Notice2024-21169
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 6897 To Establish Fees for Industry Members Related to Certain Historical Costs of the National Market System Plan Governing the Consolidated Audit Trail
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 18, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 181 (Wednesday, September 18, 2024)</title>
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[Federal Register Volume 89, Number 181 (Wednesday, September 18, 2024)]
[Notices]
[Pages 76626-76673]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-21169]
[[Page 76625]]
Vol. 89
Wednesday,
No. 181
September 18, 2024
Part II
Securities and Exchange Commission
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Self-Regulatory Organizations; Financial Industry Regulatory Authority,
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend FINRA Rule 6897 To Establish Fees for Industry Members
Related to Certain Historical Costs of the National Market System Plan
Governing the Consolidated Audit Trail; Notice
Federal Register / Vol. 89 , No. 181 / Wednesday, September 18, 2024
/ Notices
[[Page 76626]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101012; File No. SR-FINRA-2024-013]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rule 6897 To Establish Fees for
Industry Members Related to Certain Historical Costs of the National
Market System Plan Governing the Consolidated Audit Trail
September 12, 2024.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\
notice is hereby given that on September 5, 2024, 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 and II below, which Items
have been prepared by FINRA. FINRA has designated the proposed rule
change as ``establishing or changing a due, fee or other charge'' under
Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2)
thereunder,\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6897 (Consolidated Audit
Trail Funding Fees) to establish fees for Industry Members \5\ related
to certain historical costs of the National Market System Plan
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or
``Plan'') incurred prior to January 1, 2022. These fees would be
payable to Consolidated Audit Trail, LLC (``CAT LLC'' or ``the
Company'') \6\ and referred to as Historical CAT Assessment 1.
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\5\ An ``Industry Member'' is defined as ``a member of a
national securities exchange or a member of a national securities
association.'' See FINRA Rule 6810(u). See also Section 1.1 of the
CAT NMS Plan. Unless otherwise specified, capitalized terms used in
this rule filing are defined as set forth in the CAT NMS Plan and/or
the CAT Compliance Rule. See FINRA Rule 6800 Series (Consolidated
Audit Trail Compliance Rule).
\6\ The term ``CAT LLC'' may be used to refer to Consolidated
Audit Trail, LLC or CAT NMS, LLC, depending on the context.
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The fee rate for Historical CAT Assessment 1 will be $0.000013 per
executed equivalent share. CAT Executing Brokers will receive their
first monthly invoice for Historical CAT Assessment 1 in November 2024
calculated based on their transactions as CAT Executing Brokers for the
Buyer (``CEBB'') and/or CAT Executing Brokers for the Seller (``CEBS'')
in October 2024.
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 July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the self-regulatory organizations (``SROs'') to
submit a national market system (``NMS'') plan to create, implement and
maintain a consolidated audit trail that would capture customer and
order event information for orders in NMS securities across all
markets, from the time of order inception through routing,
cancellation, modification or execution.\7\ On November 15, 2016, the
Commission approved the CAT NMS Plan.\8\ Under the CAT NMS Plan, the
Operating Committee has the discretion to establish funding for CAT LLC
to operate the CAT, including establishing fees for Industry Members to
be assessed by CAT LLC that would be implemented on behalf of CAT LLC
by the Participants.\9\ The Operating Committee adopted a revised
funding model to fund the CAT (``CAT Funding Model''). On September 6,
2023, the Commission approved the CAT Funding Model, after concluding
that the model was reasonable and that it satisfied the requirements of
Section 11A of the Exchange Act and Rule 608 thereunder.\10\
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\7\ See Securities Exchange Act Release. No. 67457 (July 18,
2012), 77 FR 45721 (August 1, 2012) (``Rule 613 Adopting Release'').
\8\ See Securities Exchange Act Release. No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan Approval
Order'').
\9\ Section 11.1(b) of the CAT NMS Plan.
\10\ See Securities Exchange Act Release No. 98290 (September 6,
2023), 88 FR 62628 (September 12, 2023) (``CAT Funding Model
Approval Order'').
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The CAT Funding Model provides a framework for the recovery of the
costs to create, develop and maintain the CAT, including providing a
method for allocating costs to fund the CAT among Participants and
Industry Members. The CAT Funding Model establishes two categories of
fees: (1) CAT fees assessed by CAT LLC and payable by certain Industry
Members to recover a portion of historical CAT costs previously paid by
the Participants (``Historical CAT Assessment'' fees); and (2) CAT fees
assessed by CAT LLC and payable by Participants and Industry Members to
fund prospective CAT costs (``Prospective CAT Costs'' fees).\11\
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\11\ Under the CAT Funding Model, the Operating Committee may
establish one or more Historical CAT Assessments. See Section
11.3(b) of the CAT NMS Plan. This filing only establishes Historical
CAT Assessment 1 related to certain Historical CAT Costs as
described herein; it does not address any other potential Historical
CAT Assessment related to other Historical CAT Costs. In addition,
under the CAT Funding Model, the Operating Committee also may
establish CAT Fees related to CAT costs going forward. See Section
11.3(a) of the CAT NMS Plan. This filing does not address any
potential CAT Fees related to CAT costs going forward. Any such
other fee for any other Historical CAT Assessment or CAT Fee for
Prospective CAT Costs will be subject to a separate fee filing.
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Under the CAT Funding Model, ``[t]he Operating Committee will
establish one or more fees (each a `Historical CAT Assessment') to be
payable by Industry Members with regard to CAT costs previously paid by
the Participants (`Past CAT Costs').'' \12\ In establishing a
Historical CAT Assessment, the Operating Committee will determine a
``Historical Recovery Period'' and calculate a ``Historical Fee Rate''
for that Historical Recovery Period. Then, for each month in which a
Historical CAT Assessment is in effect, each CEBB and CEBS would be
required to pay the fee--the Historical CAT Assessment--for each
transaction in Eligible Securities executed by the CEBB or CEBS from
the prior month as set forth in CAT Data, where the Historical CAT
Assessment for each transaction will be calculated by multiplying the
number of executed equivalent shares in the
[[Page 76627]]
transaction by one-third and by the Historical Fee Rate.\13\
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\12\ Section 11.3(b) of the CAT NMS Plan.
\13\ In approving the CAT Funding Model, the Commission stated
that, ``[i]n the Commission's view, the proposed recovery of the
Past CAT Costs via the Historical CAT Assessment is reasonable.''
See CAT Funding Model Approval Order, 88 FR 62628, 62662.
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Each Historical CAT Assessment to be paid by CEBBs and CEBSs is
designed to contribute toward the recovery of two-thirds of the
Historical CAT Costs. Because the Participants previously have paid
Past CAT Costs via loans to the Company, the Participants would not be
required to pay any Historical CAT Assessment. In lieu of a Historical
CAT Assessment, the Participants' one-third share of Historical CAT
Costs will be paid by the cancellation of loans made by the
Participants to the Company on a pro rata basis based on the
outstanding loan amounts due under the loans, instead of through the
payment of a CAT fee.\14\ In addition, the Participants also will be
100% responsible for certain Excluded Costs (as discussed below).
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\14\ Section 11.3(b)(ii) of the CAT NMS Plan.
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CAT LLC proposes to charge CEBBs and CEBSs (as described in more
detail below) Historical CAT Assessment 1 to recover certain historical
CAT costs incurred prior to January 1, 2022, in accordance with the CAT
Funding Model.\15\ To implement this fee on behalf of CAT LLC, the CAT
NMS Plan requires the Participants to ``file with the SEC under Section
19(b) of the Exchange Act any such fees on Industry Members that the
Operating Committee approves, and such fees shall be labeled as
`Consolidated Audit Trail Funding Fees.''' \16\ The Plan further states
that ``Participants will be required to file with the SEC pursuant to
Section 19(b) of the Exchange Act a filing for each Historical CAT
Assessment.'' \17\ Accordingly, the purpose of this filing is to
implement a Historical CAT Assessment on behalf of CAT LLC for Industry
Members, referred to as Historical CAT Assessment 1, in accordance with
the CAT NMS Plan.\18\
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\15\ See CAT Funding Model Approval Order.
\16\ Section 11.1(b) of the CAT NMS Plan.
\17\ Section 11.3(b)(iii)(B)(I) of the CAT NMS Plan.
\18\ Note that there may be one or more Historical CAT
Assessments. Section 11.3(b) of the CAT NMS Plan.
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FINRA previously filed a fee filing to implement Historical CAT
Assessment 1. On January 17, 2024, the SEC published this prior filing
for Historical CAT Assessment 1, temporarily suspended the fee filing,
and instituted proceedings to determine whether to approve or
disapprove the fee filing.\19\ FINRA has withdrawn its previous fee
filing for Historical CAT Assessment 1.\20\ This Historical CAT
Assessment 1 replaces the previous Historical CAT Assessment 1 that was
previously filed with the Commission.
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\19\ See Securities Exchange Act Release No. 99372 (January 17,
2024), 89 FR 11153 (February 13, 2024) (Notice of Filing of File No.
SR-FINRA-2024-003).
\20\ See supra note 19.
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1. CAT Executing Brokers
Historical CAT Assessment 1 will be charged to each CEBB and CEBS
for each applicable transaction in Eligible Securities.\21\ The CAT NMS
Plan defines a ``CAT Executing Broker'' to mean:
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\21\ In its approval of the CAT Funding Model, the Commission
determined that charging CAT fees to CAT Executing Brokers was
reasonable. In reaching this conclusion the Commission noted that
the use of CAT Executing Brokers is appropriate because the CAT
Funding Model is based upon the calculation of executed equivalent
shares, and, therefore, charging CAT Executing Brokers would reflect
their executing role in each transaction. Furthermore, the
Commission noted that, because CAT Executing Brokers are already
identified in transaction reports from the exchanges and FINRA's
equity trade reporting facilities recorded in CAT Data, charging CAT
Executing Brokers could streamline the billing process. See CAT
Funding Model Approval Order, 88 FR 62628, 62629.
(a) with respect to a transaction in an Eligible Security that
is executed on an exchange, the Industry Member identified as the
Industry Member responsible for the order on the buy-side of the
transaction and the Industry Member responsible for the sell-side of
the transaction in the equity order trade event and option trade
event in the CAT Data submitted to the CAT by the relevant exchange
pursuant to the Participant Technical Specifications; and
(b) with respect to a transaction in an Eligible Security that
is executed otherwise than on an exchange and required to be
reported to an equity trade reporting facility of a registered
national securities association, the Industry Member identified as
the executing broker and the Industry Member identified as the
contra-side executing broker in the TRF/ORF/ADF transaction data
event in the CAT Data submitted to the CAT by FINRA pursuant to the
Participant Technical Specifications; provided, however, in those
circumstances where there is a non-Industry Member identified as the
contra-side executing broker in the TRF/ORF/ADF transaction data
event or no contra-side executing broker is identified in the TRF/
ORF/ADF transaction data event, then the Industry Member identified
as the executing broker in the TRF/ORF/ADF transaction data event
would be treated as CAT Executing Broker for the Buyer and for the
Seller.\22\
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\22\ Section 1.1 of the CAT NMS Plan. Note that CEBBs and CEBSs
may, but are not required to, pass-through their CAT fees to their
clients, who may, in turn, pass their fees to their clients until
they are imposed ultimately on the account that executed the
transaction. See CAT Funding Model Approval Order, 88 FR 62628,
62649.
Fields Nos. 26 and 28 of the Participant Technical Specifications,
listed below, indicate the CAT Executing Brokers for transactions
executed otherwise than on an exchange.
TRF/ORF/ADF Transaction Data Event.\23\
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\23\ See Table 61, Section 6.1 (TRF/ORF/ADF Transaction Data
Event) of the CAT Reporting Technical Specifications for Plan
Participants.
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No. Field name Data type Description Include key
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26.................... reportingExecutingMpid............ Member Alias........ MPID of the R
executing party.
28.................... contraExecutingMpid............... Member Alias........ MPID of the C
contra-side
executing party.
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(2) Calculation of Historical Fee Rate 1
The Operating Committee determined the Historical Fee Rate to be
used in calculating Historical CAT Assessment 1 (``Historical Fee Rate
1'') by dividing the Historical CAT Costs for Historical CAT Assessment
1 (``Historical CAT Costs 1'') by the projected total executed share
volume of all transactions in Eligible Securities for the Historical
Recovery Period for Historical CAT Assessment 1 (``Historical Recovery
Period 1''), as discussed in detail below. Based on this calculation,
the Operating Committee has determined that Historical Fee Rate 1 would
be $0.00003994969693072937 per executed equivalent share. This rate is
then divided by three and rounded to determine the fee rate of
$0.000013 per executed equivalent share that will be assessed to CEBBs
and CEBSs, as also discussed in detail below.
(A) Executed Equivalent Shares for Transactions in Eligible Securities
Under the CAT NMS Plan, for purposes of calculating each Historical
CAT Assessment, executed equivalent shares in a transaction in Eligible
Securities will be reasonably counted as follows: (1) each executed
share for a transaction in NMS Stocks will be
[[Page 76628]]
counted as one executed equivalent share; (2) each executed contract
for a transaction in Listed Options will be counted based on the
multiplier applicable to the specific Listed Options (i.e., 100
executed equivalent shares or such other applicable multiplier); and
(3) each executed share for a transaction in OTC Equity Securities
shall be counted as 0.01 executed equivalent share.\24\
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\24\ Section 11.3(a)(i)(B) and 11.3(b)(i)(B) of the CAT NMS
Plan. In approving the CAT Funding Model, the Commission concluded
that ``the use of executed equivalent share volume as the basis of
the proposed cost allocation methodology is reasonable and
consistent with the approach taken by the funding principles of the
CAT NMS Plan.'' See CAT Funding Model Approval Order, 88 FR 62628,
62640.
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(B) Historical CAT Costs 1
The CAT NMS Plan states that ``[t]he Operating Committee will
reasonably determine the Historical CAT Costs sought to be recovered by
each Historical CAT Assessment, where the Historical CAT Costs will be
Past CAT Costs minus Past CAT Costs reasonably excluded from Historical
CAT Costs by the Operating Committee. Each Historical CAT Assessment
will seek to recover from CAT Executing Brokers two-thirds of
Historical CAT Costs incurred during the period covered by the
Historical CAT Assessment.'' \25\ As described in detail below,
Historical CAT Costs 1 would be $318,059,819. This figure includes Past
CAT Costs of $401,312,909 minus certain Excluded Costs of $83,253,090.
Participants collectively will remain responsible for one-third of
Historical CAT Costs 1 (which is $106,019,939.67), plus the Excluded
Costs of $83,253,090. CEBBs collectively will be responsible for one-
third of Historical CAT Costs 1 (which is $106,019,939.67), and CEBSs
collectively will be responsible for one-third of Historical CAT Costs
1 (which is $106,019,939.67).
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\25\ Section 11.3(b)(i)(C) of the CAT NMS Plan.
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The following describes in detail Historical CAT Costs 1 with
regard to four separate historical time periods as well as Past CAT
Costs excluded from Historical CAT Costs 1 (``Excluded Costs''). The
following cost details are provided in accordance with the requirement
in the CAT NMS Plan to provide in the fee filing ``a brief description
of the amount and type of Historical CAT Costs, including (1) the
technology line items of cloud hosting services, operating fees, CAIS
operating fees, change request fees, and capitalized developed
technology costs, (2) legal, (3) consulting, (4) insurance, (5)
professional and administration and (6) public relations costs.'' \26\
Each of the costs described below are reasonable, appropriate and
necessary for the creation, implementation and maintenance of CAT.
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\26\ Section 11.3(b)(iii)(B)(II)(B) of the CAT NMS Plan.
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(i) Historical CAT Costs Incurred Prior to June 22, 2020 (Pre-FAM
Costs)
Historical CAT Costs 1 would include costs incurred by CAT prior to
June 22, 2020 (``Pre-FAM Period'') and already funded by the
Participants, excluding Excluded Costs (described further below).
Historical CAT Costs 1 would include costs for the Pre-FAM Period of
$124,290,730. The Participants would remain responsible for one-third
of this cost (which they have previously paid) ($41,430,243.33), and
Industry Members would be responsible for the remaining two-thirds,
with CEBBs paying one-third ($41,430,243.33) and CEBSs paying one-third
($41,430,243.33). These costs do not include Excluded Costs, as
discussed further below. The following table \27\ breaks down
Historical CAT Costs 1 for the Pre-FAM Period into the categories set
forth in Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan.
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\27\ The costs described in this table of costs for the Pre-FAM
Period were calculated based upon CAT LLC's review of applicable
bills and invoices and related financial statements. CAT LLC
financial statements are available on the CAT website. In addition,
in accordance with Section 6.6(a)(i) of the CAT NMS Plan, in 2018
CAT LLC provided the SEC with ``an independent audit of fees, costs,
and expenses incurred by the Participants on behalf of the Company
prior to the Effective Date of the Plan that will be publicly
available.'' The audit is available on the CAT website.
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Historical CAT costs 1 for
Operating expense Pre-FAM Period (prior to June
22, 2020)
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Capitalized Developed Technology Costs *. $51,847,150
Technology Costs......................... 33,568,579
Cloud Hosting Services............... 10,268,840
Operating Fees....................... 21,085,485
CAIS Operating Fees.................. 2,072,908
Change Request Fees.................. 141,346
Legal.................................... 19,674,463
Consulting............................... 17,013,414
Insurance................................ 880,419
Professional and administration.......... 1,082,036
Public relations......................... 224,669
------------------------------
Total Operating Expenses......... 124,290,730
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* The non-cash amortization of these capitalized developed technology
costs of $2,115,545 incurred during the period prior to June 22, 2020
have been appropriately excluded from the above table.\28\
The Pre-FAM Period includes a broad range of CAT-related activity
from 2012 through June 22, 2020, including the evaluation of the
requirements of SEC Rule 613, the development of the CAT NMS Plan, the
evaluation and selection of the initial and successor Plan Processors,
the commencement of the creation and implementation of the CAT to
comply with Rule 613 and the CAT NMS Plan, including technical
specifications for transaction reporting and regulatory access, and
related technology and the commencement of reporting to the CAT. The
following describes the costs for each of the categories for the Pre-
FAM Period.
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\28\ With respect to certain costs that were ``appropriately
excluded,'' such excluded costs relate to the amortization of
capitalized technology costs, which are amortized over the life of
the Plan Processor Agreement. As such costs have already been
otherwise reflected in the filing, their inclusion would double
count the capitalized technology costs. In addition, amortization is
a non-cash expense.
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(a) Technology Costs--Cloud Hosting Services
The $10,268,840 in technology costs for cloud hosting services
represent
[[Page 76629]]
costs incurred for services provided by the cloud services provider for
the CAT, Amazon Web Services, Inc. (``AWS''), during the Pre-FAM
Period.
As part of its proposal for acting as the successor Plan Processor
for the CAT, FINRA CAT, LLC (``FCAT'') selected AWS as a subcontractor
to provide cloud hosting services. In 2019, after reviewing the
capabilities of other cloud services providers, FCAT determined that
AWS was the only cloud services provider at that time sufficiently
mature and capable of providing the full suite of necessary cloud
services for the CAT, including, for example, the security, resiliency
and complexity necessary for the CAT computing requirements. The use of
cloud hosting services is standard for this type of high-volume data
activity and reasonable and necessary for implementation of the CAT,
particularly given the substantial data volumes associated with the
CAT.
