broker-dealers.
For that reason, in issuing this Order, the Commission makes no
determinations regarding the Participants' compliance or non-
compliance with the conditions set forth in the prior Orders or the
potential impact of such compliance or non-compliance on the
Participants' ability to meet the Financial Accountability
Milestones set forth in Section 1.1 of the CAT NMS Plan or the
potential application of fee reduction provisions set forth in
Section 11.6 of the CAT NMS Plan. Rather, the Commission will
consider the Participants' compliance with the CAT NMS Plan
requirements, and/or compliance with the conditions set forth in the
prior Orders and the Third Order and the impact of that compliance,
in the context of such fee proposals. Moreover, the Commission makes
no determinations regarding the Participants' compliance or non-
compliance with other provisions or requirements of the CAT NMS Plan
that are not discussed in the prior Orders or in this Order.
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II. Discussion and Exemptive Relief
Section 36 of the Exchange Act grants the Commission the authority
to ``conditionally or unconditionally exempt any person, security, or
transaction . . . from any provision or provisions of [the Exchange
Act] or of any rule or regulation thereunder, to the extent that such
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.'' \13\ Rule 608(e) of
Regulation NMS similarly grants the Commission the authority to
``exempt from [Rule 608], either unconditionally or on specified terms
and conditions, any self-regulatory organization, member thereof, or
specified security, if the Commission determines that such exemption is
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets and the removal of impediments
to, and perfection of the mechanisms of, a national market system.''
\14\
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\13\ 15 U.S.C. 78mm(a)(1).
\14\ 17 CFR 242.608(e).
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In each of the areas of CAT operation addressed below, the current
functionality of the CAT does not yet comply with CAT NMS Plan
requirements. As explained above, the Commission's intention in issuing
the prior Orders was to provide the Participants with additional time
in which to come into compliance with the CAT NMS Plan, subject to
certain conditions generally intended to allow the Commission (and, in
some instances, the public) to monitor progress towards that goal. The
Participants represent that, in many of these areas, strict compliance
with the CAT NMS Plan requirements and/or the conditions set forth in
the prior Orders would not be cost-effective; in other areas, the
Participants disagree with or seek clarification of the Commission's
interpretation of the CAT NMS Plan's requirements. Upon consideration
of the Participants' arguments and evidence, the Commission has
determined that the revised exemptive relief discussed herein is
appropriate in the public interest and consistent with the protection
of investors under Section 36 of the Exchange Act, as well as
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets, and the perfection of the
mechanisms of a national market system under Rule 608(e).
The Commission approved the CAT NMS Plan to help to protect
investors and maintain fair and orderly markets by providing a
sophisticated audit trail that improves regulators' ability to
investigate potential misconduct, to reconstruct and to analyze market
events, and to support regulatory decisions with detailed and accurate
data, among other benefits. To realize this full spectrum of regulatory
benefits, however, the CAT must be implemented in a manner that
achieves the regulatory goals of Rule 613 and the CAT NMS Plan. The
Commission believes that providing the Participants with additional
time to achieve such implementation will improve the functionality of
the CAT for regulators and thus further the public interest, the
protection of investors, the maintenance of fair and orderly markets,
and the perfection of the mechanisms of a national market system.
In evaluating the Participants' implementation of the provisions of
the CAT NMS Plan, the Commission is guided by the desire to realize the
full spectrum of the CAT's intended benefits, as encompassed in the
terms of the CAT NMS Plan and the CAT NMS Plan Approval Order. To the
extent that Participants seek to implement alternative solutions that
deviate from the CAT NMS Plan requirements, they must first obtain
Commission approval of either an amendment to the CAT NMS Plan or
permanent exemptive relief. The Commission is therefore issuing this
new Order to clarify certain aspects of the prior Orders, to modify
other aspects of the prior Orders in light of subsequent developments
and/or additional information provided by the Participants, and to
provide the Participants with additional time either to come into
compliance with the relevant provisions of the CAT NMS Plan or to
develop alternative solutions that achieve the regulatory goals of Rule
613 and the CAT NMS Plan in a more cost-effective manner. In doing so,
the Commission emphasizes its willingness to consider such alternative
solutions in the form of a proposed CAT NMS Plan amendment or a request
for permanent exemptive relief.
A. OTQT Performance Requirements
Section 6.10(c)(i) of the CAT NMS Plan requires the Plan Processor
\15\ to provide Participants and the Commission with access to CAT Data
\16\
[[Page 42249]]
stored in the Central Repository \17\ through three different methods:
(1) the OTQT, (2) user-defined direct queries, and (3) bulk extracts.
Section 8.1.2 of Appendix D of the CAT NMS Plan sets forth certain
performance requirements for the OTQT, including timeframes in which
results must be returned for various types of queries (``Search Return
Functionality''). Specifically, the CAT NMS Plan requires the OTQT to
return results for searches that include only equities and options
trade data within the following timeframes: (1) ``within 1 minute for
all trades and related lifecycle events for a specific Customer or CAT
Reporter with the ability to filter by security and time range for a
specified time window up to and including an entire day''; (2) ``within
30 minutes for all trades and related lifecycle events for a specific
Customer or CAT Reporter in a specified date range (maximum 1 month)'';
and (3) ``within 6 hours for all trades and related lifecycle events
for a specific Customer or CAT Reporter in a specified date range
(maximum 12-month duration from the most recent 24 months).'' \18\
Section 8.1.2 of Appendix D also requires the OTQT to ``support
parallel processing of queries'' and states that the OTQT ``must be
able to process up to 300 simultaneous query requests with no
performance degradation'' (``Simultaneous Query Functionality'').
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\15\ ``Plan Processor'' is a defined term under the CAT NMS Plan
and means ``the Initial Plan Processor or any other Person selected
by the Operating Committee pursuant to SEC Rule 613 and Sections
4.3(b)(i) and 6.1, and with regard to the Initial Plan Processor,
the Selection Plan, to perform the CAT processing functions required
by SEC Rule 613 and set forth in this Agreement.'' See CAT NMS Plan,
supra note 3, at Section 1.1.
\16\ ``CAT Data'' is a defined term under the CAT NMS Plan and
means ``data derived from Participant Data, Industry Member Data,
SIP Data, and such other data as the Operating Committee may
designate as `CAT Data' from time to time.'' See id.
\17\ ``Central Repository'' is a defined term under the CAT NMS
Plan and means ``the repository responsible for the receipt,
consolidation, and retention of all information reported to the CAT
pursuant to SEC Rule 613 and this Agreement.'' See id.
\18\ Different timeframes are identified for searches that
include equities and options order and National Best Bid and
National Best Offer data in search criteria. Id. at Appendix D,
Section 8.1.2.
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The Participants sought relief from these requirements in their
December 1, 2020 letter.\19\ The Participants explained that the OTQT
provided by the Plan Processor is based on a model that responds to
user queries by first collecting all relevant data into a ``data mart''
and then making this ``data mart'' available to the user for subsequent
filtering and analysis.\20\ This data mart functionality does not
consistently return results to users in accordance with the timeframes
specified by the Search Return Functionality requirements of the CAT
NMS Plan.\21\ Nor does the OTQT currently satisfy the Simultaneous
Query Functionality requirements of the CAT NMS Plan, which require the
OTQT ``to process up to 300 simultaneous query requests with no
performance degradation.'' \22\ As the Commission explained in the
First Order, ``performance degradation'' is a deterioration in
performance as measured according to a certain standard.\23\ The OTQT's
ability to process up to 300 simultaneous queries with ``no performance
degradation'' should accordingly be based on the ability of the OTQT to
achieve the timeframes set forth in Appendix D, Section 8.1.2 of the
CAT NMS Plan.\24\ Because the current data mart model cannot
consistently achieve these timeframes even on fewer than 300
simultaneous queries, the OTQT does not currently comply with the
performance requirements of the CAT NMS Plan.\25\ And, as discussed in
the First Order, the OTQT does not currently meet the above-described
1-minute, 30-minute, and 6-hour requirements that apply to certain
queries run on ``all trades and related lifecycle events.'' \26\ The
Participants argued, however, that the data mart model is a ``more
powerful, useful[,] and reliable regulatory surveillance tool'' than
``an alternative OTQT'' that ``might be constructed'' that ``returns
results'' within the required timeframes.\27\
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\19\ See Participant Letter, supra note 4, at 3-6. The
Participants also sought relief from certain requirements of
Appendix D, Section 8.1.1 of the CAT NMS Plan in their Dec. 1, 2020
letter, see id. at 2-3, but the Participants have asserted that this
functionality was implemented in Feb. 2021. See, e.g., CAT Q4 2021
Quarterly Progress Report, available at <a href="https://catnmsplan.com/sites/default/files/2022-01/CAT-Q4-2021-QPR.pdf">https://catnmsplan.com/sites/default/files/2022-01/CAT-Q4-2021-QPR.pdf</a>.
