[Federal Register Volume 86, Number 177 (Thursday, September 16, 2021)]
[Notices]
[Pages 51690-51696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19972]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92937; File No. SR-NASDAQ-2021-071]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Delete the Order Audit Trail System Rules in the Equity 5 Series of the 
Exchange's Rulebook

September 10, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 3, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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 the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete the Order Audit Trail System 
(``OATS'') rules in the Equity 5 Series of the Exchange's rulebook that 
provides for the collection of information that is duplicative of the 
data collection requirements of the CAT. Further, the Financial 
Industry Regulatory Authority (``FINRA'') has determined to eliminate 
its OATS rules.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

[[Page 51691]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule 613 of Regulation NMS requires national securities exchanges 
and FINRA to create, implement, and maintain a consolidated audit trail 
to capture customer and order event information for orders in NMS 
Securities and OTC Equity Securities, across all markets, from the time 
of order inception through routing, cancellation, modification, or 
execution in a single consolidated data source. The Participants filed 
the Plan to comply with Rule 613 of Regulation NMS under the Act. The 
Plan was published for comment in the Federal Register on May 17, 
2016,\3\ and approved by the Commission, as modified, on November 15, 
2016.\4\
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    \3\ See Securities Exchange Act Release No. 77724 (April 27, 
2016), 81 FR 30614 (May 17, 2016).
    \4\ See Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``Order Approving the 
National Market System Plan Governing the Consolidated Audit Trail) 
(``Approval Order'').
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    On August 14, 2020, FINRA filed with the Commission a proposed rule 
change to delete the OATS rules once Industry Members are effectively 
reporting to the CAT (the ``OATS Retirement Filing'').\5\ On October 
29, 2020, FINRA filed Amendment No. 1 to the proposed rule change 
(``Amendment No. 1'') and a response to the comments that were 
submitted on the original filing (``Response to Comments'').\6\ On 
November 30, 2020, the Commission approved the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.\7\ On June 17, 
2021, FINRA filed a proposed rule change setting forth the basis for 
its determination that the accuracy and reliability of the CAT meet the 
standards approved by the Commission in the OATS Retirement Filing for 
purposes of eliminating the OATS rules.\8\ The FINRA proposal stated 
that FINRA would retire OATS effective September 1, 2021.
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    \5\ See Securities Exchange Act Release No. 89679 (August 26, 
2020), 85 FR 54461 (September 1, 2020) (Notice of Filing of File No. 
SR-FINRA-2020-024).
    \6\ See Letter from Lisa C. Horrigan, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated October 
29, 2020.
    \7\ See Securities Exchange Act Release No. 90535 (November 30, 
2020), 85 FR 78395 (December 4, 2020) (Notice of Filing of Amendment 
No. 1 and Order Granting Accelerated Approval of SR-FINRA-2020-024).
    \8\ See Securities Exchange Act Release No. 92239 (June 23, 
2021), 86 FR 34293 (June 29, 2021) (SR-FINRA-2021-017) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Retirement of FINRA's Order Audit Trail System).
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    After conducting an analysis of its rules in accordance with the 
CAT NMS Plan, the Exchange has determined that the information 
collected pursuant to the OATS rules is intended to be collected by 
CAT. Further, the Exchange believes that the Equity 5 Series will no 
longer be necessary and proposes to delete such rules from the 
Exchange's rulebook. Discussed below is a description of the 
duplicative rule requirements as well as the timeline for eliminating 
the duplicative rules followed by a discussion on the OATS Retirement 
Filing that formed the basis for retiring OATS.
Duplicative OATS Requirements
    The Equity 5 Series consists of Section 1 through Section 6 and 
sets forth the recording and reporting requirements of the OATS Rules. 
The OATS Rules require all Exchange member organizations and associated 
persons to record in electronic form and report to FINRA, on a daily 
basis, certain information with respect to orders originated, received, 
transmitted, modified, canceled, or executed by members in all NMS 
stocks, as that term is defined in Rule 600(b)(47) of Regulation 
NMS,\9\ traded on the Exchange, including Nasdaq-listed securities. The 
Exchange relies on the information reported to OATS either to conduct 
surveillance or to facilitate surveillance conducted by FINRA pursuant 
to a regulatory services agreement (``RSA''). This information is used 
by Exchange and FINRA staff to conduct surveillance and investigations 
of member firms for violations of Exchange and FINRA rules and federal 
securities laws. The Exchange believes it is appropriate to retire OATS 
because the requirements of the Equity 5 Series are duplicative of 
information available in the CAT and thus will no longer be necessary 
now that the CAT is operational.