Under the Plan Processor Agreement with FCAT, CAT LLC is required
to pay FCAT the fees incurred by the Plan Processor for cloud hosting
services provided by AWS as FCAT's subcontrator [sic] on a monthly
basis for the cloud hosting services, and FCAT, in turn, pays such fees
to AWS. The fees for cloud hosting services were negotiated by FCAT on
an arm's length basis with the goals of managing cost and receiving
services required to comply with the CAT NMS Plan and Rule 613, taking
into consideration a variety of factors, including the expected volume
of data, the breadth of services provided and market rates for similar
services. The fees for cloud hosting services during the Pre-FAM Period
were paid to FCAT by CAT NMS LLC \29\ and subsequently Consolidated
Audit Trail, LLC (as previously noted, both entities are referred to
generally as ``CAT LLC''),\30\ and FCAT, in turn, paid AWS. CAT LLC was
funded via loan contributions by the Participants.\31\
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\29\ CAT NMS, LLC was formed by FINRA and the U.S. national
securities exchanges to implement the requirements of SEC Rule 613
under the Exchange Act. SEC Rule 613 required the SROs to jointly
submit to the SEC the CAT NMS Plan to create, implement and maintain
the CAT. The SEC approved the CAT NMS Plan on November 15, 2016. See
CAT NMS Plan Approval Order, supra note 8.
\30\ On August 29, 2019, the Participants formed a new Delaware
limited liability company named Consolidated Audit Trail, LLC for
the purpose of conducting activities related to the CAT from and
after the effectiveness of the proposed amendment of the CAT NMS
Plan to replace CAT NMS, LLC. See Securities Exchange Act Release
No. 87149 (September 27, 2019), 84 FR 52905 (October 3, 2019).
\31\ For each of the costs paid by CAT NMS, LLC and Consolidated
Audit Trail, LLC as discussed throughout this filing, CAT NMS, LLC
and Consolidated Audit Trail, LLC paid these costs via loan
contributions by the Participants to CAT NMS, LLC and Consolidated
Audit Trail, LLC, respectively.
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AWS was engaged by FCAT to provide a broad array of cloud hosting
services for the CAT, including data ingestion, data management, and
analytic tools. Services provided by AWS include storage services,
databases, compute services and other services (such as networking,
management tools and DevOps tools). AWS also was engaged to provide
various environments for CAT, such as development, performance testing,
test and production environments.
The cost for AWS services for the CAT is a function of the volume
of CAT Data. The greater the amount of CAT Data, the greater the cost
of AWS services to the CAT. During the Pre-FAM Period from the
engagement of AWS in February 2019 through June 2020, AWS provided
cloud hosting services for volumes of CAT Data far in excess of the
volume predictions set forth in the CAT NMS Plan. The CAT NMS Plan
states, when all CAT Reporters are submitting their data to the CAT, it
``must be sized to receive[,] process and load more than 58 billion
records per day,'' \32\ and that ``[i]t is expected that the Central
Repository will grow to more than 29 petabytes of raw, uncompressed
data.'' \33\ However, the volume of CAT Data for the Pre-FAM Period was
far in excess of these predicted levels. By the end of this period,
data submitted to the CAT included options and equities Participant
Data,\34\ Phase 2a and Phase 2b Industry Member Data \35\ (including
certain linkages), as well as SIP Data,\36\ reference data and other
types of Other Data.\37\ The following chart provides data regarding
the average daily volume, cumulative total events, total compute hours
and storage footprint of the CAT during the Pre-FAM Period.\38\
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\32\ CAT NMS Plan, Appendix D-4 n.262.
\33\ CAT NMS Plan, Appendix D-5.
\34\ See Section 6.3(d) of the CAT NMS Plan.
\35\ See Securities Exchange Release No. 88702 (April 20, 2020),
85 FR 23075 (April 24, 2020) (``Phased Reporting Exemptive Relief
Order'') for a description of Phase 2a and Phase 2b Industry Member
Data.
\36\ See Section 6.5(a)(ii) of the CAT NMS Plan.
\37\ See CAT NMS Plan, Appendix C-108.
\38\ Note that the volume data described in this table does not
include CAIS data.
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Date Range: 3/29/19 to Date Range: 4/13/20 to
4/12/20 * 6/21/20 **
----------------------------------------------------------------------------------------------------------------
Average Daily Volume in Billions
Participant--Equities..................................... 5 5
Participant--Options...................................... 80 981
Industry Member--Equities................................. ....................... 3
Industry Member--Options.................................. ....................... 0.04
SIP--Options & Equities................................... 64 70
Average Total Daily Volume................................ 149 166
Cumulative Total Events for the Period........................ 3,890 4,990
Total Compute Hours for the Period............................ *** N/A 5,663,247
Storage Footprint at End of Period (Petabytes)................ 30.57 47.96
----------------------------------------------------------------------------------------------------------------
* The Participant Equities in RSA format.
** Start of Industry Member reporting on 4/13/2020
*** Although there were compute hours during this period, data related to such compute hours are no longer
available in current data.
(b) Technology Costs--Operating Fees
The $21,085,485 in technology costs related to operating fees
represent costs incurred with regard to activities of FCAT as the Plan
Processor. Operating fees are those fees paid by CAT LLC to FCAT as the
Plan Processor to operate and maintain the CAT and to perform business
operations related to the system, including compliance, security,
testing, training, communications with the industry (e.g., management
of the FINRA CAT Helpdesk, FAQs, website and webinars) and program
management as required by the CAT NMS Plan.
FCAT was selected to assume the role of the successor Plan
Processor. Prior to this selection, the Participants engaged
[[Page 76630]]
in discussions with two prior Bidders \39\ for the successor Plan
Processor role. The Operating Committee formed a Selection Subcommittee
in accordance with Section 4.12 of the CAT NMS Plan to evaluate and
review Bids and to make a recommendation to the Operating Committee
with respect to the selection of the successor Plan Processor. In an
April 9, 2019 letter to the Commission, the Participants described the
reasons for its selection of the successor Plan Processor:
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\39\ The term ``Bidder'' is defined in Section 1.1 of the CAT
NMS Plan.
The Selection Subcommittee considered factors including, but not
limited to, the following, in recommending FINRA to the Operating
Committee as the successor Plan Processor:
a. FINRA's specialized technical expertise and capabilities in
the area of broker-dealer technology;
b. The need to appoint a successor Plan Processor with
specialized expertise to develop, implement, and maintain the CAT
System in accordance with the CAT NMS Plan and SEC Rule 613;
c. FINRA's detailed proposal in response to CAT LLC's recent
inquiries; and
d. FINRA's data query and analytics systems demonstration to the
Participants.
Based on these and other factors, the Selection Subcommittee
determined that FINRA was the most appropriate Bidder to become the
successor Plan Processor.\40\
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\40\ See Letter from Michael J. Simon, Chair, CAT NMS, LLC
Operating Committee, to Brent J. Fields, Secretary, SEC, dated April
9, 2019, <a href="https://www.sec.gov/divisions/marketreg/rule613-info">https://www.sec.gov/divisions/marketreg/rule613-info</a>-
notice-of-plan-processor-selection-040919.pdf.
On February 26, 2019, the Operating Committee (with FINRA recusing
itself) voted to select FINRA as the successor Plan Processor pursuant
to Section 6.1(t) of the CAT NMS Plan.\41\ On March 29, 2019, CAT LLC
and FCAT (a wholly owned subsidiary of FINRA) entered into a Plan
Processor Agreement pursuant to which FCAT would perform the functions
and duties of the Plan Processor contemplated by the CAT NMS Plan,
including the management and operation of the CAT.
---------------------------------------------------------------------------
\41\ See supra note 40.
---------------------------------------------------------------------------
Under the Plan Processor Agreement with FCAT, CAT LLC is required
to pay FCAT a negotiated monthly fixed price for the operation of the
CAT. This fixed price contract was negotiated on an arm's length basis
with the goals of managing costs and receiving services required to
comply with the CAT NMS Plan and Rule 613, taking into consideration a
variety of factors, including the breadth of services provided and
market rates for similar types of activity. The operating fees during
the Pre-FAM Period were paid to FCAT by CAT LLC.
From March 29, 2019 (the commencement of the Plan Processor
Agreement with FCAT) through June 22, 2020 (the end of the Pre-FAM
Period), the Plan Processor's activities with respect to the CAT
included the following:
<bullet> Commenced user acceptance testing with market data
provided by Exegy Incorporated (``Exegy''), a market data provider;
\42\
---------------------------------------------------------------------------
\42\ The use of Exegy to provide market data, including the
costs and market data provided, is discussed below in Item
II.A.1.(2)(B)(i)(i).
---------------------------------------------------------------------------
<bullet> Published Technical Specifications and related reporting
scenarios documents for Phase 2a, 2b, and 2c reporting for Industry
Members, after substantial engagement with SEC staff, Industry Members
and Participants on the Technical Specifications;
<bullet> Facilitated testing for Phase 2a and 2b reporting for
Industry Members;
<bullet> Began developing Technical Specifications and related
reporting scenarios documents for Phase 2d reporting for Industry
Members, after substantial engagement with SEC staff, Industry Members
and Participants on the Technical Specifications;
<bullet> Published Central Repository Access Technical
Specifications, and provided regulator access to test data from
Industry Members;
<bullet> Facilitated Participant exchanges that support options
market makers sending Quote Sent Time to the CAT;
<bullet> Facilitated the introduction of OPRA and Options NBBO
Other Data to CAT;
<bullet> Addressed compliance items, including drafting CAT
policies and procedures, and addressing requirements under Regulation
SCI;
<bullet> Provided support to the Operating Committee, the
Compliance Subcommittee and CAT working groups;
<bullet> Assisted with interpretive efforts and exemptive requests
regarding the CAT NMS Plan;
<bullet> Oversaw the security of the CAT;
<bullet> Monitored the operation of the CAT, including with regard
to Participant and Industry Member reporting;
<bullet> Provided support to subcontractors under the Plan
Processor Agreement;
<bullet> Provided support in discussions with, Participants, SEC
and its staff;
<bullet> Operated the FINRA CAT Helpdesk, which is the primary
source for answers to questions about CAT, including questions
regarding: clock synchronization, firm reporting responsibilities,
interpretive questions, technical specifications for reporting to CAT
and more;
<bullet> Facilitated communications with the industry, including
via FAQs, CAT Alerts, meetings, presentations and webinars;
<bullet> Administered the CAT website and all of its content; \43\
and
---------------------------------------------------------------------------
\43\ The CAT website is <a href="https://www.catnmsplan.com">https://www.catnmsplan.com</a>.
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<bullet> Provided technical support and assistance with
connectivity, data access, and user support, including the use of CAT
Data and query tools, for Participants and the SEC staff.
(c) Technology Costs--CAIS Operating Fees
The $2,072,908 in technology costs related to CAIS operating fees
represent the fees paid for FCAT's subcontractor charged with the
development and operation of CAT's Customer and Account Information
System (``CAIS''). The CAT is required under the CAT NMS Plan to
capture and store Customer Identifying Information and Customer Account
Information in a database separate from the transactional database and
to create a CAT-Customer-ID for each Customer.
During the Pre-FAM Period, the CAIS-related services were provided
by the Plan Processor through the Plan Processor's subcontractor,
Kingland Systems Incorporation (``Kingland''). Kingland had experience
operating in the securities regulatory technology space, and as a part
of its proposal for acting as the Plan Processor for the CAT, FCAT
selected Kingland as a subcontractor to provide certain CAIS-related
services.
Under the Plan Processor Agreement with FCAT, CAT LLC is required
to pay to the Plan Processor the fees incurred by FCAT for CAIS-related
services provided by FCAT through Kingland on a monthly basis. FCAT
negotiated the fees for Kingland's CAIS-related services on an arm's
length basis with the goals of managing costs and receiving services
required to comply with the CAT NMS Plan, taking into consideration a
variety of factors, including the services to be provided and market
rates for similar types of activity. The fees for CAIS-related services
during the Pre-FAM Period were paid by CAT LLC to FCAT. FCAT, in turn,
paid Kingland.
During the Pre-FAM Period, Kingland began development of the CAIS
Technical Specifications and the building of CAIS. In addition,
Kingland also worked on the build related to the CCID Alternative, an
alternative approach to customer information that was not included in
the CAT NMS Plan
[[Page 76631]]
as originally adopted.\44\ Furthermore, Kingland also worked on the
acceleration of the reporting of large trader identifiers (``LTID'')
earlier than originally contemplated during this period, in accordance
with exemptive relief granted by the SEC.\45\
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\44\ For a discussion of the CCID Alternative, see Securities
Exchange Act Release No. 88393 (March 17, 2020), 85 FR 16152 (March
20, 2020).
\45\ See Phased Reporting Exemptive Relief Order, 85 FR 23075,
23079-80.
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(d) Technology Costs--Change Request Fees
The technology costs related to change request fees include costs
related to certain modifications, upgrades or other changes to the CAT.
Change requests are standard practice and necessary to reflect
operational changes, including changes related to new market
developments, such as new market participants. In general, if CAT LLC
determines that a modification, upgrade or other change to the
functionality or service is necessary and appropriate, CAT LLC will
submit a request for such a change to the Plan Processor. The Plan
Processor will then respond to the request with a proposal for
implementing the change, including the cost (if any) of such a change.
CAT LLC then determines whether to approve the proposed change. The
change request costs were paid by CAT LLC to FCAT. During the Pre-FAM
Period, CAT LLC incurred costs of $141,346 related to change requests
implemented by FCAT. Such change requests related to a development fee
regarding the OPRA and SIP data feeds, and the reprocessing of certain
exchange data.\46\
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\46\ Note that CAT LLC also has incurred costs related to
specific Industry Members (e.g., reprocessing costs related to
Industry Member reporting errors).
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(e) Technology Costs--Capitalized Developed Technology Costs
This category of costs includes capitalizable application
development costs incurred in the development of the CAT. The
capitalized developed technology costs for the Pre-FAM Period of
$51,847,150 relate to technology provided by the Initial Plan Processor
and the successor Plan Processor.
Initial Plan Processor: Thesys CAT, LLC. The capitalized developed
technology costs related to the Initial Plan Processor include costs
incurred with regard to testing for Participant reporting, Participant
reporting to the CAT, a security assessment of the CAT, and the
development of the billing function for the CAT.
On, January 17, 2017, the Selection Committee of the CAT NMS Plan
selected the Initial Plan Processor, Thesys Technologies, LLC, for the
CAT NMS Plan pursuant to Article V of the CAT NMS Plan.\47\ The
Participants utilized a request for proposal (``RFP'') to seek
proposals to build and operate the CAT, receiving a number of proposals
in response to the RFP. The Participants carefully reviewed and
considered each of the proposals, including holding in-person meetings
with each of the Bidders. After several rounds of review, the
Participants selected the Initial Plan Processor in accordance with the
CAT NMS Plan, taking into consideration that the Initial Plan Processor
had experience operating in the securities regulatory technology space,
among other considerations. On April 6, 2017, CAT LLC entered into an
agreement with Thesys CAT LLC (``Thesys CAT''), a Thesys affiliate, to
perform the functions and duties of the Plan Processor contemplated by
the CAT NMS Plan, including the management and operation of the CAT.
Under the agreement, CAT LLC would pay Thesys CAT a negotiated, fixed
price fee for its role as the Initial Plan Processor. Effective January
30, 2019, the Plan Processor Agreement with Thesys CAT was terminated,
and FCAT was subsequently selected as the successor Plan Processor.
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\47\ See Letter from the Participants to Brent J. Fields,
Secretary, SEC, dated January 18, 2017, <a href="https://www.sec.gov/divisions/marketreg/rule613-info">https://www.sec.gov/divisions/marketreg/rule613-info</a>-notice-of-plan-processor-
selection.pdf.
---------------------------------------------------------------------------
From January 17, 2017 through January 30, 2019, the time in which
the Thesys CAT was engaged for the CAT, but excluding the period from
November 15, 2017 through January 30, 2019, the Initial Plan Processor
engaged in various activities with respect to the CAT, including
preparing iterative drafts of Participant Technical Specifications,
Industry Member Technical Specifications and the Central Repository
Access Technical Specifications. In addition, Thesys CAT also developed
CAT technology, addressed compliance items, including drafting CAT
policies and procedures, addressing Regulation SCI requirements,
establishing a CAT Compliance Officer and a Chief Information Security
Officer, addressed security-related matters for the CAT, and worked
towards the initiation of Participant reporting per the Participant
Technical Specifications.
Successor Plan Processor: FCAT. The capitalized developed
technology costs related to FCAT include: (1) development costs
incurred during the application development stage to meet various
agreed-upon milestones regarding the CAT, including the completion of
go-live functionality related to options ingestion and validation,
equities regulatory services agreement query tool updates and unlinked
options data query, options linkages release, Industry Member Phase 2a
file submission and data integrity (including error corrections), and
Industry Member testing, including reporting relationships, ATS order
type management, basic reporting statistics, SFTP data integrity
feedback and error correction; (2) costs related to certain
modifications, upgrades, or other changes to the CAT that were not
contemplated by the agreement between CAT LLC and the Plan Processor,
including a one-time development fee for a secure analytics workspace,
a one-time development fee of an Industry Member connectivity solution;
and a one-time development fee for the acceleration of multi-factor
authentication; (3) CAIS implementation fees; and (4) license fees.
(f) Legal Costs
The legal costs of $19,674,463 represent the fees paid for legal
services provided by two law firms, Wilmer Cutler Pickering Hale and
Dorr LLP (``WilmerHale'') and Pillsbury Winthrop Shaw Pittman LLP
(``Pillsbury''), during the Pre-FAM Period. The legal costs exclude
those costs incurred from November 15, 2017 through November 15, 2018.
Law Firm: WilmerHale. Following the adoption of Rule 613, the
Participants determined it was necessary to engage external legal
counsel to advise the Participants with respect to corporate and
regulatory legal matters related to the CAT, including drafting and
developing the CAT NMS Plan. The Participants considered a variety of
factors in their analysis of prospective law firms, including (1) the
firm's qualifications, resources, and expertise, (2) the firm's
relevant experience and understanding of the regulatory matters raised
by the CAT and in advising on matters of similar scope, (3) the
composition of the legal team, and (4) professional fees. Following a
series of interviews, the Participants acting as a consortium
determined that WilmerHale was well qualified given the balance of
these considerations and engaged WilmerHale in February 2013.
WilmerHale's billing rates are negotiated on an annual basis and
are determined with reference to the rates charged by other leading law
firms for similar work. The Participants assess WilmerHale's
performance and review prospective budgets and staffing plans
[[Page 76632]]
submitted by WilmerHale on an annual basis. WilmerHale's compensation
arrangements are reasonable and appropriate, and in line with the rates
charged by other leading law firms for similar work.
The legal costs for WilmerHale during the Pre-FAM Period included
costs incurred from 2013 until June 22, 2020 to address corporate and
regulatory legal matters related to the CAT. The legal fees for this
law firm during the period from February 2013 until the formation of
the CAT NMS, LLC on November 15, 2016 were paid directly by the
exchanges and FINRA to WilmerHale. After the formation of CAT NMS LLC,
the legal fees were paid by CAT LLC to WilmerHale.