\20\ See Participant Letter, supra note 4, at 4; see also First
Motion, supra note 7, at 6.
\21\ See Participant Letter, supra note 4, at 4-5 (``It
typically currently takes up to four minutes for queries for a
single day involving equities trades and up to six minutes for
options trade queries for a single day for the OTQT to create and
return a data mart in response to targeted search requests with a
required response time of one minute under Section 8.1.2 of Appendix
D.''); First Motion, supra note 7, at 6 (``The OTQT query function
can perform the latter step, but not both steps, in one minute.'').
\22\ See CAT NMS Plan, supra note 3, at Appendix D, Section
8.1.2.
\23\ See First Order, supra note 4, at 83670.
\24\ See id.
\25\ See Participant Letter, supra note 4, at 6 (requesting
relief from the requirement that the OTQT achieve ``parallel
processing up to 300 simultaneous query requests with no performance
degradation'').
\26\ See First Order, supra note 4, at 83669.
\27\ See Participant Letter, supra note 4, at 5.
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In the First Order, the Commission granted the Participants'
request for temporary exemptive relief from the Search Return
Functionality and Simultaneous Query Functionality requirements until
July 31, 2023.\28\ The Commission conditioned this exemptive relief on:
(1) the satisfaction of all other requirements of the Full
Implementation of Core Equity Reporting Requirements milestone by
December 31, 2020; (2) the performance of benchmark queries to measure,
on a monthly basis, the timeframes in which the OTQT returns results
for specified types of queries, the provision of monthly reports
containing certain data on the timeframes in which the OTQT returns
results for any actual queries done by regulatory users, the provision
of such information to the Operating Committee, and the inclusion of
such information as factual indicators in the Quarterly Progress
Reports required by Section 6.6(c) of the CAT NMS Plan; and (3) the
monthly testing, using benchmark queries, of the time it takes to
provide results to users from OTQT searches that are run concurrently
with either 50-100, 100-200, or 200-300 queries, the provision of such
information to the Operating Committee, and the inclusion of such
information as factual indicators in the Quarterly Progress Reports
required by Section 6.6(c) of the CAT NMS Plan.\29\
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\28\ See First Order, supra note 4, at 83670.
\29\ See id. at 83670-71.
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In requesting a stay of the conditions of the First Order, the
Participants challenge the Commission's conclusion that ``[t]he
timeframe for `returning results' in Section 8.1.2 of Appendix D . . .
begins with the submission of the query in the OTQT and ends with the
return of the results of the query to user; it does not begin with the
population of a data mart.'' \30\ The Participants argue that the CAT
NMS Plan is ``silent'' as to ``whether creation of the data mart counts
toward'' the timeframe for ``returning results'' and that the timeframe
should thus be assessed after the system creates a data mart.\31\ But
in requiring results to be returned within a specified timeframe, the
CAT NMS Plan by its terms refers to the entirety of the time it takes
to generate results in response to the user's initial query. It thus
encompasses the time it takes the system to process the user's initial
query, to generate results, and to return the results to the user.
There is nothing in the natural reading of ``returning results'' that
indicates that the timeframe actually begins at some point,
undiscernible by the user, after query submission. Nor is there any
other indication that the CAT NMS Plan contemplated such a possibility.
Moreover, the CAT NMS Plan requires the OTQT to record the date and
time the query request is submitted. It therefore stands to reason that
the query
[[Page 42250]]
response times set forth in the CAT NMS Plan were intended to be
measured from the time of query submission.\32\
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\30\ Id. at 83669.
\31\ See, e.g., First Motion, supra note 7, at 7.
\32\ Appendix D, Section 8.1.1 of the CAT NMS Plan requires that
the OTQT ``must provide a record count of the result set, the date
and time the query request is submitted, and the date and time the
result set is provided to the users.'' It also requires that the
OTQT must ``log submitted queries and parameters used in the query,
the user ID of the submitter, the date and time of the submission,
as well as the delivery of results.''
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This plain language interpretation also accords with the purpose of
the performance requirements. The OTQT is an important regulatory tool
required by the CAT NMS Plan; it is one of only three methods that
regulators have to access and query CAT Data, and it is the only method
that can be used by regulatory staff without programming experience to
directly access and query the CAT with tools provided by the Plan
Processor. And to most efficiently enable regulatory use, a well-
functioning regulatory tool should consistently return results in a
predictable, reliable, and timely manner. Measuring the OTQT's
performance from the time a data mart is generated would undermine that
goal. Such an interpretation builds in an undetermined, undiscernible
timeframe for the provisions of results to the user and, taken to its
logical extreme, would essentially erase the required timeframes set
forth in Appendix D, Section 8.1.2 of the CAT NMS Plan.\33\ Given its
significance to regulators, it is critically important that the OTQT be
subject to meaningful and enforceable performance standards.
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\33\ For instance, under this approach, the OTQT could be said
to satisfy the 1-minute timeframe set forth in Appendix D, Section
8.1.2 if it took 72 hours to generate a data mart but only 30
seconds to return that data mart to the user. The Commission does
not believe this is a sensible or plausible reading of the CAT NMS
Plan.
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The Participants assert that it is technologically infeasible for
the OTQT, using the data mart functionality, to meet the requirements
of the CAT NMS Plan and that the data mart functionality is beneficial
to regulatory users. But, if that is the case, the more appropriate
course is for the Participants to seek regulatory relief in the form of
a CAT NMS Plan amendment or permanent exemptive relief, rather than
adhere to an implausible interpretation of straightforward CAT NMS Plan
requirements.
The Commission continues to believe that temporary conditional
exemptive relief from the performance requirements set forth in
Appendix D, Section 8.1.2 is appropriate. Such relief gives the
Participants additional time either to implement the required
functionality or to obtain the Commission's approval of an alternative
solution that would meaningfully advance the goals that the standards
were intended to promote. In light of information that the Participants
have provided with the First Motion, and further developments in the
interim period, the Commission believes it is appropriate for the Third
Order to provide this exemptive relief until July 31, 2024 and to
replace the conditions set forth in the First Order with the following
conditions:
<bullet> The Participants must maintain or improve the existing
performance of the OTQT.
<bullet> The Participants must continue to test the OTQT's
performance with benchmark queries and to evaluate the response times
for actual queries on a monthly basis. Such tests and evaluations
should contain the same content that is currently provided to the
Commission and should be provided to the Commission within 30 days from
the end of each month.
<bullet> The Participants must provide the results of any
concurrency testing performed on the OTQT within 30 days from the date
of such testing.\34\
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\34\ Unlike the First Order, the exemptive relief provided by
the Third Order is not conditioned on the satisfaction of ``all
other requirements of the Full Implementation of Core Equity
Reporting Requirements milestone by December 31, 2020.'' See First
Order, supra note 4, at 83670. This milestone has passed and is
therefore no longer relevant to the exemptive relief provided
herein. However, the Commission will consider the Participants'
compliance with that condition in assessing whether the Participants
have met the target deadlines established for the Full
Implementation of Core Equity Reporting Requirements milestone. See
note 12 supra.