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    \9\ 17 CFR 242.600(B)(47).
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Timeline for Elimination of Duplicative Rules
    The CAT NMS Plan states that the elimination of rules that are 
duplicative of the requirements of the CAT and the retirement of the 
related systems should be effective at such time as CAT Data meets 
minimum standards of accuracy and reliability.\10\ As discussed in more 
detail in the OATS Retirement Filing, FINRA believes that OATS may be 
retired effective September 1, 2021 given the error rate thresholds 
have been met, and FINRA has determined that its usage of the CAT Data 
has not revealed material issues that have not been corrected and 
further confirmed that the CAT includes all data necessary to allow 
FINRA to continue to meet its surveillance obligations.
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    \10\ Appendix C of CAT NMS Plan, Approval Order at 85010.
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OATS Retirement Filing
    In the OATS Retirement Filing, FINRA proposed to eliminate the OATS 
rules once Industry Members are effectively reporting to the CAT and 
the CAT's accuracy and reliability meet certain standards. 
Specifically, FINRA proposed that before OATS could be retired, the CAT 
generally must achieve a sustained error rate for Industry Member 
reporting in five categories for a period of at least 180 days of 5% or 
lower on a pre-correction basis, and 2% or lower on a post-correction 
basis (measured at T+5). In addition to the maximum error rates and 
matching thresholds, FINRA's use of CAT Data must confirm that (i) 
there are no material issues that have not been corrected, (ii) the CAT 
includes all data necessary to allow FINRA to continue to meet its 
surveillance obligations, and (iii) the Plan Processor is sufficiently 
meeting its obligations under the CAT NMS Plan relating to the 
reporting and linkage of Phase 2a Industry Member Data.
    In the OATS Retirement Filing, FINRA explained that its review of 
CAT Data and error rates would be based on data and linkages in the 
initial phase of reporting (or ``Phase 2a''), which replicate the data 
in OATS today and thus are most relevant for OATS retirement purposes. 
Phase 2a Data includes all events and scenarios covered by OATS and 
applies only to equities. FINRA did not consider options order events 
or Phase 2c data and validations, which are not in OATS today, for 
purposes of OATS retirement.

[[Page 51692]]

    As described below, FINRA has determined that the CAT meets the 
accuracy and reliability standards approved by the Commission in the 
OATS Retirement Filing.
(1) Maximum Error Rates
    As discussed in the OATS Retirement Filing, FINRA believes that 
relevant error rates are the primary, but not the sole, metric by which 
to determine the CAT's accuracy and reliability and will serve as the 
baseline requirement needed before OATS can be retired. FINRA proposed 
that, before OATS could be retired, the CAT would generally need to 
achieve a sustained error rate for Industry Member reporting in five 
categories for a period of at least 180 days of 5% or lower, measured 
on a pre-correction or as-submitted basis, and 2% or lower on a post-
correction basis (measured at T+5).\11\ FINRA proposed to average the 
error rates across the period, rather than require a 5% pre-correction 
and 2% post-correction maximum each day for 180 consecutive days. FINRA 
also proposed to measure the error rates in the aggregate, rather than 
on a firm-by-firm basis. Finally, FINRA proposed to measure the error 
rates separately for each of the five categories, rather than evaluate 
all categories in the aggregate. As noted above, FINRA's assessment of 
the error rates for Industry Member reporting is based solely on Phase 
2a CAT reporting for equity events since options orders are not 
included in OATS today.
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    \11\ As clarified in the OATS Retirement Filing, although FINRA 
does not believe that post-correction errors need to be de minimis 
before OATS can be retired, FINRA was not suggesting, with the 
proposal, that 2% would meet the ultimate objective of de minimis 
error rates for CAT. See CAT NMS Plan, Appendix C, note 102 (error 
rates after reprocessing of error corrections are ultimately 
expected to be de minimis for the CAT). See also Approval Order.
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    As discussed in the OATS Retirement Filing, FINRA measured the 
error rates in each of the five categories discussed below during the 
period from October 26, 2020 through April 26, 2021 (the ``applicable 
period''). FINRA commenced this period on October 26, 2020, which was 
the date that Industry Members were required to begin correcting all 
errors for inter-firm linkages and exchange/TRF/ORF match validations. 
