Document ID: SEC-2017-0899-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2017-06-01T04:00Z

[Federal Register Volume 82, Number 104 (Thursday, June 1, 2017)]
[Notices]
[Pages 25469-25472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11363]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80787; File No. SR-ISE-2017-46]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Eliminate Requirements That Will Be 
Duplicative of CAT

May 26, 2017.
    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 May 15, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by 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 amend Rule 1404 (the ``EBS Rule''), as the 
EBS Rule provides for the collection of information that is duplicative 
of the data collection requirements of the Consolidated Audit Trail 
(``CAT'') adopted pursuant to the National Market System Plan Governing 
the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\3\
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    \3\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth herein, or in the CAT 
Compliance Rule Series or in the CAT NMS Plan.
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    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, 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, 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
    Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA 
Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 
Options Exchange, Incorporated, Chicago Board Options Exchange, 
Incorporated, Chicago Stock Exchange, Inc., Financial Industry 
Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami 
International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, 
Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\4\ NASDAQ 
PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, 
NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\5\ (collectively, 
the ``Participants'') filed with the Commission, pursuant to Section 
11A of the Exchange Act \6\ and Rule 608 of Regulation NMS 
thereunder,\7\ CAT NMS Plan.\8\ The Participants filed the Plan to 
comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan 
was published for comment in the Federal Register on May 17, 2016,\9\ 
and approved by the Commission, as modified, on November 15, 2016.\10\ 
On March 15, 2017, the Commission approved the new Rule 900 Series to 
implement provisions of the CAT NMS Plan that are applicable to ISE 
members.\11\
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    \4\ ISE Gemini, LLC, ISE Mercury, LLC and International 
Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq 
MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange 
Act Release No. 80248 (March 15, 2017), 82 FR. 14547 (March 21, 
2017); Securities Exchange Act Release No. 80326 (March 29, 2017), 
82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No. 
80325 (March 29, 2017), 82 FR 16445 (Apr. 4, 2017).
    \5\ National Stock Exchange, Inc. has been renamed NYSE 
National, Inc. See Securities Exchange Act Release No. 79902 
(January 30, 2017), 82 FR 9258 (February 3, 2017).
    \6\ 15 U.S.C. 78k-1.
    \7\ 17 CFR 242.608.
    \8\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 24, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
    \9\ Securities Exchange Act Release No. 77724 (April 27, 2016), 
81 FR 30614 (May 17, 2016).
    \10\ Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 
81 FR 84696 (November 23, 2016) (``Approval Order'').
    \11\ See Securities Exchange Act Release No. 80256 (March 15, 
2017), 82 FR 14526 (March 21, 2017) (SR-ISE-2017-08).
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    The Plan is designed to create, implement and maintain a CAT that

[[Page 25470]]