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<bullet> To ensure that the Participants remain on track either to
come into compliance with the requirements of the CAT NMS Plan or
obtain the Commission's approval of an alternative solution by July 31,
2024, the Participants and the Plan Processor must meet with Commission
staff on at least a monthly basis to provide a detailed status update
regarding their current efforts towards this goal and promptly respond
to related requests for additional information or data.
The Commission intends these conditions to preserve, as a baseline, the
OTQT functionality that is already in place and expects that the
Participants will provide the Commission with sufficient information to
gather necessary insight into the performance of the OTQT and the
impact of any changes or improvements made by the Participants.\35\
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\35\ Because these revised conditions only require the
Participants to provide the Commission with the results of testing
that is already performed, such revisions should also address the
Participants' objections that the testing conditions set forth in
the First Order imposed significant and unwarranted new costs. See
First Motion, supra note 7, at 9-10.
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B. Requirements for Lifecycle Linkages Timeframes
Appendix D, Section 6.1 of the CAT NMS Plan states that ``Noon
Eastern Time T+1 (transaction date + one day)'' is the deadline for
``initial data validation, lifecycle linkages and communication of
errors to CAT Reporters.'' The CAT NMS Plan further explains that the
Plan Processor must ``link and create the order lifecycle'' using a
``daisy chain approach,'' in which ``a series of unique order
identifiers, assigned to all order events handled by CAT Reporters[,]
are linked together by the Central Repository and assigned a single
CAT-generated CAT-Order-ID that is associated with each individual
order event and used to create the complete lifecycle of an order.''
\36\ This language makes clear that additional steps by the Plan
Processor are required after the submission of certain ``unique order
identifiers'' by CAT Reporters to ``link and create the order
lifecycle.'' In context, the term ``lifecycle linkages'' in Section 6.1
of Appendix D is thus properly understood as a reference to this order
event connection process (i.e., completed processing and linkage of the
initial data) and not, as the Participants assert,\37\ to the ``unique
order identifiers'' that are used to create lifecycle linkages. Section
6.1 of Appendix D requires that the Plan Processor create these
lifecycle linkages, and not just validate or verify them, by T+1 at
noon Eastern Time. Initial data validation, including validation of
data elements that can be used by the Plan Processor to create a
lifecycle linkage, is a separate step that must also occur by T+1 at
noon Eastern Time.\38\
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\36\ CAT NMS Plan, supra note 3, at Appendix D, Section 3.
\37\ See Second Motion, supra note 7, at 6.
\38\ See CAT NMS Plan, supra note 3, at Appendix D, Section 6.1;
see also Securities Exchange Act Release No. 77724 (Apr. 27, 2016),
81 FR 30614, 30691 (May 17, 2016) (``CAT NMS Plan Notice'') (``The
CAT Data would be made available to regulators in raw form after it
is received from reporters and passes basic validations; the Plan
does not specify exactly when these validations would be complete,
but the requirement to link records by 12:00 p.m. (noon) Eastern
Time on day T+1 gives a practical upper bound on this timeline for
initial access to the data.''). If the Participants were only
required to validate lifecycle linkages by T+1 at noon Eastern Time,
the CAT NMS Plan would state that ``lifecycle validations''--not
``lifecycle linkages''--were due to be completed by that deadline.
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The Plan Processor creates lifecycle linkages by assigning an
interim CAT
[[Page 42251]]
Order ID.\39\ The Commission understands that, currently, the Plan
Processor is generally capable of assigning interim CAT Order IDs by
T+1 at 9 p.m. Eastern Time, rather than by the T+1 at noon Eastern Time
deadline set forth in the CAT NMS Plan. Accordingly, in the Second
Order, the Commission granted the Participants temporary exemptive
relief, until July 31, 2023, to give the Participants time to achieve
compliance with the CAT NMS Plan's requirement that the Plan Processor
create lifecycle linkages by noon Eastern Time on T+1.\40\ The
Commission conditioned this exemptive relief on the Participants
``providing an interim CAT Order ID and lifecycle linkages by 9 p.m.
EST T+1''--which it understood to represent current performance--and
including in Quarterly Progress Reports factual indicators that
describe ``any improvements to the time by which the Plan Processor is
capable of providing an interim CAT Order ID and lifecycle linkages.''
\41\
---------------------------------------------------------------------------
\39\ See, e.g., Second Order, supra note 5, at 83634.
\40\ See id. at 83634-35.
\41\ Id. at 83635.
---------------------------------------------------------------------------
The Participants requested a stay of this aspect of the Second
Order, arguing that the CAT NMS Plan is ``silent regarding when CAT
Order IDs must be assigned'' and does not ``expressly recite'' a
requirement to assign interim CAT Order IDs.\42\ But the CAT NMS Plan
does expressly require the creation of lifecycle linkages by noon
Eastern Time on T+1. And the obligation to assign CAT Order IDs--the
mechanism by which the Plan Processor creates lifecycle linkages--by
noon Eastern Time on T+1 necessarily follows from that requirement.
---------------------------------------------------------------------------
\42\ See Second Motion, supra note 7, at 5-6.
---------------------------------------------------------------------------
Contrary to Participants' suggestion,\43\ this conclusion is not at
odds with the CAT NMS Plan's framework for identifying and correcting
errors. Although the initial data submitted by CAT Reporters may
contain errors, the CAT NMS Plan specifically contemplates regulator
access to ``all iterations of processed data'' during the period
between noon Eastern Time on T+1 (when such errors must be identified)
and T+5 (when corrected data must be made available to regulators).\44\
Consistent with this framework, the CAT NMS Plan requires that the Plan
Processor first provide lifecycle linkages to regulators by T+1 at noon
Eastern Time, and then, after any errors in linkage data have been
identified and corrected, provide finalized and corrected lifecycle
linkages by T+5 at 8:00 a.m. Eastern Time.\45\ Indeed, the error
correction process has not prevented the Plan Processor from generally
providing interim CAT Order IDs by T+1 at 9 p.m. Eastern Time, which
are then corrected if necessary by T+5.
---------------------------------------------------------------------------
\43\ See id. at 7.
\44\ See, e.g., CAT NMS Plan, supra note 3, at Appendix D,
Section 6.2.
\45\ See id. None of the CAT NMS Plan provisions cited by the
Participants state that the Plan Processor may wait until T+5 to
assign CAT Order IDs given their role in creating lifecycle
linkages. See Second Motion, supra note 7, at 7.
---------------------------------------------------------------------------
The Participants also incorrectly assert that there is ``no
benefit'' to requiring lifecycle linkages by noon Eastern Time on
T+1.\46\ Timely access to linked data was one of the underlying goals
of Rule 613 and the CAT NMS Plan. Before the implementation of CAT, it
could take up to several days for regulators to gain access to
uncorrected order event data, and regulators could spend additional
days (or months) processing data to create lifecycle linkages.\47\ The
CAT NMS Plan proposed by the Participants and approved by the
Commission therefore specifically included measures like Appendix D,
Section 3 and Section 6.1 that require the Plan Processor to provide
faster access to uncorrected data in a linked format.\48\ These
measures ``generally represent[ed] a significant improvement in
timeliness'' and were intended to ``reduce or eliminate the delays
associated with merging and linking order events within the same
lifecycle.'' \49\ The alternative approach suggested by the
Participants in their Second Motion--e.g., that regulatory users should
manually piece together lifecycle linkages using unique order
identifiers submitted by CAT Reporters instead of the Plan Processor
providing lifecycle linkages by T+1 at noon Eastern Time \50\--actively
undercuts these goals by burdening regulatory users with the Plan
Processor's obligations. The expected regulatory benefits provided by
timely access to linked CAT Data would be even further undermined if
the CAT did not provide lifecycle linkages to regulatory users until
T+5. In order to study and react to market events and/or problematic
trading activity in an effective and expeditious way, regulators need
access to relevant data as close in time to such events or activity as
is possible. Delays in access to data could delay a regulator's
response time.