As discussed in the Response to Comments, although the production 
environment for inter-firm linkage and exchange/TRF/ORF match 
validations was open for testing as of September 28, 2020, FINRA did 
not believe it would be appropriate for the 180-day period to commence 
prior to the October 26, 2020 compliance date.\12\
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    \12\ See FINRA's Response to Comments, supra note 7.
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Rejection Rates and Data Validations
    As described in the OATS Retirement Filing, the Plan Processor must 
perform certain basic data validations,\13\ and if a record does not 
pass these basic data validations, it must be rejected and returned to 
the CAT Reporter to be corrected and resubmitted. FINRA proposed that 
over the 180-day period, aggregate rejection rates must be no more than 
5% pre-correction or 2% post-correction across all Industry Member 
Reporters. FINRA has determined that, over the applicable period, 
aggregate rejection rates across all Industry Member Reporters were 
0.03% pre-correction and 0.01% post-correction.
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    \13\ Appendix D of the CAT NMS Plan, Section 7.2, for example, 
requires that certain file validations (e.g., file transmission and 
receipt are in the correct formats, confirmation of a valid SRO-
Assigned Market Participant Identifier, etc.), and syntax and 
context checks (e.g., format checks, data type checks, consistency 
checks, etc.) be performed on all submitted records.
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Intra-Firm Linkages
    As described in the OATS Retirement Filing, the Plan Processor must 
be able to link all related order events from all CAT Reporters 
involved in the lifecycle of an order. At a minimum, this requirement 
includes the creation of an order lifecycle between all order events 
handled within an individual CAT Reporter, including orders routed to 
internal desks or departments with different functions (e.g., an 
internal ATS). FINRA proposed that aggregate intra-firm linkage rates 
across all Industry Member Reporters must be at least 95% pre-
correction and 98% post-correction. FINRA has determined that, over the 
applicable period, aggregate intra-firm linkage rates across all 
Industry Member Reporters were 99.97% pre-correction and 99.99% post-
correction.
Inter-Firm Linkages
    As described in the OATS Retirement Filing, the Plan Processor must 
be able to create the lifecycle between orders routed between broker-
dealers. FINRA proposed that at least a 95% pre-correction and 98% 
post-correction aggregate match rate be achieved for orders routed 
between two Industry Member Reporters. FINRA has determined that during 
the applicable period there was a 99.08% pre-correction and 99.84% 
post-correction aggregate match rate for orders routed between two 
Industry Member Reporters.
Order Linkage Rates
    As described in the OATS Retirement Filing, in addition to creating 
linkages within and between broker-dealers, the Plan Processor must be 
able to create lifecycles to link various pieces of related orders. For 
example, the Plan requires linkages of order information to create an 
order lifecycle from origination or receipt to cancellation or 
execution. This category essentially combines all of the order-related 
linkages to capture an overall snapshot of order linkages in the 
CAT.\14\ FINRA proposed that there be at least a 95% pre-correction and 
98% post-correction rate for order linkages that are required in Phase 
2a. FINRA has determined that during the applicable period there was a 
99.66% pre-correction and 99.93% post-correction rate for order 
linkages required in Phase 2a.16.\15\
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    \14\ See FINRA's Response to Comments, supra note 7.
    \15\ FINRA noted that in Phase 2a, linkage is required between 
the representative street side order and the order being represented 
when the representative order was originated specifically to 
represent a single order (received either from a customer or another 
broker-dealer) and there is: (1) An existing direct electronic link 
in the firm's system between the order being represented and the 
representative order, and (2) any resulting executions are 
immediately and automatically applied to the represented order in 
the firm's system. As set forth in the OATS Retirement Filing, while 
such linkages are not required in OATS, FINRA believes that it is 
appropriate to evaluate them for purposes of retiring OATS because 
they represent a significant enhancement to the data currently 
available in OATS and will enhance the quality of the equity audit 
trail. However, FINRA also explained in the Response to Comments 
that if all other proposed criteria have been met, FINRA would not 
anticipate delaying OATS retirement based on Phase 2a representative 
order linkage error rates alone.