After WilmerHale was engaged in 2013 through the end of the Pre-FAM
Period on June 22, 2020 (excluding the legal costs from November 15,
2017 through November 15, 2018), WilmerHale provided legal assistance
to the CAT on a variety of matters, including with regard to the
following:
<bullet> Analyzed various legal matters associated with the
Selection Plan, and drafted an amendment to the Selection Plan;
<bullet> Assisted with the RFP and bidding process for the CAT Plan
Processor;
<bullet> Analyzed legal matters related to the Development Advisory
Group (``DAG'');
<bullet> Drafted the CAT NMS Plan, analyzed various items related
to the CAT NMS Plan, and responded to comment letters on CAT NMS Plan;
<bullet> Provided legal support for the formation of the legal
entity, the governance of the CAT, including governance support prior
to the adoption of the CAT NMS Plan, which involved support for the
full committee of exchanges and FINRA as well as subcommittees of this
group (e.g., Joint Subcommittee Group, Technical, Industry Outreach,
Cost and Funding and Other Products) and the DAG, governance support
during the transition to the new governance structure under the CAT NMS
Plan; and governance support after the adoption of the CAT NMS Plan,
which involved support for the Operating Committee, Advisory Committee,
Compliance Subcommittee, and CAT working groups;
<bullet> Assisted with the development of the CAT funding model and
drafted related amendments of the CAT NMS Plan and related filings;
<bullet> Negotiated and drafted the plan processor agreements with
the Initial Plan Processor and the successor Plan Processor;
<bullet> Provided assistance with compliance with Regulation SCI;
<bullet> Assisted with clock synchronization study;
<bullet> Provided assistance with respect to the establishment of
CAT security;
<bullet> Drafted exemptive requests from CAT NMS Plan requirements,
including with regard to options market maker quotes, Customer IDs, CAT
Reporter IDs, linking allocations to executions, CAT reporting
timeline, FDIDs, customer and account information, timestamp
granularity, small industry members, data facility reporting and
linkage, allocation reports, SRO-assigned market participant
identifiers and cancelled trade indicators, thereby seeking to
implement changes that would be cost effective and benefit of Industry
Members and Participants;
<bullet> Assisted with the Implementation Plan required pursuant to
Section 6.6(c)(i) of the CAT NMS Plan;
<bullet> Provided advice regarding CAT policies and procedures;
<bullet> Analyzed the SEC's amendment of the CAT NMS Plan regarding
financial accountability;
<bullet> Provided interpretations of and related to the CAT NMS
Plan;
<bullet> Provided support with regard to discussions with the SEC
and its staff, including with respect to addressing interpretive and
implementation issues; and
<bullet> Assisted with third-party vendor agreements.
Law Firm: Pillsbury. The legal costs for CAT during the Pre-FAM
Period include costs related to the legal services performed by
Pillsbury. The Participants interviewed this law firm as well as other
potential law firms to provide legal assistance regarding certain
liability matters. After considering a variety of factors in its
analysis, including the relevant expertise and fees of the firm, CAT
LLC determined to hire Pillsbury in April 2019. The hourly fee rates
for this law firm were in line with market rates for specialized legal
expertise. The legal fees were paid by CAT LLC to Pillsbury. The legal
costs for Pillsbury during the Pre-FAM Period included costs incurred
from April 2019 until June 22, 2020 to address legal matters regarding
the agreements between CAT Reporters and CAT LLC concerning certain
terms associated with CAT Reporting (the ``Reporter Agreement'').
During that period, Pillsbury advised CAT LLC regarding applicable
legal matters, participated in negotiations between the Participants
and Industry Members, participated in meetings with senior SEC staff,
the Chairman, and Commissioners, represented CAT LLC and the
Participants in an SEC administrative proceeding, and drafted a
proposed amendment to the CAT NMS Plan regarding liability matters.
Liability issues related to the CAT are important matters that needed
to be resolved and clarified. CAT LLC's efforts to seek such resolution
and clarity work to the benefit of Participants, Industry Members and
other market participants. Moreover, litigation involving CAT LLC is an
expense of operating the CAT, and, therefore, is appropriately an
obligation of both Participants and Industry Members under the CAT
Funding Model.
(g) Consulting Costs
The consulting costs of $17,013,414 represent the fees paid to the
consulting firm Deloitte & Touche LLP (``Deloitte'') as project manager
during the Pre-FAM Period, from October 2012 until June 22, 2020. These
consulting costs include costs for advisory services related to the
operation of the CAT, and meeting facilitation and communications
coordination, vendor support and financial analyses.
To help facilitate project management given the unprecedented
complexity and scope of the CAT project, the Participants determined it
was necessary to engage a consulting firm to assist with the CAT
project in 2012, following the adoption of Rule 613. A variety of
factors were considered in the analysis of prospective consulting
firms, including (1) the firm's qualifications, resources, and
expertise, (2) the firm's relevant experience and understanding of the
regulatory issues raised by the CAT and in coordinating matters of
similar scope, (3) the composition of the consulting team, and (4)
professional fees. Following a series of interviews, the exchanges and
FINRA as a consortium determined that Deloitte was well qualified given
the balance of these considerations and engaged Deloitte on October 1,
2012.
Deloitte's fee rates are negotiated on an annual basis and are in
line with market rates for this type of specialized consulting work.
CAT LLC assesses Deloitte's performance and reviews prospective budgets
and staffing plans submitted by Deloitte on an annual basis. Deloitte's
compensation arrangements are reasonable and appropriate, and in line
with the rates charged by other leading consulting firms for similar
work.
The consulting costs for CAT during the period from 2012 until the
formation of the CAT NMS, LLC were paid directly by the Participants to
Deloitte. After the formation of CAT NMS, LLC, the consulting fees were
paid by CAT
[[Page 76633]]
LLC to Deloitte. CAT LLC reviewed the consulting fees each month and
approved the invoices.
After Deloitte was hired in 2012 through the end of the Pre-FAM
Period on June 22, 2020 (excluding the consulting costs from November
15, 2017 through November 15, 2018), Deloitte provided a variety of
consulting services, including the following:
<bullet> Established and implemented program operations for the CAT
project, including the program management [sic] office and workstream
design;
<bullet> Assisted with the Plan Processor selection process,
including but not limited to, the development of the RFP and the bidder
evaluation process, and facilitation and consolidation of the
Participant's independent reviews;
<bullet> Assisted with the development and drafting of the CAT NMS
Plan, including conducting cost-benefit studies, analyzing the Order
Audit Trail System (``OATS'') and CAT requirements, and drafting
appendices to the Plan;
<bullet> Assisted with cost and funding-related activities for the
CAT, including the development of the CAT funding model and assistance
with loans and the CAT bank account for CAT funding;
<bullet> Provided governance support to the CAT, including
governance support prior to the adoption of the CAT NMS Plan, which
involved support for the full committee of exchanges and FINRA as well
as subcommittees of this group (e.g., Joint Subcommittee Group,
Technical, Industry Outreach, Cost and Funding and Other Products) and
the DAG, governance support during the transition to the new governance
structure under the CAT NMS Plan and governance support after the
adoption of the CAT NMS Plan, which involved support for the Operating
Committee, Advisory Committee, Compliance Subcommittee and CAT working
groups;
<bullet> Provided support to the Operating Committee, the Chair of
the Operating Committee and the Leadership Team, including project
management support, coordination and planning for meetings and
communications, and interfacing with law firms and the SEC;
<bullet> Assisted with industry outreach and communications
regarding the CAT, including assistance with industry outreach events,
the development of the CAT website, frequently asked questions, and
coordinating with the CAT LLC's public relations firm;
<bullet> Provided support for updating the SEC on the progress of
the development of the CAT;
<bullet> Provided active planning and coordination with and support
for the Initial Plan Processor with regard to the development of the
CAT, and reported to the Participants on the progress;
<bullet> Coordinated efforts regarding the selection of the
successor Plan Processor;
<bullet> Assisted with the transition from the Initial Plan
Processor to the successor Plan Processor, including support for the
Operating Committee and successor Plan Processor for the new role; and
<bullet> Provided support for third-party vendors for the CAT,
including FCAT, Anchin and the law firms engaged by CAT LLC.
(h) Insurance
The insurance costs of $880,419 represent the cost incurred for
insurance for CAT during the Pre-FAM Period. Commencing in 2020, CAT
LLC performed an evaluation of various potential alternatives for CAT
insurance policies, which included engaging in discussions with
different insurance companies and conducting cost comparisons of
various alternative approaches to insurance. Based on an analysis of a
variety of factors, including coverage and premiums, CAT LLC determined
to purchase cyber security liability insurance, directors' and
officers' liability insurance, and errors and omissions liability
insurance from USI Insurance Services LLC (``USI''). Such policies are
standard for corporate entities, and cyber security liability insurance
is important for the CAT System. The annual premiums for these policies
were competitive for the coverage provided. The annual premiums were
paid by CAT LLC to USI.
(i) Professional and Administration Costs
In adopting the CAT NMS Plan, the Commission amended the Plan to
add a requirement that CAT LLC's financial statements be prepared in
compliance with GAAP, audited by an independent public accounting firm,
and made publicly available.\48\ The professional and administration
costs include costs related to accounting and accounting advisory
services to support the operating and financial functions of CAT,
financial statement audit services by an independent accounting firm,
preparation of tax returns, and various cash management and treasury
functions. In addition, professional and administration costs for the
Pre-FAM Period include costs related to the receipt of market data and
a security assessment. The costs for these professional and
administration services were $1,082,036 for the Pre-FAM Period.
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\48\ Section 9.2 of the CAT NMS Plan.
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Financial Advisory Firm: Anchin Accountants & Advisors
(``Anchin''). CAT LLC determined to hire a financial advisory firm,
Anchin, to assist with financial matters for the CAT in April 2018. CAT
LLC interviewed Anchin as well as other potential financial advisory
firms to assist with the CAT project, considering a variety of factors
in its analysis, including the firm's relevant expertise and fees. The
hourly fee rates for this firm were in line with market rates for these
financial advisory services. The fees for these services were paid by
CAT LLC to Anchin.
After Anchin was hired in April 2018 through the end of the Pre-FAM
Period on June 22, 2020 (excluding the period from April 2018 through
November 15, 2018), Anchin provided a variety of services, including
the following:
<bullet> Developed, updated and maintained internal controls;
<bullet> Provided cash management and treasury functions;
<bullet> Facilitated bill payments;
<bullet> Provided monthly bookkeeping;
<bullet> Reviewed vendor invoices and documentation in support of
cash disbursements;
<bullet> Provided accounting research and consultations on various
accounting, financial reporting and tax matters;
<bullet> Addressed not-for-profit tax and accounting
considerations;
<bullet> Prepared tax returns;
<bullet> Addressed various accounting, financial and operating
inquiries from Participants;
<bullet> Developed and maintained quarterly and annual operating
and financial budgets, including budget to actual fluctuation analyses;
<bullet> Addressed accounting and financial reporting matters
relating to the transition from CAT NMS, LLC to Consolidated Audit
Trail, LLC, including supporting the dissolution of CAT NMS, LLC;
<bullet> Supported compliance with the CAT NMS Plan;
<bullet> Worked with and provided support to the Operating
Committee and various CAT working groups;
<bullet> Prepared monthly, quarterly and annual financial
statements;
<bullet> Supported the annual financial statement audits by an
independent auditor;
<bullet> Reviewed historical costs from inception; and
<bullet> Provided accounting and financial information in support
of SEC filings.
Accounting Firm: Grant Thornton LLP (``Grant Thornton''). In
February 2020, CAT LLC determined to engage an
[[Page 76634]]
independent accounting firm, Grant Thornton, to complete the audit of
CAT LLC's financial statements, in accordance with the requirements of
the CAT NMS Plan. CAT LLC interviewed this firm as well as another
potential accounting firm to audit CAT LLC's financial statements,
considering a variety of factors in its analysis, including the
relevant expertise and fees of each of the firms. CAT LLC determined
that Grant Thornton was well-qualified for the proposed role given the
balance of these considerations. Grant Thornton's fixed fee rate
compensation arrangement was reasonable and appropriate, and in line
with the market rates charged for these types of accounting services.
The fees for these services were paid by CAT LLC to Grant Thornton.
Market Data Provider: Exegy. The professional and administrative
costs for the Pre-FAM Period included costs related to the receipt of
certain market data for the CAT pursuant to an agreement with the CAT
LLC, and then with FCAT. Exegy provided SIP Data required by the CAT
NMS Plan.
After performing an analysis of the available market data vendors
to confirm that the data provided met the SIP Data requirements of the
CAT NMS Plan and comparing the costs of the vendors providing the
required SIP Data, CAT LLC determined to purchase market data from
Exegy from July 2018 through March 2019. CAT LLC determined that,
unlike certain other vendors, Exegy provided market data that included
all data elements required by the CAT NMS Plan.\49\ In addition, the
fees were reasonable and in line with market rates for the market data
received. Accordingly, the professional and administrative costs for
the Pre-FAM Period include the Exegy costs from November 2018 through
March 2019. The cost of the market data was reasonable for the market
data received. The fees for the market data were paid directly by CAT
LLC to Exegy.
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\49\ See Section 6.5(a)(ii) of the CAT NMS Plan.
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Upon the termination of the contract between CAT LLC and Exegy,
FCAT entered into a contract with Exegy to purchase the required market
data from Exegy in July 2019. All costs under the contract were treated
as a direct pass through cost to CAT LLC. Therefore, the fees for the
market data were paid by CAT LLC to FCAT, who, in turn, paid Exegy for
the market data.
Security Assessment: RSM US LLP (``RSM''). The operating costs for
the Pre-FAM Period include costs related to a third-party security
assessment of the CAT performed by RSM. The assessment was designed to
verify and validate the effective design, implementation, and operation
of the controls specified by NIST Special Publication 800-53, Revision
4 and related standards and guidelines. Such a security assessment is
in line with industry practice and important given the data included in
the CAT. CAT LLC determined to engage RSM to perform the security
assessment, after considering a variety of factors in its analysis,
including the firm's relevant expertise and fees. The fees were
reasonable and in line with market rates for such an assessment. RSM
performed the assessment from October 2018 through December 2018.
Accordingly, the costs for the Pre-FAM Period include the costs
incurred in November and December 2018. The cost for the security
assessment were paid directly to RSM by CAT LLC.
(j) Public Relations Costs
The public relations costs of $224,669 represent the fees paid to
public relations firms during the Pre-FAM Period for professional
communications services to CAT, including media relations consulting,
strategy and execution. By engaging a public relations firm, CAT LLC
was better positioned to understand and address CAT matters to the
benefit of all market participants. Specifically, the public relations
firms provided services related to communications with the public
regarding the CAT, including monitoring developments related to the CAT
(e.g., congressional efforts, public comments and reaction to
proposals, press coverage of the CAT), reporting such developments to
CAT LLC, and drafting and disseminating communications to the public
regarding such developments as well as reporting on developments
related to the CAT (e.g., amendments to the CAT NMS Plan). Public
relations services were important for various reasons, including
monitoring comments made by market participants about CAT and
understanding issues related to the CAT discussed on the public record.
The services performed by each of the public relations firms were
comparable. The fees for such services were reasonable and in line with
market rates. Only one public relations firm was engaged at a time; the
three firms were engaged sequentially as the primary public relations
contact moved among the three firms during this time period.
Public Relations Firm: Peppercomm, Inc. (``Peppercomm''). The
national securities exchanges and FINRA, acting as a consortium,
determined to hire the public relations firm Peppercomm in October 2014
and continued to engage this firm through September 2017. The exchanges
and FINRA made this engagement decision after considering a variety of
factors in its analysis, including the firm's relevant expertise and
fees. The fee rates for this public relations firm were negotiated on
an arm's length basis and were in line with market rates for these
types of services. The public relations costs during the period from
October 2014 until the formation of the CAT NMS LLC were paid directly
by the exchanges and FINRA to the public relations firm. After the
formation of CAT NMS, LLC, the consulting fees were paid by CAT LLC.
Public Relations Firm: Sloane & Company (``Sloane''). CAT LLC
determined to hire a new public relations firm, Sloane, in March 2018,
based on, among other things, their expertise and the primary contact's
history with the project. The fee rates for this public relations firm
were in line with market rates for these types of services. The fees
during the Pre-FAM Period were paid by CAT LLC to Sloane. CAT LLC
continued the engagement with Sloane until February 2020.
Public Relations Firm: Peak Strategies. CAT LLC determined to hire
a new public relations firm, Peak Strategies, in March 2020, based on,
among other things, their expertise and the primary contact's history
with the project. The fee rates for this public relations firm were in
line with market rates for these types of services. The fees during the
Pre-FAM Period were paid by CAT LLC to Peak Strategies.
(ii) Historical CAT Costs Incurred in Financial Accountability
Milestone Period 1
Historical CAT Costs 1 would include costs incurred by CAT and
already funded by the Participants during Period 1 of the Financial
Accountability Milestones (``FAM Period 1''),\50\ which covers the
period from June 22, 2020--July 31, 2020. Historical CAT Costs 1 would
include costs for FAM Period 1 of $6,377,343. The Participants would
remain responsible for one-third of this cost (which they have
previously paid) ($2,125,781), and Industry Members would be
responsible for the remaining two-thirds, with CEBBs paying one-third
($2,125,781) and CEBSs paying one-third ($2,125,781). The following
table breaks down Historical CAT Costs 1 for FAM Period 1 into the
categories
[[Page 76635]]
set forth in Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan.\51\
---------------------------------------------------------------------------
\50\ Section 11.6(a)(i)(A) of the CAT NMS Plan.
\51\ The costs described in this table of costs for FAM Period 1
were calculated based upon CAT LLC's review of applicable bills and
invoices and related financial statements. CAT LLC financial
statements are available on the CAT website.
------------------------------------------------------------------------
Historical CAT costs
Operating expense for FAM Period 1
------------------------------------------------------------------------
Capitalized Developed Technology Costs *....... $1,684,870
Technology Costs............................... 3,996,800
Cloud Hosting Services..................... 2,642,122
Operating Fees............................. 1,099,680
CAIS Operating Fees........................ 254,998
Change Request Fees........................ .......................
Legal.......................................... 481,687
Consulting..................................... 137,209
Insurance...................................... .......................
Professional and administration................ 69,077
Public relations............................... 7,700
------------------------
Total Operating Expenses................... 6,377,343
------------------------------------------------------------------------
* The non-cash amortization of these capitalized developed technology
costs of $362,121 incurred during FAM Period 1 have been appropriately
excluded from the above table.\52\
By the completion of FAM Period 1, CAT LLC was required to
implement the reporting by Industry Members (excluding Small Industry
Members that are not OATS reporters) of equities transaction data and
options transaction data, excluding Customer Account Information,
Customer-ID and Customer Identifying Information.\53\ CAT LLC completed
the requirements of FAM Period 1 by July 31, 2020. The following
describes the costs for each of the categories for FAM Period 1.
---------------------------------------------------------------------------
\52\ As discussed above, with respect to certain costs that were
``appropriately excluded,'' such excluded costs relate to the
amortization of capitalized technology costs, which are amortized
over the life of the Plan Processor Agreement. As such costs have
already been otherwise reflected in the filing, their inclusion
would double count the capitalized technology costs. In addition,
amortization is a non-cash expense.
\53\ See definition of ``Initial Industry Member Core Equity and
Options Reporting'' in Section 1.1 of the CAT NMS Plan.
---------------------------------------------------------------------------
(a) Technology Costs--Cloud Hosting Services
CAT LLC continued to utilize AWS in FAM Period 1 to provide a broad
array of cloud hosting services for the CAT, including data ingestion,
data management, and analytic tools. AWS continued to provide storage
services, databases, compute services and other services (such as
networking, management tools and DevOps tools), as well as various
environments for CAT, such as development, performance testing, test,
and production environments, during the FAM 1 Period. Accordingly, the
$2,642,122 in technology costs for cloud hosting services represent
costs incurred for services provided by AWS, as the cloud services
provider, during FAM Period 1. The fee arrangement for AWS described
above with regard to the Pre-FAM Period continued in place during FAM
Period 1 pursuant to the Plan Processor Agreement. Moreover, CAT LLC
continued to believe that AWS's maturity in the cloud services space as
well as the significant cost and time necessary to move the CAT to a
different cloud services provider supported the continued engagement of
AWS.