---------------------------------------------------------------------------
\46\ See Second Motion, supra note 7, at 8.
\47\ See CAT NMS Plan Notice, supra note 38, at 30693.
\48\ See id. at 30691-93.
\49\ Id. at 30691, 30693.
\50\ See Second Motion, supra note 7, at 6.
---------------------------------------------------------------------------
The Participants argue that, in exercising its discretionary
authority to grant exemptive relief, the Commission must consider
whether the regulatory benefits of the requirement to create lifecycle
linkages by T+1 at noon justify the cost of reconfiguring the CAT
system to enable it do so.\51\ But in granting sua sponte exemptive
relief from this requirement, the Commission was relieving burdens. The
Commission has not altered the CAT NMS Plan requirement to create
lifecycle linkages by T+1 at noon Eastern Time and the Participants
configured the CAT System knowing what that requirement was. To the
extent the Participants believe that requirement is no longer
appropriate in light of the way the CAT System has been built, the
Participants may propose an alternative solution that advances the
relevant regulatory objectives in a more cost-effective manner, either
through a CAT NMS Plan amendment or a request for permanent exemptive
relief. The Commission is open to considering and working with the
Participants to identify such a solution.
---------------------------------------------------------------------------
\51\ See, e.g., id. at 8.
---------------------------------------------------------------------------
To give the Participants additional time either to implement the
required functionality or to obtain the Commission's approval of an
alternative solution, the Commission continues to believe that
temporary conditional exemptive relief from the requirement set forth
in Appendix D, Section 6.1 that lifecycle linkages be created by T+1 at
noon Eastern Time is appropriate. However, in light of the information
the Participants have provided with their stay motion and further
developments in the interim period, the Commission believes it is
appropriate for the Third Order to provide this exemptive relief until
July 31, 2024, and to replace the conditions set forth in the Second
Order with the following conditions:
<bullet> The Participants must maintain or improve the existing
performance of functionality currently providing lifecycle linkages by
T+1 at 9 p.m. Eastern Time.
<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe any improvements to the time by which the Plan Processor is
capable of providing lifecycle linkages.
<bullet> To ensure that the Participants remain on track either to
come into compliance with the requirements of the CAT NMS Plan or
obtain the Commission's approval of an alternative solution by July 31,
2024, the
[[Page 42252]]
Participants and the Plan Processor must meet with Commission staff on
at least a monthly basis to provide a detailed status update regarding
their current efforts towards this goal and promptly respond to related
requests for additional information or data.
The Commission intends these conditions to preserve, as a baseline, the
lifecycle linkage functionality that is already in place and expects
that the Participants will provide the Commission with sufficient
information to gather necessary insight into the Plan Processor's
ability to meet the T+1 at noon Eastern Time deadline and the impact of
any changes or improvements made by the Participants.
C. Requirements for Re-Processing of Corrected Data Received After T+5
Appendix D, Section 3 of the CAT NMS Plan requires that ``[a]ll CAT
Data reported to the Central Repository must be processed and assembled
to create the complete lifecycle of each Reportable Event.'' The CAT
NMS Plan sets a deadline of T+3 at 8:00 a.m. Eastern Time for the
``[r]esubmission of corrected data'' and a deadline of T+5 at 8:00 a.m.
Eastern Time for the Plan Processor to make ``[c]orrected data
available to Participant regulatory staff and the SEC.'' \52\ For data
corrections received after T+5, the CAT NMS Plan specifies that
``Participants' regulatory staff and the SEC must be notified and
informed as to how re-processing will be completed.'' \53\ Together,
these sections require the Plan Processor to process and assemble any
corrected CAT Data received after T+5 into complete order event
lifecycles and to notify regulatory users as to how such re-processing
will be completed.
---------------------------------------------------------------------------
\52\ See CAT NMS Plan, supra note 3, at Appendix D, Section 6.1.
\53\ See id. at Appendix D, Section 6.2.
---------------------------------------------------------------------------
The Commission understands that the Participants do not currently
process and assemble all corrected CAT Data received after T+5 into
complete order event lifecycles; in some cases, for instance, the Plan
Processor may simply add corrected CAT Data to the Central Repository
without integrating such CAT Data into order event lifecycles.\54\ In
the Second Order, the Commission granted the Participants temporary
exemptive relief, until July 31, 2021, to provide the Participants time
to come into compliance with the requirement in Section 3 and Section
6.2 of Appendix D of the CAT NMS Plan that the Participants process and
assemble the complete lifecycle for corrected Reportable Events
received by the Plan Processor after T+5.\55\ The Commission
conditioned this exemptive relief on the Participants including in the
Quarterly Progress Reports required by Section 6.6(c) of the CAT NMS
Plan factual indicators that describe ``progress made with respect to
the re-processing of all corrections received after T+5 prior to the
expiration of the exemptive relief on July 31, 2021.'' \56\
---------------------------------------------------------------------------
\54\ See, e.g., Second Motion, supra note 7, at 11. For example,
if a corrected record submitted after T+5 connects two broken order
event lifecycles into one order event lifecycle, the Plan Processor
does not join all relevant records into a single order event
lifecycle as it would have if the corrected data had been received
prior to T+5. As another example, in some instances the Plan
Processor adds a corrected record to an order event lifecycle but
also retains the original record, leaving two records representing
the same event in the Central Repository--whereas the Plan Processor
would have replaced the original record if the corrected data had
been received prior to T+5.
\55\ See Second Order, supra note 5, at 83635.
\56\ See id.
---------------------------------------------------------------------------
In their Second Motion, the Participants object that the
Commission's interpretation requires the Plan Processor to assign a new
CAT Order ID every time a correction is received after T+5.\57\ But the
Commission recognizes that, in many such circumstances, it may not be
necessary to assign a new CAT Order ID. As discussed above, the CAT NMS
Plan gives the Participants the discretion to choose how--but not
whether--to process and assemble corrected CAT Data submitted after T+5
into complete order event lifecycles. Some re-processing is mandatory
under Appendix D, Section 3 of the CAT NMS Plan to ensure that CAT Data
submitted after T+5 is processed and assembled into complete order
event lifecycles; if the Plan Processor is able to process and assemble
CAT Data submitted after T+5 into complete and accurate order event
lifecycles using existing CAT Order IDs, it need not assign a new CAT
Order ID. To the extent the Participants believe that the above-
described requirements should be revised because of the costs involved
in or technological obstacles presented by implementing such
requirements in certain circumstances, the Participants may propose an
amendment to the CAT NMS Plan or request permanent exemptive relief
from the Commission.
---------------------------------------------------------------------------
\57\ See, e.g., Second Motion, supra note 7, at 10.
---------------------------------------------------------------------------
One of the main regulatory goals of Rule 613 and the CAT NMS Plan
was to cure shortcomings in existing audit trail systems that made it
impractical to follow orders through their entire lifecycles, as they
may be routed, aggregated, re-routed, and disaggregated.\58\ Failure to
process and assemble corrected data received after T+5 into complete
order event lifecycles would perpetuate a similar problem within the
CAT by making it difficult and/or time-consuming for regulators to find
the relevant data and by forcing individual regulatory users to
manually process data and assemble lifecycles on their own.\59\ These
are burdens that the CAT NMS Plan was specifically designed to
alleviate.\60\
---------------------------------------------------------------------------
\58\ See, e.g., Rule 613 Adopting Release, supra note 2, at
45722. See also, e.g., CAT NMS Plan Notice, supra note 38, at 30615;
CAT NMS Plan Approval Order, supra note 3, at 84698.