    In evaluating whether the standards for OATS retirement have 
been met, FINRA determined that the error rates for the Phase 2a 
representative order linkages did not have a significant negative 
impact on the overall error rates for order linkages. Accordingly, 
FINRA did not need to separately evaluate or exclude Phase 2a 
representative order linkage rates in measuring the error rates over 
the applicable period. For example, if the intra-firm linkage error 
rate had been above 5% over the applicable period, FINRA would have 
evaluated whether the error rate was the result of unlinked 
representative orders to create an apples-to-apples comparison to 
OATS.
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Exchange and TRF/ORF Match Rates
    As described in the OATS Retirement Filing, an order lifecycle must 
be created to link orders routed from broker-dealers to exchanges and 
executed orders and trade reports. FINRA proposed at least a 95% 
precorrection and 98% post-correction aggregate match rate across all 
equity exchanges \16\ for orders routed from

[[Page 51693]]

Industry Members to an exchange and, for over-the-counter executions, 
the same match rate for orders linked to trade reports. FINRA 
determined that, during the applicable period, there was a 99.51% pre-
correction and 99.87% post-correction aggregate match rate across all 
equity exchanges for orders routed from Industry Members to an exchange 
and, for over-the-counter executions, there was a 99.34% pre-correction 
and 99.53% post-correction rate for orders linked to trade reports 
submitted to the FINRA Trade Reporting Facilities and OTC Reporting 
Facility.
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    \16\ See Amendment No. 1.
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    As set forth above, the error rates for Industry Member reporting 
over the applicable period were well below the maximum rates 
established in the OATS Retirement Filing. FINRA also noted that the 
overall post-correction error rate for Phase 2a Industry Member 
reporting of 1.01% is comparable to the current overall OATS post-
correction error rate, which generally is at or slightly below 1%. 
Therefore, FINRA has determined that, based on the error rates for 
Industry Member reporting, the CAT Data meets the accuracy and 
reliability baseline standards required for OATS retirement.
(2) FINRA's Use of CAT Data
    In the OATS Retirement Filing, FINRA stated that while error rates 
are a key standardized measure in determining whether OATS retirement 
is appropriate, FINRA's use of the data in the CAT also must confirm 
that (i) there are no material issues that have not been corrected 
(e.g., delays in the processing of data, issues with query functions, 
etc.), (ii) the CAT includes all data necessary to allow FINRA to 
continue to meet its surveillance obligations, and (iii) the Plan 
Processor is sufficiently meeting its obligations under the CAT NMS 
Plan relating to the reporting and linkage of Phase 2a Data.
    In the OATS Retirement Filing, FINRA stated that it has been 
planning for OATS retirement for several years and the necessary 
development work has been underway for some time. FINRA also has been 
analyzing and testing production CAT Data for purposes of transitioning 
its automated equity surveillance patterns since the commencement of 
Phase 2a Industry Member reporting in June 2020 and through subsequent 
CAT milestone releases. For example, in addition to quantitative 
reviews, such as the error rate statistics discussed above, FINRA has 
conducted a series of qualitative reviews of Industry Member CAT Data. 
Such reviews include, among other things, comparing the count and 
distribution of Industry Member event reporting through CAT versus OATS 
(e.g., new order and execution events, and data elements such as buy/
sell/sell short codes), and reviewing results of examinations, alert 
reviews, and investigations relating to the timeliness and accuracy of 
Industry Member reporting. Based on such qualitative data reviews, 
FINRA has concluded that Industry Member CAT Data, in the aggregate, is 
a sufficient replacement for OATS for purposes of FINRA's surveillance 
program.
    As discussed in the OATS Retirement Filing, today, FINRA's 
surveillance patterns rely on the cross-market data model (``CMDM''), 
which comprises linked OATS data, equity exchange data feeds from each 
of the exchanges with which FINRA has entered into a RSA, and 
transactions reported to FINRA's equity trade reporting facilities. The 
CMDM will be retired and replaced by a newly created surveillance data 
mart, the Pattern Optimized Datamart (``POD''), which incorporates both 
equities and options data. At that point, FINRA's patterns will rely on 
CAT Data in POD, i.e., Plan Participant and Industry Member data 
reported in CAT format and linked by CAT.\17\ FINRA notes that the Plan 
Participants transitioned to reporting via the CAT technical 
specification as of April 26, 2021, and full Plan Participant equities 
reporting and linkage validations in accordance with the CAT 
specification commenced on June 1, 2021.\18\ Successful completion of 
the transition to the CAT specification for Plan Participants is a 
prerequisite for FINRA to retire the CMDM and leverage CAT Data and 
linkages in POD for its surveillance patterns. As of the date of this 
filing, FINRA has completed all planned activities on schedule, 
including substantially completing the process of integrating CAT Data 
into POD and successfully running large amounts of production CAT Data 
for the month of May through POD.\19\ FINRA anticipates completing 
additional activities before the proposed OATS retirement date, 
including, e.g., planned user acceptance testing.\20\
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    \17\ FINRA's Response to Comments noted this dependency, stating 
that the process of transitioning FINRA's surveillance patterns to 
CAT Data necessarily includes, among other things, ingestion of all 
Industry Member and Plan Participant data and linkages in CAT 
format. See Response to Comments, supra note 7, at 4. The Response 
to Comments further noted that the Plan Participants would be 
reporting to CAT via another mechanism until April 2021.