would 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. Pursuant to Appendix C 
of the CAT NMS Plan, each Participant is required to conduct analyses 
of which of its existing trade and order data rules and systems require 
the collection of information that is duplicative of information 
collected for the CAT.\12\ In addition, among other things, Section C.9 
of Appendix C to the Plan, as modified by the Commission, 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.'' \13\ 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.'' \14\ ISE has determined that the EBS Rule is 
affected by the implementation of the CAT and, therefore, is filing 
this proposed rule change.
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    \12\ Appendix C of CAT NMS Plan, Approval Order at 85010.
    \13\ Id.
    \14\ Id.
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    The EBS Rule is the Exchange's rule regarding the automated 
submission of specific trading data to ISE upon request using the 
Electronic Blue Sheet (``EBS'') system. Rule 1404 require members to 
submit certain trade information as prescribed by the Exchange, 
including, for proprietary transactions, the clearing house number or 
alpha symbol of the member submitting the data, the identifying symbol 
assigned to the security, and the date the transaction was 
executed.\15\
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    \15\ The Exchange notes that both the rules of Nasdaq MRX, LLC 
and Nasdaq GEMX, LLC incorporate Rule 1404 by reference.
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    Once broker-dealer reporting to the CAT has begun, the CAT will 
contain the data the Participants would otherwise have requested via 
the EBS system for purposes of NMS Securities and OTC Equity 
Securities. Consequently, the Exchange will not need to use the EBS 
system or request information pursuant to the EBS Rule for NMS 
Securities or OTC Equity Securities for time periods after CAT 
reporting has begun if the appropriate accuracy and reliability 
thresholds are achieved, including an acceptable accuracy rate for 
customer and account information. However, the EBS Rule cannot be 
completely eliminated immediately upon the CAT achieving the 
appropriate thresholds because Exchange staff may still need to request 
information pursuant to the EBS Rule for trading activity occurring 
before a member was reporting to the CAT.\16\
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    \16\ Firms are required to maintain the trade information for 
pre-CAT transactions in equities and options pursuant to applicable 
rules, such as books and records retention requirements, for the 
relevant time period, which is generally three or six years 
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
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    The proposed rule change proposes to add new Supplementary Material 
to the EBS Rule to clarify how the Exchange will request data under 
these rules after members are reporting to the CAT. Specifically, the 
proposed Supplementary Material to the EBS Rule will note that the 
Exchange will request information under the EBS Rule only if the 
information is not available in the CAT because, for example, the 
transactions in question occurred before the firm was reporting 
information to the CAT or involved securities that are not reportable 
to the CAT. In essence, under the new Supplementary Material, the 
Exchange will make requests under these rules if and only if the 
information is not otherwise available through the CAT.
    The CAT NMS Plan states, however, 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.\17\ Accordingly, 
as discussed in more detail below, the Exchange believes that the EBS 
data may be replaced by CAT Data at a date after all Industry Members 
are reporting to the CAT when the proposed error rate thresholds have 
been met, and the Exchange has determined that its usage of the CAT 
Data has not revealed material issues that have not been corrected, 
confirmed that the CAT includes all data necessary to allow the 
Exchange to continue to meet its surveillance obligations, and 
confirmed that the Plan Processor is sufficiently meeting all of its 
obligations under the CAT NMS Plan.
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    \17\ Id. [sic].
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    The Exchange believes CAT Data should not be used in place of EBS 
data until all Participants and Industry Members are reporting data to 
CAT. In this way, the Exchange will continue to have access to the 
necessary data to perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \18\ 
The Exchange believes that the submission of data to the CAT by Small 
Industry Members a year earlier than is required in the CAT NMS Plan, 
at the same time as the other Industry Members, would expedite the 
replacement of EBS data with CAT Data, as the Exchange believes that 
the CAT would then have all necessary data from the Industry Members 
for the Exchange to perform the regulatory surveillance that currently 
is performed via EBS. For this reason, the Exchange supports amending 
the CAT NMS Plan to require Small Industry Members to report data to 
the CAT two years after the Effective Date (instead of three), and 
intends to work with other Participants toward that end.
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    \18\ Id.
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    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \19\ The Exchange believes that a single 
cut-over from EBS to CAT is highly preferable to a firm-by-firm 
approach and is not proposing to exempt members from the EBS 
requirements on a firm-by-firm basis. The Exchange believes that 
providing such individual exemptions to Industry Members would be 
inefficient, more costly, and less reliable than the single cut-over. 
Providing individual exemptions would require the exchanges to create, 
for a brief temporary period, a cross-system regulatory function and to 
integrate data from EBS and the CAT to avoid creating any regulatory 
gaps as a result of such exemptions. Such a function would be costly to 
create and would give rise to a greater likelihood of data errors or 
other issues. Given the limited time in which such exemptions would be 
necessary, the Exchange does not believe that such exemptions would be 
an appropriate use of limited resources. Moreover, the primary benefit 
to a firm-by-firm exemptive approach would be to reduce the amount of 
time an individual firm is required to comply with EBS if it is also 
accurately and reliably reporting to the CAT. The Exchange believes 
that the overall accuracy and reliability thresholds for the CAT 
described above would need to be met under any conditions before