\59\ Simply adding corrected data to the Central Repository, for
example, could require regulators to run multiple, time-consuming
searches to locate corrected data (or just to discover whether
corrected data exists), to manually process data to weed out
inaccurate event records, to manually format data to look the same
as data that was submitted before T+5, and/or to manually construct
lifecycles. Depending on the circumstances, this methodology may not
satisfy the requirement that corrected data submitted after T+5 be
``processed and assembled to create the complete lifecycle of each
Reportable Event.''
\60\ See, e.g., CAT NMS Plan Notice, supra note 38, at 30693
(``Currently regulators can spend days and up to months processing
data they receive into a useful format. Part of this delay is due to
the need to combine data across sources that could have non-uniform
formats and to link data about the same event both within and across
data sources. . . . [T]he Commission preliminarily believes that the
Plan would reduce or eliminate the delays associated with merging
and linking order events within the same lifecycle.'').
---------------------------------------------------------------------------
To give the Participants additional time either to implement the
required functionality or to obtain the Commission's approval of an
alternative solution, the Commission continues to believe that it is
appropriate to grant temporary conditional exemptive relief from the
requirements set forth in Appendix D, Section 3 and Appendix D, Section
6.2 of the CAT NMS Plan that the Plan Processor process and assemble
any corrected CAT Data received after T+5 into complete order event
lifecycles and notify regulatory users as to how such re-processing
will be completed. However, in light of information the Participants
have provided with their stay motion and further developments in the
interim period, the Commission believes it is appropriate for the Third
Order to provide this exemptive relief until July 31, 2024, and to
replace the condition set forth in the Second Order with the following
condition:
<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe any improvements to functionality that processes and assembles
corrected CAT Data submitted after T+5 into complete order event
lifecycles.
<bullet> To ensure that the Participants remain on track either to
come into compliance with the requirements of the CAT NMS Plan or
obtain the
[[Page 42253]]
Commission's approval of an alternative solution by July 31, 2024, the
Participants and the Plan Processor must meet with Commission staff on
at least a monthly basis to provide a detailed status update regarding
their current efforts towards this goal and promptly respond to related
requests for additional information or data.
The Commission intends these conditions to provide the Commission with
sufficient information to gather necessary insight into the Plan
Processor's ability to meet the above-described requirements and the
impact of any changes or improvements made by the Participants.
D. Requirements for SIP Data Linkage
Section 6.5(a)(ii) of the CAT NMS Plan, which implements Rule
613(e)(7), requires that the Central Repository ``collect . . . and
retain on a current and continuing basis,'' certain SIP Data ``in a
format compatible with'' the Participant Data and Industry Member Data
that is collected pursuant to Rule 613(c)(7).\61\ This SIP Data must
include: ``(A) information, including the size and quote condition, on
quotes including the National Best Bid and National Best Offer for each
NMS Security; [and] (B) Last Sale Reports and transaction reports
reported pursuant to an effective transaction reporting plan filed with
the SEC pursuant to, and meeting the requirements of, SEC Rules 601 and
608.'' \62\ Section 6.5(b)(i) of the CAT NMS Plan further states that
SIP Data, ``when available to Participant regulatory staff and the
SEC[,] shall be linked'' to the Participant Data and Industry Member
Data that is collected pursuant to Rule 613(c)(7). Moreover, the CAT
NMS Plan explicitly includes the SIP Data described in Section
6.5(a)(ii) in its definition of ``CAT Data,'' \63\ thereby subjecting
SIP Data to the same requirements that generally apply to CAT Data,
including the requirement set forth in Appendix D, Section 3 that
``[a]ll CAT Data reported to the Central Repository must be processed
and assembled to create the complete lifecycle of each Reportable
Event.'' \64\
---------------------------------------------------------------------------
\61\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(ii)(A)-
(B); 17 CFR 242.613(e)(7).
\62\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(ii)(A)-
(B); see also 17 CFR 242.613(e)(7).
\63\ See CAT NMS Plan, supra note 3, at Section 1.1 (defining
``CAT Data'' as ``data derived from Participant Data, Industry
Member Data, SIP Data, and such other data as the Operating
Committee may designate as `CAT Data' from time to time'').
\64\ See also 17 CFR 242.613(e)(1) (``The central repository
shall store and make available to regulators data in a uniform
electronic format, and in a form in which all events pertaining to
the same originating order are linked together in a manner that
ensures timely and accurate retrieval of the information required by
paragraph (c)(7) of this section for all reportable events for that
order.'').
---------------------------------------------------------------------------
The Commission understands that the CAT currently does not link SIP
Data to the ``complete lifecycle of each Reportable Event,'' but
instead presents regulatory users with a side-by-side view of SIP Data
and other transactional data reported to the CAT.\65\ In other words,
SIP Data is provided to regulatory users in a separate stream from
order event lifecycles, such that regulatory users may only view SIP
Data sequentially with other CAT Data, rather than as part of order
event lifecycles. This side-by-side functionality forces regulatory
users to perform the time-consuming and burdensome work of manually
matching SIP Data with order event lifecycles and creating their own
combined and linked audit trail.\66\ In approving the CAT NMS Plan, the
Commission explained that ``regulators analyzing an event or running a
surveillance pattern often need to link data,'' but that ``linking many
different data sources'' was ``cumbersome and time-consuming'' and that
``the inability to link all records affects the accuracy of the
resulting data and can force an inefficient manual linkage process that
would delay the completion of the data collection and analysis portion
of an examination, investigation, or reconstruction.'' \67\ Linkage of
all CAT Data--which includes SIP Data by definition--was intended to
address these issues by improving the accuracy of the data provided to
regulators and the timeliness of regulatory review.\68\ SIP Data is a
core component of market structure and established market control
mechanisms; SIP Data linkage would better enable regulators to clearly
and accurately identify the market participants involved in the order
event lifecycles that cause SIP messages, which is critical in
recreating market events and looking for problematic trading behaviors.
---------------------------------------------------------------------------
\65\ See, e.g., Second Order, supra note 5, at 83635.
\66\ The Commission identified several possible uses for SIP
Data in approving the CAT NMS Plan. See CAT NMS Plan Approval Order,
supra note 3, at 84914 n.3222-23.
\67\ See, e.g., CAT NMS Plan Approval Order, supra note 3, at
84814-15.
\68\ See notes 58, 60 and associated text supra; see also CAT
NMS Plan Approval Order, supra note 3, at 84826-27.
---------------------------------------------------------------------------
In the Second Order, the Commission granted the Participants
temporary exemptive relief, until July 31, 2023, to give them more time
to develop the changes necessary to meet the SIP data linkage
requirements described above.\69\ The Commission conditioned this
exemptive relief on the Participants including in Quarterly Progress
Reports factual indicators that describe ``the release of updated
specifications and/or scenarios documents relating to the linkage of
Participant Data and Industry Member Data with SIP Data, such that SIP
Data is incorporated in the lifecycle of an order.'' \70\
---------------------------------------------------------------------------
\69\ See Second Order, supra note 5, at 83635.
\70\ Id.
---------------------------------------------------------------------------
In their Second Motion, the Participants argue that the Commission
was obligated to consider various practical and technological obstacles
before requiring them to link SIP data to the complete order
lifecycle.\71\ But as discussed above, that requirement was imposed by
the CAT NMS Plan itself, not by the Commission's exemptive order, which
merely granted the Participants more time to meet the requirement. To
the extent the Participants now believe this CAT NMS Plan requirement
is inappropriate or unjustified in light of its costs, the Participants
are free to propose an alternative solution that advances the relevant
regulatory objectives in a more cost-effective manner, either through a
CAT NMS Plan amendment or a request for permanent exemptive relief. The
Commission is open to considering and working with the Participants to
identify such a solution.
---------------------------------------------------------------------------
\71\ See, e.g., Second Motion, supra note 7, at 15.