    \18\ For example, according to the CAT Reporting Technical 
Specification for Plan Participants (version 4.0.0-r4 dated April 
20, 2021), additional linkage error feedback for off-exchange trade 
reports was effective as of June 1, 2021. The Technical 
Specifications can be found on the CAT NMS Plan website at http://www.catnmsplan.com/sites/default/files/2021-04/04.20.2021-CAT-ReportingTechnical-Specifications-for-Participants-4.0.0-r4.pdf.
    \19\ FINRA notes that additional POD releases are scheduled; 
however, these releases introduce minor enhancements to POD, as 
opposed to significant changes that would impact the way data is 
ingested or processed in POD.
    \20\ FINRA notes that user acceptance testing is the final stage 
of any software development life cycle and enables actual users to 
test the system to confirm that it is able to carry out the required 
tasks it was designed to address in real-world situations.
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    As discussed in the OATS Retirement Filing, FINRA has performed 
broad analysis of its equity surveillance patterns and has determined 
that all of the data required to support the transition is available in 
CAT. By mapping OATS data to Industry Member CAT Data in POD, FINRA has 
confirmed that CAT Data has equivalent analogs to all data elements in 
OATS. In that regard, FINRA notes that, as a Plan Participant, FINRA 
has been involved in CAT development efforts to ensure that the scope 
and features of Industry Member data and processed output are 
sufficient for FINRA's surveillance program. These efforts include, for 
example, developing and updating the Industry Member Technical 
Specifications and Reporting Scenarios, conducting OATS-CAT gap 
analyses and validating that all such gaps have been properly 
addressed, and performing OATS-to-CAT field-level mappings.
    With respect to Plan Participant data, FINRA notes in the OATS 
Retirement Filing that the test environment for Plan Participant 
reporting in accordance with the CAT specification opened on February 
15, 2021.\21\ Plan Participant equity reporting in accordance with the 
CAT specification in the test environment had a very high compliance 
rate for data ingestion and validation, and compliance in the 
production environment is comparable. In addition, starting on April 
26, 2021, CAT began linking copies of Industry Member and Plan 
Participant data reported via the CAT specification in a test 
environment, and at that point, FINRA began its evaluation of the 
quality of these linkages. Based on this review and evaluation, in the 
OATS Retirement Filing, FINRA stated that it believes that the linkages 
between Plan Participant data and Industry Member data in CAT are 
comparable to the linkages between RSA exchange data

[[Page 51694]]

and OATS data in the CMDM today.\22\ FINRA CAT and the Plan 
Participants have now met the necessary criteria for a full cutover 
from the RSA specification to the CAT specification, including, e.g., 
achieving comparable data ingestion validation and inter-venue linkage 
rates (within a variance of under one percent) between RSA and CAT 
specification submissions. Accordingly, the Operating Committee 
approved the cutover from the RSA specification to the CAT 
specification as the official source of Plan Participant data as of 
June 1, 2021, and today, all Industry Member and Plan Participant 
equities data reported via the CAT specification is linked in the CAT 
production environment.
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    \21\ See, e.g., CAT Q1 2021 Quarterly Progress Report dated 
April 30, 2021, available at www.catnmsplan.com/sites/default/files/2021-05/CAT-Q1-2021-QPR.pdf.
    \22\ FINRA notes that the CAT uses the same code in both the 
test and production environments. Thus, FINRA believes that linkages 
in the test environment are reliable indicators of linkages in the 
production environment.