[[Page 25471]]

firms could stop reporting to EBS, and as discussed above, by 
accelerating Small Industry Members to report on the same timeframe as 
all other Industry Members, there is no need to exempt members from EBS 
requirements on a firm-by-firm basis.
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    \19\ Id.
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    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine when duplicative systems will be retired, 
including, but not limited to, whether the attainment of a certain 
Error Rate should determine when a system duplicative of the CAT can be 
retired.'' \20\ The Exchange believes that it is critical that the CAT 
Data be sufficiently accurate and reliable for the Exchange to perform 
the regulatory functions that it now performs via EBS. Accordingly, the 
Exchange believes that the CAT Data should meet specific quantitative 
error rates, as well as certain qualitative requirements.
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    \20\ Id.
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    The Exchange believes that, before CAT Data may be used in place of 
EBS data, the CAT would need to achieve a sustained error rate 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).\21\ ISE proposes to measure the 5% pre-correction 
and 2% post-correction thresholds by averaging the error rate across 
the period, not require a 5% pre-correction and 2% post-correction 
maximum each day for 180 consecutive days. The Exchange believes that 
measuring each of the thresholds over the course of 180 days will 
ensure that the CAT consistently meets minimum accuracy and reliability 
thresholds while also ensuring that single-day measurements do not 
unduly affect the overall measurements. The Exchange proposes to 
measure the appropriate error rates in the aggregate, rather than firm-
by-firm. The 2% and 5% error rates are in line with the proposed 
retirement threshold for other systems, such as FINRA's Order Audit 
Trail System (``OATS'') and the consolidated options audit trail system 
(``COATS'').
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    \21\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
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    In addition to these minimum error rates before using CAT Data 
instead of EBS data, the Exchange believes that during the minimum 180-
day period during which the thresholds are calculated, the Exchange's 
use of the data in the CAT must confirm that (i) usage over that time 
period has not revealed material issues that have not been corrected, 
(ii) the CAT includes all data necessary to allow the Exchange to 
continue to meet its surveillance obligations, and (iii) the Plan 
Processor is sufficiently meeting all of its obligations under the CAT 
NMS Plan. The Exchange believes this time period to use the CAT Data is 
necessary to reveal any errors that may manifest themselves only after 
surveillance patterns and other queries have been run and to confirm 
that the Plan Processor is meeting its obligations and performing its 
functions adequately.
    If the Commission approves the proposed rule change, the Exchange 
will announce the implementation date for the proposed rule change in a 
Regulatory Notice that will be published once the Exchange concludes 
the thresholds for accuracy and reliability described above have been 
met and that the Plan Processor is sufficiently meeting all of its 
obligations under the CAT NMS Plan.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) of the Exchange Act,\22\ which 
require, among other things, that the ISE rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest, and not designed to permit unfair 
discrimination between customers, issuers, brokers and dealer. The 
Exchange believes that this proposal is consistent with the Exchange 
Act because it fulfills the obligation in the CAT NMS Plan for the 
Exchange to submit a proposed rule change to eliminate or modify 
duplicative rules. In approving the Plan, the SEC noted that the Plan 
``is necessary and appropriate in the public interest, for the 
protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanism of a 
national market system, or is otherwise in furtherance of the purposes 
of the Act.'' \23\ As this proposal implements the Plan, the Exchange 
believes that this proposal furthers the objectives of the Plan, as 
identified by the SEC, and is therefore consistent with the Exchange 
Act.
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Approval Order at 84697.
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    Moreover, the purpose of the proposed rule change is to amend rules 
that require the submission of duplicative data to the exchange. The 
elimination of such duplicative requirements will reduce unnecessary 
costs and other compliance burdens for the Exchange and its members, 
and therefore, will enhance the efficiency of the securities markets. 
Furthermore, the Exchange believes that the approach set forth in the 
proposed rule change strikes the appropriate balance between ensuring 
that the Exchange is able to continue to fulfill its statutory 
obligation to protect investors and the public interest by ensuring its 
surveillance of market activity remains accurate and effective while 
also establishing a reasonable timeframe for elimination or 
modification of its rules that will be rendered duplicative after 
implementation of the CAT.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 6(b)(8) of the Exchange Act \24\ requires that Exchange 
rules not impose any burden on competition that is not necessary or 
appropriate. The Exchange does not believe that the proposed rule 
change will result in any burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Exchange Act. The 
Exchange notes that the proposed rule change implements the 
requirements of the CAT NMS Plan approved by the Commission regarding 
the elimination of rules and systems that are duplicative the CAT, and 
is designed to assist the Exchange in meeting its regulatory 
obligations pursuant to the Plan. Similarly, all exchanges and FINRA 
are proposing the elimination of their EBS rules to implement the 
requirements of the CAT NMS Plan. Therefore, this is not a competitive 
rule filing and, therefore, it does not raise competition issues 
between and among the self-regulatory organizations and/or their 
members.
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    \24\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Although written comments on the proposed rule change were not 
solicited, ISE received comments from two commenters, the Financial 
Information Forum (``FIF'') and the Securities Industry and Financial 
Markets Association (``SIFMA''), regarding the retirement of systems 
related to the CAT.\25\ In its comment letters, with