---------------------------------------------------------------------------
The Participants contend that linking SIP Data to complete order
lifecycles is impractical, in part because it would require changes to
the existing national market system plans that govern the collection,
consolidation, processing, and dissemination of SIP Data (the
``existing SIP Plans''),\72\ and because of the new approach to SIP
Data provided for under the Commission's Market Data Infrastructure
Rule (``MDI Rules'').\73\ The Commission does not believe that amending
the existing SIP Plans is impractical. The Commission also believes
that there may be alternatives that would allow the Participants to
achieve SIP Data linkage without changing the existing SIP Plans or the
MDI Rules. Under the existing SIP Plans, which remain in effect despite
the promulgation of the MDI Rules, the Participants provide data to the
SIPs; under the MDI Rules, the Participants would provide data to
competing consolidators. The Participants are also the parties that
currently provide this data to the CAT and that would provide
[[Page 42254]]
this data to the CAT in the future. To achieve compliance with the CAT
NMS Plan, the Participants may therefore be able to include in their
data the information necessary for the Plan Processor to facilitate SIP
Data linkage in a manner that would not require an amendment to the
existing SIP Plans or the MDI Rules. In any event, if the Participants
disagree, the appropriate course is for the Participants to seek
regulatory relief in the form of a CAT NMS Plan amendment or permanent
exemptive relief.
---------------------------------------------------------------------------
\72\ See Securities Exchange Act Release No. 90610 (Dec. 9,
2020), 86 FR 18596, at 18598 n.10 (Apr. 9, 2021) (describing the
three effective national market system plans that govern the
collection, consolidation, processing, and dissemination of certain
NMS information) (``MDI Release'').
\73\ See id.; see also Second Motion, supra note 7, at 14-15.
---------------------------------------------------------------------------
The Commission continues to believe that temporary conditional
exemptive relief from the requirements set forth in Section 6.5(b)(i)
and Appendix D, Section 3 of the CAT NMS Plan that SIP Data ``shall be
linked,'' processed, and assembled to create complete order event
lifecycles is appropriate to give the Participants time either to
implement the required functionality or to obtain the Commission's
approval of an alternative solution. However, in light of information
the Participants have provided with their stay motion, further
developments in the interim period, and the current status of
implementation of the MDI Rules, the Commission believes it is
appropriate for the Third Order to provide this exemptive relief until
July 31, 2024.\74\ The Commission further believes it is appropriate to
replace the condition set forth in the Second Order with the following
conditions:
---------------------------------------------------------------------------
\74\ The MDI Rules, pursuant to which the SIPs will eventually
be replaced by ``competing consolidators,'' are in the process of
being implemented. The Commission has stated that as a result of the
MDI Rules, ``the Central Repository may have to collect the data
from a different source,'' which may be one or multiple competing
consolidators. See MDI Release, supra note 72, at 18697. Therefore,
the Participants can meet the requirements of Section 6.5(b)(i) and
Appendix D, Section 3 of the CAT NMS Plan by July 31, 2024, by using
the current SIPs or one or more competing consolidators that the
Operating Committee may determine to use once they are operational.
---------------------------------------------------------------------------
<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe any improvements to functionality that links Participant Data
and Industry Member Data with SIP Data, such that SIP Data is
incorporated into complete order event lifecycles.
<bullet> To ensure that the Participants remain on track to either
come into compliance with the requirements of the CAT NMS Plan or
obtain the Commission's approval of an alternative solution by July 31,
2024, the Participants and the Plan Processor must meet with Commission
staff on at least a monthly basis to provide a detailed status update
regarding their current efforts towards this goal and promptly respond
to related requests for additional information or data.
The Commission intends these conditions to provide the Commission with
sufficient information to gather necessary insight into the
Participants' efforts to meet the requirements of the CAT NMS Plan and
the impact of any changes or improvements made by the Participants.
E. Reporting Requirements for Port-Level Settings
Rule 613 and Sections 6.3(d)(i)(F), 6.3(d)(ii)(G), 6.3(d)(iii)(F),
6.3(d)(iv)(E), and 6.4(d)(i) of the CAT NMS Plan require the
Participants to report, and to amend their Compliance Rules to require
Industry Members to report, the ``Material Terms of the Order'' for
certain events in an order's lifecycle, including ``for original
receipt or origination of an order,'' ``for the routing of an order,''
``for the receipt of an order that has been routed,'' and for orders
that are ``modified or cancelled.'' \75\ Rule 613 and the CAT NMS Plan
further define the ``Material Terms of the Order'' to include ``any
special handling instructions.'' \76\ Port-level settings are used by
Industry Members and Participants as one method of communicating
various Material Terms of the Order, including, in some cases, special
handling instructions.\77\ When port-level settings are used to
communicate Material Terms of the Order, Rule 613 and the CAT NMS Plan
thus require these port-level settings to be reported for that order by
both senders and receivers.\78\
---------------------------------------------------------------------------
\75\ See also 17 CFR 242.613(c)(7).
\76\ See CAT NMS Plan, supra note 3, at Section 1.1; 17 CFR
242.613(j)(7).
\77\ Material Terms of the Order can also be communicated
verbally. In response to the Participants' request for exemptive
relief, the Commission granted temporary exemptive relief from
certain reporting requirements contained in the CAT NMS Plan that
relate to such verbal communications. See Securities Exchange Act
Release No. 90405 (Nov. 12, 2020), 85 FR 73544 (Nov. 18, 2020).
\78\ The terms of Rule 613 and the CAT NMS Plan require that any
special handling instructions be reported by senders (for
``origination of an order'' and ``for the routing of an order'') and
receivers (``for original receipt'' of an order and ``for the
receipt of an order that has been routed''), as well as by both
Participants and Industry Members. Each party--sender and receiver,
Participant and Industry Member--is therefore required to report any
special handling instructions that it communicated through a port-
level setting. Requiring both the sender and the receiver to report
in this manner is not necessarily duplicative. Rather, this kind of
differential reporting is of value to regulators; comparing the
special handling instructions reported by senders and receivers can
be used by regulators to identify inconsistencies in reporting.
Moreover, even where two-sided reporting would be duplicative, it
still provides value to regulators. Because of the differences
between the technical specifications utilized by Industry Members
and Participants, and the varied approach to applying and reporting
port-level settings among the Participants, it is far more efficient
for regulators evaluating the trading activity of one firm to
analyze that firm's (e.g., the sender's) data directly. If only
receivers are required to report, the regulatory user would be
required to expend significant additional effort to run unique
queries to find each receiver's data and process such data into a
consistent and usable format.
---------------------------------------------------------------------------
The Commission understands, however, that Participants and/or
Industry Members would have to make technological changes to ensure the
accurate and reliable reporting of port-level settings by both the
sender and receiver of the order. In the Second Order, the Commission
therefore granted the Participants temporary exemptive relief, until
July 31, 2023, from the requirement that both the CAT Reporter sending
an order and the CAT Reporter receiving an order report port-level
settings as part of the Material Terms of an Order.\79\ The Commission
conditioned this relief on the Participants (1) including in the
Quarterly Progress Reports required by Section 6.6(c) factual
indicators that describe ``the release of updated specifications and/or
scenarios documents relating to the reporting of port-level settings by
both the sender and receiver of an Order as a special handling
instruction'' and (2) engaging both the Commission and Industry Members
on a plan to address the reporting of port-level settings on an
exchange-by-exchange basis.\80\
---------------------------------------------------------------------------
\79\ See Second Order, supra note 5, at 83636.
\80\ Id.
---------------------------------------------------------------------------
The Participants correctly assert in the Second Motion that the CAT
NMS Plan does not require all port-level settings to be reported to the
CAT.\81\ Rule 613 and the CAT NMS Plan only require Participants and
Industry Members to report port-level settings that are used by a
sender or a receiver of an order to communicate the Material Terms of
the Order, including ``any special handling instructions.''