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    As discussed in the OATS Retirement Filing, FINRA continues to 
evaluate CAT Data quality, and in particular, linkages between Industry 
Member and Plan Participant data, and to test its surveillance patterns 
to run on CAT Data in POD. In that regard, FINRA notes that it has 
followed established and time-tested processes and protocols throughout 
the development process to ensure that its patterns will perform as 
expected and produce the necessary output using CAT Data following the 
retirement of OATS. For example, FINRA's Software Development Lifecycle 
(``SDLC'') procedures govern systems design, changes, testing and 
controls. The SDLC procedures are an essential component of FINRA's 
operations and have been developed to serve FINRA's unique regulatory 
needs and structure. Additionally, consistent with SEC Regulation SCI, 
FINRA procedures include a plan of coordination and communication with 
regulatory staff. By relying on these established processes and 
protocols, FINRA has confidence that the CAT Data and linkages are 
reliable and sufficient to run FINRA's surveillance patterns.
    Based on these results, as well as the results of its quantitative 
and qualitative reviews of CAT Data and successful efforts integrating 
CAT Data into POD, in the OATS Retirement Filing, FINRA stated that it 
believes that the complete portfolio of equity surveillance patterns 
will be capable of consuming CAT Data and achieving comparable (or 
better) output results.
    Thus, FINRA proposes to retire OATS in accordance with the schedule 
set forth herein. FINRA will run its surveillance patterns for review 
periods through the end of the second quarter of 2021 using OATS data 
and begin using--and be fully reliant on--CAT Data for its surveillance 
patterns for review periods beginning in the third quarter of 2021. 
Following the retirement of OATS, FINRA expects to maintain the current 
established cadence of its monthly, quarterly and semi-annual 
surveillance patterns. In addition, FINRA's analytics platforms will 
have access to CAT Data as soon as such data is made available to 
regulators. Thus, outside of regularly scheduled surveillance pattern 
runs, FINRA can perform expedited analytics, as required by market 
events.
    As discussed in the OATS Retirement Filing, FINRA is finalizing the 
development and certification of its surveillance patterns to run on 
CAT Data on a rolling basis and, in accordance with its existing SDLC 
procedures, will run a month's worth of data and compare the output 
before certifying each pattern. For those equity patterns that will be 
subject to certification after OATS retirement, FINRA anticipates that 
there would be sufficient time to identify and remediate any issues 
prior to running the patterns in accordance with the current 
established cadence. FINRA does not anticipate significant issues 
arising from additional scheduled POD releases or in the final stages 
of its pattern development and certification efforts.
    As discussed in the OATS Retirement Filing, on an ongoing basis 
following the retirement of OATS, FINRA will conduct regular reviews to 
ensure confidence in the completeness and accuracy of Industry Member 
reporting, along with the ability to remediate any issues in a timely 
manner. Among other things, FINRA has a robust mechanism for detecting 
data issues, determining which issues are material for purposes of its 
surveillance program, and requesting resubmission and/or reprocessing 
of data, as necessary. FINRA also (1) performs a suite data quality 
checks against data sourced from CAT to POD and against data processed 
by POD for use in surveillance patterns; (2) oversees a robust 
surveillance and examination compliance program that evaluates Industry 
Member reporting timeliness, data quality, and other issues and trends; 
(3) reviews CAT compliance program alerts using a rapid remediation 
process and formal reviews, as necessary; and (4) reviews Industry 
Member self-reporting and error correction trends. FINRA believes that 
these practices are sufficient for identification and timely resolution 
of Industry Member reporting and data issues after OATS has been 
retired.
    Specifically, with regard to the additional standards approved in 
the OATS Retirement Filing, through its use of CAT Data to date, as 
described above, FINRA believes that these standards have been 
satisfied. With respect to the first factor, FINRA does not believe 
that there are any material issues that have not been corrected (or 
could not be corrected in the course of operation of CAT, as approved 
by the Operating Committee) \23\ that would impact FINRA's ability to 
incorporate and use CAT Data in FINRA's surveillance program. For 
example, the Plan requires that raw unprocessed data that has been 
ingested by the Plan Processor must be available to Participant 
regulatory staff and the SEC prior to 12:00 p.m. Eastern Time on T+1, 
and access to all iterations of processed data must be available to 
Participant regulatory staff and the SEC between 12:00 p.m. Eastern 
Time on T+1 and T+5.\24\ The Plan Processor also must ensure that 
regulators have access to corrected and linked order data by 8:00 a.m. 