The cost for AWS cloud services for the CAT continued to be a
function of the volume of CAT Data. During the FAM 1 Period, the volume
of CAT Data continued to far exceed the original predictions for the
CAT as set forth in the CAT NMS Plan. During this period, data
submitted to the CAT included options and equities Participant Data,
Phase 2a and Phase 2b Industry Member Data (including certain linkages)
as well as SIP Data, reference data and other types of Other Data. The
following chart provides data regarding the average daily volume,
cumulative total events, total compute hours and storage footprint of
the CAT during FAM Period 1.\54\
---------------------------------------------------------------------------
\54\ Note that the volume data described in this table does not
include CAIS data.
------------------------------------------------------------------------
Date Range: 6/22/20-7/
31/20
------------------------------------------------------------------------
Average Daily Volume in Billions:
Participant--Equities...................... 6
Participant--Options....................... 103
Industry Member--Equities.................. 7
Industry Member--Options................... 0.31
SIP--Options & Equities.................... 74
Average Total Daily Volume................. 185
Cumulative Total Events for the Period......... 5,190
Total Compute Hours for the Period............. 2,612,082
Storage Footprint at End of Period (Petabytes). 57.47
------------------------------------------------------------------------
(b) Technology Costs--Operating Fees
Pursuant to the Plan Processor Agreement discussed above, FCAT
continued in its role as the Plan Processor for the CAT during FAM
Period 1. Accordingly, the $1,099,680 in technology costs for operating
fees represent costs incurred for the services provided by FCAT under
the Plan Processor Agreement, during FAM Period 1. The fee arrangement
for FCAT described above with regard to the Pre-
[[Page 76636]]
FAM Period continued in place during FAM Period 1 pursuant to the Plan
Processor Agreement. During FAM Period 1, FCAT's activities with
respect to the CAT included the following:
<bullet> Published iterative drafts of Technical Specifications for
Phase 2d, after substantial engagement with SEC staff, Industry Members
and Participants on the Technical Specifications;
<bullet> Published iterative drafts of CAIS Technical
Specifications, after substantial engagement with SEC staff, Industry
Members and Participants on the Technical Specifications;
<bullet> Facilitated Industry Member reporting of Quote Sent Time
on Options Market Maker quotes;
<bullet> Addressed compliance items, including drafting CAT
policies and procedures, and addressing Regulation SCI requirements;
<bullet> Provided support to the Operating Committee, the
Compliance Subcommittee and CAT working groups;
<bullet> Assisted with interpretive efforts and exemptive requests
regarding the CAT NMS Plan;
<bullet> Oversaw the security of the CAT;
<bullet> Monitored the operation of the CAT, including with regard
to Participant and Industry Member reporting;
<bullet> Provided support to subcontractors under the Plan
Processor Agreement;
<bullet> Provided support in discussions with Participants and the
SEC and its staff;
<bullet> Operated the FINRA CAT Helpdesk;
<bullet> Facilitated communications with the industry, including
via FAQs, CAT Alerts, meetings, presentations and webinars;
<bullet> Administered the CAT website and all of its content; and
<bullet> Provided technical support and assistance with
connectivity, data access, and user support, including the use of CAT
Data and query tools, for Participants and the SEC staff.
(c) Technology Costs--CAIS Operating Fees
Pursuant to the Plan Processor Agreement discussed above, Kingland
continued in its role as a subcontractor for the development and
implementation of CAIS during FAM Period 1. Accordingly, the $254,998
in technology costs for CAIS operating fees represent costs incurred
for services provided by Kingland during FAM Period 1. The fee
arrangement for Kingland described above with regard to the Pre-FAM
Period continued in place during FAM Period 1 pursuant to the Plan
Processor Agreement. During FAM Period 1, Kingland continued the
development of the CAIS Technical Specifications and building of CAIS.
In addition, Kingland continued to work on the CAIS Technical
Specifications and build related to CCID Alternative, as well as the
acceleration of the reporting of LTIDs.
(d) Technology Costs--Change Request Fees
CAT LLC did not incur costs related to change requests during FAM
Period 1.
(e) Technology Costs--Capitalized Developed Technology Costs
Capitalized developed technology costs for FAM Period 1 of
$1,684,870 include capitalizable application development costs incurred
in the development of the CAT by FCAT. Such costs include: (1) costs
related to certain modifications, upgrades, or other changes to the CAT
that were not contemplated by the agreement between CAT LLC and the
Plan Processor, including separate production and industry test
entitlements, and reprocessing of exchange event timestamps; (2)
implementation fees; and (3) license fees.
(f) Legal Costs
The legal costs of $481,687 represent the fees paid for legal
services provided by two law firms, WilmerHale and Pillsbury during FAM
Period 1.
Law Firm: WilmerHale. CAT LLC continued to employ WilmerHale during
FAM Period 1 based on, among other things, their expertise and long
history with the project. The hourly fee rates for this law firm were
in line with market rates for specialized legal expertise. The legal
fees during FAM Period 1 were paid by CAT LLC to WilmerHale. During FAM
Period 1, WilmerHale provided legal assistance to the CAT including
with regard to the following:
<bullet> Assisted with the development of the CAT funding model and
drafted related amendments and fee filings;
<bullet> Drafted exemptive requests from CAT NMS Plan requirements
regarding, for example, verbal activity, options market maker quote
sent time, TRF linkages, and allocations;
<bullet> Provided interpretations related to CAT NMS Plan
requirements, including the Financial Accountability Milestone
amendment;
<bullet> Assisted with compliance with Regulation SCI;
<bullet> Provided support for the Operating Committee, Compliance
Subcommittee, working groups and Leadership Team, including with regard
to meetings with the SEC staff;
<bullet> Assisted with the drafting of the Implementation Plan
required pursuant to Section 6.6(c)(i) of the CAT NMS Plan;
<bullet> Assisted with communications and presentations for the
industry regarding CAIS;
<bullet> Drafted SRO rule filings related to the CAT Compliance
Rule;
<bullet> Provided support for Compliance Subcommittee, including
with regard to response to OCIE examinations and the annual assessment;
<bullet> Provided guidance regarding CAT technical specifications;
<bullet> Assisted with third-party vendor agreements; and
<bullet> Provided support with regard to discussions with the SEC
and its staff, including with respect to addressing interpretive and
implementation issues.
Law Firm: Pillsbury. CAT LLC continued to employ Pillsbury during
FAM Period 1 based on, among other things, their expertise and history
with the project. The hourly fee rates for this law firm were in line
with market rates for specialized legal expertise. The legal fees
during FAM Period 1 were paid by CAT LLC to Pillsbury. During FAM
Period 1, Pillsbury provided legal assistance to the CAT regarding the
CAT Reporter Agreement. During that period, Pillsbury advised CAT LLC
regarding applicable legal matters and drafted a proposed amendment to
the CAT NMS Plan regarding liability matters. Liability issues related
to the CAT are important matters that needed to be resolved and
clarified. CAT LLC's efforts to seek such resolution and clarity work
to the benefit of Participants, Industry Members and other market
participants.
(g) Consulting Costs
The consulting costs of $137,209 represent the fees paid to
Deloitte as project manager during FAM Period 1. CAT LLC continued to
employ Deloitte during FAM Period 1 based on, among other things, their
expertise and cumulative experience with the CAT. The fee rates for
Deloitte during FAM Period 1 were negotiated and in line with market
rates for this type of specialized consulting work. The consulting fees
during FAM Period 1 were paid by CAT LLC to the consulting firm. CAT
LLC reviewed the consulting fees each month and approved the invoices.
During FAM Period 1, Deloitte's CAT-related activities included the
following:
<bullet> Implemented program operations for the CAT project;
<bullet> Provided support to the Operating Committee, the Chair of
the Operating Committee and the Leadership Team, including project
management support,
[[Page 76637]]
coordination and planning for meetings and communications, and
interfacing with law firms and the SEC;
<bullet> Assisted with cost and funding matters for the CAT,
including the development of the CAT funding model and assistance with
loans and the CAT bank account for CAT funding;
<bullet> Provided support for updating the SEC on the progress of
the development of the CAT;
<bullet> Assisted with the transition from the Initial Plan
Processor to the successor Plan Processor; and
<bullet> Provided support for third-party vendors for the CAT,
including FCAT, Anchin and the law firms engaged by CAT LLC.
(h) Insurance
Although insurance was in effect during FAM Period 1, CAT LLC did
not incur costs related to insurance during FAM Period 1.
(i) Professional and Administration Costs
Financial Advisory Firm: Anchin. The professional and
administration costs of $69,077 represent the fees paid to Anchin
during FAM Period 1. CAT LLC continued to employ Anchin during FAM
Period 1 based on, among other things, their expertise and history with
the project. The hourly fee rates for this firm were in line with
market rates for these type of financial advisory services. The fees
for these services during FAM Period 1 were paid by CAT LLC to Anchin.
During FAM Period 1, Anchin provided a variety of services, including
the following:
<bullet> Maintained internal controls;
<bullet> Provided cash management and treasury functions;
<bullet> Facilitated bill payments;
<bullet> Provided monthly bookkeeping;
<bullet> Reviewed vendor invoices and documentation in support of
cash disbursements;
<bullet> Provided accounting research and consultations on various
accounting, financial reporting and tax matters;
<bullet> Addressed various accounting, financial reporting and
operating inquiries from Participants;
<bullet> Developed and maintained quarterly and annual operating
and financial budgets, including budget to actual fluctuation analyses;
<bullet> Supported compliance with the CAT NMS Plan;
<bullet> Worked with and provided support to the Operating
Committee and various CAT working groups; and
<bullet> Prepared monthly and quarterly financial statements.
(j) Public Relations Costs
The public relations costs of $7,700 represent the fees paid to
Peak Strategies during FAM Period 1. CAT LLC continued to employ Peak
Strategies during FAM Period 1 based on, among other things, their
expertise and history with the project. The fee rates for this firm
were reasonable and in line with market rates for these types of
services. The fees for these services during FAM Period 1 were paid by
CAT LLC to Peak Strategies. During FAM Period 1, Peak Strategies
continued to provide professional communications services to CAT LLC,
including media relations consulting, strategy and execution.
Specifically, the public relations firm provided services related to
communications with the public regarding the CAT, including monitoring
developments related to the CAT (e.g., congressional efforts, public
comments and reaction to proposals, press coverage of the CAT),
reporting such developments to CAT LLC, and drafting and disseminating
communications to the public regarding such developments as well as
reporting on developments related to the CAT (e.g., amendments to the
CAT NMS Plan). As discussed above, such public relations services were
important for various reasons, including monitoring comments made by
market participants about the CAT and understanding issues related to
the CAT discussed on the public record. By engaging a public relations
firm, CAT LLC was better positioned to understand and address CAT
matters to the benefit of all market participants.
(iii) Historical CAT Costs Incurred in Financial Accountability
Milestone Period 2
Historical CAT Costs 1 would include costs incurred by CAT LLC and
already funded by Participants during Period 2 of the Financial
Accountability Milestones (``FAM Period 2''),\55\ which covers the
period from August 1, 2020--December 31, 2020. Historical CAT Costs 1
would include costs for FAM Period 2 of $42,976,478. The Participants
would remain responsible for one-third of this cost (which they have
previously paid) ($14,325,493), and Industry Members would be
responsible for the remaining two-thirds, with CEBBs paying one-third
($14,325,493) and CEBSs paying one-third ($14,325,493). The following
table breaks down Historical CAT Costs 1 for FAM Period 2 into the
categories set forth in Section 11.3(b)(iii)(B)(II) of the CAT NMS
Plan.\56\
---------------------------------------------------------------------------
\55\ Section 11.6(a)(i)(B) of the CAT NMS Plan.
\56\ The costs described in this table of costs for FAM Period 2
were calculated based upon CAT LLC's review of applicable bills and
invoices and related financial statements. CAT LLC financial
statements are available on the CAT website.
\57\ As discussed above, with respect to certain costs that were
``appropriately excluded,'' such excluded costs relate to the
amortization of capitalized technology costs, which are amortized
over the life of the Plan Processor Agreement. As such costs have
already been otherwise reflected in the filing, their inclusion
would double count the capitalized technology costs. In addition,
amortization is a non-cash expense.
------------------------------------------------------------------------
Historical CAT costs
Operating expense for FAM Period 2
------------------------------------------------------------------------
Capitalized Developed Technology Costs *....... $6,761,094
Technology Costs............................... 31,460,033
Cloud Hosting Services..................... 20,709,212
Operating Fees............................. 9,108,700
CAIS Operating Fees........................ 1,590,298
Change Request Fees........................ 51,823
Legal.......................................... 2,766,644
Consulting..................................... 532,146
Insurance...................................... 976,098
Professional and administration................ 438,523
Public relations............................... 41,940
------------------------
Total Operating Expenses................... 42,976,478
------------------------------------------------------------------------
* The non-cash amortization of these capitalized developed technology
costs of $1,892,505 incurred during FAM Period 2 have been
appropriately excluded from the above table.\57\
[[Page 76638]]
By the completion of FAM Period 2, CAT LLC was required to
implement the following with regard to the CAT:
(a) Industry Member reporting (excluding reporting by Small
Industry Members that are not OATS reporters) for equities
transactions, excluding Customer Account Information, CustomerID,
and Customer Identifying Information, is developed, tested, and
implemented at a 5% Error Rate or less and with sufficient intra-
firm linkage, inter-firm linkage, national securities exchange
linkage, and trade reporting facilities linkage to permit the
Participants and the Commission to analyze the full lifecycle of an
order across the national market system, excluding linkage of
representative orders, from order origination through order
execution or order cancellation; and (b) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates the Industry
Member equities transaction data described in condition (a) and is
available to the Participants and to the Commission.\58\
---------------------------------------------------------------------------
\58\ See definition of ``Full Implementation of Core Equity
Reporting Requirements'' in Section 1.1 of the CAT NMS Plan.
CAT LLC completed the requirements of FAM Period 2 by December 31,
2020. The following describes the costs for each of the categories for
FAM Period 2.
(a) Technology Costs--Cloud Hosting Services
CAT LLC continued to utilize AWS in FAM Period 2 to provide a broad
array of cloud hosting services for the CAT, including data ingestion,
data management, and analytic tools. AWS continued to provide storage
services, databases, compute services and other services (such as
networking, management tools and DevOps tools), as well as various
environments for CAT, such as development, performance testing, test,
and production environments, during FAM Period 2. Accordingly, the
$20,709,212 in technology costs for cloud hosting services represent
costs incurred for services provided by AWS, as the cloud services
provider, during FAM Period 2. The fee arrangement for AWS described
above with regard to the Pre-FAM Period and FAM Period 1 continued in
place during FAM Period 2 pursuant to the Plan Processor Agreement.
The cost for AWS cloud services for the CAT continued to be a
function of the volume of CAT Data. During the FAM Period 2, the volume
of CAT Data continued to far exceed the original predictions for the
CAT as set forth in the CAT NMS Plan. During this period, data
submitted to the CAT included options and equities Participant Data,
Phase 2a and Phase 2b Industry Member Data (including certain linkages)
as well as SIP Data, and Other Data, including reference data. In
addition, Industry Members began reporting LTID account information.
The following chart provides data regarding the average daily volume,
cumulative total events, total compute hours and storage footprint of
the CAT during FAM Period 2.\59\
---------------------------------------------------------------------------
\59\ Note that the volume data described in this table does not
include CAIS data.
------------------------------------------------------------------------
Date range: 8/1/20-12/
31/20
------------------------------------------------------------------------
Average Daily Volume in Billions:
Participant--Equities...................... 6
Participant--Options....................... 116
Industry Member--Equities.................. 11
Industry Member--Options................... 0.98
SIP--Options & Equities.................... 80
Average Total Daily Volume................. 282
Cumulative Total Events for the Period......... 2,170
Total Compute Hours for the Period............. 15,660,392
Storage Footprint at End of Period (Petabytes). 114.59
------------------------------------------------------------------------
(b) Technology Costs--Operating Fees
Pursuant to the Plan Processor Agreement discussed above, FCAT
continued in its role as the Plan Processor for the CAT during FAM
Period 2. Accordingly, the $9,108,700 in technology costs for operating
fees represent costs incurred for the services provided by FCAT under
the Plan Processor Agreement during FAM Period 2. The fee arrangement
for FCAT described above with regard to the Pre-FAM Period and FAM
Period 1 continued in place during FAM Period 2 pursuant to the Plan
Processor Agreement. During FAM Period 2, FCAT's activities with
respect to the CAT included publishing the Technical Specifications for
Phase 2d and overseeing the reporting of firm to firm and intrafirm
linkages by Industry Members. In addition, FCAT also continued to
engage in the following activities during FAM Period 2:
<bullet> Addressed compliance items, including drafting CAT
policies and procedures, and addressing Regulation SCI requirements;
<bullet> Provided support to the Operating Committee, Compliance
Subcommittee and CAT working groups;
<bullet> Assisted with interpretive efforts and exemptive requests
regarding the CAT NMS Plan;
<bullet> Oversaw the development and implementation of the security
of the CAT;
<bullet> Monitored the operation of the CAT, including with regard
to Participant and Industry Member reporting;
<bullet> Provided support to subcontractors under the Plan
Processor Agreement;
<bullet> Provided support in discussions with the Participants and
the SEC and its staff;
<bullet> Operated the FINRA CAT Helpdesk;
<bullet> Facilitated communications with the industry, including
via FAQs, CAT Alerts, meetings, presentations and webinars);
<bullet> Administered the CAT website and all of its content; and
<bullet> Provided technical support and assistance with
connectivity, data access, and user support, including the use of CAT
Data and query tools, for Participants and the SEC staff.
(c) Technology Costs--CAIS Operating Fees
Pursuant to the Plan Processor Agreement discussed above, Kingland
continued in its role as a subcontractor for the development and
implementation of CAIS during FAM Period 2. Accordingly, the $1,590,298
in technology costs for CAIS operating fees represent costs incurred
for services provided by Kingland during FAM Period 2. The fee
arrangement for Kingland described above with regard to the Pre-FAM
Period and FAM Period 1 continued in place during FAM Period
[[Page 76639]]
2 pursuant to the Plan Processor Agreement. During FAM Period 2,
Kingland continued the development of the CAIS Technical Specifications
and building of CAIS. In addition, Kingland continued to work on the
CAIS Technical Specifications and build related to the CCID
Alternative, as well as the acceleration of the reporting of LTIDs.
(d) Technology Costs--Change Request Fees
During FAM Period 2, CAT LLC engaged FCAT to pursue certain change
requests in accordance with the Plan Processor Agreement. The change
request costs were paid by CAT LLC to FCAT. Specifically, during the
FAM Period 2, CAT incurred costs of $51,823 related to a change request
regarding the addition of functionality for exchange Participants to
report rejected messages to the CAT.
(e) Technology Costs--Capitalized Developed Technology Costs
Capitalized developed technology costs for FAM Period 2 of
$6,761,094 include capitalizable application development costs incurred
in the development of the CAT by FCAT. Such costs include (1)
development costs incurred during the application development stage to
meet various agreed-upon milestones regarding the CAT, as defined in
the agreement between CAT LLC and the Plan Processor; (2) costs related
to certain modifications, upgrades, or other changes to the CAT that
were not contemplated by the agreement between CAT LLC and the Plan
Processor, including costs related to separate production and industry
test entitlements, market maker reference data, and back-processing of
exchange exception logic; (3) implementation fees; and (4) license
fees.
(f) Legal Costs
The legal costs of $2,766,644 represent the fees paid for legal
services provided by two law firms, WilmerHale and Pillsbury during FAM
Period 2.