Furthermore, Rule 613 and the CAT NMS Plan only obligate the sender of
an order to report the Material Terms of the Order that it communicated
to and/or agreed upon with the receiver of the order, including default
or implicit special handling instructions communicated through a port-
level setting. If the receiver of an order subsequently attaches ``any
special handling instructions'' to an order without informing the
sender, including special handling instructions communicated through a
port-level
[[Page 42255]]
setting, only the receiver would be obligated to report those Material
Terms of the Order.
---------------------------------------------------------------------------
\81\ See, e.g., Second Motion, supra note 7, at 16.
---------------------------------------------------------------------------
However, the Participants go further, suggesting that the reporting
obligation is only implicated when instructions communicated through
such port-level settings are ``applied'' or ``triggered,'' but that
fact is irrelevant to this inquiry.\82\ A special handling instruction
that a sender or receiver communicates through a port-level setting
must be reported as Material Terms of the Order regardless of whether
it is subsequently ``applied'' or ``triggered.'' Neither Rule 613 nor
the CAT NMS Plan state, for instance, ``any special handling
instructions applied to the order'' or ``Material Terms Applied to the
Order.'' Rather, as one example, an instruction that prevents an order
from trading with another order from the same broker-dealer (self-trade
match prevention) is reportable as a special handling instruction even
if the exchange does not need to apply the instruction because there is
not another order from the same broker-dealer that would trade with the
incoming order.\83\ Such information is valuable to regulators,
regardless of whether it is applied, because it could potentially help
regulators to identify and investigate trading behaviors like layering
or wash sales and establish the intent of broker-dealers sending such
orders.
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\82\ See, e.g., Second Motion, supra note 7, at 16; see also FAQ
D34, available at <a href="https://catnmsplan.com/faq">https://catnmsplan.com/faq</a>.
\83\ See Second Order, supra note 5, at 83635-36.
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The Participants also argue that, in exercising its discretion to
grant a temporary exemption from the port-level settings reporting
requirements, the Commission was obligated to consider certain costs
and practical obstacles.\84\ But in granting sua sponte exemptive
relief from this requirement, the Commission was relieving burdens and
did not alter the CAT NMS Plan requirement. To the extent the
Participants now believe this CAT NMS Plan requirement is inappropriate
or unjustified in light of its costs, the Participants are free to
propose an alternative solution that advances the relevant regulatory
objectives in a more cost-effective manner, either through a CAT NMS
Plan amendment or a request for permanent exemptive relief. The
Commission is open to considering and working with the Participants to
identify such a solution.
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\84\ See, e.g., Second Motion, supra note 7, at 16.
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To give the Participants and Industry Members additional time
either to implement the required functionality or to obtain the
Commission's approval of an alternative solution, the Commission
continues to believe that it is appropriate to grant temporary
conditional exemptive relief from the requirement set forth in Rule
613(c)(7) and Sections 6.3(d)(i)(F), 6.3(d)(ii)(G), 6.3(d)(iii)(F),
6.3(d)(iv)(E), and 6.4(d)(i) of the CAT NMS Plan that the Participants
report, and amend their Compliance Rules to require Industry Members to
report, the Material Terms of the Order for certain events in an
order's lifecycle that are communicated through a port-level setting.
However, in light of information the Participants have provided with
their stay motion and further developments in the interim period, the
Commission believes it is appropriate for the Third Order to provide
this exemptive relief until July 31, 2024, and to replace the
conditions set forth in the Second Order with the following conditions:
<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe any improvements to the Participants' current efforts to
report, and to require Industry Members to report, port-level settings
that communicate ``Material Terms of the Order,'' including efforts to
implement two-sided reporting (when required) and efforts to require
that port-level settings that communicate ``any special handling
instructions'' be reported regardless of whether such instructions are
``applied.''
<bullet> To ensure that the Participants remain on track to either
come into compliance with the requirements of the CAT NMS Plan or
obtain the Commission's approval of an alternative solution by July 31,
2024, the Participants and the Plan Processor must meet with Commission
staff on at least a monthly basis to provide a detailed status update
regarding their current efforts towards this goal and promptly respond
to related requests for additional information or data.\85\
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\85\ The Commission believes the Participants will need to
engage and meet regularly with Industry Members in order to satisfy
this condition.
The Commission intends these conditions to provide the Commission with
sufficient information to gather necessary insight into the
Participants' efforts to meet the requirements of the CAT NMS Plan and
the impact of any changes or improvements made by the Participants.
F. Requirements for Lifecycle Linkages Between Customer Orders and
``Representative'' Orders
Appendix D, Section 3 of the CAT NMS Plan requires the Plan
Processor to ``link all related order events from all CAT Reporters
involved in the lifecycle of an order. At a minimum,'' the CAT NMS Plan
specifies that the ``Central Repository must be able to create the
lifecycle between . . . [c]ustomer orders to `representative' orders
created in firm accounts for the purpose of facilitating a customer
order (e.g., linking a customer order handled on a riskless principal
basis to the street-side proprietary order).'' \86\ As discussed above,
one of the main regulatory goals of Rule 613 and the CAT NMS Plan was
to cure shortcomings in existing audit trail systems that made it
impractical to follow orders through their entire lifecycles, as they
may be routed, aggregated, re-routed, and disaggregated.\87\ Lifecycle
linkage for all order events--including linkage of ``representative
orders'' to customer orders and linkage of customer data across an
order event lifecycle--was intended to alleviate the burdens associated
with manual processing and linkage of data and to provide regulators
with information that is not otherwise available.\88\ It is therefore
critical that the Participants fully implement functionality to create
complete order event lifecycle linkages, including linkage of
``representative'' orders to customer orders.
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\86\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3. 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. See, e.g., Second Order,
supra note 5, at 83636 n.14.
\87\ See, e.g., note 58 and associated text supra.
\88\ See, e.g., note 60 and associated text supra; see also,
e.g., CAT NMS Plan Notice, supra note 38, at 30665-66 (describing
difficulties involved in manual linkage of customer data across
multiple parts of an order lifecycle).
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The Commission understands that the Participants do not currently
have the ability to create lifecycles in certain representative order
scenarios where Industry Members do not have a systematic or direct
link between their order management systems and execution management
systems. This is a critical loss of data that breaks order event
lifecycles, because regulatory users would not be able to recreate
these parts of the order event lifecycles on their own. In the Second
Order, the Commission granted the Participants temporary exemptive
relief, until July 31, 2023, to allow time for Participants and
Industry Members to develop the
[[Page 42256]]
capability of meeting this CAT NMS Plan requirement.\89\ The Commission
conditioned this relief on the Participants (1) continuing to require
Industry Member reporting of representative orders as described in
another exemptive relief order related to the timing and phasing of
Industry Member reporting and (2) including in the Quarterly Progress
Reports required by Section 6.6(c) factual indicators that describe
``progress made regarding the release of updated specifications and/or
scenarios documents relating to the reporting of all representative
orders.'' \90\
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\89\ See Second Order, supra note 5, at 83636.
\90\ Id.
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After challenging this part of the Second Order in the Second
Motion, the Participants issued guidance indicating that Industry
Members will be required to provide the data necessary for the Central
Repository to create the required lifecycle linkages starting on July
31, 2023.\91\ To give Industry Members additional time to implement the
necessary reporting, the Commission believes that it is appropriate to
grant temporary conditional exemptive relief from the requirement set
forth in Appendix D, Section 3 of the CAT NMS Plan that the ``Central
Repository must be able to create the lifecycle between . . .
[c]ustomer orders to `representative' orders created in firm accounts
for the purpose of facilitating a customer order (e.g., linking a
customer order handled on a riskless principal basis to the street-side
proprietary order)'' for representative order scenarios in which
Industry Members do not have a systematic or direct link between their
order management systems and execution management systems until July
31, 2024. The Commission also believes that it is appropriate to impose
conditions on this relief similar to those set forth in the Second
Order:
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\91\ See, e.g., FAQ F5-F7, available at <a href="https://catnmsplan.com/faq">https://catnmsplan.com/faq</a>.