Eastern Time on T+5.\25\ Additionally, after ingestion by the Central 
Repository, the raw unprocessed data must be transformed into a format 
appropriate for data querying and regulatory output.\26\ The user-
defined direct queries and bulk extracts must provide authorized users 
with the ability to retrieve CAT Data via a query tool or language that 
allows users to query all available attributes and data sources.\27\ 
FINRA's use of the CAT Data has not uncovered any processing delays or 
other material issues impacting the availability of, and FINRA's access 
to, the data.
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    \23\ FINRA notes that FINRA CAT tracks known issues relating to 
Industry Member and Plan Participant reporting. See, e.g., 
catnmsplan.com/CAT-Transaction-Known-Issues-List. FINRA regularly 
reviews and analyzes FINRA CAT's list of current and resolved issues 
and does not believe that any of these issues would impact its 
ability to incorporate and use CAT Data in its surveillance program.
    \24\ See CAT NMS Plan, Appendix D, Section 6.2.
    \25\ See CAT NMS Plan, Appendix C, Section A.2(a).
    \26\ See CAT NMS Plan, Appendix C, Section A.1(b).
    \27\ See CAT NMS Plan, Section 6.10(c).
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    With respect to the second factor, FINRA stated in the OATS 
Retirement Filing that it believes that the CAT includes all data 
necessary for FINRA to meet its surveillance obligations after the 
retirement of OATS. FINRA must ensure that the CAT, as the single 
source of order and trade data, can enable FINRA to conduct accurate 
and effective market surveillance in accordance with its regulatory

[[Page 51695]]

obligations.\28\ As noted above, Phase 2a Data includes all events and 
scenarios covered by OATS and is the most relevant for OATS retirement 
purposes. FINRA Rule 7440 describes the OATS requirements for recording 
information, which includes information related to the receipt or 
origination of orders, order transmittal, and order modifications, 
cancellations and executions. Large Industry Members and Small Industry 
Members that currently are reporting to OATS were required to submit 
data to the CAT for these same events and scenarios commencing in Phase 
2a. FINRA's testing, analysis and use of the CAT Data (including 
integration into POD), as described above, has confirmed that the CAT 
includes all data necessary for FINRA to meet its surveillance 
obligations and that CAT is a reliable substitute for OATS. In 
addition, based on its qualitative data reviews, FINRA has concluded 
that Industry Member CAT Data, in the aggregate, is a sufficient 
replacement for OATS for purposes of FINRA's surveillance program.
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    \28\ As discussed in the OATS Retirement Filing, OATS was 
originally proposed to fulfill one of the undertakings contained in 
an order issued by the Commission relating to the settlement of an 
enforcement action against FINRA (f/k/a National Association of 
Securities Dealers, Inc. (``NASD'')) for failure to adequately 
enforce its rules. See Securities Exchange Act Release No. 39729 
(March 6, 1998), 63 FR 12559 (March 13, 1998) (Order Approving File 
No SR-NASD-97-56) (``OATS Approval Order''); see also Securities 
Exchange Act Release No. 37538 (August 8, 1996); Administrative 
Proceeding File No. 3-9056 (``SEC Order''). In the OATS Approval 
Order, the Commission concluded that OATS satisfied the conditions 
of the SEC Order and was consistent with the Exchange Act. See 63 FR 
12559, 12566-67. FINRA believes that it will continue to be in 
compliance with the requirements of the SEC Order once the OATS 
Rules are deleted.
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    With respect to the third factor, FINRA stated in the OATS 
Retirement Filing that it believes that the Plan Processor is 
sufficiently meeting its obligations under the CAT NMS Plan relating to 
the reporting and linkage of Phase 2a Data. As detailed in the 
Implementation Plan and Quarterly Progress Reports submitted by the 
Plan Participants, the Plan Processor has met its targeted completion 
dates for the milestones for Phase 2a, including, for example, 
production Go-Live for Equities 2a file submission and data integrity 
validation (Large Industry Members and Small OATS Reporters) on June 
22, 2020; Production Go-Live for Equities 2a Intrafirm Linkage 
validations on July 27, 2020; and production go-live for firm-to-firm 
linkage validations for equities (Large Industry Members and Small OATS 
Reporters) and exchange and TRF/ORF linkage validations for equities 
(Large Industry Members and Small OATS Reporters) on October 26, 
2020.\29\
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    \29\ The Implementation Plan and Quarterly Progress Reports are 
available at www.catnmsplan.com/implementation-plan.