[[Page 25472]]

regard to the retirement of duplicative systems more generally, FIF 
recommended that the Participants continue the effort to incorporate 
current reporting obligations into the CAT in order to replace existing 
reportable systems with the CAT. In addition, FIF further recommended 
that, once a CAT Reporter achieved satisfactory reporting data quality, 
the CAT Reporter should be exempt from reporting to any duplicative 
reporting systems. FIF believed that these recommendations ``would 
serve both an underlying regulatory objective of more immediate and 
accurate access to data as well as an industry objective of reduced 
costs and burdens of regulatory oversight.'' \26\ In its comments about 
EBS specifically, FIF stated that the retirement of the EBS 
requirements should be a high priority, and that the CAT should be 
designed to include the requisite data elements to permit the rapid 
retirement of EBS.\27\ Similarly, SIFMA stated that ``the establishment 
of the CAT must be accompanied by the prompt elimination of duplicative 
systems,'' and ``recommend[ed] that the initial technical 
specifications be designed to facilitate the immediate retirement of . 
. . duplicative reporting systems.'' \28\
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    \25\ Letter from William H. Hebert, FIF, to Participants re: 
Milestone for Participants' rule change filings to eliminate/modify 
duplicative rules (Apr. 12, 2017) (``FIF Letter''); Letter from 
William H. Hebert, FIF, to Brent J. Fields, SEC re: Milestone for 
Participants' rule change filings to eliminate/modify duplicative 
rules (Apr. 12, 2017); and Letter from Kenneth E. Bentsen, Jr., 
SIFMA, to Participants re: Selection of Thesys as CAT Processor 
(Apr. 4, 2017) (``SIFMA Letter'') at 2.
    \26\ FIF Letter at 2.
    \27\ FIF Letter at 2.
    \28\ SIFMA Letter at 2.
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    As discussed above in Section 3 [sic], the Exchange agrees with the 
commenters that the EBS reporting requirements should be replaced by 
the CAT reporting requirements as soon as accurate and reliable CAT 
Data is available. To this end, the Exchange anticipates that the CAT 
will be designed to collect the data necessary to permit the retirement 
of EBS. However, as discussed above, the Exchange disagrees with the 
recommendation to provide individual exemptions to those CAT Reporters 
who obtain satisfactory data reporting quality.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2017-46 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2017-46. 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 Web site (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 Web site 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2017-46 and should be 
submitted on or before June 22, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11363 Filed 5-31-17; 8:45 am]
BILLING CODE 8011-01-P