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<bullet> The Participants must require Industry Members to report
``representative'' orders as currently described in FAQs F5-F7 and as
described in other exemptive relief issued by the Commission by July
31, 2024.\92\
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\92\ See, e.g., Securities Exchange Act Release No. 88702 (Apr.
20, 2020), 85 FR 23075 (Apr. 24, 2020).
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<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe the progress made towards the release of updated
specifications and/or scenarios documents relating to the reporting and
linkage of all ``representative'' orders.
<bullet> To ensure that the Participants remain on track to come
into compliance with the requirements of the CAT NMS Plan by July 31,
2024, the Participants and the Plan Processor must meet with Commission
staff on at least a monthly basis to provide a detailed status update
regarding their current efforts towards this goal and promptly respond
to related requests for additional information or data.\93\
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\93\ The Commission believes the Participants will need to
engage and meet regularly with Industry Members in order to satisfy
this condition.
The Commission intends these conditions to preserve, as a baseline, the
reporting and linkage functionality that is already in place for
``representative'' orders and expects the Participants and Industry
Members to provide the Commission with sufficient information to gather
necessary insight into the efforts made by both Participants and
Industry Members to fully meet the requirements of the CAT NMS Plan.
G. Requirements for Participant Reporting of Rejected Orders
Rule 613(c)(7) and Section 6.3(d)(i) of the CAT NMS Plan require
Participants to ``record and electronically report to the Central
Repository'' certain information for ``each order and each Reportable
Event,'' including ``for original receipt or origination of an order.''
\94\ The CAT NMS Plan specifies that ``order'' has ``the meaning set
forth in Rule 613(j)(8),'' \95\ which further defines ``order'' to
include: ``(i) [a]ny order received by a member of a national
securities exchange or national securities association from any person;
(ii) [a]ny order originated by a member of a national securities
exchange or national securities association; or (iii) [a]ny bid or
offer.'' \96\ These provisions require the Participants to report all
orders that are ``received,'' not just those orders that are ``received
and successfully processed by the matching engine,'' those orders that
are ``received and accepted,'' and/or those orders that are ``received
and assigned an order ID''; the reporting requirement is not
conditioned on how a Participant acts on an order that is received. For
example, if a Participant receives a message that contains all of the
terms necessary for an order to be executed, that message still
constitutes a ``received'' order that must be reported pursuant to the
provisions of Section 6.3(d) of the CAT NMS Plan regardless of whether
it is subsequently rejected. Moreover, as ``CAT Data,'' rejected orders
must also be ``processed and assembled to create the complete lifecycle
of each Reportable Event'' under Appendix D, Section 3 of the CAT NMS
Plan.
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\94\ 17 CFR 242.613(c)(7); CAT NMS Plan, supra note 3, at
Section 6.3(d)(i).
\95\ See CAT NMS Plan, supra note 3, at Section 1.1.
\96\ 17 CFR 242.613(j)(8).
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Orders that are received and rejected are part of a complete order
event lifecycle, in the same way that cancelled orders are part of a
complete order event lifecycle. Without information about these events,
regulatory users reviewing trading activity could struggle to determine
how orders that are received but rejected were resolved.\97\ As
discussed above, one of the main regulatory goals of Rule 613 and the
CAT NMS Plan was to cure shortcomings in existing audit trail systems
that made it impractical to follow orders through their entire
lifecycles.\98\ Providing regulatory users with a more complete and
comprehensive set of audit trail data was another of the main
regulatory goals of Rule 613 and the CAT NMS Plan.\99\ Failure to
report orders that are received and rejected and to create complete
order lifecycles for such orders would subvert these two goals, because
regulators would not have access to ``all of the market activity of
interest in sufficient detail in one consolidated audit trail.'' \100\
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\97\ Sometimes a rejected order may represent the final action
in a complete order event lifecycle; other times, the sender may
submit a second order as a ``follow-up'' to the rejected order. In
both cases, data reflecting orders that were received and rejected
provides useful and necessary context to regulatory users evaluating
trading activity.
\98\ See, e.g., note 58, note 60 and associated text supra.
\99\ See, e.g., Rule 613 Adopting Release, supra note 2, at
45723 (``In performing their oversight responsibilities, regulators
today must attempt to cobble together disparate data from a variety
of existing information systems lacking in completeness, accuracy,
accessibility, and/or timeliness--a model that neither supports the
efficient aggregation of data from multiple trading venues nor
yields the type of complete and accurate market activity data needed
for robust market oversight.''); see also, e.g., CAT NMS Plan
Notice, supra note 38, at 30652 (stating that the CAT NMS Plan would
benefit regulators by improving the completeness of data by
requiring the reporting of additional data fields, events, and
products in Section 6.3 of the CAT NMS Plan).
\100\ See CAT NMS Plan Notice, supra note 38, at 30662.
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In the Second Order, the Commission granted the Participants
temporary exemptive relief, until December 13, 2021, from the
requirement in Section 6.3(d) of the CAT NMS Plan that the Participants
report rejected orders.\101\ The Commission conditioned this relief on
the Participants including in Quarterly Progress Reports factual
indicators that describe ``any updates to specifications and/or
scenarios
[[Page 42257]]
documents relating to the capture and reporting of rejected orders.''
\102\ The Participants represent in the Second Motion that they are
reporting to the CAT ``all messages rejected after receipt by an
exchange.'' \103\ However, the Commission understands that the
Participants are currently only reporting a subset of the rejected
orders that are required to be reported by Section 6.3(d) and are
working on implementing functionality that will permit the Participants
to report additional rejected orders.
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\101\ See Second Order, supra note 5, at 83636.
\102\ Id. at 83636-37.
\103\ See Second Motion, supra note 7, at 3 n.8.
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To give the Participants and Industry Members sufficient time
either to implement the required functionality or to obtain the
Commission's approval of an alternative solution, the Commission
continues to believe that it is appropriate to grant temporary
conditional exemptive relief from the requirement set forth in Rule
613(c)(7) and Section 6.3(d)(i) of the CAT NMS Plan that Participants
``record and electronically report to the Central Repository'' certain
information for orders that are received and subsequently rejected, and
from the requirement set forth in Appendix D, Section 3 of the CAT NMS
Plan that ``[a]ll CAT Data'' related to such orders be ``processed and
assembled to create the complete lifecycle of each Reportable Event.''
However, in light of further developments in the interim period, the
Commission believes it is appropriate for the Third Order to provide
this exemptive relief until July 31, 2024, and to replace the condition
set forth in the Second Order with the following conditions:
<bullet> The Participants must maintain or improve their existing
reporting of orders that are received and subsequently rejected,
including existing efforts towards implementing functionality that
would permit the Participants to report additional rejected orders.
<bullet> The Participants must provide, in Quarterly Progress
Reports submitted pursuant to Section 6.6(c), factual indicators that
describe any improvements to the Participants' reporting of orders that
are received and subsequently rejected, as well as improvements to the
functionality that creates linkages for such orders.
<bullet> To ensure that the Participants remain on track to either
come into compliance with the requirements of the CAT NMS Plan or
obtain the Commission's approval of an alternative solution by July 31,
2024, the Participants and the Plan Processor must meet with Commission
staff on at least a monthly basis to provide a detailed status update
regarding their current efforts towards this goal and promptly respond
to related requests for additional information or data.
The Commission intends these conditions to preserve, as a baseline, the
reporting functionality that is already in place and expects the
Participants to provide the Commission with sufficient information to
gather necessary insight into the Participants' efforts to meet the
requirements of the CAT NMS Plan.
III. Conclusion
Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of
the Exchange Act \104\ and Rule 608(e) under the Exchange Act,\105\
that the above-described temporary conditional exemptive relief be
granted.
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\104\ 15 U.S.C. 78mm(a)(1).
\105\ 17 CFR 242.608(e).
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-14982 Filed 7-13-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on July 14, 2022.
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