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    Based on the foregoing, FINRA has determined that the CAT meets the 
accuracy and reliability standards approved by the Commission in the 
OATS Retirement Filing for purposes of eliminating the OATS Rules. 
FINRA has determined to retire OATS and remove the OATS rules from its 
rulebook effective September 1, 2021. Firms must continue to report to 
OATS all order events that occur on or prior to August 31, 2021. 
Reports submitted to OATS for order events that occur after August 31, 
2021 will be rejected. In other words, August 31, 2021 will be the last 
``OATS Business Day,'' as defined under FINRA Rule 7450(b)(3), for 
which OATS will accept order events and perform routine processing 
(including incorporation of corrections and repairs of rejections) 
occurring within the normal OATS timeframe for such activities. OATS 
will continue to accept reports for order events that occur on or prior 
to August 31, 2021 (including, but not limited to, late and corrected 
reports for such order events) through September 16, 2021. Firms must 
ensure that their OATS reporting is accurate and complete for all order 
events that occur on or prior to August 31, 2021.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \30\ in general and Section 6(b)(5) of the Act \31\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \30\ 15 U.S.C. 78f.
    \31\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that the proposed rule change 
is consistent with Section C.9 of Appendix C to the Plan, which 
requires each Participant to ``file with the SEC the relevant rule 
change filing to eliminate or modify its duplicative rules within six 
(6) months of the SEC's approval of the CAT NMS Plan.'' \32\ The Plan 
notes that ``the elimination of such rules and the retirement of such 
systems [will] be effective at such time as CAT Data meets minimum 
standards of accuracy and reliability.'' \33\ Accordingly, the Exchange 
believes the proposed rule change implements, supports, interprets or 
clarifies the provisions of the Plan, and is designed to assist the 
Exchange and its member organizations in meeting regulatory obligations 
pursuant to, and milestones established by, the Plan. In approving the 
Plan, the SEC noted that it ``is necessary and appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanism of a national market system, or is otherwise in furtherance 
of the purposes of the Act.'' \34\ To the extent that this proposal 
implements, interprets or clarifies the Plan and applies specific 
requirements to member organizations, the Exchange believes that this 
proposal furthers the objectives of the Plan, as identified by the SEC, 
and is therefore consistent with the Act.
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    \32\ Appendix C of CAT NMS Plan, Approval Order at 85010.
    \33\ Id.
    \34\ Approval Order at 84697.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The proposed change is not 
designed to address any competitive issue but rather implement 
provisions of the CAT NMS Plan, and is designed to assist the Exchange 
in meeting its regulatory obligations pursuant to the Plan.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \35\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\36\ The proposed rule 
change

[[Page 51696]]

would not significantly affect the protection of investors or the 
public interest because it seeks to delete the Exchange's OATS rules to 
be consistent with FINRA's retirement of its OATS rules. The Exchange 
further believes that the proposed rule change would not impose any 
significant burden on competition because the proposed rule change is 
not designed to address any competitive issue but rather implements 
provisions of the CAT NMS Plan, and is designed to assist the Exchange 
in meeting its regulatory obligations pursuant to the Plan.
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    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \37\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\38\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. As noted above, the 
Exchange believes that the OATS reporting requirements of the Equity 5 
Series are duplicative of information available in the CAT and thus 
will no longer be necessary now that the CAT is operational. The 
Commission believes that it is consistent with the protection of 
investors and the public interest for the Exchange to delete its OATS 
reporting because FINRA has retired OATS. Accordingly, the Commission 
hereby waives the 30-day operative delay and designates the proposal 
operative upon filing.\39\
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    \37\ 17 CFR 240.19b-4(f)(6).
    \38\ 17 CFR 240.19b-4(f)(6)(iii).
    \39\ For purposed only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f280879e97df919d9f9f979c8681b2819791dc959d84"><span class="__cf_email__" data-cfemail="d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0">[email protected]</span></a>. Please include 
File Number SR-NASDAQ-2021-071 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2021-071. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2021-071, and should be submitted 
on or before October 7, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19972 Filed 9-15-21; 8:45 am]
BILLING CODE 8011-01-P


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