Law Firm: WilmerHale. CAT LLC continued to employ WilmerHale during
FAM Period 2 based on, among other things, their expertise and long
history with the project. The hourly fee rates for this law firm were
in line with market rates for specialized legal expertise. The legal
fees during FAM Period 2 were paid by CAT LLC to WilmerHale. During FAM
Period 2, the legal assistance provided by WilmerHale included
providing legal advice regarding the following:
<bullet> Assisted with the development of the CAT funding model and
drafting related amendments and rule filings;
<bullet> Drafted exemptive requests from CAT NMS Plan requirements
regarding, for example, allocations, exchange activity, OTQT, initial
data validation, error corrections and recordkeeping;
<bullet> Provided interpretations related to CAT NMS Plan
requirements, including with regard to the Financial Accountability
Milestone amendment, FAQs and technical specifications;
<bullet> Provided support for the Operating Committee, Compliance
Subcommittees, working groups and Leadership Team, including with
regard to meetings with the SEC staff;
<bullet> Assisted with the Implementation Plan and Quarterly
Progress Reports required pursuant to Section 6.6 of the CAT NMS Plan;
<bullet> Drafted SRO rule filings related to the CAT Compliance
Rule;
<bullet> Provided support for the Compliance Subcommittee,
including with regard to responses to OCIE examinations and the annual
assessment;
<bullet> Provided guidance regarding the SEC's proposed security
amendments to the CAT NMS Plan;
<bullet> Provided guidance regarding SRO rule filings for the
retirement of systems;
<bullet> Provided legal support for Operating Committee meetings,
including drafting resolutions and other materials and voting advice;
<bullet> Assisted with third-party vendor agreements (e.g., with
regard to Anchin, Grant Thornton and insurance policies);
<bullet> Assisted with change requests; and
<bullet> Provided support with regard to discussions with the SEC
and its staff, including with respect to addressing interpretive and
implementation issues.
Law Firm: Pillsbury. CAT LLC continued to employ Pillsbury during
FAM Period 2 based on, among other things, their expertise and history
with the project. The hourly fee rates for this law firm were in line
with market rates for specialized legal expertise. The legal fees
during FAM Period 2 were paid by CAT LLC to Pillsbury. During FAM
Period 2, Pillsbury provided legal assistance to the CAT regarding the
CAT Reporter Agreement. During that period, Pillsbury advised CAT LLC
regarding applicable legal matters and drafted and filed a proposed
amendment to the CAT NMS Plan regarding liability matters. As discussed
above, liability issues related to the CAT are important matters that
needed to be resolved and clarified. CAT LLC's efforts to seek such
resolution and clarity work to the benefit of Participants, Industry
Members and other market participants.
(g) Consulting Costs
The consulting costs of $532,146 represent the fees paid to
Deloitte as project manager during FAM Period 2. CAT LLC continued to
employ Deloitte during FAM Period 2 based on, among other things, their
expertise and long history with the project. The fee rates for Deloitte
during FAM Period 2 were negotiated and in line with market rates for
this type of specialized consulting work. The consulting fees during
FAM Period 2 were paid to Deloitte by CAT LLC. CAT LLC reviewed the
consulting fees each month and approved the invoices. During FAM Period
2, Deloitte's CAT-related activities included the following:
<bullet> Implemented program operations for the CAT project;
<bullet> Provided support to the Operating Committee, the Chair of
the Operating Committee and the Leadership Team, including project
management support, coordination and planning for meetings and
communications, and interfacing with law firms and the SEC;
<bullet> Assisted with cost and funding matters for the CAT,
including the development of the CAT funding model and assistance with
loans and the CAT bank account for CAT funding;
<bullet> Provided support for updating the SEC on the progress of
the development of the CAT; and
<bullet> Provided support for third-party vendors for the CAT,
including FCAT, Anchin and the law firms engaged by CAT LLC.
(h) Insurance
The insurance costs of $976,098 represent the fees paid for
insurance during FAM Period 2. CAT LLC continued to maintain cyber
security liability insurance, directors' and officers' liability
insurance, and errors and omissions liability insurance offered by USI.
After engaging in a process for renewing the coverage, CAT LLC
determined to purchase these insurance policies from USI. The annual
premiums for these policies were competitive for the coverage provided.
The annual premiums were paid by CAT LLC to USI.
(i) Professional and Administration Costs
The professional and administration costs of $438,523 represent the
fees paid to Anchin and Grant Thornton for financial services provided
during FAM Period 2.
Financial Advisory Firm: Anchin. CAT LLC continued to engage Anchin
during FAM Period 2 based on, among other things, their expertise and
history
[[Page 76640]]
with the project. The hourly fee rates for this firm were in line with
market rates for these types of financial advisory services. The fees
for these services during FAM Period 2 were paid by CAT LLC to Anchin.
During FAM Period 2, Anchin provided a variety of services, including
the following:
<bullet> Updated and maintained internal controls;
<bullet> Provided cash management and treasury functions;
<bullet> Facilitated bill payments;
<bullet> Provided monthly bookkeeping;
<bullet> Reviewed vendor invoices and documentation in support of
cash disbursements;
<bullet> Provided accounting research and consultations on various
accounting, financial reporting and tax matters;
<bullet> Addressed not-for-profit tax and accounting
considerations;
<bullet> Prepared tax returns;
<bullet> Addressed various accounting, financial reporting and
operating inquiries from the Participants;
<bullet> Developed and maintained quarterly and annual operating
and financial budgets, including budget to actual fluctuation analyses;
<bullet> Supported compliance with the CAT NMS Plan;
<bullet> Worked with and provided support to the Operating
Committee and various CAT working groups;
<bullet> Prepared monthly, quarterly and annual financial
statements;
<bullet> Supported the annual financial statement audit by an
independent auditor; and
<bullet> Reviewed historical costs from inception.
Accounting Firm: Grant Thornton. CAT LLC continued to employ the
accounting firm Grant Thornton during FAM Period 2 based on, among
other things, its expertise and cumulative knowledge of CAT LLC. CAT
LLC continued to believe that Grant Thornton was well qualified for its
role and its fee rates were in line with market rates for these
accounting services. The fees for these services during FAM Period 2
were paid by CAT LLC to Grant Thornton. During FAM Period 2, Grant
Thornton performed a financial statement audit for CAT LLC as an
independent accounting firm.
(j) Public Relations Costs
The public relations costs of $41,940 represent the fees paid to
Peak Strategies during FAM Period 2. CAT LLC continued to employ Peak
Strategies during FAM Period 2 based on, among other things, their
expertise and history with the project. The fee rates for this firm
were in line with market rates for these types of services. The fees
for these services during FAM Period 2 were paid by CAT LLC to Peak
Strategies. During FAM Period 2, Peak Strategies continued to provide
professional communications services to CAT, including media relations
consulting, strategy and execution. Specifically, the public relations
firm provided services related to communications with the public
regarding the CAT, including monitoring developments related to the CAT
(e.g., congressional efforts, public comments and reaction to
proposals, press coverage of the CAT), reporting such developments to
CAT LLC, and drafting and disseminating communications to the public
regarding such developments as well as reporting on developments
related to the CAT (e.g., amendments to the CAT NMS Plan). As discussed
above, such public relations services were important for various
reasons, including monitoring comments made by market participants
about the CAT and understanding issues related to the CAT discussed on
the public record. By engaging a public relations firm, CAT LLC was
better positioned to understand and address CAT matters to the benefit
of all market participants.
(iv) Historical CAT Costs Incurred in Financial Accountability
Milestone Period 3
Historical CAT Costs 1 would include costs incurred by CAT and
already funded by the Participants during Period 3 of the Financial
Accountability Milestones (``FAM Period 3''),\60\ which covers the
period from January 1, 2021-December 31, 2021. Historical CAT Costs 1
would include costs for FAM Period 3 of $144,415,268. The Participants
would remain responsible for one-third of this cost (which they have
previously paid) ($48,138,423), and Industry Members would be
responsible for the remaining two-thirds, with CEBBs paying one-third
($48,138,423) and CEBSs paying one-third ($48,138,423). The following
table breaks down Historical CAT Costs 1 for FAM Period 3 into the
categories set forth in Section 11.3(b)(iii)(B)(II) of the CAT NMS
Plan.\61\
---------------------------------------------------------------------------
\60\ Section 11.6(a)(i)(C) of the CAT NMS Plan.
\61\ The costs described in this table of costs for FAM Period 3
were calculated based upon CAT LLC's review of applicable bills and
invoices and related financial statements. CAT LLC financial
statements are available on the CAT website.
\62\ As discussed above, with respect to certain costs that were
``appropriately excluded,'' such excluded costs relate to the
amortization of capitalized technology costs, which are amortized
over the life of the Plan Processor Agreement. As such costs have
already been otherwise reflected in the filing, their inclusion
would double count the capitalized technology costs. In addition,
amortization is a non-cash expense.
------------------------------------------------------------------------
Historical CAT costs
Operating expense for FAM Period 3
------------------------------------------------------------------------
Capitalized Developed Technology Costs *....... $10,763,372
Technology Costs............................... 123,639,402
Cloud Hosting Services..................... 94,574,759
Operating Fees............................. 23,106,091
CAIS Operating Fees........................ 5,562,383
Change Request Fees........................ 396,169
Legal.......................................... 6,333,248
Consulting..................................... 1,408,209
Insurance...................................... 1,582,714
Professional and administration................ 595,923
Public relations............................... 92,400
------------------------
Total Operating Expenses................... 144,415,268
------------------------------------------------------------------------
* The non-cash amortization of these capitalized developed technology
costs of $5,108,044 incurred during FAM Period 3 have been
appropriately excluded from the above table.\62\
[[Page 76641]]
By the completion of FAM Period 3, CAT LLC was required to
implement the following requirements with regard the CAT:
(a) reporting to the Order Audit Trail System (``OATS'') is no
longer required for new orders; (b) Industry Member reporting for
equities transactions and simple electronic options transactions,
excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, with sufficient intra-firm linkage, inter-
firm linkage, national securities exchange linkage, trade reporting
facilities linkage, and representative order linkages (including any
equities allocation information provided in an Allocation Report) to
permit the Participants and the Commission to analyze the full
lifecycle of an order across the national market system, from order
origination through order execution or order cancellation, is
developed, tested, and implemented at a 5% Error Rate or less; (c)
Industry Member reporting for manual options transactions and
complex options transactions, excluding Customer Account
Information, Customer-ID, and Customer Identifying Information, with
all required linkages to permit the Participants and the Commission
to analyze the full lifecycle of an order across the national market
system, from order origination through order execution or order
cancellation, including any options allocation information provided
in an Allocation Report, is developed, tested, and fully
implemented; (d) the query tool functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3, Section 8.2.1,
and Section 8.5 incorporates the data described in conditions (b)-
(c) and is available to the Participants and to the Commission; and
(e) the requirements of Section 6.10(a) are met.\63\
---------------------------------------------------------------------------
\63\ See definition of ``Full Availability and Regulatory
Utilization of Transactional Database Functionality'' in Section 1.1
of the CAT NMS Plan.
CAT LLC completed the requirements of FAM Period 3 by December 31,
2021. The following describes the costs for each of the categories for
FAM Period 3.
(a) Technology Costs--Cloud Hosting Services
CAT LLC continued to utilize AWS in FAM Period 3 to provide a broad
array of cloud hosting services for the CAT, including data ingestion,
data management, and analytic tools. AWS continued to provide storage
services, databases, compute services and other services (such as
networking, management tools and DevOps tools), as well as various
environments for CAT, such as development, performance testing, test,
and production environments, during the FAM Period 3. Accordingly, the
$94,574,759 in technology costs for cloud hosting services represents
costs incurred for services provided by AWS, as the cloud services
provider, during FAM Period 3. The fee arrangement for AWS described
above for the earlier periods continued in place during FAM Period 3
pursuant to the Plan Processor Agreement.
The cost for AWS cloud services for the CAT continued to be a
function of the volume of CAT Data. During FAM Period 3, the volume of
CAT Data continued to far exceed the original predictions for the CAT
as set forth in the CAT NMS Plan. During this period, data submitted to
the CAT included options and equities Participant Data, Phase 2a, Phase
2b, Phase 2c and Phase 2d Industry Member Data (including certain
linkages), SIP Data, Other Data, including reference data, and LTID
account information. The following chart provides data regarding the
average daily volume, cumulative total events, total compute hours and
storage footprint of the CAT during FAM Period 3.\64\
---------------------------------------------------------------------------
\64\ Note that the volume data described in this table does not
include CAIS data.
----------------------------------------------------------------------------------------------------------------
Date range: 1/1/21 to 4/ Date range: 4/26/21 to
25/21 12/31/21 *
----------------------------------------------------------------------------------------------------------------
Average Daily Volume in Billions:
Participant--Equities..................................... 9 9
Participant--Options...................................... 135 136
Industry Member--Equities................................. 20 19
Industry Member--Options.................................. 2 2
SIP--Options & Equities................................... 129 137
Average Total Daily Volume................................ 297 304
Cumulative Total Events for the Period........................ 7,480 5,310
Total Compute Hours for the Period............................ 15,860,304 33,487,318
-------------------------------------------------
Storage Footprint at End of Period (Petabytes)................ 180.22 284.62
----------------------------------------------------------------------------------------------------------------
* Start of Participant Equities in CAT format and SIP Equities on 4/26/21.
(b) Technology Costs--Operating Fees
Pursuant to the Plan Processor Agreement discussed above, FCAT
continued in its role as the Plan Processor for the CAT during FAM
Period 3. Accordingly, the $23,106,091 in technology costs for
operating fees represent costs incurred for the services provided by
FCAT under the Plan Processor Agreement, during FAM Period 3. The fee
arrangement for FCAT described above with regard to the prior Periods
continued in place during FAM Period 3 pursuant to the Plan Processor
Agreement. During FAM Period 3, FCAT's activities with respect to the
CAT included the following:
<bullet> Facilitated Phase 2c and Phase 2d testing for Industry
Members;
<bullet> Oversaw creation of linkages of the lifecycle of order
events based on the received data through Phase 2d;
<bullet> Addressed compliance items, including drafting CAT
policies and procedures, and addressing Regulation SCI requirements;
<bullet> Provided support to the Operating Committee, the
Compliance Subcommittee and CAT working groups;
<bullet> Assisted with interpretive efforts and exemptive requests
regarding the CAT NMS Plan;
<bullet> Oversaw the security of the CAT;
<bullet> Monitored the operation of the CAT, including with regard
to Participant and Industry Member reporting;
<bullet> Provided support to subcontractors under the Plan
Processor Agreement;
<bullet> Provided support in discussions with the Participants and
the SEC and its staff;
<bullet> Operated the FINRA CAT Helpdesk;
<bullet> Facilitated communications with the industry, including
via FAQs, CAT Alerts, meetings, presentations and webinars;
<bullet> Administered the CAT website and all of its content; and
<bullet> Provided technical support and assistance with
connectivity, data access, and user support, including the use of CAT
Data and query tools, for Participants and the SEC staff.
[[Page 76642]]
(c) Technology Costs--CAIS Operating Fees
Pursuant to the Plan Processor Agreement with FCAT discussed above,
Kingland continued in its role as a subcontractor for the development
and implementation of CAIS during FAM Period 3. Accordingly, the
$5,562,383 in technology costs for CAIS operating fees represents costs
incurred for services provided by Kingland during FAM Period 3. The fee
arrangement for Kingland described above with regard to the prior
Periods continued in place during FAM Period 3 pursuant to the Plan
Processor Agreement. During FAM Period 3, Kingland continued the
development of the CAIS Technical Specifications and building of CAIS.
In addition, Kingland continued to work on the CAIS Technical
Specifications and build related to the CCID Alternative, as well as
the acceleration of the reporting of LTIDs. The full CAIS Technical
Specifications were published during FAM Period 3.
(d) Technology Costs--Change Request Fees
During FAM Period 3, CAT LLC engaged FCAT to pursue certain change
requests in accordance with the Plan Processor Agreement. The change
request costs were paid by CAT LLC to FCAT. Specifically, during the
FAM Period 3, CAT incurred costs of $396,169 related to change
requests, including the following: (1) the addition of functionality
for exchange Participants to report rejected messages to the CAT; (2)
the migration of MIRS query engine to AWS to reduce operational costs
and increase resiliency; and (3) updating the Participant Technical
Specifications to allow for two-sided Participant option quote
reporting.
(e) Technology Costs--Capitalized Developed Technology Costs
Capitalized developed technology costs for FAM Period 3 of
$10,763,372 include capitalizable application development costs
incurred in the development of the CAT by FCAT. Such costs include (1)
development costs incurred during the application development stage to
meet various agreed-upon milestones regarding the CAT, as defined in
the agreement between CAT LLC and the Plan Processor, including the
transition from equity data received by FINRA pursuant to various
regulatory services agreements between FINRA and Participant exchanges
to the equity CAT Data, and the completion of the Industry Member Phase
2d options manual and complex orders go-live requirements; (2) costs
related to certain modifications, upgrades, or other changes to the CAT
that were not contemplated by the agreement between CAT LLC and the
Plan Processor, including costs related to off-exchange volume
concentration, Participant 24-hour trading and an external metastore;
(3) implementation fees; and (4) license fees.
(f) Legal Costs
The legal costs of $6,333,248 represent the fees paid for legal
services provided by three law firms, WilmerHale, Pillsbury and
Covington & Burling LLP (``Covington'') during FAM Period 3.
Law Firm: WilmerHale. CAT LLC continued to employ WilmerHale during
FAM Period 3 based on, among other things, their expertise and long
history with the project. The hourly fee rates for this law firm were
in line with market rates for specialized legal expertise. The legal
fees during FAM Period 3 were paid by CAT LLC to WilmerHale. During FAM
Period 3, the legal assistance provided by WilmerHale included
providing legal advice regarding the following:
<bullet> Assisted with the development of the CAT funding model and
drafting related amendments and rule filings;
<bullet> Drafted exemptive requests from CAT NMS Plan requirements,
including, for example, verbal activity regarding Phase 2c cutover;
error reports, error corrections, Phase 2d Reporting; unique Order-ID
on internal route events; reporting addresses; recordkeeping, and
unique CCID for foreign customers;
<bullet> Provided interpretations related to CAT NMS Plan
requirements, including with regard to the Financial Accountability
Milestone amendment, FAQs, CAIS requirements, ADF, and technical
specifications;
<bullet> Provided support for the Operating Committee, Compliance
Subcommittee, working groups and Leadership Team, including with regard
to meetings with the SEC staff;
<bullet> Assisted with the Implementation Plan and Quarterly
Progress Reports required pursuant to Section 6.6(c) of the CAT NMS
Plan;
<bullet> Drafted SRO rule filings related to the CAT Compliance
Rule;
<bullet> Provided support for Compliance Subcommittee, including
with regard to responses to OCIE examinations and the annual
assessment;
<bullet> Provided guidance regarding the SEC's proposed security
amendments to the CAT NMS Plan;
<bullet> Provided guidance regarding SRO rule filings for the
retirement of systems;
<bullet> Provided legal support for Operating Committee meetings,
including drafting resolutions and other materials and voting advice;
<bullet> Provided assistance with change requests;
<bullet> Provided guidance and regulatory support for litigation
regarding the response to the SEC's exemptive orders;
<bullet> Assisted with communications with the industry, includng
CAT Alerts and presentations;
<bullet> Provided guidance regarding the confidentiality of CAT
Data, including third-party information requests;
<bullet> Assisted with cost management analysis and proposals; and
<bullet> Provided support with regard to discussions with the SEC
and its staff, including with respect to addressing interpretive and
implementation issues.
Law Firm: Pillsbury. CAT LLC continued to employ Pillsbury during
FAM Period 3 based on, among other things, their expertise and history
with the project. The hourly fee rates for this law firm were in line
with market rates for specialized legal expertise. The legal fees
during FAM Period 3 were paid by CAT LLC to Pillsbury. During FAM
Period 3, Pillsbury provided legal assistance to the CAT regarding the
CAT Reporter Agreement. During this period, Pillsbury advised CAT LLC
regarding applicable legal matters, reviewed and responded to comment
letters regarding the proposed Plan amendment, participated in meetings
with senior SEC staff, responded to comments submitted following the
SEC's April 6, 2021 order instituting proceedings,\65\ and assessed
legal matters regarding the SEC's October 29, 2021 order denying the
proposed Plan amendment.\66\
---------------------------------------------------------------------------
\65\ Securities Exchange Act Release. No. 91487 (April 6, 2021),
86 FR 19054 (April 12, 2021).
\66\ Securities Exchange Act Release. No. 93484 (October 29,
2021), 86 FR 60933 (November 4, 2021).
---------------------------------------------------------------------------
Law Firm: Covington. CAT LLC hired Covington for litigation with
the SEC regarding certain exemptive orders related to the CAT,
including orders issued in December 2020.\67\ CAT LLC interviewed this
law firm as well as other potential law firms, considering a variety of
factors in its analysis for choosing legal assistance, including the
relevant expertise and fees of the potential lawyers. CAT LLC approved
the engagement of Covington in January 2021. The fee rates for this law
firm, which were calculated based on hourly rates, were in line with
market rates for
[[Page 76643]]
specialized services. The legal fees for FAM Period 3 for this firm
were paid by CAT LLC to Covington.
---------------------------------------------------------------------------
\67\ See Securities Exchange Act Release No. 90688 (December 16,
2020), 85 FR 83634 (December 22, 2020); and Securities Exchange Act
Release No. 90689 (December 16, 2020), 85 FR 83667 (December 22,
2020) (collectively, the ``2020 Orders'').
---------------------------------------------------------------------------
After Covington was hired in 2021 through the end of 2021, the firm
provided legal assistance regarding the litigation with the SEC
regarding the 2020 Orders. These services included researching,
drafting, and filing motions to stay the 2020 Orders and related
materials in proceedings before the SEC, as well as researching,
drafting, and filing petitions for judicial review of the 2020 Orders
in proceedings before the U.S. Court of Appeals for the D.C. Circuit.
Covington oversaw ongoing litigation proceedings on these matters, and
also supported WilmerHale with respect to settlement negotiations with
the SEC staff regarding the 2020 Orders.
In addition to these services, CAT LLC engaged Covington in
November 2021 to provide assistance with respect to the SEC's
disapproval of CAT NMS Plan amendments concerning a proposed limitation
on liability in the event of a data breach or similar event. Covington
provided advice concerning CAT's response to the SEC's disapproval
order. This work accounted for a minority of Covington's fees in
2021.\68\
---------------------------------------------------------------------------
\68\ As discussed above with regard to Pillsbury's work on
liability matters, liability issues related to the CAT are important
matters that needed to be resolved and clarified. CAT LLC's efforts
to seek such resolution and clarity work to the benefit of
Participants, Industry Members and other market participants.
Moreover, such activity is a necessary part of the operation of the
CAT.
---------------------------------------------------------------------------
(g) Consulting Costs
The consulting costs of $1,408,209 represent the fees paid to
Deloitte as project manager during FAM Period 3. CAT LLC continued to
employ Deloitte during FAM Period 3 based on, among other things, their
expertise and long history with the project. The fee rates for Deloitte
during FAM Period 3 were negotiated and in line with market rates for
this type of specialized consulting work. The consulting fees during
FAM Period 3 were paid to Deloitte by CAT LLC. CAT LLC reviewed the
consulting fees each month and approved the invoices. During FAM Period
3, Deloitte's CAT-related activities included the following:
<bullet> Implemented program operations for the CAT project;
<bullet> Provided support to the Operating Committee, the Chair of
the Operating Committee and the Leadership Team, including project
management support, coordination and planning for meetings and
communications, and interfacing with law firms and the SEC;
<bullet> Assisted with cost and funding matters for the CAT,
including the development of the CAT funding model and assistance with
loans and the CAT bank account for CAT funding;
<bullet> Provided support for updating the SEC on the progress of
the development of the CAT; and
<bullet> Provided support for third-party vendors for the CAT,
including FCAT, Anchin and the law firms engaged by CAT LLC.
(h) Insurance
The insurance costs of $1,582,714 represent the fees paid for
insurance during FAM Period 3. CAT LLC continued to maintain cyber
security liability insurance, directors' and officers' liability
insurance, and errors and omissions liability insurance offered by USI.
After engaging in a process for renewing the coverage, CAT LLC
determined to purchase these insurance policies from USI. The annual
premiums for these policies were competitive for the coverage provided.
The annual premiums were paid by CAT LLC to USI.
(i) Professional and Administration Costs
The professional and administration costs of $595,923 represent the
fees paid to Anchin and Grant Thornton for financial services during
FAM Period 3.
Financial Advisory Firm: Anchin. CAT LLC continued to employ Anchin
during FAM Period 3 based on, among other things, their expertise and
history with the project. The hourly fee rates for this firm were in
line with market rates for these financial advisory services. The fees
for these services during FAM Period 3 were paid by CAT LLC to Anchin.
During FAM Period 3, Anchin provided a variety of services, including
the following:
<bullet> Updated and maintained internal controls;
<bullet> Provided cash management and treasury functions;
<bullet> Facilitated bill payments;
<bullet> Provided monthly bookkeeping;
<bullet> Reviewed vendor invoices and documentation in support of
cash disbursements;
<bullet> Provided accounting research and consultations on various
accounting, financial reporting and tax matters;
<bullet> Addressed not-for-profit tax and accounting
considerations;
<bullet> Prepared tax returns;
<bullet> Addressed various accounting, financial reporting and
operating inquiries from Participants;
<bullet> Developed and maintained quarterly and annual operating
and financial budgets, including budget to actual fluctuation analyses;
<bullet> Supported compliance with the CAT NMS Plan;
<bullet> Worked with and provided support to the Operating
Committee and various CAT working groups;
<bullet> Prepared monthly, quarterly and annual financial
statements;
<bullet> Supported the annual financial statement audits by an
independent auditor;
<bullet> Reviewed historical costs from inception; and
<bullet> Provided accounting and financial information in support
of SEC filings.
Accounting Firm: Grant Thornton. CAT LLC continued to employ the
accounting firm Grant Thornton during FAM Period 3 based on, among
other things, their expertise and cumulative knowledge of CAT LLC. CAT
LLC determined that Grant Thornton was well qualified for its role and
that its fixed fee rates were in line with market rates for these
accountant services. The fees for these services during FAM Period 3
were paid by CAT LLC to Grant Thornton. During FAM Period 3, Grant
Thornton provided audited financial statements for CAT LLC.
(j) Public Relations Costs
The public relations costs of $92,400 represent the fees paid to
Peak Strategies during FAM Period 3. CAT LLC continued to employ Peak
Strategies during FAM Period 3 based on, among other things, their
expertise and history with the project. The fee rates for this firm
were in line with market rates for these types of services. The fees
for these services during FAM Period 3 were paid by CAT LLC to Peak
Strategies. During FAM Period 3, Peak Strategies continued to provide
professional communications services to CAT, including media relations
consulting, strategy and execution. Specifically, the public relations
firm provided services related to communications with the public
regarding the CAT, including monitoring developments related to the CAT
(e.g., congressional efforts, public comments and reaction to
proposals, press coverage of the CAT), reporting such developments to
CAT LLC, and drafting and disseminating communications to the public
regarding such developments as well as reporting on developments
related to the CAT (e.g., amendments to the CAT NMS Plan). As discussed
above, such public relations services were important for various
reasons, including monitoring comments made by market participants
about the CAT and understanding issues related to the CAT discussed on
the public record. By engaging a public relations firm, CAT LLC was
better positioned to understand and address
[[Page 76644]]
CAT matters to the benefit of all market participants.
(v) Excluded Costs
Historical CAT Costs 1 would not include three categories of CAT
costs (``Excluded Costs''): (1) $14,749,362 of costs related to the
termination of the relationship with the Initial Plan Processor; (2)
$48,874,937, which are all CAT costs incurred from November 15, 2017
through November 15, 2018; and (3) $19,628,791, which are costs paid to
the Initial Plan Processor from November 16, 2018 through February 2019
when the relationship with the Initial Plan Processor was concluded.
The Participants would remain responsible for 100% of these costs,
which total $83,253,090. CAT LLC determined to exclude these Excluded
Costs from Historical CAT Costs 1 because these costs relate to the
delay in the start of reporting to the CAT and the conclusion of the
relationship with the Initial Plan Processor.\69\
---------------------------------------------------------------------------
\69\ In approving the CAT Funding Model, the Commission states
that the proposed exclusion of the first two categories of Excluded
Costs ``is reasonable in the Commission's view because it would not
require all costs incurred by the Participants to be recovered from
Industry Members through the Historical CAT Assessment, specifically
excluding those costs related to the delay in the start of reporting
to the CAT and costs related to the conclusion of the relationship
with the Initial Plan Processor.'' See CAT Funding Model Approval
Order, 88 FR 62628, 62663. In addition to the first two categories
of Excluded Costs, CAT LLC is now proposing a third category of
Excluded Costs that would exclude all costs paid to the Initial Plan
Processor after November 15, 2018.
---------------------------------------------------------------------------
(a) Costs Related to Conclusion of Relationship With Initial Plan
Processor
First, Historical CAT Costs 1 would not include $14,749,362 of
costs related to the conclusion of the relationship with the Initial
Plan Processor. Such costs include costs related to the American
Arbitration Association, the legal assistance of Pillsbury with regard
to the arbitration with the Initial Plan Processor, and the settlement
costs related to the arbitration with the Initial Plan Processor. The
Participants would remain responsible for 100% of these $14,749,362 in
costs.
(b) Costs Incurred From November 15, 2017 through November 15, 2018
Second, Historical CAT Costs 1 would not include all CAT costs
incurred from November 15, 2017 through November 15, 2018. CAT LLC
determined to exclude all costs during this one-year period of
$48,874,937 from fees charged to Industry Members due to the delay in
the start of reporting to the CAT. The Participants would remain
responsible for 100% of these $48,874,937 in costs. The following table
breaks down these costs into the categories set forth in Section
11.3(b)(iii)(B)(II) of the CAT NMS Plan.\70\
---------------------------------------------------------------------------
\70\ The costs described in this table of Excluded Costs were
calculated based upon CAT LLC's review of applicable bills and
invoices and related financial statements. CAT LLC financial
statements are available on the CAT website.
------------------------------------------------------------------------
Excluded costs for
Operating expense November 15, 2017-
November 15, 2018
------------------------------------------------------------------------
Capitalized Developed Technology Costs......... $37,852,083
Technology Costs...............................
Cloud Hosting Services.....................
Operating Fees.............................
CAIS Operating Fees........................
Change Request Fees........................
Legal.......................................... 6,143,278
Consulting..................................... 4,452,106
Insurance......................................
Professional and administration................ 340,145
Public relations............................... 87,325
------------------------
Total Operating Expenses....................... 48,874,937
------------------------------------------------------------------------
The following provides additional detail regarding the Excluded
Costs.
(I) Technology Costs--Cloud Hosting Services, Operating Fees, CAIS
Operating Fees and Change Request Fees
CAT LLC did not incur technology costs related to the categories of
cloud hosting services, operating fees, CAIS operating fees or change
requests during the period from November 15, 2017 through November 15,
2018.
(II) Technology Costs--Capitalized Developed Technology Costs
Capitalized developed technology costs for the period from November
15, 2017 through November 15, 2018 include capitalizable application
development costs of $37,852,083 incurred in the development of the CAT
by the Initial Plan Processor. Such costs include development costs
incurred during the application development stage to meet various
agreed-upon milestones regarding the CAT, as defined in the agreement
between CAT LLC and the Initial Plan Processor. Such costs include
costs related to Industry Member technical specifications for orders
and transactions, the system security plan, testing and production for
Participant CAT reporting, third-party security assessment and
response, query portal, onboarding of the Chief Information Security
Officer, and ingestion of FINRA TRF data and FINRA data related to
halts and corporate actions.
(III) Legal Costs
The legal costs of $6,143,278 represent the fees paid to WilmerHale
for legal services from November 15, 2017 through November 15, 2018.
During this period, WilmerHale provided legal assistance to the CAT
including with regard to the following:
<bullet> Provided legal support for the governance of the CAT,
including governance support for the Operating Committee, Advisory
Committee, Compliance Subcommittee, and CAT working groups;
<bullet> Assisted with the development of the CAT funding model and
drafted related amendments of the CAT NMS Plan;
<bullet> Provided assistance related to CAT security;
<bullet> Drafted exemptive requests, including requests related to
PII;
<bullet> Assisted with the Implementation Plan required pursuant to
Section 6.6(c)(i) of the CAT NMS Plan;
<bullet> Provided interpretations of and related to the CAT NMS
Plan;
<bullet> Provided advice with regard to regulator access to the
CAT;
[[Page 76645]]
<bullet> Assisted with the Plan Processor transition;
<bullet> Provided assistance regarding communications with the
industry regarding the CAT;
<bullet> Provided advice regarding Customer Account Information and
PII;
<bullet> Provided support for litigation related to SEC exemptive
orders; and
<bullet> Provided support with regard to discussions with the SEC
and its staff, including with respect to addressing interpretative and
implementation issues.
(IV) Consulting Costs
The consulting costs of $4,452,106 represent the fees paid to
Deloitte for their role as project manager for the CAT from November
15, 2017 through November 15, 2018. During this period, Deloitte
engaged in the following activities with respect to the CAT:
<bullet> Implemented program operations for the CAT project;
<bullet> Provided governance support to the Operating Committee,
including support for Subcommittees and working groups of the Operating
Committee (e.g., Compliance Subcommittee, Cost and Funding Working
Group, Technical Working Group, Industry Outreach Working Group,
Security Working Group and Steering Committee);
<bullet> Assisted with cost and funding issues for the CAT,
including the development of the CAT funding model and assistance with
loans and the CAT bank account for CAT funding;
<bullet> Provided support for updating the SEC on the progress of
the development of the CAT; and
<bullet> Provided active planning and coordination with and support
for the Initial Plan Processor with regard to the development of the
CAT, and reported to the Participants on the progress.
(V) Insurance
CAT LLC did not incur costs related to insurance during the period
from November 15, 2017 through November 15, 2018.
(VI) Professional and Administration Costs
The professional and administration costs of $340,145 represent the
fees paid to Anchin, Exegy and RSM from November 15, 2017 through
November 15, 2018.
Financial Advisory Firm: Anchin. From the commencement of its
engagement in April 2018 through November 15, 2018, Anchin engaged in
the following activities with respect to the CAT:
<bullet> Developed, updated and maintained internal controls;
<bullet> Provided cash management and treasury functions;
<bullet> Facilitated bill payments;
<bullet> Provided monthly bookkeeping;
<bullet> Reviewed vendor invoices and documentation in support of
cash disbursements;
<bullet> Provided accounting research and consultations on various
accounting, financial reporting and tax matters;
<bullet> Addressed not-for-profit tax and accounting
considerations;
<bullet> Prepared tax returns;
<bullet> Addressed various accounting, financial reporting and
operating inquiries from Participants;
<bullet> Developed and maintained quarterly and annual operating
and financial budgets, including budget to actual fluctuation analyses;
<bullet> Addressed accounting and financial matters relating to the
transition from CAT NMS, LLC to Consolidated Audit Trail, LLC,
including supporting the dissolution of CAT NMS, LLC;
<bullet> Supported compliance with the CAT NMS Plan;
<bullet> Worked with and provided support to the Operating
Committee and various CAT working groups;
<bullet> Prepared monthly, quarterly and annual financial
statements;
<bullet> Supported the annual financial statement audits by an
independent auditor;
<bullet> Reviewed historical costs from inception; and
<bullet> Provided accounting and financial information in support
of SEC filings.
Market Data Provider: Exegy. From July 2018 through November 15,
2018, CAT LLC purchased market data from Exegy (as described in more
detail above).
Security Assessment: RSM. From October 2018 through November 15,
2018, CAT LLC incurred costs for RSM's performance of a security
assessment (as described in more detail above).
(VII) Public Relations Costs
The public relations costs of $87,325 represent the fees paid to
Sloane from November 15, 2017 through November 15, 2018. From the
commencement of its engagement in March 2018 through November 15, 2018,
Sloane provided professional communications services to CAT, including
media relations consulting, strategy and execution. Specifically,
Sloane provided services related to communications with the public
regarding the CAT, including monitoring developments related to the CAT
(e.g., congressional efforts, public comments and reaction to
proposals, press coverage of the CAT), reporting such developments to
CAT LLC, and drafting and disseminating communications to the public
regarding such developments as well as reporting on developments
related to the CAT (e.g., amendments to the CAT NMS Plan).
(c) Costs Paid to Initial Plan Processor From November 16, 2018 Through
February 2019
Third, Historical CAT Costs 1 would not include the $19,628,791 in
costs paid to the Initial Plan Processor from November 16, 2018 through
February 2019 when CAT LLC's relationship with the Initial Plan
Processor concluded. CAT LLC determined that Historical CAT Costs 1
would not include any fees paid to the Initial Plan Processor after
November 15, 2017,\71\ which was the date by which Participants were
required to begin reporting to the CAT.\72\ As discussed above, the
Participants determined that Historical CAT Costs 1 would not include
all CAT costs incurred from November 15, 2017 through November 15,
2018, which includes $37,852,083 in Initial Plan Processor costs
incurred from November 15, 2017 through November 15, 2018 (as well as
other CAT costs during this period). The remaining Initial Plan
Processor costs incurred after November 15, 2018 are the $19,628,791 in
costs for the period from November 16, 2018 through February 2019
incurred in the development of the CAT by the Initial Plan Processor,
as well as a transition fee for the transition from the Initial Plan
Processor to the successor Plan Processor. The Participants would
remain responsible for 100% of these $19,628,791 in costs.
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\71\ As discussed below, CAT LLC believes that it is appropriate
to recover costs related to the services performed by the Initial
Plan Processor prior to November 15, 2017. See Item 3(a)(10)(E)
below.
\72\ The SEC approved the CAT NMS Plan on November 15, 2016, and
Participant reporting was required to begin on the first anniversary
of this date, November 15, 2017. See Section 6.3 of the CAT NMS Plan
and CAT NMS Plan Approval Order.
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(C) Historical Recovery Period 1
Under the CAT NMS Plan, the Operating Committee is required to
reasonably establish the length of the Historical Recovery Period used
in calculating each Historical Fee Rate based upon the amount of the
Historical CAT Costs to be recovered by the Historical CAT Assessment,
and to describe the reasons for its length.\73\ The Historical Recovery
Period used in calculating the Historical Fee Rate may not be less than
24 months or more than
[[Page 76646]]
five years.\74\ The Operating Committee has determined to establish a
Historical Recovery Period 1 of 24 months for Historical CAT Assessment
1.
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\73\ Section 11.3(b)(i)(D)(I) and Section 11.3(b)(iii)(B)(II) of
the CAT NMS Plan.
\74\ Section 11.3(b)(i)(D)(I) of the CAT NMS Plan. In the CAT
Funding Model Approval Order, the SEC stated that ``[i]n the
Commission's view, it is reasonable for the Operating Committee to
establish the length of the Historical Recovery Period to be no less
than 24 months and no more than five years.'' CAT Funding Model
Approval Order, 88 FR 62628, 62664.
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The Operating Committee determined that the length of Historical
Recovery Period 1 appropriately weighs the need for a reasonable
Historical Fee Rate 1 that spreads the Historical CAT Costs over an
appropriate amount of time and the need to repay the loans to the
Participants in a timely fashion. The Operating Committee determined
that 24 months for Historical Recovery Period 1 would establish a fee
rate that is lower than other transaction-based fees, including fees
assessed pursuant to Section 31.\75\ In addition, in establishing a
Historical Recovery Period of 24 months, the Operating Committee
recognized that the total costs for Historical CAT Assessment 1 were
less than the total costs for 2022 and 2023,\76\ and therefore it would
be reasonable and appropriate to recover costs subject to this filing
over an approximate two-year period.
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\75\ As the SEC noted in the CAT Funding Model Approval Order,
recent Section 31 fees ranged from $0.00009 per share to $0.0004 per
share. CAT Funding Model Approval Order, 88 FR 62628, 62682.
\76\ The total CAT costs for 2022 were approximately $186
million and the total CAT costs for 2023 were approximately $233
million.
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The length of the Historical Recovery Period 1 and the reasons for
its length are provided in this filing in accordance with the
requirement in the CAT NMS Plan to provide such information in a fee
filing for a Historical CAT Assessment.\77\
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\77\ Section 11.3(b)(iii)(B)(II)(C) of the CAT NMS Plan.
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(D) Projected Total Executed Equivalent Share Volume
The calculation of Historical Fee Rate 1 also requires the
determination of the projected total executed equivalent share volume
of transactions in Eligible Securities for Historical Recovery Period
1. Under the CAT NMS Plan, the Operating Committee is required to
``reasonably determine the projected total executed equivalent share
volume of all transactions in Eligible Securities for each Historical
Recovery Period based on the executed equivalent share volume of all
transactions in Eligible Securities for the prior twelve months.'' \78\
The Operating Committee is required to base its projection on the prior
twelve months, but it may use its discretion to analyze the likely
volume for the upcoming year. Such discretion would allow the Operating
Committee to use its judgment when estimating projected total executed
equivalent share volume if the volume over the prior twelve months was
unusual or otherwise unfit to serve as the basis of a future volume
estimate.\79\
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\78\ Section 11.3(b)(i)(E) of the CAT NMS Plan.
\79\ See CAT Funding Model Approval Order, 88 FR 62628, 62664.
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The total executed equivalent share volume of transactions in
Eligible Securities for the 12-month period from June 2023 through May
2024 was 3,980,753,840,905.21 executed equivalent shares. The Operating
Committee has determined to calculate the projected total executed
equivalent share volume for the 24 months of Historical Recovery Period
1 by doubling the executed equivalent share volume for the prior 12
months. The Operating Committee determined that such an approach was
reasonable as the CAT's annual executed equivalent share volume has
remained relatively constant. For example, the executed equivalent
share volume for 2021 was 3,963,697,612,395, the executed equivalent
share volume for 2022 was 4,039,821,841,560.31, and the executed
equivalent share volume for 2023 was 3,868,940,345,680.6. Accordingly,
the projected total executed equivalent share volume for Historical
Recovery Period 1 is projected to be 7,961,507,681,810.42 executed
equivalent shares.\80\
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\80\ This projection was calculated by multiplying
3,980,753,840,905.21 executed equivalent shares by two.
---------------------------------------------------------------------------
The projected total executed equivalent share volume of all
transactions in Eligible Securities for Historical Recovery Period 1
and a description of the calculation of the projection is provided in
this filing in accordance with the requirement in the CAT NMS Plan to
provide such information in a fee filing for a Historical CAT
Assessment.\81\
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\81\ Section 11.3(b)(iii)(B)(II)(D) of the CAT NMS Plan.
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(E) Historical Fee Rate 1
Historical Fee Rate 1 would be calculated by dividing Historical
CAT Costs 1 by the reasonably projected total executed equivalent share
volume of all transactions in Eligible Securities for Historical
Recovery Period 1, as described in detail above.\82\ Specifically,
Historical Fee Rate 1 would be calculated by dividing $318,059,819 by
7,961,507,681,810.42. As a result, the Historical Fee Rate 1 would be
$0.00003994969693072937 per executed equivalent share. Historical Fee
Rate 1 is provided in this filing in accordance with the requirement in
the CAT NMS Plan to provide the Historical Fee Rate in a fee filing for
a Historical CAT Assessment.\83\
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\82\ In approving the CAT Funding Model, the Commission stated
that ``[t]he calculation of the Historical Fee Rate by dividing the
Historical CAT Costs by the projected total executed equivalent
share volume of all transactions in Eligible Securities for the
Historical Recovery Period is reasonable.'' See CAT Funding Model
Approval Order, 88 FR 62628, 62664.
\83\ Section 11.3(b)(iii)(B)(II)(A) of the CAT NMS Plan.
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(3) Past CAT Costs and Participants
Participants would not be required to pay any fees associated with
Historical CAT Assessment 1 as the Participants previously have paid
all Past CAT Costs. The CAT NMS Plan explains that:
Because Participants previously have paid Past CAT Costs via
loans to the Company, Participants would not be required to pay any
Historical CAT Assessment. In lieu of a Historical CAT Assessment,
the Participants' one-third share of Historical CAT Costs and such
other additional Past CAT Costs as reasonably determined by the
Operating Committee will be paid by the cancellation of loans made
to the Company on a pro rata basis based on the outstanding loan
amounts due under the loans.\84\
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\84\ Section 11.3(b)(ii) of the CAT NMS Plan.
The CAT NMS Plan further states that ``Historical CAT Assessments
are designed to recover two-thirds of the Historical CAT Costs.'' \85\
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\85\ See supra note 84. In approving the CAT Funding Model, the
Commission stated that ``[t]he proposed allocation of the Historical
CAT Assessment solely to CEBSs and CEBBs, and ultimately Industry
Members, is reasonable. The Historical CAT Assessment will still be
divided into thirds,'' as the Participants' one-third share of
Historical CAT Costs will be paid by the cancellation of loans made
to the Company. CAT Funding Model Approval Order, 88 FR 62628,
62666.
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(4) Monthly Fees
CEBBs and CEBSs would be required to pay fees for Historical CAT
Assessment 1 on a monthly basis for the period in which Historical CAT
Assessment 1 is in effect.\86\ A CEBB or CEBS's fee for each month
would be calculated based on the transactions in Eligible Securities
executed by the CEBB or CEBS from the prior month.\87\ Proposed
paragraph (a)(1)(A)(i) of Rule 6897 would state that each CAT Executing
Broker would receive its first invoice in November 2024, and ``would
receive an invoice each month thereafter in which Historical CAT
Assessment 1
[[Page 76647]]
is in effect.'' Proposed paragraph (a)(1)(A)(ii) would state that
``Consolidated Audited Trail, LLC shall provide each CAT Executing
Broker with an invoice for Historical CAT Assessment 1 on a monthly
basis.'' In addition, proposed paragraph (a)(2)(A) states that each
CEBB and CEBS is required to pay its CAT fees ``each month.''
---------------------------------------------------------------------------
\86\ See Section 11.3(b)(iii)(A) of the CAT NMS Plan.
\87\ See proposed paragraph (a)(1)(A)(ii) of proposed Rule 6897.
---------------------------------------------------------------------------
(5) Actual Recovery Period for Historical CAT Assessment 1
The CAT NMS Plan states that, ``[n]otwithstanding the length of the
Historical Recovery Period used in calculating the Historical Fee Rate,
each Historical CAT Assessment calculated using the Historical Fee Rate
will remain in effect until all Historical CAT Costs for the Historical
CAT Assessment are collected.'' \88\ Accordingly, Historical CAT
Assessment 1 will remain in effect until all Historical CAT Costs 1
have been collected. The actual recovery period for Historical CAT
Assessment 1 may be shorter or longer than Historical Recovery Period 1
depending on the actual executed equivalent share volumes during the
time that Historical CAT Assessment 1 is in effect.\89\
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\88\ Section 11.3(b)(i)(D)(II) of the CAT NMS Plan.
\89\ In approving the CAT Funding Model, the Commission stated
that ``[i]n the Commission's view, it is reasonable for Industry
Members to be charged a Historical CAT Assessment until all
Historical CAT Costs for the Historical CAT Assessment are
collected.'' See CAT Funding Model Approval Order, 88 FR 62628,
62665.
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(6) Consolidated Audit Trail Funding Fees
To implement Historical CAT Assessment 1, FINRA proposes to adopt
FINRA Rule 6897(a)(1)(A) (Historical CAT Assessment 1), including the
proposed paragraphs described below.
(A) Historical CAT Assessment 1
The CAT NMS Plan states that:
Each month in which a Historical CAT Assessment is in effect,
each CEBB and each CEBS shall pay a fee for each transaction in
Eligible Securities executed by the CEBB or CEBS from the prior
month as set forth in CAT Data, where the Historical CAT Assessment
for each transaction will be calculated by multiplying the number of
executed equivalent shares in the transaction by one-third and by
the Historical Fee Rate reasonably determined pursuant to paragraph
(b)(i) of this Section 11.3.\90\
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\90\ Section 11.3(b)(iii)(A) of the CAT NMS Plan.
Accordingly, based on the factors discussed above, FINRA proposes
to adopt paragraph (a)(1)(A) of FINRA Rule 6897, which would state
---------------------------------------------------------------------------
that:
(i) Each CAT Executing Broker shall receive its first invoice
for Historical CAT Assessment 1 in November 2024, which shall set
forth the Historical CAT Assessment 1 fees calculated based on
transactions in October 2024, and shall receive an invoice for
Historical CAT Assessment 1 for each month thereafter in which
Historical CAT Assessment 1 is in effect.
(ii) Consolidated Audit Trail, LLC shall provide each CAT
Executing Broker with an invoice for Historical CAT Assessment 1 on
a monthly basis. Each month, such invoices shall set forth a fee for
each transaction in Eligible Securities executed by the CAT
Executing Broker in its capacity as a CAT Executing Broker for the
Buyer (``CEBB'') and/or the CAT Executing Broker for the Seller
(``CEBS'') (as applicable) from the prior month as set forth in CAT
Data. The fee for each such transaction will be calculated by
multiplying the number of executed equivalent shares in the
transaction by the fee rate of $0.000013 per executed equivalent
share.
(iii) Historical CAT Assessment 1 will remain in effect until
$212,039,879.34 (two-thirds of Historical CAT Costs 1) are collected
from CAT Executing Brokers collectively, which is estimated to be
approximately two years, but could be for a longer or shorter period
of time. Consolidated Audit Trail, LLC will provide notice when
Historical CAT Assessment 1 will no longer be in effect.
(iv) Each CAT Executing Broker shall be required to pay each
invoice for Historical CAT Assessment 1 in accordance with paragraph
(a)(2) of this Rule.
As noted in the Plan amendment for the CAT Funding Model, as a
practical matter, the fee filing for a Historical CAT Assessment would
provide the exact fee per executed equivalent share to be paid for each
Historical CAT Assessment, by multiplying the Historical Fee Rate by
one-third and describing the relevant number of decimal places for the
fee rate.\91\ Accordingly, proposed paragraph (a)(1)(A)(ii) of Rule
6897 would set forth a fee rate of $0.000013 per executed equivalent
share. This fee rate is calculated by multiplying Historical Fee Rate 1
of $0.00003994969693072937 by one-third, and rounding the result to 6
decimal places.\92\ The Operating Committee determined to use six
decimal places to balance the accuracy of the calculation with the
potential systems and other impracticalities of using additional
decimal places in the calculation.
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\91\ See CAT Funding Model Approval Order, 88 FR 62628, 62658
n.658.
\92\ Dividing $0.00003994969693072937 by three equals
$0.00001331656564357646. Rounding $0.00001331656564357646 to six
decimal places equals $0.000013.
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The proposed language in paragraph (a)(1)(A)(i) would describe when
CAT Executing Brokers would receive their first monthly invoice for
Historical CAT Assessment 1. Specifically, CAT Executing Brokers would
receive their first monthly invoice for Historical CAT Assessment 1 in
November 2024 and the fees set forth in that invoice would be
calculated based on transactions executed in the prior month, that is,
transactions executed in October 2024. The payment for the first
invoice would be required within 30 days after the receipt of the first
invoice (unless a longer period is indicated), as described in
paragraph (a)(2)(B) of proposed Rule 6897.
Proposed paragraph (a)(1)(A)(i) also would describe the monthly
cadence of the invoices for Historical CAT Assessment 1. Specifically,
after the first invoices are provided to CAT Executing Brokers in
November 2024, invoices will be sent to CAT Executing Brokers each
month thereafter while Historical CAT Assessment 1 is in effect.
Proposed paragraph (a)(1)(A)(ii) would describe the invoices for
Historical CAT Assessment 1. Proposed paragraph (a)(1)(A)(ii) would
state that ``Consolidated Audit Trail, LLC shall provide each CAT
Executing Broker with an invoice for Historical CAT Assessment 1 on a
monthly basis.'' Proposed paragraph (a)(1)(A)(ii) also would describe
the fees to be set forth in the invoices for Historical CAT Assessment
1. Specifically, it would state that ``[e]ach month, such invoices
shall set forth a fee for each transaction in Eligible Securities
executed by the CAT Executing Broker in its capacity as a CAT Executing
Broker for the Buyer (``CEBB'') and/or the CAT Executing Broker for the
Seller (``CEBS'') (as applicable) from the prior month as set forth in
CAT Data. The fee for each such transaction will be calculated by
multiplying the number of executed equivalent shares in the transaction
by the fee rate of $0.000013 per executed equivalent share.''
Furthermore, proposed paragraph (a)(1)(A)(iii) would describe how
long Historical CAT Assessment 1 would remain in effect. It would state
that ``Historical CAT Assessment 1 will remain in effect until
$212,039,879.34 (two-thirds of Historical CAT Costs 1) are collected
from CAT Executing Brokers collectively, which is estimated to be
approximately two years, but could be for a longer or shorter period of
time.'' This proposed paragraph would further state that ``Consolidated
Audit Trail, LLC will provide notice when Historical CAT Assessment 1
will no longer be in effect.''
Historical CAT Assessment 1 will be assessed for all transactions
executed in each month through the end of the month in which two-thirds
of Historical CAT Costs 1 are assessed, and then CAT
[[Page 76648]]
LLC will provide notice that Historical CAT Assessment 1 is no longer
in effect. Since Historical CAT Assessment 1 is a monthly fee based on
transaction volume from the prior month, Historical CAT Assessment 1
may collect more than two-thirds of Historical CAT Costs 1. To the
extent that occurs, any excess money collected during the final month
in which Historical CAT Assessment 1 is in effect will be used to
offset future fees and/or to fund the reserve for the CAT.
Finally, proposed paragraph (a)(1)(A)(iv) sets forth the
requirement for the CAT Executing Brokers to pay the invoices for
Historical CAT Assessment 1. It would state that ``[e]ach CAT Executing
Broker shall be required to pay each invoice for Historical CAT
Assessment 1 in accordance with paragraph (a)(2) of this Rule.''
(B) Manner of Payment
Paragraph (a)(2) of Rule 6897 (Consolidated Audit Trail Funding
Fees) describes the manner of payment of Industry Member CAT fees.
Paragraph (a)(2)(A) states that ``[e]ach CAT Executing Broker shall pay
its CAT fees as required pursuant to paragraph (a)(1) of this Rule each
month to the Consolidated Audit Trail, LLC in the manner prescribed by
the Consolidated Audit Trail, LLC.'' The CAT NMS Plan requires the
Operating Committee to establish a system for the collection of CAT
fees.\93\ The Plan Processor has established a billing system for CAT
fees.\94\ Therefore, FINRA proposes to require CAT Executing Brokers to
pay Historical CAT Assessment 1 in accordance with such system.
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\93\ Section 11.4 of the CAT NMS Plan.
\94\ The billing process and system are described in CAT Alert
2023-02 as well as the CAT FAQs related to the billing of CAT fees,
the Industry Member CAT Reporter Portal User Guide, the FCAT
Industry Member Onboarding Guide, the FCAT Connectivity Supplement
for Industry Members and the CAT Billing Webinars (dated Sept. 28,
2023, and Nov. 7, 2023), each available on the CAT website.
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(C) Failure To Pay CAT Fees
The CAT NMS Plan further states that:
Participants shall require each Industry Member to pay all
applicable fees authorized under this Article XI within thirty (30)
days after receipt of an invoice or other notice indicating payment
is due (unless a longer payment period is otherwise indicated). If
an Industry Member fails to pay any such fee when due (as determined
in accordance with the preceding sentence), such Industry Member
shall pay interest on the outstanding balance from such due date
until such fee is paid at a per annum rate equal to the lesser of:
(a) the Prime Rate plus 300 basis points; or (b) the maximum rate
permitted by applicable law.\95\
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\95\ Section 11.4 of the CAT NMS Plan.
Accordingly, FINRA previously has added this requirement to Rule
---------------------------------------------------------------------------
6897. Paragraph (a)(2)(B) of Rule 6897 states:
Each CAT Executing Broker shall pay the CAT fees required
pursuant to paragraph (a)(1) of this Rule within 30 days after
receipt of an invoice or other notice indicating payment is due
(unless a longer payment period is otherwise indicated). If a CAT
Executing Broker fails to pay any such CAT fee when due, such CAT
Executing Broker shall pay interest on the outstanding balance from
such due date until such fee is paid at a per annum rate equal to
the lesser of (i) the Prime Rate plus 300 basis points, or (ii) the
maximum rate permitted by applicable law.
The requirements of paragraph (a)(2)(B) would apply to Historical
CAT Assessment 1.
(7) Historical CAT Assessment Details
The CAT NMS Plan states that:
Details regarding the calculation of a CAT Executing Broker's
Historical CAT Assessment will be provided upon request to such CAT
Executing Broker. At a minimum, such details would include each CAT
Executing Broker's executed equivalent share volume and
corresponding fee by (1) Listed Options, NMS Stocks and OTC Equity
Securities, (2) by transactions executed on each exchange and
transactions executed otherwise than on an exchange, and (3) by buy-
side transactions and sell-side transactions.\96\
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\96\ Section 11.3(a)(iv)(A) of the CAT NMS Plan.
Such information would provide CEBBs and CEBSs with the ability to
understand the details regarding the calculation of their Historical
CAT Assessment.\97\ CAT LLC will provide CAT Executing Brokers with
these details regarding the calculation of their Historical CAT
Assessments on their monthly invoice for the Historical CAT Assessment.
---------------------------------------------------------------------------
\97\ In approving the CAT Funding Model, the Commission stated
that, ``[i]n the Commission's view, providing CAT Execut[ing]
Brokers information regarding the calculation of their CAT Fees will
aid in transparency and permit CAT Execut[ing] Brokers to confirm
the accuracy of their invoices for CAT Fees.'' See CAT Funding Model
Approval Order, 88 FR 62628, 62667.
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In addition, CAT LLC will make certain aggregate statistics
regarding Historical CAT Assessments publicly available. Specifically,
the CAT NMS Plan states that, ``[f]or each Historical CAT Assessment,
at a minimum, CAT LLC will make publicly available the aggregate
executed equivalent share volume and corresponding aggregate fee by (1)
Listed Options, NMS Stocks and OTC Equity Securities, (2) by
transactions executed on each exchange and transactions executed
otherwise on an exchange, and (3) by buy-side transactions and sell-
side transactions.'' \98\ Such aggregate statistics will be available
on the CAT website. Furthermore, CAT LLC will make publicly available
on the CAT website the total amount invoiced each month that Historical
CAT Assessment 1 is in effect as well as the total amount invoiced for
Historical CAT Assessment 1 for all months since its commencement. CAT
LLC also will make publicly available on the CAT website the total
costs to be collected from Industry Members for Historical CAT
Assessment 1. By reviewing statistics regarding how much has been
invoiced and how much remains to be invoiced for Historical CAT
Assessment 1, Industry Members would have sufficient information to
reasonably track how much longer Historical CAT Assessment 1 is likely
to be in place.
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\98\ Section 11.3(a)(iv)(B) of the CAT NMS Plan. In approving
the CAT Funding Model, the Commission stated that ``[t]he
publication of the aggregate executed equivalent share volume and
aggregate fee is appropriate because it would allow Participants and
CAT Executing Brokers a high-level validation of executed volume and
fees.'' See CAT Funding Model Approval Order, 88 FR 62628, 62667.
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(8) Implementation Assistance
To assist Industry Members with compliance with the commencement of
Historical CAT Assessment 1, CAT LLC has been making available to CAT
Executing Brokers mock invoices prior to the commencement of Historical
CAT Assessment 1. Specifically, CAT Executing Brokers have received
mock invoices based on transaction data each month since November 2023.
The mock invoices are in the same form as the actual, payable invoices,
including both the relevant transaction data and the corresponding fee.
However, no payments have been required in response to such mock
invoices; they have been used solely to assist CAT Executing Brokers
with the development of their processes for paying the CAT fees. Such
data has provided CAT Executing Brokers with a preview of the
transaction data used in creating the invoices for Historical CAT
Assessment 1 fees, as the data is the same as data provided in actual
invoices. Such data preview is intended to facilitate the payment of
Historical CAT Assessment 1.
(9) Financial Accountability Milestones
The CAT NMS Plan states that ``[n]o Participant will make a filing
with the SEC pursuant to Section 19(b) of the Exchange Act regarding
any Historical CAT Assessment until any applicable
[[Page 76649]]
Financial Accountability Milestone described in Section 11.6 has been
satisfied.'' \99\ The CAT NMS Plan further states that ``in all filings
submitted by the Participants to the Commission under Section 19(b) of
the Exchange Act, to establish or implement Post-Amendment Industry
Member Fees pursuant to this Article, . . . the Participants shall
clearly indicate whether such fees are related to Post-Amendment
Expenses incurred during Period 1, Period 2, Period 3, or Period 4.''
\100\ As discussed in detail below, all applicable Financial
Accountability Milestones for Historical CAT Assessment 1--that is,
Period 1, Period 2 and Period 3 of the Financial Accountability
Milestones--have been satisfied. Furthermore, as discussed below, this
filing clearly indicates that Historical CAT Assessment 1 relates to
Post-Amendment Expenses incurred during Periods 1, 2 and 3 of the
Financial Accountability Milestones.
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\99\ Section 11.3(b)(iii)(B)(III) of the CAT NMS Plan.
\100\ Section 11.6(b) of the CAT NMS Plan.
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(A) Period 1 of the Financial Accountability Milestones
In accordance with Section 11.6(b) of the CAT NMS Plan, Historical
CAT Assessment 1 seeks to recover costs that are related to ``all fees,
costs, and expenses (including legal and consulting fees, costs, and
expenses) incurred by or for the Company in connection with the
development, implementation and operation of the CAT from the effective
date of [Section 11.6 of the CAT NMS Plan] until such time as Full
Implementation of CAT NMS Plan Requirements has been achieved'' \101\
(``Post-Amendment Expenses'') incurred during FAM Period 1. FAM Period
1 began on June 22, 2020, the effective date of Section 11.6 of the CAT
NMS Plan, and concluded on July 31, 2020, the date of Initial Industry
Member Core Equity and Options Reporting. Section 1.1 of the CAT NMS
Plan defines ``Initial Industry Member Core Equity and Options
Reporting'' as:
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\101\ Section 11.6 of the CAT NMS Plan
The reporting by Industry Members (excluding Small Industry
Members that are not OATS reporters) of both: (a) equities
transaction data, excluding Customer Account Information, Customer-
ID, and Customer Identifying Information; and (b) options
transaction data, excluding Customer Account Information, Customer-
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ID and Customer Identifying Information.''
Under Section 1.1 of the CAT NMS Plan, this Financial
Accountability Milestone is considered complete as of the date
identified in the Participants' Quarterly Progress Reports.\102\ As
indicated by the Participants' Quarterly Progress Report for the third
quarter of 2020,\103\ Initial Industry Member Core Equity and Option
Reporting was completed on schedule on July 22, 2020, which is prior to
the July 31, 2020 deadline.
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\102\ The Quarterly Progress Reports are available at <a href="https://www.catnmsplan.com/implementation-plan">https://www.catnmsplan.com/implementation-plan</a>.
\103\ See CAT Q3 2020 Quarterly Progress Report (October 30,
2020), <a href="https://catnmsplan.com/sites/default/files/2020-10/CAT-Q3-2020-QPR.pdf">https://catnmsplan.com/sites/default/files/2020-10/CAT-Q3-2020-QPR.pdf</a> and Updated CAT Q3 2020 Quarterly Progress Report
(January 29, 2021), <a href="https://catnmsplan.com/sites/default/files/2021-02/CAT-Q3-2020-QPR-Updated.pdf">https://catnmsplan.com/sites/default/files/2021-02/CAT-Q3-2020-QPR-Updated.pdf</a>.
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Under the FAM Period 1 requirement of Initial Industry Member Core
Equity and Options Reporting, Industry Members--excluding Small
Industry Members that are not OATS reporters--were required to report
two categories of data to the CAT: equities transaction data and
options transaction data (both excluding Customer Account Information,
Customer-ID, and Customer Identifying Information) by July 31, 2020.
Pursuant to exemptive relief provided by the Commission, the Commission
authorized the Participants' Compliance Rules to allow core equity
reporting for Industry Members (Phase 2a) to begin on June 22, 2020 and
core options reporting for Industry Members (Phase 2b) to begin on July
20, 2020.\104\
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\104\ See Phased Reporting Exemptive Relief Order, supra, note
35. Under the CAT NMS Plan as adopted, the Participants were
required, through their Compliance Rules, to require their Large
Industry Members to commence reporting Industry Member Data to the
Central Repository by November 15, 2018, and to require their Small
Industry Members to commence reporting Industry Member Data to the
Central Repository by November 15, 2019. See Sections 6.7(a)(v) and
(vi) of the CAT NMS Plan. The SEC granted exemptive relief from
these provisions of the CAT NMS Plan to allow for the phased
implementation of Industry Member reporting via five phases
addressing the reporting requirements for Phase 2a Industry Member
Data, Phase 2b Industry Member Data, Phase 2c Industry Member Data,
Phase 2d Industry Member Data and Phase 2e Industry Member Data.
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In adopting the FAMs, the Commission stated that the equities
transaction reporting required for FAM Period 1 ``is consistent with
the functionality that the Participants describe on the CAT NMS Plan
website as `Production Go-Live for Equities 2a file submission and data
integrity validations.''' \105\ The Phase 2a Industry Member Data is
described in detail in the SEC's Phased Reporting Exemptive Relief
Order, and includes the following data related to Eligible Securities
that are equities:
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\105\ See Securities Exchange Act Release. No. 88890 (May 15,
2020), 85 FR 31322, 31330 n.97 (May 22, 2020) (``FAM Adopting
Release'').
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<bullet> All events and scenarios covered by OATS, which includes
information related to the receipt or origination of orders, order
transmittal, and order modifications, cancellations and executions;
<bullet> Reportable Events for: (1) proprietary orders, including
market maker orders, for Eligible Securities that are equities; (2)
electronic quotes in listed equity Eligible Securities (i.e., NMS
stocks) sent to a national securities exchange or FINRA's Alternative
Display Facility (``ADF''); (3) electronic quotes in unlisted Eligible
Securities (i.e., OTC Equity Securities) received by an Industry Member
operating an interdealer quotation system (``IDQS''); and (4)
electronic quotes in unlisted Eligible Securities sent to an IDQS or
other quotation system not operated by a Participant or Industry
Member;
<bullet> Firm Designated IDs (``FDIDs''), which Industry Members
must report to the CAT as required by Sections 6.3(d)(i)(A) and
6.4(d)(ii)(C) of the CAT NMS Plan;
<bullet> Industry Members would be required to report all street
side representative orders, including both agency and proprietary
orders and mark such orders as representative orders, except in certain
limited exceptions as described in the Industry Member Technical
Specifications;
<bullet> The link between the street side representative order and
the order being represented when: (1) the representative order was
originated specifically to represent a single order received either
from a customer or another broker-dealer; and (2) there is (a) an
existing direct electronic link in the Industry Member's system between
the order being represented and the representative order and (b) any
resulting executions are immediately and automatically applied to the
represented order in the Industry Member's system;
<bullet> Manual and Electronic Capture Time for Manual Order
Events;
<bullet> Special handling instructions for the original receipt or
origination of an order during Phase 2a; and
<bullet> When routing an order, whether the order was routed as an
intermarket sweep order (``ISO'').
In Phase 2a, Industry Members were not required to report
modifications of a previously routed order in certain limited
instances, nor were they required to report a cancellation of an order
received from a Customer after the order has been executed.\106\
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\106\ See Phased Reporting Exemptive Relief Order, 85 FR 23075,
23076-78.
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[[Page 76650]]
The Quarterly Progress Report for the third quarter of 2020 states
that ``Interim Step: Production Go-Live for Equities 2a file submission
and data integrity validation (Large Industry Members and Small OATS
Reporters)'' was completed on June 22, 2020. Accordingly, the FAM
Period 1 requirement of reporting by Industry Members (excluding Small
Industry Members that are not OATS reporters) of ``equities transaction
data, excluding Customer Account Information, Customer-ID, and Customer
Identifying Information'' was completed on June 22, 2020.
In adopting the FAMs, the Commission stated that the options
transaction reporting required for FAM Period 1 is ``consistent with
the functionality that the Participants describe on the CAT NMS Plan
website as `Production Go-Live for Options 2b file submission and data
integrity validations.' '' \107\ The Phase 2b Industry Member Data is
described in detail in the SEC's Phased Reporting Exemptive Relief
Order, and includes the Industry Member Data related to Eligible
Securities that are options and related to simple electronic option
orders, excluding electronic paired option orders. A simple electronic
option order is an order to buy or sell a single option that is not
related to or dependent on any other transaction for pricing and timing
of execution that is either received or routed electronically by an
Industry Member. Electronic receipt of an order is defined as the
initial receipt of an order by an Industry Member in electronic form in
standard format directly into an order handling or execution system.
Electronic routing of an order is the routing of an order via
electronic medium in standard format from one Industry Member's order
handling or execution system to an exchange or another Industry Member.
An electronic paired option order is an electronic option order that
contains both the buy and sell side that is routed to another Industry
Member or exchange for crossing and/or price improvement as a single
transaction on an exchange. Responses to auctions of simple orders and
paired simple orders would be reportable in Phase 2b. Furthermore,
combined orders in options would be treated in Phase 2b in the same way
as equity representative orders are treated in Phase 2a. A combined
order would mean, as permitted by SRO rules, a single, simple order in
Listed Options created by combining individual, simple orders in Listed
Options from a customer with the same exchange origin code before
routing to an exchange. During Phase 2b, the single combined order sent
to an exchange must be reported and marked as a combined order, but the
linkage to the underlying orders is not required to be reported until
Phase 2d.\108\
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\107\ See supra note 105 at 31322, 31330 n.98.
\108\ See Phased Reporting Exemptive Relief Order, 85 FR 23075,
23078.
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The Quarterly Progress Report for the third quarter of 2020 states
that ``Interim Step: Production Go-Live for Options 2b file submission
and data integrity validations'' was completed on July 20, 2020.
Accordingly, the FAM Period 1 requirement of reporting by Industry
Members (excluding Small Industry Members that are not OATS reporters)
of ``options transaction data, excluding Customer Account Information,
Customer-ID and Customer Identifying Information'' was completed on
July 20, 2020.
As discussed above, the Historical CAT Costs 1 to be recovered via
Historical CAT Assessment 1 would include fees, costs and expenses
incurred by or for the Company in connection with the development,
implementation and operation of the CAT during the period from June 22,
2020 through July 31, 2020. The total costs for this period, as
discussed above, are $6,377,343. Participants would remain responsible
for one-third of this cost (which they have previously paid), and
Industry Members would be responsible for the remaining two-thirds,
with CEBBs paying one-third ($2,125,781) and CEBSs paying one-third
($2,125,781).
(B) Period 2 of the Financial Accountability Milestones
Historical CAT Assessment 1 seeks to recover costs that are related
to Post-Amendment Expenses incurred during FAM Period 2. FAM Period 2
began on August 1, 2020, and concluded on December 31, 2020, the date
of the Full Implementation of Core Equity Reporting. Section 1.1 of the
CAT NMS Plan defines ``Full Implementation of Core Equity Reporting''
as:
the point at which: (a) Industry Member reporting (excluding
reporting by Small Industry Members that are not OATS reporters) for
equities transactions, excluding Customer Account Information,
Customer-ID, and Customer Identifying Information, is developed,
tested, and implemented at a 5% Error Rate or less and with
sufficient intra-firm linkage, inter-firm linkage, national
securities exchange linkage, and trade reporting facilities linkage
to permit the Participants and the Commission to analyze the full
lifecycle of an order across the national market system, excluding
linkage of representative orders, from order origination through
order execution or order cancellation; and (b) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates the Industry
Member equities transaction data described in condition (a) and is
available to the Participants and to the Commission. This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements
of Section 6.6(c).
Under Section 1.1 of the CAT NMS Plan, this Financial
Accountability Milestone is considered complete as of the date
identified in the Participants' Quarterly Progress Reports. As
indicated by the Participants' Quarterly Progress Report for the fourth
quarter of 2020,\109\ Full Implementation of Core Equity Reporting was
completed on schedule by December 31, 2020.
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\109\ See CAT Q4 2020 Quarterly Progress Report (January 29,
2021), <a href="https://catnmsplan.com/sites/default/files/2021-02/CAT-Q4-2020-QPR.pdf">https://catnmsplan.com/sites/default/files/2021-02/CAT-Q4-2020-QPR.pdf</a>.
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Specifically, the Full Implementation of Core Equity Reporting
requires the satisfaction of two prongs. The first prong requires
Participants to have fully implemented the first phase of equities
transaction reporting for Industry Members (excluding Small Industry
Members that are not OATS reporters) at an Error Rate of less than 5%.
In addition, equities transaction data produced by the CAT at this
stage must also be sufficiently interlinked so as to permit full
analysis of an order's lifecycle across the national market, excluding
full linkage of representative orders. As CAT LLC reported on its
Quarterly Progress Reports, Phase 2a was fully implemented as of
October 26, 2020, including intra-firm, inter-firm, national securities
exchange, and trade reporting facilities linkages.\110\ In addition to
the reporting of Phase 2a Industry Member Data as described above with
regard to FAM Period 1, the following linkage data was added to the CAT
as described in the Quarterly Progress Reports for the third and fourth
quarter of 2020:
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\110\ For a description of the requirements of Phases 2a, see
Phased Reporting Exemptive Relief Order, supra note 35.
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<bullet> ``Production Go-Live for Equities 2a Intrafirm Linkage
validations'' was completed on 7/27/2020; \111\
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\111\ See CAT Q3 2020 Quarterly Progress Report (October 30,
2021), <a href="https://catnmsplan.com/sites/default/files/2020-10/CAT-Q3-2020-QPR.pdf">https://catnmsplan.com/sites/default/files/2020-10/CAT-Q3-2020-QPR.pdf</a>.
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<bullet> ``Production Go-Live for Firm to Firm Linkage validations
for Equities 2a (Large Industry Members and Small OATS Reporters)'' was
completed on October 26, 2020; and
<bullet> ``Production Go-Live for Equities 2a Exchange and TRF
Linkage validations (Large Industry Members and Small
[[Page 76651]]
OATS Reporters)'' was completed on October 26, 2020.
Furthermore, as CAT LLC reported on its Quarterly Progress Report
for the fourth quarter of 2020, the average overall error rate for
Phase 2a Industry Member Data was less than 5% as of December 31, 2020.
The average overall error rate was calculated by dividing the
compliance errors by processed records.
The second prong of this FAM requires that the equities transaction
data collected by the CAT at this stage be made available to regulators
through two basic query tools required by the CAT NMS Plan--a targeted
query tool that will enable regulators to retrieve data via an online
query screen with a variety of predefined selection criteria, and a
user-defined direct query tool that will provide regulators with the
ability to query data using all available attributes and data
sources.\112\ As CAT LLC reported on its Quarterly Progress Reports,
the query tool functionality incorporating the data from Phase 2a was
available to the Participants and the Commission as of December 31,
2020.\113\
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\112\ Section 6.10(c)(i)(A) of the CAT NMS Plan requires the
Plan Processor to ``provide Participants and the SEC with access to
all CAT Data stored in the Central Repository'' via an ``online
targeted query tool.'' Appendix D, Sections 8.1.1-8.1.3 of the CAT
NMS Plan describes the required functionality associated with this
regulatory tool. Appendix D, Section 8.2.1 describes the required
functionality associated with a user-defined direct query tool that
will ``deliver large sets of data that can then be used in internal
surveillance or market analysis applications.''
\113\ See Q3 2020 Quarterly Progress Report (October 30, 2020);
Updated Q3 2020 Quarterly Progress Report (January 29, 2021); and Q4
2020 Quarterly Progress Report (January 29, 2021).
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The Commission has determined that the Participants have
sufficiently complied with the conditions set forth in the 2020 Orders
and with the technical requirements for Quarterly Progress Reports set
forth in Section 6.6(c) of the CAT NMS Plan for purposes of determining
compliance with this FAM.\114\
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\114\ See Securities Exchange Act Release No. 98848 (November 2,
2023), 88 FR 77128, 77129 n.13 (November 8, 2023) (``Settlement
Exemptive Order'').
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As discussed above, Historical CAT Costs 1 to be recovered via
Historical CAT Assessment 1 would include fees, costs and expenses
incurred by or for the Company in connection with the development,
implementation and operation of the CAT during the period from August
1, 2020 through December 31, 2020. The total costs for this period, as
discussed above, are $42,976,478. Participants would remain responsible
for one-third of this cost (which they have previously paid), and
Industry Members would be responsible for the remaining two-thirds,
with CEBBs paying one-third ($14,325,492.70) and CEBSs paying one-third
($14,325,492.70).
(C) Period 3 of the Financial Accountability Milestones
Historical CAT Assessment 1 seeks to recover costs that are related
to Post-Amendment Expenses incurred during FAM Period 3. FAM Period 3
began on January 1, 2021, and concluded on December 31, 2021, the date
of the Full Availability and Regulatory Utilization of Transactional
Database Functionality. Section 1.1 of the CAT NMS Plan defines ``Full
Availability and Regulatory Utilization of Transactional Database
Functionality'' as:
the point at which: (a) reporting to the Order Audit Trail
System (``OATS'') is no longer required for new orders; (b) Industry
Member reporting for equities transactions and simple electronic
options transactions, excluding Customer Account Information,
Customer-ID, and Customer Identifying Information, with sufficient
intra-firm linkage, inter-firm linkage, national securities exchange
linkage, trade reporting facilities linkage, and representative
order linkages (including any equities allocation information
provided in an Allocation Report) to permit the Participants and the
Commission to analyze the full lifecycle of an order across the
national market
[…truncated; see source link]Indexed from Federal Register on September 18, 2024.
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